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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
December 31, 1997
For the fiscal year ended
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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
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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 of incorporation) (I.R.S. Employer Identification No.)
ONE BANK AVENUE, KAUKAUNA, WISCONSIN 54130
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 766-1717
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1.00
PAR VALUE
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 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. [ ]
As of March 16, 1998, there were 9,898,170 shares of Common Stock outstanding,
and the aggregate market value of the Common Stock (based upon the $42.00
closing sale price on that date on the NASDAQ National Market) held by
non-affiliates (excludes a total of 472,055 outstanding shares reported as
beneficially owned by directors and officers -- does not constitute an admission
as to affiliate status) was approximately $395 million.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH
DOCUMENT PORTIONS OF DOCUMENTS ARE INCORPORATED
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Proxy Statement for Annual Meeting of Part III
Shareholders on or about May 21, 1998
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PART I
ITEM 1. BUSINESS.
F&M Bancorporation, Inc. ("F&M" or the "Company") was formed in
1980 to acquire the shares of Farmers and Merchants Bank of Kaukauna, Wisconsin
(now known as F&M Bank- Kaukauna). F&M has grown internally and through
acquisitions from a one-bank holding company with total assets of $37 million at
its inception to a multi-bank holding company with total assets of $1.6 billion
at December 31, 1997.
In January 1998, F&M acquired Sentry Bancorp., Inc. ("SBI"), the
holding company of Cannon Valley Bank, with total consolidated assets of $26.4
million at December 31, 1997, in a transaction being accounted for using the
purchase method of accounting. In February 1998, F&M acquired Bank of South
Wayne ("BSW"), with total assets of $19.3 million at December 31, 1997, in a
transaction being accounted for using the pooling method of accounting. See
"Recent Developments" below. Giving effect to the SBI and BSW acquisitions, F&M
had pro forma total assets of $1.7 billion at December 31, 1997. The
acquisitions of SBI and BSW occurred in 1998, all financial information and data
included in this Annual Report on Form 10-K are prior to those transactions
unless otherwise indicated. F&M does not believe that these acquisitions will
have a material effect on its financial condition or results of operations.
Unless otherwise indicated, share and per share amounts in this Report
on Form 10-K have been restated to reflect F&M's 10% stock dividends in June
1996 and June 1997.
Recent Developments
Pending Acquisitions
Jefferson Acquisition. On December 31, 1997, F&M entered into an
agreement to acquire Financial Management Services of Jefferson, Inc.
("Jefferson"), the holding company for The Farmers & Merchants Bank of Jefferson
("FMBJ"). FMBJ has two offices in the city of Jefferson, in southcentral
Wisconsin. The agreement provides for the exchange of Jefferson stock for
approximately 641,975 shares of F&M Common (subject to adjustments provided in
the agreement). The transaction is expected to be completed in the second
quarter of 1998.
At December 31, 1997, Jefferson had total assets of $99.7 million, net
loans of $62.0 million, total deposits of $80.7 million and shareholders' equity
of $13.2 million. For the year ended December 31, 1997, Jefferson had net income
of $1.0 million. F&M expects to account for the transaction using the pooling of
interests method of accounting.
Marshalltown, Iowa Acquisition. On December 1, 1997, F&M entered into
an agreement to acquire BancSecurity Corporation ("BancSecurity") of
Marshalltown, Iowa, the holding company for several banks located in Iowa
("BancSecurity Banks"). The BancSecurity Banks have 14 offices in central Iowa.
The agreement provides for the exchange of BancSecurity stock for approximately
$145 million in value of shares of F&M Common (subject to adjustments provided
in the agreement). The transaction is expected to be completed in the second
quarter 1998.
At December 31, 1997, BancSecurity had total assets of $546.7 million,
net loans of $329.7 million, total deposits of $446.6 million and shareholders'
equity of $52.1 million. For the year ended December 31, 1997, BancSecurity had
net income of $3.1 million. F&M expects to account for the transaction using the
pooling of interests method of accounting.
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Other Recent Developments
Dundas, Minnesota Acquisition. On January 27, 1998, F&M acquired
Sentry Bancorp., Inc. ("SBI"), the holding company of Cannon Valley Bank ("CVB")
(renamed "F&M Bank-Cannon Valley"). CVB has its office in the community of
Dundas in southeastern Minnesota. The acquisition represents F&M's first office
outside of Wisconsin, and provides F&M a platform for possible future Minnesota
expansion. The acquisition was a cash transaction, in which F&M paid SBI
shareholders a total of $5.4 million. F&M is accounting for the transaction
using the purchase method of accounting.
At December 31, 1997, SBI had total assets of $26.4 million, net
loans of $19.2 million, total deposits of $23.5 million and shareholder's equity
of $2.3 million. For the year ended December 31, 1997, SBI had net income of
$346,000.
South Wayne Acquisition. On February 9, 1998, F&M acquired the
Bank of South Wayne ("BSW"). BSW has one office in South Wayne, in southwestern
Wisconsin. F&M acquired BSW in exchange for approximately 144,000 shares of F&M
Common. F&M is accounting for the transaction using the pooling of interests
method of accounting, although periods prior to January 1, 1998 will not be
restated because of the relatively small size of BSW as compared to F&M. F&M
intends to combine the operations of BSW and F&M Bank - Darlington in the near
future.
At December 31, 1997, BSW had total assets of $19.3 million, net
loans of $7.8 million, total deposits of $14.7 million and shareholders' equity
of $4.5 million. For the year ended December 31, 1997, BSW had net income of
$231,000.
Trust Company. In January 1998, F&M announced the formation of
F&M Trust Company, a Wisconsin chartered trust company. The F&M Trust Company is
continuing the trust business of F&M Bank - Kaukauna, which was established in
1996. F&M intends to expand the operations of F&M Trust Company to other
communities served by F&M subsidiary banks.
Antigo Office Acquisition. On October 1, 1997, F&M completed the
acquisition of the Antigo branch office of Security Bank ("Security"), which was
divested in connection with Security's acquisition by Marshall & Ilsley
Corporation. The acquisition included the purchase of the branch buildings and
other fixed assets and the assumption of deposit liabilities in a cash
transaction, in which F&M's F&M Bank - Central subsidiary purchased the physical
assets and was reimbursed in cash (reduced by an agreed-upon premium) for the
assumption of deposits. Security's Antigo office had total deposits of
approximately $35 million at September 30, 1997.
Darlington Acquisition. On August 14, 1997, F&M acquired Citizens
National Bancorp., Inc. ("CNB"), the holding company of Citizens National Bank
of Darlington. CNB, which was renamed "F&M Bank - Darlington National
Association", has two offices, in Darlington and Hazel Green (in southwest
Wisconsin). F&M acquired CNB in exchange for approximately 577,500 shares of F&M
Common. F&M is accounting for the transaction using the pooling of interests
method of accounting.
At December 31, 1996, CNB had total assets of $75.3 million, net
loans of $48.9 million, total deposits of $65.2 million and shareholder's equity
of $9.5 million. For the year ended December 31, 1996, CNB had net income of
$653,000.
Clear Lake Acquisition. On August 12, 1997, F&M acquired Clear
Lake Bancorp Inc. ("CLB"), the holding company of Landmark Bank. CLB, which
was renamed "F&M Bank -
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Landmark", has four offices in northwest Wisconsin. F&M acquired CNB in exchange
for approximately 161,000 shares of F&M Common. F&M is accounting for the
transaction using the pooling of interest method of accounting.
At December 31, 1996, CLB had total assets of $35.0 million, net
loans of $24.5 million, total deposits of $31.8 million and shareholder's equity
of $2.1 million. For the year ended December 31, 1996, CLB had net income of
$191,000.
Prairie du Chien Acquisition. On May 30, 1997, F&M acquired
Wisconsin Ban Corp. ("WBC"), the holding company of Prairie City Bank ("PCB").
PCB, which has been renamed "F&M Bank-Prairie du Chien", has five offices in
southwest Wisconsin. F&M acquired WBC in exchange for approximately 637,000
shares of F&M Common. Also, outstanding WBC preferred stock was redeemed for
approximately $350,000 in cash, and outstanding indebtedness of WBC to its
shareholders and affiliates, in the amount of approximately $2.6 million
(including accrued interest) was repaid in cash. F&M is accounting for the
transaction using the pooling of interests method of accounting.
At December 31, 1996, WBC had total assets of $87.3 million, net
loans of $56.0 million, total deposits of $69.9 million and shareholders' equity
of $8.5 million. For the year ended December 31, 1996, WBC had net income of
$740,000.
Brodhead Acquisition. On February 27, 1997, F&M acquired Green
County Bank ("GCB"), with one office in Brodhead in south-central Wisconsin. GCB
has been renamed "F&M Bank-Brodhead." F&M acquired GCB in exchange for
approximately 201,000 shares of F&M Common, in a formula amount set forth in the
definitive acquisition agreement; the total value of those shares was
approximately $5.4 million for purposes of the agreement. F&M accounted for the
transaction using the pooling of interests method of accounting, although
periods prior to January 1, 1997 were not restated because of the relatively
small size of GCB as compared to F&M.
At December 31, 1996, GCB had total assets of $31.5 million, net
loans of $21.5 million, total deposits of $28.1 million and shareholders' equity
of $3.2 million. For the year ended December 31, 1996, GCB had net income of
$287,000.
East Troy Acquisition. On January 10, 1997, F&M acquired East
Troy Bancshares, Inc. ("ETB"), which owned all of the shares of State Bank of
East Troy (renamed "F&M Bank-East Troy"), with one office in East Troy in
southeast Wisconsin. F&M's acquisition of ETB was made in exchange for
approximately 484,000 shares of F&M Common, valued for purposes of the
transaction at $13.5 million for purposes of the agreement. F&M accounted
for the transaction using the pooling of interests method of accounting,
although periods prior to January 1, 1997 were not restated because of the
relatively small size of ETB as compared to F&M.
At December 31, 1996, ETB had total assets of $56.0 million, net
loans of $43.2 million, total deposits of $46.6 million and shareholders' equity
of $7.7 million. For the year ended December 31, 1996, ETB had net income of
$224,000.
Additional Locations and Bank Combinations. In October 1997, F&M
Bank-Appleton opened an additional full-service supermarket branch in Appleton,
to complement its three other Appleton offices. In November 1997, F&M Bank-East
Troy opened a full-service express market branch in East Troy, Wisconsin, to
complement its other office in that community. In November 1997, F&M Bank-Grant
County became the successor in a merger of F&M Banks - Fennimore, Potosi and
Lancaster.
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Subsidiary Banks
At March 15, 1998, F&M owned 20 subsidiary banks (the "Banks" or
the "F&M Banks"). All but two of the Banks are Wisconsin state banks. One bank
is a national bank, which is expected to be combined with one of the Wisconsin
chartered F&M Banks in the near future; CVB is a Minnesota state bank. Each of
the F&M Banks (other than recently acquired CVB and BSW, which have not yet
become members) is a member of the Federal Reserve System. The Banks are
community banks which provide a full range of services to consumers and
businesses in small and medium-sized communities. F&M also owns F&M Trust
Company, a full-service trust company. F&M provides the benefits of holding
company affiliation while allowing the Banks to operate with considerable
autonomy.
The following table presents certain information as to the F&M
Banks. Each of the F&M Banks is wholly-owned by F&M.
<TABLE>
<CAPTION>
NO. OF FULL TOTAL
YEAR SERVICE OFFICES ASSETS
BANK ACQUIRED (1) AT 3/15/98 (2) AT 12/31/97
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(in millions)
<S> <C> <C> <C>
F&M Bank-Kaukauna 1980 5 $136.7
F&M Bank-Appleton 1981 4 68.6
F&M Bank-Hilbert 1983 3 31.6
F&M Bank-Winnebago County 1985 3 99.6
F&M Bank-New London 1987 1 37.1
F&M Bank-Central 1987 3 113.9
F&M Bank-Grant County 1988 4 133.9
F&M Bank-Lakeland 1991 7 161.1
F&M Bank-Kiel 1991 1 43.9
F&M Bank-Northeast 1994 11 312.1
F&M Bank-Waushara County 1995 5 110.5
F&M Bank-Superior 1996 1 33.8
F&M Bank-Algoma 1996 2 64.6
F&M Bank-East Troy 1997 2 54.6
F&M Bank-Brodhead 1997 1 31.4
F&M Bank-Prairie du Chien 1997 5 91.6
F&M Bank-Landmark 1997 4 39.2
F&M Bank-Darlington, N.A.(3) 1997 2 77.0
F&M Bank-Cannon Valley 1998 1 26.4
Bank of South Wayne(3) 1998 1 19.3
</TABLE>
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(1) In the case of F&M Banks resulting from mergers, represents the date
F&M first acquired any of the constituent banks in those mergers.
(2) The F&M Banks also maintain a total of 51 ATM locations, certain of
which are located at the full-service offices.
(3) F&M intends to combine these banks in the near future under the name
"F&M Bank- Darlington."
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F&M's network of community banks generally operates with significant
local autonomy, with general oversight and support from F&M. F&M believes this
autonomy allows the F&M Banks to better serve the customers in their respective
communities, and thus enhances the F&M Banks' business opportunities and
operations. After acquiring banks, F&M generally maintains local bank charters
and keeps intact existing management and boards of directors. Generally, F&M
Bank managements operate independently of F&M in selecting deposit products
developed by F&M and in making pricing and credit decisions. F&M maintains an
approval procedure for new loans above certain threshold amounts and provides
ongoing loan review and administration assistance and other services for the F&M
Banks. F&M encourages F&M Bank officers and employees to be active in community
groups and projects.
Markets
F&M Banks provide services through a total of 66 full-service bank
offices in 52 Wisconsin communities and one Minnesota community. In recent
years, the economic and business environment in the State of Wisconsin and
nearby states has been relatively strong and stable. The communities in which
the F&M Banks maintain offices range in population from almost 100,000 to less
than 500. Although many of the communities in which the F&M Banks are located
are relatively small, they generally have diverse economies with representation
from many industry groups. In many communities, F&M Banks maintain the only
commercial bank offices in those communities. Each F&M Bank branch provides
complete retail banking services and full service banking for personal,
commercial and service industry customers.
Acquisition and Expansion Strategy
The Company's strategy is to continue to grow by actively pursuing
opportunities to acquire other financial institutions and by establishing or
acquiring additional branches. The Company's primary geographic area of focus
for expansion is small metropolitan areas and other communities in Wisconsin.
F&M has recently begun pursuing out-of-state acquisitions, with one acquisition
in Minnesota and a pending acquisition in Iowa. F&M believes that markets in
nearby states can present attractive markets for future expansion, and provide
additional opportunities than those which are available in Wisconsin. However,
there can be no assurances that such acquisitions will occur, and acquisitions
outside of Wisconsin may present difficulties, due to market differences, state
law considerations, and relative distances, which could affect F&M's ability to
consummate and integrate any such acquisitions. The Company generally
concentrates on acquisitions of banks with $25 million or more in assets,
although it would consider acquiring a smaller institution (such as BSW) if the
Company would be able conveniently and economically to operate it as a branch of
a nearby Bank or other attractive factors exist.
The Company's acquisition strategy also focuses on past performance of
the target, management strengths and weaknesses, location, community
demographics, relative health of the local economy, organizational structure of
the target, size of the target and consideration for the acquisition. In
evaluating these criteria, management considers the alternatives and costs
associated therewith to enter a particular market, and the impact of the
proposed acquisition on the Company's earnings and stock price.
To supplement the presence it has established in various markets, and
to expand to new markets, the Banks will from time to time open additional
branch offices, including supermarket and other non-traditional branches, in
communities which warrant additional coverage. The Company also considers branch
purchases (as in the case of Antigo), the relocation of bank offices to more
attractive locations, and closing of branch offices where warranted.
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The Company believes that its experience in making acquisitions and in
assimilating acquired institutions into the Company's system, as well as its
philosophy of permitting significant independence of the management of the
Banks, position the Company well to take advantage of future expansion
opportunities. The Company believes that its experience with, and willingness to
acquire banks in smaller communities gives it an advantage in responding to
certain acquisition opportunities. These opportunities may be created by
management succession needs, desires to obtain assistance in responding to
increasing regulatory requirements, bank shareholder liquidity needs and similar
situations.
Since its inception, the Company has experienced substantial growth
through acquisitions of other financial institutions. F&M's strategy to continue
to make acquisitions is dependent upon its ability to identify potential targets
for acquisition and consummate transactions on terms acceptable to F&M. Also,
F&M's future success is dependent in part upon its ability to integrate the
operations of, and manage over time, acquired financial institutions. F&M
acquired its first non- Wisconsin bank in 1998. F&M has pending another
acquisition in Iowa which would be the largest acquisition by F&M in terms of
both consideration paid and assets acquired. The factors of size and distance
could combine to make the pending acquisition transition more challenging for
F&M than in past acquisitions.
Business Planning and Marketing
Company-wide plans are set each year, both for F&M and for the Banks,
and are developed after substantial input from and consultation with Bank
personnel. Progress is regularly monitored in meetings with Bank employees and
in system-wide reports. F&M also uses compensation and performance incentives
for all of its employees to help achieve the plan targets.
F&M developed "Lifestyle Banking" for implementation by the Banks to
bolster each of their marketing efforts in the communities they serve. Lifestyle
Banking seeks to attract new customers and create broad banking relationships
with customers by focusing on their varying needs rather than attempting to
design products and services of general application or aggressively price a
particular product or service. Bank employees are trained to recognize customer
needs and take additional responsibility and initiative in marketing the Banks'
products and services to provide more individualized customer service. Lifestyle
Banking is also designed to provide a continuing customer-level source of ideas
to help the Banks better serve their customers and communities.
Lending and Investments
The F&M Banks offer short-term and long-term loans on a secured or
unsecured basis for business or personal purposes. The F&M Banks focus their
lending activities on individuals and small businesses in their immediate market
areas. Lending has been almost exclusively within the State of Wisconsin. The
markets of the F&M Banks include a wide variety of businesses; therefore, F&M
does not believe it is unduly exposed to problems in any particular industry
group.
F&M believes that it can best serve its customers, and thereby enhance
F&M's business, operations and profitability, by maximizing local autonomy in
credit decisions. Generally, managements of the F&M Banks operate independently
of F&M in making credit decisions. F&M maintains an approval procedure for any
new loan that exceeds a specified threshold amount (varying depending upon the
F&M Bank) or loan participations exceeding $750,000. F&M also provides
continuing loan review and administrative assistance for the F&M Banks. The
foregoing are in addition to each F&M Bank's internal loan procedures.
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The F&M Banks participate in lending guaranteed by the Small Business
Administration and/or the Federal Housing Administration. For residential
customers, the F&M Banks make mortgage loans and offer a variety of programs
which are for resale in secondary mortgage markets or which are retained in the
F&M Banks' portfolios. F&M does not have any substantial business with foreign
obligors.
Real Estate Loans. Real estate loans include residential mortgages and
agricultural real estate, commercial real estate and construction loans. On a
company-wide basis, real estate lending represents F&M's largest category of
loans outstanding. At December 31, 1997, residential, commercial and
agricultural real estate loans represented approximately 62.5% of loans
outstanding, the majority of which consists of residential real estate first
mortgages, with real estate construction loans approximating an additional 3.3%
of the portfolio.
F&M originates residential mortgage loans which generally are
long-term, with either fixed or variable interest rates. F&M's general policy,
which is subject to review by management as a result of changing market and
economic conditions, and other factors, is to retain all variable interest rate
mortgage loans in its portfolio and to sell all long-term fixed interest rate
mortgage loans to the secondary market, but retaining servicing rights to most
of those loans. Variable interest rate real estate loans are generally
repriceable on an annual basis or may be adjusted at F&M's discretion. All
commercial and agricultural real estate loans are written on an adjustable
basis, the majority of which are tied to the prime rate, or short-term fixed
rate basis. F&M believes the most significant risks relating to real estate
loans result from possible declines in value of the real estate securing loans,
as well as the borrower's ability to repay.
Commercial and Industrial Loans. Loans in this category principally
include loans to service, retail, wholesale and manufacturing businesses. At
December 31, 1997, approximately 20.4% of loans outstanding were in this
category. The F&M Banks provide both secured and unsecured loans and lines of
credit for the operations and expansion needs of local business. The F&M Banks
generally look to a borrower's business operations as the principal source of
repayment, but they also receive, when appropriate, mortgages on real estate,
security interests in inventory, accounts receivable and other personal
property, and/or personal guaranties. Repayment risk relating to commercial and
industrial loans generally relates to the success or failure of the underlying
business enterprise.
Agricultural Loans. There is a strong focus on the agricultural
industry in many of the communities in which F&M Banks' offices are located. The
agricultural products produced in these communities vary significantly, and
include dairy, livestock, vegetables and other cash crops. At December 31, 1997,
approximately 6.6% of loans outstanding were made to agricultural producers,
excluding agricultural real estate lending which constitutes an additional
approximately 5.0% of loans. These loans are in a variety of communities and
relate to a variety of agricultural commodities, thus lessening F&M's exposure
to weaknesses in any one geographical area or type of agricultural production.
Because of the breadth and relative health of Wisconsin's agricultural
industries, F&M has not experienced significant system-wide problems in
agricultural-related loans. Credit risks relating to agricultural loans
generally depend upon varying commodity prices and crop conditions which affect
agricultural producers.
Installment and Other Consumer Loans. F&M makes installment and other
consumer loans, including automobile loans, home improvement loans and personal
lines of credit. At December 31, 1997, approximately 7.2% of the loans were
installment or other consumer loans. F&M believes that consumer loans often
represent the beginning of a long-term banking relationship with new customers.
Credit risks relating to installment and consumer loans include the risks
relating to the
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repayment capacity of the borrower involved and the depreciation of the assets
used as collateral for such loans.
Other Investments. F&M maintains a diversified portfolio of
investments, primarily consisting of U.S. Treasury securities, obligations of
U.S. government corporations and agencies, and obligations of states and their
political subdivisions. The portfolio includes limited mortgage-backed
securities. F&M attempts to balance its portfolio to meet its liquidity needs
while endeavoring to maximize investment income, and to maximize tax advantages.
Deposits
Each of the F&M Banks offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market accounts, and certificates of deposit. Deposits at each F&M
Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
statutory limits.
Local managements of the F&M Banks are given significant latitude in
determining and pricing the depository products offered. F&M makes a general
determination of the deposit products which may be offered by the F&M Banks, and
its corporate staff regularly consults with local management in developing new
products which may be appropriate for local communities. However, local
management selects which of F&M's various products can be most successfully
offered in the various communities which its F&M Bank serves. In addition, local
management is given the flexibility to price deposit products locally, to best
compete in an F&M Bank's particular marketplace.
Other Customer Services and Products
Effective in January 1998, F&M established F&M Trust Company as a
separate subsidiary, and began operations of trust services through that
subsidiary. Previously, F&M Banks-Kaukauna and Lancaster had offered trust
services.
Other aspects of the business of the Banks include safety deposit box
services, and the sale and purchase of U.S. government securities, obligations
of U.S. government agencies, obligations of state and political subdivisions and
other similar securities. The Banks use repurchase agreements on a limited
basis, primarily with municipal customers.
Certain of the Banks have established "Investment Centers" which,
through arrangements with other service providers, offer securities brokerage
services, annuities, and mutual fund products in addition to the other banking
products and services offered by the Banks.
Administration of the Banks
Although each of the Banks operates with a significant level of
independence, F&M has centralized operations for certain functions, and makes
available its corporate staff and centralized resources for other functions upon
request. In early 1997, the Corporation reorganized its bank subsidiaries under
five regions, with teams of bank and holding company officers to oversee the
operations of the Banks within those regions.
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Credit-Related Services. Initial customer credit decisions are made by
the local management of each Bank. To assist local management and to maintain
system-wide credit standards, F&M has established a system-wide credit committee
to review credits to the extent lending proposals exceed threshold amounts for
the Banks, or if a Bank wishes to participate in a credit with other Banks. See
"Lending and Investments" above. In addition, F&M's corporate staff will provide
individual Banks with assistance on credit review and collection upon request.
Internal audit and compliance officers of F&M regularly review the Banks'
lending portfolios and require periodic reports from the Banks as to outstanding
credits and their quality.
Investments. To help maximize the investment return to F&M and the
Banks, F&M has centralized investment functions through commonly-managed
investment subsidiaries of each Bank. F&M has determined that this centralized
investment management strategy is more efficient and economical and creates the
possibility for more advantageous investment returns to the Banks than would be
possible with each Bank independently managing its investment portfolio.
Data Processing and Information Systems. F&M has contracted with an
outside provider for data processing services through a combination of on-site
Bank personnel and remote processing hardware and software. Under this
arrangement, hardware and software are being maintained at remote locations
although F&M has the option to acquire both the hardware and the software to
perform the data processing in-house if that is subsequently deemed in its best
interests. F&M provides data processing services to nine of the Banks through
this arrangement. Other processing methods are now being utilized for the other
Banks (in the case of seven of the Banks, because their relatively recent
acquisitions by F&M).
F&M is currently evaluating various options for its data processing
services, which may include expansion of the current arrangements to additional
F&M Banks or the entry into a new arrangement. F&M would expect to adopt a
solution which it would use system-wide. While it is expected that F&M would
continue to utilize an outsourcing arrangement for most of its data processing
needs, a final decision has not been made. Future costs for processing services,
or capital expenditures related to data processing, could change depending upon
the ultimate determination of data processing issues.
Like other financial institutions, F&M must assure that its computer
and other systems are "year 2000 compliant" (meaning capable of operating, and
accurately recognizing dates and processing information, in and after the year
2000). To help assure that F&M's systems are year 2000 compliant on a timely
basis, F&M began a focused compliance program, and has designated an F&M
employee to coordinate F&M's year 2000 compliance efforts. As part of that
effort, F&M is monitoring year 2000 compliance efforts by its suppliers, because
many of F&M's affected systems (such as data processing) are contracted from
third parties and a significant part of F&M being year 2000 compliant requires
such compliance by the third parties. Based in part upon information being
received from these third parties, F&M currently believes that it will be year
2000 compliant on a timely basis to avoid material operational disruptions and
to comply with the requirements of its regulators. To date, F&M has not
identified material expenditures which will be required to become year 2000
compliant. However, there can be no assurance that such operational difficulties
or expenditures will not be identified or experienced in the future.
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. While the
Company's community banking strategy stresses "traditional" personal service,
the Company's future success will depend in part on its ability to address the
needs of its customers by using technology to provide products and services that
will satisfy customer demands for
-9-
<PAGE> 11
convenience as well as to create additional efficiencies in F&M's bank
operations. Many of F&M's competitors have substantially greater resources to
invest in technological improvements.
Other Operations and Services. F&M provides other services for the
benefit of the Banks such as marketing assistance, human resources services and
benefits administration, internal audit and centralized purchasing of supplies.
F&M believes that centralizing these services promotes efficiency and cost
savings for the Banks without interfering with their community-oriented
management.
Competition
The F&M Banks actively compete with other financial institutions and
businesses in both attracting and retaining deposits and making loans. Direct
competitors include banks, savings and loans and credit unions. These
institutions offer direct competition in the areas of deposits and loans. Other
competitors include insurance companies, securities brokerage firms, trust
companies and investment management firms which also offer competition for many
of the services offered by the F&M Banks, such as discount brokerage and
annuities.
F&M believes it has a competitive advantage because in many
communities, F&M Bank office locations represent the only commercial bank office
in those communities. However, in some of these communities, savings and loan
associations, savings banks and/or credit unions also maintain offices, and
there are bank offices located in other nearby communities. Competition with
other financial institutions and businesses can affect the Banks' ability to
obtain and retain customers as well as the pricing levels of their products and
services. F&M believes its focus on establishing continuing banking
relationships and on individualized customer service provides additional
competitive advantages.
F&M also faces competition in seeking institutions to acquire.
Wisconsin has recently experienced a significant consolidation of its banking
industry, and many large holding companies with greater resources than F&M
(including several out-of-state holding companies) are actively pursuing
acquisitions in Wisconsin. Similar conditions affect acquisition opportunities
in other nearby states such as Minnesota and Iowa. This competition affects the
available acquisition opportunities for F&M and can affect the costs of such
acquisitions.
Regulation and Supervision
The banking industry is highly regulated by both federal and state
regulatory authorities. Regulation includes, among other things, capital and
reserve requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
reinvestment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, may be the subject of further significant
legislation in the future, and is not within the control of F&M. This regulation
substantially affects the business and financial results of all financial
institutions and holding companies, including F&M and the F&M Banks.
All but two of the F&M Banks are incorporated under the banking laws of
Wisconsin. Each of the Wisconsin-chartered F&M Banks is therefore subject to
supervision and regulation by the Wisconsin Department of Financial Institutions
(the "Department") through its Division of Banking. One of the F&M Banks is
chartered in Minnesota, and is subject to the supervision and regulation by the
Minnesota Department of Commerce. Another F&M Bank is a national bank, regulated
by the federal Office of the Comptroller of the Currency; it is expected that
this Bank will be merged into one of the Wisconsin chartered banks in the near
future.
-10-
<PAGE> 12
Each of the F&M Banks (except in certain instances recently acquired
banks, which are expected to apply for membership) is a member of the Federal
Reserve System, and is therefore subject to regulation by the Federal Reserve
Board. The deposits of each of the banks are insured, up to statutory limits, by
the FDIC. As a registered bank holding company under the Bank Holding Company
Act of 1956, F&M itself is subject to review and regulation by the Federal
Reserve Board. F&M, as a holding company, is also subject to review and
examination by the Department under Wisconsin law.
In addition to general requirements that banks retain specified levels
of capital and otherwise conduct their business in a safe and sound manner,
Wisconsin law requires that dividends of Wisconsin banks declared and paid
without the approval of the Department be paid out of current earnings or, no
more than once within the immediate preceding two years, out of undivided
profits in the event there have been insufficient net profits. Any other
dividends require the prior written consent of the Department. Each of the F&M
Banks is in compliance with all applicable capital requirements. Each of the F&M
Banks may pay dividends to F&M.
Under federal legislation enacted in 1994, beginning in September 1995
Wisconsin bank holding companies, including F&M, have been allowed to acquire
banks and holding companies nationwide, and holding companies in all other
states will be allowed to acquire banks and holding companies in Wisconsin.
Wisconsin law generally requires the approval of the Department for all
acquisitions of banks in Wisconsin, whether by Wisconsin or out-of-state
entities. Interstate bank mergers, under specified circumstances, would be
permitted beginning in 1997. In 1997, F&M began to actively pursue acquisitions
of institutions outside of Wisconsin (see "Recent Developments"). Wisconsin and
Minnesota law permit establishment of full service bank branch offices
statewide.
F&M, as a member of the banking industry, is affected by general
economic conditions, particularly as those conditions affect the Wisconsin
communities served by the F&M Banks. A financial institution's earnings also
depend to a large extent upon the relationship between the cost of funds
(primarily deposits) and the yield on earning assets (loans and investments).
This relationship, known as the interest rate margin, is subject to fluctuation
and is affected by regulatory, economic and competitive factors which influence
the volume and rate of interest on interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets.
Statistical Information
The principal sources of income for the subsidiary banks of F&M are
interest and fees on loans, interest on short-term investments and interest on
securities. The total operating income and the percentage of each to total
operating income is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
ITEM OF INCOME 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans
and short-term borrowings 80.8% 79.4% 78.4%
Interest on securities 12.5% 14.4% 15.8%
Non-interest income 6.7% 6.2% 5.8%
Total operating income (in thousands) $ 131,361 $ 105,496 $ 92,928
</TABLE>
F&M and its subsidiaries do not have any material foreign deposits, loans or
operations.
-11-
<PAGE> 13
The following statistical information is offered in response to the
Securities and Exchange Commission's "Guide 3 - Statistical Disclosures by Bank
Holding Companies". Certain of that information is included in the Company's
Management's Discussion and Analysis of Results of Operations and Financial
Condition" ("MD&A") at Item 7 hereof, and is incorporated in this section by
reference thereto.
I. A. & B. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S
EQUITY - INTEREST RATES AND DIFFERENTIALS
Incorporated by reference from MD&A under the caption "Results
of Operations Net Interest Income."
I. C. INTEREST INCOME AND EXPENSE VOLUME AND RATE CHANGE
Incorporated by reference from MD&A under the caption "Results
of Operations Net Interest Income."
II. A. INVESTMENT PORTFOLIO
Incorporated by reference from MD&A under the caption
"Financial Condition - Investment Portfolio."
II. B. RELATIVE MATURITIES & WEIGHTED AVERAGE INTEREST RATES
Incorporated by reference from MD&A under the caption
"Financial Condition - Investment Portfolio."
III. LOAN PORTFOLIO
A. TYPES OF LOANS
Incorporated by reference from MD&A under the caption
"Financial Condition - Loan Portfolio."
The Company does not have any loans known to be to foreign obligors.
The Company is not lessee under leases which, in the aggregate, are material to
it. To the extent the Company utilizes lease financing for its customers, the
leases are accounted for as loans, and included in the appropriate loan
categories.
B. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST
RATES
Incorporated by reference from MD&A under the caption
"Financial Condition - Loan Portfolio."
C. RISK ELEMENTS
Incorporated by reference from MD&A under the caption
"Financial Condition - NonPerforming Assets."
D. OTHER INTEREST BEARING ASSETS
None
-12-
<PAGE> 14
IV. A. SUMMARY OF LOAN LOSS EXPERIENCE
Incorporated by reference from MD&A under the caption
"Financial Condition - Summary of Loan Loss Experience."
IV. B. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Incorporated by reference from MD&A under the caption
"Financial Condition - Allocation of Allowance for Loan Loss."
V. DEPOSITS
The Companies average balances of deposits and the average rate paid on these
deposits during the years ended December 31, 1997, 1996 and 1995 are:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS BALANCE RATE BALANCE RATE BALANCE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 157,753 --- $ 130,030 --- $ 112,386 ---
Interest bearing demand deposits 115,703 1.73% 104,709 1.87% 98,843 1.95%
Saving deposits 368,218 3.65% 281,121 3.28% 233,039 2.98%
Time deposits 634,498 5.77% 550,905 5.71% 504,325 5.59%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,276,172 $1,066,765 $948,593
====================================================================================================================================
</TABLE>
The amount of time certificates of deposit issued in amounts of $100,000 or
more and outstanding as of December 31, 1997 is: $149,642,000. Their maturing
distribution is as follows:
-- three months or less $66,971,000
-- over three months and through twelve months $68,187,000
-- over one year $14,484,000
Neither F&M or its subsidiaries have any deposits in foreign banking offices.
VI. RETURN ON EQUITY AND ASSETS
The various ratios are included in the MD&A under the caption "Results of
Operations" and "Financial Condition - Capital Adequacy" and are incorporated by
reference thereto.
-13-
<PAGE> 15
VII. SHORT-TERM BORROWINGS
The comparison of short-term borrowings as of each indicated December 31
follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities
sold under repurchase agreement $47,685 $42,263 $12,627
Other short-term borrowings --- --- ---
- --------------------------------------------------------------------------------
Totals $47,685 $42,263 $12,627
================================================================================
</TABLE>
The following information relates to federal funds purchased and securities sold
under repurchase agreements for the years ended December 31:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------
As of end of year:
<S> <C> <C> <C>
Weighted average rate 6.62% 6.37% 5.65%
For the year:
Maximum amount outstanding $ 79,021 $ 45,237 $ 31,904
Average amount outstanding $ 56,678 $ 33,833 $ 18,062
Weighted average rate 5.80% 5.47% 5.78%
</TABLE>
ITEM 2. PROPERTIES.
Of the Banks' 66 total offices, 60 are located in buildings which are
owned by the respective Banks. Five grocery store or market offices and one
other branch office locations are located in leased facilities; the leases are
short-term, which the Company believes is appropriate for the particular
locations. In addition, the Company owns its headquarters building in Kaukauna,
Wisconsin.
All of the owned facilities are designed for commercial banking
operations. All facilities used by the Company and the Banks are suitable for
their current and anticipated expanded utilization, although the Company
regularly reviews whether any changes or improvements would be advisable.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings other than routine
litigation which is not material to its business.
-14-
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of F&M. Executive officers are elected annually by the Board
of Directors, and serve at the discretion of the Board.
<TABLE>
<CAPTION>
AGE AT
NAME 3/15/98 POSITION(S)
- ---- ------- -----------
<S> <C> <C>
John W. Johnson 43 President, Chief Executive Officer
and Director
Gail E. Janssen 67 Chairman of the Board and Director
Douglas A. Martin 46 Vice President and Director
Daniel E. Voet 34 Chief Financial Officer and Treasurer
Donna R. Habert 47 Vice President-Data Processing
Janet M. Lakso 55 Vice President-Administration and
Secretary
Bartholomew Salazar 34 Vice President-Investments
Linda K. Seefeldt 43 Vice President-Marketing
Peter H. Smaby 36 Vice President-Credit Administration
Darlene M. Vanden Boogart 39 Vice President-Audit
Constance M. Verbruggen 38 Vice President-Human Resources
</TABLE>
Mr. Johnson has served as President of F&M since July 1997 and as its
Chief Executive Officer since November 1997. Mr. Johnson previously served as a
Vice President of F&M since 1994. Mr. Johnson was President and Chief Executive
Officer of F&M Bank-Northeast and a predecessor since 1989. Mr. Johnson
was elected to F&M's Board of Directors in April 1994, as contemplated by F&M's
acquisition of Pulaski Bancshares, Inc.
Mr. Janssen has served as Chairman and a director of F&M since its
inception. Mr. Janssen also serves as Chairman of the Board of F&M
Bank-Kaukauna. Mr. Janssen served as President of F&M from its inception until
1996, and as Chief Executive Officer of F&M from its inception until 1997. F&M
has historically considered itself highly dependent upon the services of Mr.
Janssen, although recent changes in management structure, including the
designation of Mr. Johnson as President and Chief Executive Officer, were
intended in part to lessen that dependence.
Mr. Martin became a Vice President of F&M in 1992. Mr. Martin became
Chairman of the Board of F&M Bank-Grant County in 1994. Mr. Martin has been
President and Chief Executive Officer of F&M Bank-Grant County since 1985, and
has served as a director of F&M since 1990.
Mr. Voet became Chief Financial Officer in 1994 and Treasurer in 1993.
Mr. Voet previously served as Corporate Accountant of F&M since 1991, before
which he was a certified public accountant in private practice.
-15-
<PAGE> 17
Ms. Habert became Vice President-Data Processing of F&M in 1993. Prior
to that time, she was Assistant Vice President-Data Processing since 1989. Ms.
Habert had been employed by F&M Bank-Kaukauna since 1971.
Ms. Lakso became F&M's Vice President-Administration in 1993 and
Secretary at year end 1994. Ms. Lakso was Assistant Vice
President-Administration since 1992. Ms. Lakso has served F&M since 1980 as
assistant to the President, and was first employed by F&M Bank-Kaukauna in 1970.
Mr. Salazar joined F&M as Assistant Vice President-Investments in 1992
and became Vice President-Investments in 1993. Prior to joining F&M, Mr. Salazar
was employed by another financial institution in a variety of positions
including Manager of Wire Transfer Operations, Manager of Float Control
Operations, Investment Portfolio Manager and as a financial analyst.
Ms. Seefeldt joined F&M as Vice President-Marketing in 1990.
Previously, she served as Marketing Director of another Wisconsin bank holding
company.
Mr. Smaby became Vice President-Credit Administration in 1993. Mr.
Smaby joined F&M in 1987 as a loan review and compliance officer, and was named
Assistant Vice President- Compliance/Loan Review in 1990.
Ms. Vanden Boogart became Vice President-Audit in 1993. Ms. Vanden
Boogart began employment with F&M Bank-Kaukauna in 1976, and served F&M as Audit
Manager from 1987 to 1993.
Ms. Verbruggen joined F&M as Vice President-Human Resources in March
1995. Ms. Verbruggen was Human Resources Director at Shawano Community Hospital
from 1993 to 1995, and previously served as Human Resource Manager for CMD
Corporation.
F&M and its subsidiaries employed approximately 690 persons on a
full-time equivalent basis at December 31, 1997.
* * * * *
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents
incorporated herein by reference which are not statements of historical fact
(including statements in the future tense and those which include terms such as
"believe", "will", "expect" and "anticipate") contain forward-looking
statements that involve risks and uncertainties. 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, acceptance of
new products and services, the Company's future lending and collection
experience, 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 discussed in Item 1 above in this
Report and in the Management's Discussion and Analysis in Item 7, as well as
those discussed elsewhere in this Report and the documents incorporated herein
by reference.
-16-
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
F&M Common Stock trades on The NASDAQ Stock Market ("NASDAQ")
under the symbol "FMBK". F&M had approximately 3,150 shareholders of record at
March 1, 1998. The following table summarizes high and low prices and cash
dividends paid for F&M Common Stock for the periods indicated.
<TABLE>
<CAPTION>
CASH DIVIDENDS
CALENDAR PERIOD HIGH LOW PAID PER SHARE
- ------------------------------- ---- --- --------------
<S> <C> <C> <C> <C>
1996 1st quarter 23.55 20.05 .149
2nd quarter 28.64 22.32 .149
3rd quarter 28.64 25.68 .155
4th quarter 29.09 27.05 .155
1997 1st quarter 29.09 25.91 .18
2nd quarter 40.25 26.36 .18
3rd quarter 39.50 34.00 .20
4th quarter 41.50 36.50 .20
</TABLE>
F&M has paid quarterly or annual cash dividends since its inception.
The holders of F&M Common Stock are entitled to receive such dividends as are
declared by the board of directors of F&M, which considers (and may change)
payment of dividends quarterly. For the first quarter of 1998, F&M has paid a
dividend of $.22 per share.
The ability of F&M to pay dividends is dependent upon the receipt of
dividends from the F&M Banks, payment of which is subject to regulatory
restrictions. In determining cash dividends, the board of directors of F&M
considers the earnings, capital requirements, debt servicing requirements,
financial ratio guidelines issued by the FRB and other banking regulators,
financial condition of F&M and the F&M Banks, and other relevant factors. See
Note 15 of Notes to F&M's Consolidated Financial Statements and the discussion
under "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Financial Condition--Capital Adequacy," incorporated herein
by reference, for restrictions on the ability of the F&M Banks to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to the Selected Financial Data of the
Company appearing at page F-42 of this report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Incorporated by reference to the Management's Discussion and Analysis
of the Company appearing at pages F-43 through F-62 of this report on Form 10-K.
-17-
<PAGE> 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Incorporated by reference to the third through sixth paragraphs under
"Liquidity, Interest Sensitivity and Market Risk Management" in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing at page F-60 of this report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference to the financial statements of the Company
appearing at pages F-1 through F-41 of this report on Form 10-K, and to Summary
Quarterly Financial Information appearing at page F-62 of this report on Form
10-K. Also see the "Index to Financial Statements and Financial Statement
Schedules" filed as part of Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this item is incorporated herein by
reference to "Election of Directors", "Executive Compensation," and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement to be filed pursuant to Regulation 14A for its Annual Meeting of
Shareholders to be held on or about May 21, 1998 ("1998 Proxy Statement"), and
"Executive Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to "Election of Directors", "Executive
Compensation" (excluding "Compensation Committee Report on Executive
Compensation" therein) and "Compensation Committee Interlocks and Insider
Participation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management" in
the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to "Transactions with the Corporation" in
the 1998 Proxy Statement.
-18-
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED:
1 and 2. Financial Statements and Financial Statement
Schedules. See the following "Index to Financial
Statements and Financial Statement Schedules," which
is incorporated herein by reference.
3. Exhibits. See Exhibit Index included as last part of
this report, which is incorporated herein by
reference.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATION
Years Ended December 31, 1997, 1996 and 1995
Page
Independent Auditor's Report.......................................... F-1
Financial Statements:
Consolidated Balance Sheets.................................. F-2
Consolidated Statements of Income............................ F-4
Consolidated Statements of Stockholders' Equity.............. F-6
Consolidated Statements of Cash Flows........................ F-8
Notes to Consolidated Financial Statements................... F-10
* * *
Selected Financial Data............................................... F-42
Management's Discussion and Analysis.................................. F-43
Summary Quarterly Financial Information............................... F-62
-19-
<PAGE> 21
INDEPENDENT AUDITOR'S REPORT
Board of Directors
F&M Bancorporation, Inc.
Kaukauna, Wisconsin
We have audited the accompanying consolidated balance sheets of F&M
Bancorporation, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
F&M Bancorporation, Inc. and Subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/Wipfli Ullrich Bertelson LLP
-------------------------------
Wipfli Ullrich Bertelson LLP
January 23, 1998
Appleton, Wisconsin
F-1
<PAGE> 22
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in Thousands)
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash and due from banks $ 56,581 $ 49,406
Federal funds sold 36,747 23,286
--------------- ---------------
Cash and cash equivalents 93,328 72,692
Investments:
Interest-bearing deposits in other financial
institutions 194 196
Investment securities available for sale -
Stated at fair value 178,403 154,746
Investment securities held to maturity -
Fair value of $133,040 in 1997 and
$96,824 in 1996 128,240 95,030
Total loans
1,197,895 970,554
Allowance for credit losses (15,090) (12,319)
--------------- ----------------
Net loans 1,182,805 958,235
Premises and equipment 32,858 29,623
Other assets 30,175 25,380
--------------- ---------------
TOTAL ASSETS $ 1,646,003 $ 1,335,902
=============== ===============
</TABLE>
F-2
<PAGE> 23
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Liabilities:
Non-interest-bearing deposits $ 180,312 $ 150,849
Interest-bearing deposits 1,193,060 989,522
--------------- ----------------
Total deposits 1,373,372 1,140,371
Short-term borrowings 47,685 42,263
Other borrowings 60,929 18,194
Other liabilities 15,174 12,869
--------------- ----------------
Total liabilities 1,497,160 1,213,697
--------------- ----------------
Commitments and contingent liabilities (Note 18)
Stockholders' equity:
Common stock - $1 par value:
Authorized - 20,000,000 shares
Issued - 9,779,130 and 8,173,255 shares
at December 31, 1997 and 1996,
respectively 9,779 8,173
Capital surplus 86,334 60,537
Retained earnings 53,101 54,629
Unrealized gain (loss) on securities
available for sale -
Net of tax 21 (473)
Less - Common stock held in treasury, at cost -
24,020 and 34,750 shares at December 31,
1997 and 1996, respectively (392) (661)
--------------- ----------------
Total stockholders' equity 148,843 122,205
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,646,003 $ 1,335,902
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 24
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands, Except Earnings Per Share)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 104,539 $ 82,330 $ 71,938
Interest on investment
securities:
Taxable 9,830 9,816 10,148
Tax-exempt 6,560 5,329 4,580
Other interest income 1,618 1,434 906
--------------- --------------- ---------------
Total interest income 122,547 98,909 87,572
--------------- --------------- ---------------
Interest expense:
Deposits 52,035 42,637 37,035
Short-term borrowings 3,286 1,850 1,045
Other borrowings 2,524 887 1,326
--------------- --------------- ---------------
Total interest expense 57,845 45,374 39,406
--------------- --------------- ---------------
Net interest income 64,702 53,535 48,166
Provision for credit losses 2,826 2,904 1,713
--------------- --------------- ---------------
Net interest income after
provision for credit losses 61,876 50,631 46,453
--------------- --------------- ---------------
Other income:
Service fees 4,430 3,392 2,971
Net security gains 194 59 34
Other operating income 4,190 3,136 2,351
--------------- --------------- ---------------
Total other income 8,814 6,587 5,356
--------------- --------------- ---------------
Other expenses:
Salaries and employee
benefits 22,972 18,750 16,438
Net occupancy expense 5,823 4,702 4,424
FDIC assessment 155 120 1,087
Data processing 1,617 1,533 1,586
Goodwill amortization 689 524 398
Other operating expenses 10,098 9,191 7,927
--------------- --------------- ---------------
Total other expenses 41,354 34,820 31,860
--------------- --------------- ---------------
</TABLE>
F-4
<PAGE> 25
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands, Except Earnings Per Share)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income before provision for
income taxes $ 29,336 $ 22,398 $ 19,949
Provision for income taxes 9,011 6,992 6,109
--------------- --------------- ----------------
Net income $ 20,325 $ 15,406 $ 13,840
=============== =============== ================
Earnings per share - Basic $ 2.09 $ 1.73 $ 1.59
=============== =============== ================
Earnings per share - Diluted $ 2.08 $ 1.73 $ 1.59
=============== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 26
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Capital
-------------------------
Shares Amount Surplus
-------------- --------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1995 6,221,247 $ 6,221 $ 43,664
Poolings of interests:
Wisconsin Ban Corp. 579,100 579 12
Citizens National Bancorp, Inc. 577,465 577 368
------------ -------------- ----------------
Balance, January 1, 1995, as restated 7,377,812 7,377 44,044
Net income
Cash dividends declared
Exercise of stock options (25)
Purchase of 40,000 shares of treasury
common stock
Change in unrealized gain (loss) on
securities available for sale -
Net of tax
------------ -------------- ----------------
Balance, December 31, 1995 7,377,812 7,377 44,019
Acquisition of Monycor Bancshares,
Inc. 157,563 158 649
Net income
Ten percent stock dividend 637,880 638 15,900
Cash dividends declared
Exercise of stock options (31)
Change in unrealized gain (loss) on
securities available for sale -
Net of tax
------------ -------------- ----------------
Balance, December 31, 1996 8,173,255 8,173 60,537
Acquisition of East Troy Bancshares,
Inc. 439,993 440 494
Acquisition of Green County Bank 182,967 183 1,617
Acquisition of Clear Lake Bancorp, Inc. 161,040 161 1,535
Net income
Ten percent stock dividend 821,875 822 22,193
Cash dividends declared
Exercise of stock options (42)
Change in unrealized gain (loss)
on securities available for sale -
Net of tax
------------ -------------- ----------------
Balance, December 31, 1997 9,779,130 $ 9,779 $ 86,334
============ ============== ================
</TABLE>
F-6
<PAGE> 27
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Retained Treasury Available for
Earnings Stock Sale - Net of Tax Total
-------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
$ 36,694 $ (110) $ (3,538) $ 82,931
5,954 (389) 6,156
8,167 (393) 8,719
-------------- --------------- ------------------- ---------------
50,815 (110) (4,320) 97,806
13,840 13,840
(4,308) (4,308)
131 106
(845) (845)
4,364 4,364
-------------- --------------- ------------------- ---------------
60,347 (824) 44 110,963
838 1,645
15,406 15,406
(16,538)
(5,424) (5,424)
163 132
(517) (517)
-------------- --------------- ------------------- ---------------
54,629 (661) (473) 122,205
6,788 7,722
1,437 3,237
256 1,952
20,325 20,325
(23,015)
(7,319) (7,319)
269 227
494 494
-------------- --------------- ------------------- ---------------
$ 53,101 $ (392) $ 21 $ 148,843
============== =============== =================== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 28
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents:
Cash flows from operating activities:
Net income $ 20,325 $ 15,406 $ 13,840
--------------- --------------- ---------------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation
and net amortization 3,188 2,689 2,547
Provision for credit losses 2,826 2,904 1,713
Credit for deferred income
taxes (173) (867) (299)
Net security gains (194) (59) (34)
(Gain) loss on sale of
premises and equipment and
other real estate (231) (5) (49)
Change in other assets (1,711) (1,483) (195)
Change in other
liabilities 456 (1,004) 3,979
--------------- --------------- ---------------
Total adjustments 4,161 2,175 7,662
--------------- --------------- ---------------
Net cash provided by
operating activities 24,486 17,581 21,502
--------------- --------------- ---------------
Cash flows from investing
activities:
Net decrease in
interest-bearing deposits
in other financial
institutions 2 456 487
Proceeds from sale of
securities available
for sale 8,265 7,188 14,116
Proceeds from maturities
of securities:
Available for sale 40,278 55,309 32,608
Held to maturity 11,403 5,951 13,309
Payment for purchases of
securities:
Available for sale (75,420) (30,899) (37,299)
Held to maturity (22,610) (26,841) (19,085)
Net increase in loans (139,674) (135,253) (57,997)
Capital expenditures (3,965) (8,263) (2,423)
Proceeds from sale of
premises and
equipment 322 284 16
Proceeds from sale of
other real estate 2,595 318 713
Acquisition of stock in
subsidiary banks -
Net of cash received 44,816 (484) (23)
--------------- --------------- ---------------
Net cash used in
investing activities (133,988) (132,234) (55,578)
--------------- --------------- ---------------
</TABLE>
F-8
<PAGE> 29
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 90,272 $ 86,948 $ 67,795
Net increase (decrease) in
short-term borrowings 5,222 29,636 (8,369)
Proceeds from other borrowings 49,036 8,720 8,845
Principal payments on other
borrowings (7,300) (9,076) (1,274)
Proceeds from exercise of stock
options 227 132 106
Purchase of shares of treasury
common stock (845)
Dividends paid (7,319) (5,424) (4,308)
--------------- --------------- ---------------
Net cash provided by
financing activities 130,138 110,936 61,950
--------------- --------------- ---------------
Net increase (decrease) in cash
and cash equivalents 20,636 (3,717) 27,874
Cash and cash equivalents
at beginning 72,692 76,409 48,535
--------------- --------------- ---------------
Cash and cash equivalents
at end $ 93,328 $ 72,692 $ 76,409
=============== =============== ===============
Supplemental cash flow information:
- ----------------------------------
Cash paid during the year for:
Interest $ 57,318 $ 45,066 $ 36,857
Income taxes 9,783 7,736 6,619
Noncash investing and financing activities:
- ------------------------------------------
Loans transferred to other
real estate $ 1,351 $ 1,580 $ 338
</TABLE>
See Note 3 for details of noncash consideration paid in acquisitions which
occurred in 1997, 1996, and 1995.
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 30
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of F&M Bancorporation, Inc. (the
"Company") and its subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry. Significant
accounting policies are summarized below.
Nature of Operations
F&M Bancorporation, Inc. is a Wisconsin multibank holding company. Its
subsidiary banks provide a full range of commercial and retail banking services
to customers throughout Wisconsin. Through its subsidiary banks, the Company
provides to its customers commercial, real estate, agricultural, and consumer
loans, as well as a variety of traditional deposit and trust products.
Principles of Consolidation
The consolidated financial statements include the accounts of F&M
Bancorporation, Inc. and all of its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results may differ from these estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and non-interest-bearing deposits in correspondent banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
Investment Securities
The Company's investment securities are classified in two categories and
accounted for as follows:
Securities available for sale - Securities available for sale consist of
investment securities not classified as securities held to maturity. These
securities are stated at fair value. Unrealized holding gains and losses,
net of tax, on securities available for sale are reported as a net amount in
a separate component of stockholders' equity until realized.
F-10
<PAGE> 31
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities held to maturity - Investment securities for which the Company has
the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
Interest and Fees on Loans
Interest on loans is credited to income as earned. Interest income is not
accrued on loans where management has determined collection of such interest is
doubtful. When a loan is placed on nonaccrual status, previously accrued but
unpaid interest deemed uncollectible is reversed and charged against current
income. Loan-origination fees are credited to income when received, as
capitalization of the fees and related costs would not have a material effect
on the consolidated financial statements.
Allowance for Credit Losses
The allowance for credit losses includes specific allowances related to
commercial loans which have been judged to be impaired. 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.
The Company continues to maintain a general allowance for credit losses for
loans not considered impaired. The allowance for credit losses is maintained
at a level which management believes is adequate to provide for possible credit
losses. Management periodically evaluates the adequacy of the allowance using
the Company's past credit loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
factors. This evaluation is inherently subjective since it requires material
estimates that may be susceptible to significant change.
Mortgage Servicing Rights
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
by rate in the quarter in which the related mortgage loans were sold.
F-11
<PAGE> 32
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of premises and
equipment are reflected in income. Depreciation is computed principally on the
straight-line method and is based on the estimated useful lives of the assets.
Goodwill
The excess of cost over the net assets of subsidiaries acquired is amortized
from the date of acquisition using the straight-line method over periods
ranging from ten to fifteen years.
Other Real Estate
Other real estate is carried at the lower of cost or fair value, less estimated
sales costs.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
current enacted tax rates which will be in effect when these differences are
expected to reverse. Deferred tax expense (benefit) is the result of changes
in the deferred tax asset and liability.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the consolidated financial statements when they become payable.
F-12
<PAGE> 33
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Future Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial statements.
This statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement requires that an enterprise display an
amount representing total comprehensive income for the period in a financial
statement, but does not require a specific format for that financial statement.
This statement also requires that an enterprise, a) classify items of other
comprehensive income by their nature in a financial statement and, b) display
the accumulated balance of other comprehensive income separately from retained
earnings and surplus in the equity section of the balance sheet. The statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management, at this time, cannot determine
the effect that adoption of this statement may have on the consolidated
financial statements of the Company as comprehensive income is dependent on the
amount and nature of assets and liabilities held which generate nonincome
changes to equity.
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 and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. 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.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLES
FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," in June 1996. The Company adopted
the provisions of SFAS No. 125 effective January 1, 1997. SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The statement provides
guidelines for classification of a transfer as a sale. The statement also
requires liabilities incurred or obtained by transferors as part of a transfer
of financial assets be initially recorded at fair value. Subsequent to
acquisition, the servicing assets and liabilities are to be amortized over the
estimated net servicing period.
F-13
<PAGE> 34
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - BUSINESS COMBINATIONS
On January 10, 1997, the Company acquired, through a merger, 100% of the
outstanding stock of East Troy Bancshares, Inc. which owned 100% of State Bank
of East Troy (n/k/a F&M Bank - East Troy) in exchange for 483,992 shares (after
giving effect to the 10% stock dividend) of the Company's stock.
On February 27, 1997, the Company acquired, through a merger, 100% of the
outstanding stock of Green County Bank (n/k/a F&M Bank - Brodhead) in exchange
for 201,264 shares (after giving effect to the 10% stock dividend) of the
Company's stock.
On August 12, 1997, the Company acquired, through a merger, 100% of the
outstanding stock of Clear Lake Bancorp, Inc. which owned 98.17% of Landmark
Bank (n/k/a F&M Bank - Landmark) in exchange for 161,040 shares of the
Company's stock. The minority shares of Landmark Bank were subsequently
acquired for cash.
The above transactions have been accounted for as poolings of interests. The
transactions were not material to the Company's consolidated financial
statements; accordingly, previously reported financial information has not been
restated to include the results of these acquisitions.
On May 30, 1997, the Company acquired, through a merger, 100% of the
outstanding shares of Wisconsin Ban Corp., which owned 100% of Prairie City
Bank (n/k/a F&M Bank - Prairie du Chien), in exchange for 637,010 shares (after
giving effect to the 10% stock dividend) of the Company's stock. In addition,
the Company redeemed the outstanding preferred stock of Wisconsin Ban Corp. for
cash of $350,871. Cash of $2,634,825 was also used to pay the indebtedness of
Wisconsin Ban Corp. to its shareholders.
On August 14, 1997, the Company acquired, through a merger, 100% of the
outstanding shares of Citizens National Bancorp, Inc. which owned 100% of
Citizens National Bank of Darlington (n/k/a F&M Bank - Darlington, N.A.) in
exchange for 577,465 shares of the Company's stock.
F-14
<PAGE> 35
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)
These transactions have been accounted for as poolings of interests. All
financial information included in the consolidated financial statements and
notes thereto has been restated to include the results of Wisconsin Ban Corp.
and Citizens National Bancorp, Inc. The following summarizes the separate
results of operations of the Company, Wisconsin Ban Corp., and Citizens
National Bancorp, Inc. (through the acquisition dates noted above) for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands, Except Earnings Per Share)
<S> <C> <C> <C>
Net interest income:
F&M Bancorporation, Inc. $ 61,607 $ 47,631 $ 42,284
Wisconsin Ban Corp. 1,396 3,156 3,190
Citizens National Bancorp, Inc. 1,699 2,748 2,692
--------------- --------------- ---------------
Combined and restated $ 64,702 $ 53,535 $ 48,166
=============== =============== ===============
Net income:
F&M Bancorporation, Inc. $ 19,333 $ 14,413 $ 11,987
Wisconsin Ban Corp. 470 705 1,087
Citizens National Bancorp, Inc. 522 288 766
--------------- --------------- ---------------
Combined and restated $ 20,325 $ 15,406 $ 13,840
=============== =============== ===============
Earnings per share - Basic:
F&M Bancorporation, Inc. $ 2.12 $ 1.88 $ 1.60
=============== =============== ================
Combined and restated $ 2.09 $ 1.73 $ 1.59
=============== =============== ================
Earnings per share - Diluted:
F&M Bancorporation, Inc. $ 2.11 $ 1.87 $ 1.59
=============== =============== ================
Combined and restated $ 2.08 $ 1.73 $ 1.59
=============== =============== ================
</TABLE>
On February 5, 1996, the Company acquired, through a merger, 100% of the
outstanding stock of Monycor Bancshares, Inc. ("Monycor") which owned 98.408%
of Monycor Bank of Superior (n/k/a F&M Bank - Superior) in exchange for 190,650
shares (after giving effect to the 10% stock dividends) of the Company's stock.
This transaction has been accounted for as a pooling of interests, although the
transaction was not material to the Company's financial statements and,
accordingly, prior financial statements were not restated. The minority shares
of Monycor Bank of Superior were subsequently acquired for cash.
F-15
<PAGE> 36
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)
On May 13, 1996, F&M Bank - Lakeland, a wholly owned subsidiary, acquired,
through a merger, 100% of the outstanding stock of Bradley Bank for cash of
$6,595,000. Bradley Bank had total assets of $35,310,000 at the time of the
merger. The operations of Bradley Bank were merged into F&M Bank - Lakeland.
This transaction has been accounted for as a purchase; accordingly, the
consolidated financial statements include the results of operations from the
acquisition date. This transaction resulted in goodwill of $3,192,000.
On June 28, 1996, F&M Bancorporation, Inc. acquired, through a merger, 100% of
the outstanding stock of Community State Bank (n/k/a F&M Bank - Algoma) in
exchange for 465,489 shares of the Company's stock. This transaction has been
accounted for as a pooling of interests. All financial information included in
the consolidated financial statements and notes thereto has been restated to
include the results of Community State Bank.
On January 9, 1995, the Company acquired 100% of the outstanding stock of Union
State Bank (n/k/a F&M Bank - Waushara County) in an exchange offer. Company
stock totaling 896,078 shares was issued in exchange for 99.97% of the
outstanding shares of Union State Bank. The remaining shares of Union State
Bank stock were acquired for cash. This transaction has been accounted for as
a pooling of interests. All financial information included in the consolidated
financial statements and notes thereto has been restated to include the results
of Union State Bank.
NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $5,402,000 are restricted at
December 31, 1997, to meet the reserve requirements of the Federal Reserve
System.
F-16
<PAGE> 37
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES
The estimated fair value and amortized cost of investment securities at
December 31 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Estimated Unrealized Unrealized Amortized
Fair Value Gains Losses Cost
--------------- --------------- --------------- ----------------
(Dollars in Thousands)
1997
- ----
<S> <C> <C> <C> <C>
Investment securities available
for sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 42,657 $ 72 $ 46 $ 42,631
Obligations of states
and political
subdivisions 11,123 35 22 11,110
Mortgage-related
securities 101,894 486 518 101,926
Other securities 22,729 57 30 22,702
--------------- --------------- --------------- ----------------
Total investment securities
available for sale $ 178,403 $ 650 $ 616 $ 178,369
=============== =============== =============== ================
Investment securities held
to maturity - Obligations of
states and political
subdivisions $ 133,040 $ 4,808 $ 8 $ 128,240
=============== =============== =============== ================
1996
- ----
Investment securities available
for sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 50,305 $ 73 $ 230 $ 50,462
Obligations of states and
political
subdivisions 23,674 73 311 23,912
Mortgage-related
securities 64,995 381 759 65,373
Other securities 15,772 31 25 15,766
--------------- --------------- --------------- ----------------
Total investment securities
available for sale $ 154,746 $ 558 $ 1,325 $ 155,513
=============== =============== =============== ================
Investment securities held
to maturity - Obligations of
states and political
subdivisions $ 96,824 $ 2,012 $ 218 $ 95,030
=============== =============== =============== ================
</TABLE>
F-17
<PAGE> 38
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
Fair values of securities are estimates based on financial methods or prices
paid for similar securities. It is possible interest rates could change
considerably resulting in a material change in the estimated fair value.
The estimated fair value and amortized cost of investment securities (available
for sale and held to maturity) at December 31, 1997, by contractual maturity,
are shown below. Contractual maturities will differ from expected maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
--------------------------------- ---------------------------------
Estimated Amortized Estimated Amortized
Fair Value Cost Fair Value Cost
--------------- --------------- --------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due in three months or less $ 16,852 $ 16,883 $ 1,113 $ 1,111
Due after three months
through one year 15,225 15,246 6,628 6,579
Due after one year
through five years 36,476 36,428 29,313 28,537
Due after five years
through ten years 3,008 2,996 38,723 37,229
Due after ten years 4,948 4,890 57,263 54,784
----------------- ------------ ------------- -------------
76,509 76,443 133,040 128,240
Mortgage-related securities 101,894 101,926
----------------- ------------ ------------- -------------
Total $ 178,403 $ 178,369 $ 133,040 $ 128,240
================= ============ ============= =============
</TABLE>
Following is a summary of the proceeds from sales of investment securities
available for sale as well as gross gains and losses for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Proceeds from sales of investment
securities $ 8,265 $ 7,188 $ 14,116
Gross gains on sales 206 151 121
Gross losses on sales 12 92 87
</TABLE>
The estimated fair value and amortized cost of investment securities pledged to
secure public deposits, short-term borrowings, and for other purposes required
by law were $38,049,000 and $38,139,000, respectively, as of December 31, 1997.
F-18
<PAGE> 39
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
The obligations of states and political subdivisions are generally purchased
with the intent to hold to maturity. A significant portion of these securities
are rated by Moody's with ratings ranging from A to AAA. For those securities
not rated, market values are obtained from brokerage services utilized by the
Company. At December 31, 1997, the total carrying value of nonrated
obligations of states and political subdivisions was $34,170,000.
NOTE 6 - LOANS
The composition of loans at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Commercial, industrial, and financial $ 244,629 $ 188,952
Agricultural 79,351 80,245
Real estate:
Construction 38,929 36,822
Mortgage 748,874 596,691
Installment 86,112 67,844
--------------- ---------------
Total loans $ 1,197,895 $ 970,554
=============== ===============
</TABLE>
The aggregate amount of nonperforming loans was $10,998,000 and $13,003,000 at
December 31, 1997 and 1996, respectively. Nonperforming loans are those which
are contractually past due 90 days or more as to interest or principal
payments, those loans on a nonaccrual status, or loans the terms of which have
been renegotiated to provide a reduction or deferral of interest or principal.
If nonaccrual and renegotiated loans had been current, or not troubled,
$1,085,000, $886,000, and $632,000 of interest income would have been recorded
for the years ended December 31, 1997, 1996, and 1995, respectively. Interest
income actually recorded on these loans was $369,000, $251,000, and $213,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
The recorded investment in loans considered to be impaired was $5,603,000 and
$7,483,000 of which $4,053,000 and $5,144,000 was on a nonaccrual basis at
December 31, 1997 and 1996, respectively. The related allowance for credit
losses on impaired loans was $1,303,000 and $1,207,000 as of December 31, 1997
and 1996, respectively. The average recorded investment in impaired loans was
$6,657,000 and $5,923,000 during 1997 and 1996, respectively. The Company
recognized interest income on those impaired loans of $215,000, $392,000, and
$364,000 which included $197,000, $378,000, and $356,000 of interest income
recognized using the cash basis method of income recognition for the years ended
December 31, 1997, 1996, and 1995, respectively.
F-19
<PAGE> 40
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - LOANS (CONTINUED)
The subsidiary banks in the ordinary course of banking business grant loans to
the Company's executive officers and directors including their families and
firms in which they are principal owners.
Substantially all loans to executive officers and directors were made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features. Activity
in such loans during 1997 is summarized below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Loans outstanding, January 1, 1997 $ 19,045
New loans 13,443
Repayment (12,626)
---------------
Loans outstanding, December 31, 1997 $ 19,862
===============
</TABLE>
An analysis of the allowance for credit losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, January 1 $ 12,319 $ 10,060 $ 9,255
Provision for credit losses 2,826 2,904 1,713
Allowance for credit losses of
banks acquired at date of
acquisition 1,329 587
Recoveries on loans 363 281 301
Loans charged off (1,747) (1,513) (1,209)
--------------- --------------- ---------------
Balance, December 31 $ 15,090 $ 12,319 $ 10,060
=============== =============== ===============
</TABLE>
The financial statements do not include loans serviced for others, which
totaled $134,491,000 at December 31, 1997.
NOTE 7 - MORTGAGE SERVICING RIGHTS
An analysis of changes in mortgage servicing rights for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Balance, January 1 $ 260 $
Capitalized amounts 599 297
Less - Amortization 128 37
--------------- ---------------
Balance, December 31 $ 731 $ 260
=============== ===============
</TABLE>
F-20
<PAGE> 41
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - MORTGAGE SERVICING RIGHTS (CONTINUED)
No impairment of mortgage servicing rights existed at December 31, 1997 and
1996; therefore, no valuation allowance was recorded.
The carrying value of the mortgage servicing rights is included with other
assets and approximates fair market value at December 31, 1997 and 1996.
NOTE 8 - PREMISES AND EQUIPMENT
An analysis of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Land $ 4,839 $ 5,079
Buildings and improvements 31,442 26,545
Furniture and equipment 19,356 17,963
Construction in progress 211 703
--------------- ---------------
Totals 55,848 50,290
Less - Accumulated depreciation and
amortization 22,990 20,667
--------------- ---------------
Net book value $ 32,858 $ 29,623
=============== ===============
</TABLE>
Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $2,623,000 in 1997, $2,145,000 in 1996, and $1,926,000 in
1995.
NOTE 9 - OTHER REAL ESTATE
Included in other assets is other real estate totaling $917,000 and $1,842,000
at December 31, 1997 and 1996, respectively. There is no allowance for losses
on other real estate. Other real estate expenses totaled $156,000, $140,000,
and $133,000 for 1997, 1996, and 1995, respectively.
F-21
<PAGE> 42
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - DEPOSITS
The distribution of deposits at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Non-interest-bearing demand deposits $ 180,312 $ 150,849
Interest-bearing demand deposits 112,843 100,998
Savings deposits 175,528 150,401
Money market deposits 239,450 166,649
Time deposits 665,239 571,474
--------------- ----------------
Total deposits $ 1,373,372 $ 1,140,371
=============== ================
</TABLE>
Time deposits of $100,000 or more were $149,642,000 and $99,859,000 at December
31, 1997 and 1996, respectively. Interest expense on time deposits of $100,000
or more was $7,359,000, $5,407,000, and $4,349,000 for the years ended December
31, 1997, 1996, and 1995, respectively.
NOTE 11 - SHORT-TERM BORROWINGS
The short-term borrowings of $47,685,000 and $42,263,000 at December 31, 1997
and 1996, respectively, consisted of federal funds purchased and securities
sold under repurchase agreements.
The following information relates to federal funds purchased and securities
sold under repurchase agreements for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
As of year-end - Weighted average rate 6.62% 6.37%
For the year:
Highest month-end balance $ 79,021 $ 45,237
Daily average balance 56,678 33,833
Weighted average rate 5.80% 5.47%
</TABLE>
F-22
<PAGE> 43
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Federal Home Loan Bank advances (a) $ 60,929 $ 18,177
Note payable to former stockholder (b) 17
------------------- -------------------
Totals $ 60,929 $ 18,194
=================== ===================
</TABLE>
(a) As members of the Federal Home Loan Bank (FHLB) system, individual bank
subsidiaries may utilize various borrowing alternatives, secured by
pledges of mortgage loans (totaling $276,637,000) and FHLB stock. At
December 31, 1997, the subsidiaries' outstanding advances had original
maturities ranging from five months to eight years and fixed and
adjustable rates ranging from 5.26% to 7.73%. Interest is payable
monthly.
The scheduled principal maturities of these advances at December 31,
1997, are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
1998 $ 30,200
1999 1,229
2000 18,200
2001 200
Thereafter 11,100
---------------
$ 60,929
===============
</TABLE>
(b) Note payable was due January 1, 1997. The note was unsecured.
F-23
<PAGE> 44
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES
The components of the provision for income taxes are as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 7,481 $ 6,418 $ 5,376
State 1,703 1,441 1,032
--------------- --------------- ---------------
Total current 9,184 7,859 6,408
--------------- --------------- ---------------
Deferred tax credit (171) (883) (327)
--------------- --------------- ---------------
Subtotals 9,013 6,976 6,081
Change in valuation
allowance (2) 16 28
--------------- --------------- ---------------
Total provision for
income taxes $ 9,011 $ 6,992 $ 6,109
=============== =============== ===============
</TABLE>
Included in the total provision for income taxes is expense of $70,000,
$20,000, and $12,000 for the years ended December 31, 1997, 1996, and 1995,
respectively, related to security transactions.
F-24
<PAGE> 45
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (CONTINUED)
As of December 31, 1997 and 1996, deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities. The major components of deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 5,305 $ 3,910
Deferred compensation 223 232
Nonperforming assets 528
Net operating losses 1,183 1,010
Pension 233 272
Other 196 217
Unrealized loss on securities available for sale 294
--------------- ---------------
7,140 6,463
Valuation allowance (864) (756)
--------------- ----------------
Deferred tax assets 6,276 5,707
--------------- ---------------
Deferred tax liabilities:
Depreciation (1,829) (1,571)
Mortgage servicing rights (249) (102)
Other (52) (37)
Unrealized gain on securities
available for sale (13)
--------------- ----------------
Deferred tax liabilities (2,143) (1,710)
--------------- ---------------
Net deferred tax assets $ 4,133 $ 3,997
=============== ===============
</TABLE>
The change in net deferred assets in 1997 includes changes related to
acquisitions and $308,000 of tax expense allocated directly to stockholders'
equity for unrealized gains on securities available for sale.
The Company and one of its subsidiaries have separate Wisconsin net operating
loss carryforwards totaling $16,662,000 at December 31, 1997. These net
operating loss carryforwards begin to expire in 1998. Since the Company and
these subsidiaries are required to file separate returns for Wisconsin and they
are not expected to generate taxable income, no tax benefit from these losses
is anticipated. The valuation allowance represents the benefit of
these losses, which is not expected to be realized.
F-25
<PAGE> 46
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (CONTINUED)
One subsidiary has a federal net operating loss carryforward of $382,000 and
two other subsidiaries have Wisconsin net operating loss carryforwards of
$3,632,000. These carryforwards occurred prior to the acquisition of these
subsidiaries and, therefore, can only be used to offset future taxable income
of these subsidiaries. The federal carryforwards begin to expire in 2001 and
the Wisconsin carryforwards begin to expire in 2006. Based on the annual usage
limitations, it is expected these net operating losses will be utilized.
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------------- ---------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------- ---------- -------------- ---------- ------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax expense at
statutory
rate 9,974 34.0 $ 7,615 34.0 $ 6,783 34.0
Increase (decrease)
in taxes resulting
from:
Tax-exempt
interest (2,304) (7.9) (1,875) (8.4) (1,529) (7.7)
State income
taxes 1,066 3.6 852 3.8 741 3.7
Goodwill
amortization 195 0.7 178 0.8 135 0.7
Other 80 0.3 222 1.0 (21) (0.1)
-------- ------ -------- ----- ----------- ------
Provision for income
taxes $ 9,011 30.7 $ 6,992 31.2 $ 6,109 30.6
======== ====== ======== ===== =========== ======
</TABLE>
NOTE 14 - RETIREMENT PLANS
The Company sponsors a defined contribution 401(k) retirement savings plan
covering substantially all employees. Employees are allowed to make voluntary
contributions to the plan. The Company makes a matching contribution which is
based on the Company's return on equity. The Company may also make a
discretionary profit-sharing contribution.
F-26
<PAGE> 47
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - RETIREMENT PLANS (CONTINUED)
F&M Bank - Lakeland continues to maintain an Employee Stock Ownership Plan
(ESOP), which was established prior to the Company's acquisition of this bank.
The assets of this plan, which include 185,353 shares of the Company stock,
remain frozen and have not been transferred into the Company's 401(k)
retirement savings plan as of December 31, 1997.
F&M Bank - East Troy, F&M Bank - Brodhead, F&M Bank - Prairie du Chien, F&M
Bank - Landmark, and F&M Bank - Darlington, N.A. sponsor defined contribution
401(k) retirement savings plans which cover substantially all of their
respective employees. The contributions to these plans for 1997 were
consistent with those of the Company's 401(k) retirement savings plan discussed
above. It is expected that the assets of these plans will be transferred into
the Company's plan during 1998.
Retirement plan contribution expense charged to operations for all plans
(excluding the defined benefit pension plan discussed below) totaled
$1,392,000, $1,092,000, and $1,035,000 for 1997, 1996, and 1995, respectively.
F&M Bank - Waushara County sponsored a defined benefit plan covering
substantially all employees of the former Union State Bank. Effective August
27, 1994, the plan was frozen resulting in a plan curtailment. Subsequent to
the curtailment, plan participants will not accrue any additional benefit for
service. The Bank's funding policy is to make contributions on an annual basis
to the extent allowed for tax purposes. The following table sets forth F&M
Bank - Waushara County's defined benefit pension plan funded status and amounts
reflected in the accompanying consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Actuarial present value of
benefit obligation $ (2,109) $ (2,227)
Plan assets at fair value 1,398 1,464
--------------- ---------------
Accrued pension cost recognized
in the consolidated
balance sheets $ (711) $ (763)
=============== ===============
</TABLE>
F-27
<PAGE> 48
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - RETIREMENT PLANS (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest cost on
projected benefit
obligation $ 126 $ 128 $ 161
Net amortization and
deferral (21) (12) (36)
--------------- --------------- ---------------
Total periodic pension cost 105 116 125
Less - Actual return on
plan assets 82 90 105
--------------- --------------- ---------------
Net periodic pension cost $ 23 $ 26 $ 20
=============== =============== ===============
</TABLE>
The following assumptions were used in determining the projected benefit
obligation:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 6.0% 6.0% 6.0%
Rates of increase in
compensation levels 0.0% 0.0% 0.0%
Expected long-term rate of
return on assets 7.5% 7.5% 7.5%
</TABLE>
The plan assets consist primarily of insurance investment contracts, U.S.
government securities, and short-term mutual funds.
F-28
<PAGE> 49
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - STOCKHOLDERS' EQUITY
Earnings per share are based upon the weighted average number of shares
outstanding, restated to reflect the 10% stock dividends paid to stockholders
on June 9, 1997 and June 10, 1996. The following shows the computation of the
basic and diluted earnings per share for the years ended December 31:
<TABLE>
<CAPTION>
Weighted
Average
Number of Earnings Per
Net Income Shares Share
--------------- --------------- ----------------
(In Thousands)
<S> <C> <C> <C>
1997
- ----
Earnings per share - Basic $ 20,325 9,745,459 $ 2.09
================
Effect of stock options - Net 48,025
--------------- ---------------
Earnings per share - Diluted $ 20,325 9,793,484 $ 2.08
=============== ================ ================
1996
- ----
Earnings per share - Basic $ 15,406 8,890,517 $ 1.73
================
Effect of stock options - Net 30,007
--------------- ---------------
Earnings per share - Diluted $ 15,406 8,920,524 $ 1.73
=============== ================ ================
1995
- ----
Earnings per share - Basic $ 13,840 8,694,464 $ 1.59
================
Effect of stock options - Net 18,586
--------------- ---------------
Earnings per share - Diluted $ 13,840 8,713,050 $ 1.59
=============== ================ ================
</TABLE>
On June 9, 1997, the Company issued 821,875 shares of common stock as a 10%
stock dividend. These shares had a value of $23,015,000 at the date of
issuance. All references to the number of shares of common stock in the
footnotes have been restated for the stock dividend; however, on the financial
statements, these shares are recognized as having been issued in 1997.
On June 10, 1996, the Company issued 637,880 shares of common stock as a 10%
stock dividend. These shares had a value of $16,538,000 at the date of
issuance. All references to the number of shares of common stock in the
footnotes have been restated for the stock dividend; however, on the financial
statements, these shares are recognized as having been issued in 1996.
F-29
<PAGE> 50
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must
meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 1997, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notifications from the supervisory
agencies categorized all of the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios of 10.0%, 6.0%, and 5.0%, respectively.
There are no conditions or events since those notifications that management
believes have changed the subsidiary banks' categories.
The Company's consolidated actual and minimum regulatory capital amounts (in
thousands) and ratios, as of December 31, are presented in the following table:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
For Capital
Actual Adequacy Purposes
----------------------------------------
Amount Ratio Amount Ratio
----------- ----- ------- -----
<S> <C> <C> <C> <C>
Total capital (to
risk-weighted assets) $ 154,163 12.6% >$ 98,050 >8.0%
- -
Tier I capital (to
risk-weighted assets) $ 139,073 11.4% >$ 49,025 >4.0%
- -
Tier I capital (to
average assets) $ 139,073 8.7% >$ 64,322 >4.0%
- -
</TABLE>
F-30
<PAGE> 51
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
For Capital
Actual Adequacy Purposes
---------------------------------
Amount Ratio Amount Ratio
----------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
Total capital (to
risk-weighted assets) $ 128,371 13.0% >$ 78,984 >8.0%
- -
Tier I capital (to
risk-weighted assets) $ 116,052 11.8% >$ 39,492 >4.0%
- -
Tier I capital (to
average assets) $ 116,052 8.9% >$ 51,982 >4.0%
- -
</TABLE>
Banking subsidiaries are restricted by banking regulations from making dividend
distributions above prescribed amounts. At December 31, 1997, the Company's
subsidiaries could have paid $45,483,000 of additional dividends to the Company
without prior regulatory approval.
NOTE 16 - STOCK OPTION PLANS
The Company sponsors two stock option plans, one for officers and employees
(the "Executive Plan") and one for nonemployee directors (the "Directors'
Plan"). Options under the Executive Plan are granted at the discretion of the
stock option committee of the Company's Board of Directors. Options under the
Directors' Plan are granted automatically each year at a date and in an amount
specified in the Directors' Plan. Under both plans, options to purchase shares
of the Company's common stock are granted at a price equal to the market price
of the stock at the date of grant. A total of 181,500 shares were made
available for grant under these plans.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes methodology. The following assumptions were made in estimating
fair value for options granted for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield 2.00% 2.76% 2.76%
Risk-free interest rate 5.46% 5.13% 5.13%
Weighted average expected
life (years) 4.4 4.3 4.3
Expected volatility 37.20% 23.44% 23.44%
</TABLE>
The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $5.75, $2.70, and $2.10 per share
for options granted in 1997, 1996, and 1995, respectively.
F-31
<PAGE> 52
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - STOCK OPTION PLANS (CONTINUED)
No compensation cost has been recognized for the plans. Had compensation cost
been determined on the basis of fair value, net income and earnings per share
would have been reduced as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands, Except Earnings Per Share)
<S> <C> <C> <C>
Net income:
----------
As reported $ 20,325 $ 15,406 $ 13,840
=============== =============== ================
Pro forma $ 20,181 $ 15,350 $ 13,794
=============== =============== ================
Earnings per share - Basic:
--------------------------
As reported $ 2.09 $ 1.73 $ 1.59
=============== =============== ================
Pro forma $ 2.07 $ 1.73 $ 1.59
=============== =============== ================
Earnings per share - Diluted:
----------------------------
As reported $ 2.08 $ 1.73 $ 1.59
=============== =============== ================
Pro forma $ 2.06 $ 1.72 $ 1.58
=============== =============== ================
</TABLE>
Following is a summary of stock option transactions for the years ended
December 31:
<TABLE>
<CAPTION>
Number of Shares
------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of
year 77,223 54,954 42,740
Granted during the year 25,135 27,969 23,714
Exercised during the year (at
prices ranging from
$16.53 to $26.82 per share) (13,970) (5,700) (4,500)
Canceled during the year (7,000)
--------------- --------------- ---------------
Outstanding at end of year 88,388 77,223 54,954
=============== =============== ===============
Weighted average exercise
price per share
granted during the year $ 26.98 $ 21.71 $ 17.63
=============== =============== ===============
Available for grant at
end of year 68,942 94,077 122,046
=============== =============== ================
</TABLE>
Options granted under these plans expire ten years after the
grant.
F-32
<PAGE> 53
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - STOCK OPTION PLANS (CONTINUED)
Following is a summary of the options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise
Price Range Number Life - Years Price
---------------- ------------ ------------- ------------
<S> <C> <C> <C>
$16.53 to $17.77 40,344 6.7 $ 17.17
$21.65 to $21.90 25,109 8.1 21.72
$26.82 to $27.39 22,935 9.1 27.00
------------- ---------- ------------
Totals 88,388 7.7 $ 21.01
============= ========= ============
</TABLE>
All options outstanding at December 31, 1997, were exercisable.
In connection with an acquisition in 1994, an unexercised option under a
separate stock option plan was converted into an option for 15,958 shares of
the Company's common stock with an exercise price of $7.73 per share. During
1997, 1996, and 1995, the option was exercised for 1,500, 2,000, and 1,500
shares, respectively. The option remains outstanding for 7,158 shares as of
December 31, 1997. The option expires December 15, 2002.
NOTE 17 - ADVERTISING COSTS
Advertising costs are expensed as incurred (or the first time advertising takes
place). Advertising expense for 1997, 1996, and 1995 was $1,095,000, $768,000,
and $688,000, respectively.
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.
F-33
<PAGE> 54
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-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Commitments to extend credit 120,740 $ 92,117
Standby letters of credit 2,271 5,728
Credit card commitments 24,991 20,189
--------- ----------
$ 148,002 $ 118,034
========= ==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The commitments are
structured to allow for 100% collateralization on all standby letters of
credit.
Credit card commitments are commitments on credit cards issued by the Company's
subsidiaries and serviced by other companies. These commitments are unsecured.
Contingencies
In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse effect on the
consolidated financial statements.
F-34
<PAGE> 55
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
Concentration of Credit Risk
The Company's subsidiary banks grant residential, commercial, agricultural, and
consumer loans throughout Wisconsin. Due to the diversity of locations, the
ability of debtors to honor their contracts is not tied to any particular
economic sector.
NOTE 19 - PENDING ACQUISITIONS
On June 10, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of Sentry Bancorp.,
Inc., in exchange for cash. Sentry Bancorp., Inc. owns 100% of the stock of
Cannon Valley Bank. This transaction has received regulatory and stockholder
approval. The transaction is expected to be completed in the first quarter of
1998.
On September 30, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of Bank of South Wayne
in exchange for Company stock. This transaction has received stockholder
approval and is subject to regulatory approval. The transaction is expected to
be completed in the first quarter of 1998.
On December 1, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of BancSecurity
Corporation, Inc. in exchange for Company stock. BancSecurity Corporation,
Inc. owns 100% of Security Bank, Story County Bank and Trust, and Security Bank
Jasper-Poweshiek. This transaction is subject to regulatory and stockholder
approval. The transaction is expected to be completed in the second quarter of
1998.
On December 31, 1997, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of Financial
Management Services of Jefferson, Inc. in exchange for Company stock.
Financial Management Services of Jefferson, Inc. owns 100% of Farmers &
Merchants Bank. This transaction is subject to regulatory and stockholder
approval. The transaction is expected to be completed in the second quarter of
1998.
F-35
<PAGE> 56
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments:
Cash and cash equivalents - The carrying values approximate the fair values
for these assets.
Investment securities - Fair values are based on quoted market prices, where
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Interest-bearing deposits in other financial institutions are included in
this category.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
residential mortgage, and other consumer. The fair value of loans is
calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The estimate of maturity is based
on the Company's repayment schedules for each loan classification.
The methodology in determining fair value of nonaccrual loans is to average
them into the blended interest rate at 0% interest. This has the effect of
decreasing the carrying amount below the risk-free rate amount and therefore
discounts the estimated fair value.
Impaired loans are measured at the estimated fair value of the expected
future cash flows at the loan's effective interest rate or the fair value of
the collateral for loans which are collateral dependent. Therefore, the
carrying values of impaired loans approximate the estimated fair values for
these assets.
Deposit liabilities - The fair value of deposits with no stated maturity,
such as non-interest-bearing demand deposits, savings, NOW accounts, money
market, and checking accounts, is equal to the amount payable on demand at
the reporting date. The fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate reflects
the credit quality and operating expense factors of the Company.
Short-term and other borrowings - Rates currently available for debt with
similar terms and remaining maturities are used to estimate the fair value
of existing debt. The fair value of borrowed funds due on demand is the
amount payable at the reporting date.
Off-balance-sheet instruments - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the current interest
rates, and the present creditworthiness of the counterparties. Since this
amount is immaterial, no amounts for fair value are presented.
F-36
<PAGE> 57
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for financial instruments at December
31:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- --------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 93,328 $ 93,328 $ 72,692 $ 72,692
Investment
securities 306,837 311,637 249,972 251,766
Total loans 1,197,895 970,554
Allowance for
credit losses (15,090) (12,319)
--------------- --------------- --------------- ----------------
Net loans 1,182,805 1,220,834 958,235 982,338
--------------- --------------- --------------- ----------------
Total financial
assets $ 1,582,970 $ 1,625,799 $ 1,280,899 $ 1,306,796
=============== =============== =============== ================
Financial liabilities:
Deposits $ 1,373,372 $ 1,372,821 $ 1,140,371 $ 1,140,389
Short-term and
other borrowings 108,614 108,567 60,457 60,490
--------------- --------------- --------------- ----------------
Total financial
liabilities $ 1,481,986 $ 1,481,388 $ 1,200,828 $ 1,200,879
=============== =============== =============== ================
</TABLE>
Limitations - Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. Fair value
estimates are based on existing on- and off-balance-sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include premises and equipment, other assets, and other
liabilities. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
F-37
<PAGE> 58
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents $ 7,087 $ 8,348
Investment securities available for sale -
Stated at fair value 214 473
Investment in subsidiaries 139,553 115,085
Loans 957 384
Premises and equipment - Net 1,393 1,550
Other assets 170 230
--------------- ---------------
TOTAL ASSETS $ 149,374 $ 126,070
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 531 $ 1,087
Other borrowings 2,778
--------------- ---------------
Total liabilities 531 3,865
Total stockholders' equity 148,843 122,205
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 149,374 $ 126,070
=============== ===============
</TABLE>
F-38
<PAGE> 59
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends received from
subsidiaries $ 7,751 $ 10,755 $ 7,323
Interest and dividends 502 84 57
Data processing fees 1,606 1,448 1,191
Management and service fees 2,654 2,067 1,846
Gains on sale of securities 81 67 5
--------------- --------------- ---------------
Total income 12,594 14,421 10,422
--------------- --------------- ---------------
Expenses:
Salaries and benefits 1,968 1,807 1,309
Interest 123 276 267
Other 2,352 2,499 1,946
--------------- --------------- ---------------
Total expenses 4,443 4,582 3,522
--------------- --------------- ---------------
Income before provision (credit)
for income taxes and equity
in undistributed net
income of subsidiaries 8,151 9,839 6,900
Provision (credit) for
income taxes 128 (279) (153)
--------------- --------------- ---------------
Income before equity in
undistributed net income
of subsidiaries 8,023 10,118 7,053
Equity in undistributed net
income of subsidiaries 12,302 5,288 6,787
--------------- --------------- ---------------
Net income $ 20,325 $ 15,406 $ 13,840
=============== =============== ===============
</TABLE>
F-39
<PAGE> 60
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents:
Cash flows from operating activities:
Net income $ 20,325 $ 15,406 $ 13,840
--------------- --------------- ---------------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Gain on sale of
investments available
for sale (81) (67) (5)
Provision for
depreciation and
amortization 223 188 189
Equity in undistributed
net income
of subsidiaries (12,302) (5,288) (6,787)
Change in other assets 3,197 59 100
Change in accrued
expenses (556) 727 (143)
--------------- --------------- ---------------
Total adjustments (9,519) (4,381) (6,646)
--------------- --------------- ---------------
Net cash provided by
operating activities 10,806 11,025 7,194
--------------- --------------- ---------------
Cash flows from investing
activities:
Capital contributed to
subsidiaries (2,000) (250)
Purchase of stock in
subsidiary banks (48) (23)
Payment for purchase of
securities available for
sale (726)
Proceeds from sales and
maturities of
investment securities
available for sale 337 537 423
Net (increase) decrease
in loans (493) 68 968
Capital expenditures (41) (214) (167)
--------------- --------------- ---------------
Net cash provided by
(used in) investing
activities (2,197) (383) 951
--------------- --------------- ---------------
</TABLE>
F-40
<PAGE> 61
F&M BANCORPORATION, INC. AND SUBSIDIARIES
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of
stock options $ 227 $ 132 $ 106
Proceeds from other
borrowings 119
Principal payments on
other borrowings (2,778) (1,355)
Purchase of shares of
treasury common stock (845)
Dividends paid (7,319) (5,424) (4,004)
--------------- --------------- ---------------
Net cash used in
financing activities (9,870) (5,173) (6,098)
--------------- --------------- ---------------
Net increase (decrease) in
cash and cash equivalents (1,261) 5,469 2,047
Cash and cash equivalents
at beginning 8,348 2,879 832
--------------- --------------- ---------------
Cash and cash equivalents
at end $ 7,087 $ 8,348 $ 2,879
=============== =============== ===============
Supplemental cash flow information:
- ----------------------------------
Cash received during the year
for income taxes $ 7,800 $ 6,144 $ 4,884
Cash paid during the year for:
Interest 171 226 296
Income taxes 7,661 5,800 5,133
</TABLE>
F-41
<PAGE> 62
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of F&M
Bancorporation, Inc. (the "Company" or "F&M") and its subsidiaries for the five
years ended December 31, 1997. This information and the following discussion
and analysis should be read in conjunction with other financial information
presented elsewhere in this report. See Note (1) below regarding accounting
for business combinations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (1)
Interest income $122,547 $98,909 $87,572 $74,158 $70,878
Interest expense 57,845 45,374 39,406 29,524 29,339
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 64,702 53,535 48,166 44,634 41,539
Provision for loan losses 2,826 2,904 1,713 1,398 1,389
Non-interest income 8,814 6,587 5,356 4,814 5,894
Net income before extraordinary item and cumulative
effect of change in accounting principle (2) 20,325 15,406 13,840 10,148 10,199
Net income 20,325 15,406 13,840 10,148 10,272
Net income applicable to common stock 20,325 15,406 13,840 10,126 10,085
PERIOD END BALANCE SHEET DATA
Total assets 1,646,003 1,335,902 1,148,871 1,062,771 1,011,304
Net loans 1,182,805 958,235 783,125 727,306 629,068
Total deposits 1,373,372 1,140,371 993,715 925,936 882,158
Short-term borrowings 47,685 42,263 12,627 20,996 6,806
Other borrowings 60,929 18,194 18,090 10,519 16,832
Preferred stock 0 0 0 0 2,073
Stockholders' equity 148,843 122,205 110,963 97,806 97,435
PER SHARE DATA (3)
Net income per common share before extraordinary
item and cumulative effect of change in
accounting principle (2) 2.09 1.73 1.59 1.16 1.20
Net income per common share - basic 2.09 1.73 1.59 1.16 1.21
Net income per common share - fully diluted 2.08 1.73 1.59 1.16 1.21
Cash dividends (4) .76 .61 .50 .40 .30
</TABLE>
- ---------------------
(1) Except as indicated, the data have been restated to reflect the Company's
acquisitions of F&M Bank-Portage County in 1993, F&M Bank-Northeast in
1994, F&M Bank-Waushara County in 1995, F&M Bank-Algoma in 1996, and
Wisconsin Ban Corp. ("WBC") and Citizen's National Bancorporation, Inc.
("CNB") in 1997, all using the pooling of interests method of accounting.
See Note 3 of Notes to the Company's Consolidated Financial Statements.
The F&M Bank-Superior acquisition in 1996, and the 1997 acquisitions of
East Troy Bancshares, Inc.("ETB"), Green County Bank ("GCB") and Clear
Lake Bancorp, Inc.("CLB"), accounted for as poolings of interests, were
not material to prior years' reported operating results and accordingly,
previous years' results have not been restated. The acquisitions of
Bradley Bank ("BB") and the TCF office in Little Chute in 1996 and the
1997 acquisition of the Security office in Antigo were accounted for using
the purchase method of accounting; accordingly, the financial data
includes results of operations only since the dates of acquisition. On
January 27, 1998, the Company acquired Sentry Bancorp ("SB") and on
February 9, 1998 the Company acquired Bank of South Wayne("BSW"). The
Sentry Bancorp transaction was accounted for using the purchase method of
accounting and the Bank of South Wayne was accounted as a pooling of
interests, although F&M does not intend to restate prior results because
of the bank's relative size.
(2) Cumulative effect of change in accounting principle in 1993 represents
the adoption of SFAS No. 109 (Accounting for Income Taxes) by one of the
Company's acquired subsidiaries.
(3) Per share information has been restated to reflect the two-for-one stock
split paid to stockholders on March 19, 1993 and the 10% stock dividend
paid to stockholders on June 10, 1996 and June 9, 1997.
(4) Cash dividends per common share are not restated to reflect the
acquisitions accounted for using the pooling of interests method of
accounting.
F-42
<PAGE> 63
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 and financial condition for the years ended
December 31, 1997, 1996 and 1995. These statements have been restated to
reflect the acquisitions, Union State Bank ("USB"), acquired January 9, 1995,
Community State Bank ("CSB") acquired June 28, 1996, Wisconsin Ban Corp
("WBC"), acquired on May 30, 1997 and Citizen's National Bancorporation, Inc.
("CNB"), 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 ("ETB"), acquired on
January 10, 1997, Green County Bank ("GCB"), acquired on February 27, 1997, and
Clear Lake Bancorp.("CLB"), 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 23, 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.
The Company acquired Sentry Bancorp., Inc. ("SB") on January 27, 1998. This
acquisition was accounted for using the purchase method of accounting. The
Company acquired Bank of South Wayne ("BSW") on February 9, 1998. This
acquisition is being accounted for using the pooling of interests method of
accounting. See Note 19 of Notes to the Company's Consolidated Financial
Statements. Because of the relative size of BSW as compared to F&M, the Company
does not intend to restate periods prior to January 1, 1998 to reflect this
acquisition. Because they were consummated after December 31, 1997, the SB and
BSW acquisitions are not reflected in the following discussion. While future
results and financial condition will reflect the addition of SB and BSW, F&M
does not expect the effects to be material to the Company.
The Company has also announced two pending acquisitions: BancSecurity
Corporation ("BSC") and Financial Management Services of Jefferson ("FMS").
These acquisition 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 $500 million and $100 million,
respectively, at December 31, 1997), the acquisitions 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 Analysis, 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 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, needs
for technological change, and other factors, including those described in this
Management's Discussion and Analysis and elsewhere in this report.
F-43
<PAGE> 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS
1997 was a year of continuing growth for F&M. Net interest income in 1997
increased $11.2 million, or 20.9%, to $64.7 million from $53.5 million in 1996
(compared with $48.2 million in 1995). Net income in 1997 increased $4.9
million, or 31.9%, to $20.3 million from $15.4 million in 1996 (compared with
$13.8 million in 1995).
Net income per share was $2.09 in 1997 compared with $1.73 in 1996 and $1.59 in
1995. Fully diluted net income per share was $2.08 in 1997 compared with $1.73
in 1996 and $1.59 in 1995.
Return on average assets was 1.33% in 1997, compared with 1.24% in 1996 and
1.26% in 1995. Return on average stockholders' equity was 14.37% in 1997,
compared with 13.12% in 1996 and 13.31% in 1995.
Increased net interest income, resulting from both acquisitions and internal
growth, has been the major factor affecting the growth in earnings over the
last three years. The Company has been able to keep its net interest margin
relatively constant over this time period, while at the same time increasing
its interest earning assets.
The remainder of this section provides a more detailed explanation of factors
affecting the results of operations.
F-44
<PAGE> 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
NET INTEREST INCOME
Net interest income is the most significant component of the Company's
earnings. For analytical purposes, interest earned on tax exempt assets, such
as industrial development revenue bonds and state and municipal obligations, is
adjusted in this discussion to a fully-taxable equivalent basis. This
adjustment is based upon the statutory federal corporate income tax rate, and
any interest expense which is disallowed as a deduction in connection with
carrying these tax exempt assets, and thus facilitates a meaningful comparison
between taxable and nontaxable earning assets.
Net interest income in 1997 increased $11.2 million, or 20.9%, to $64.7 million
from $53.5 million in 1996. This increase is attributable to the increase in
asset volume due to the Company's internal growth, acquisitions accounted for
using the purchase method of accounting and pooling of interests method for
which prior periods were not restated and relative stability of the Company's
net interest margin. Net interest income in 1996 increased 11.1% from $48.2
million in 1995, also attributable to the increase in asset volume.
Interest expense increased due to increase in deposits; both internally
generated and due to acquisitions, an increase in rates on deposits due to
growth in savings deposits, mainly the Treasury Plus product which mirrors the
three month Treasury, and increased other borrowings, which were utilized to
fund loan demand in excess of deposit growth.
Changes in net interest income occur due to fluctuations in the balances and/or
mixes of interest-earning assets and interest-bearing liabilities, and changes
in their corresponding interest yields and costs. In both 1997 and 1996, the
Company experienced its greatest asset growth in loans, which enhanced the
Company's net interest income because loans tend to produce higher rates of
interest paid to the Company than other types of interest earning assets.
Changes in nonperforming assets, together with interest lost and recovered on
those assets also affect comparisons of net interest income.
The following table presents the relative contribution of changes in volume and
interest rates on changes in net income for the periods indicated using average
balances.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997 VS. 1996
-------------------------------------------------------
INCREASE (DECREASE) DUE TO (1)
-------------------------------------------------------
VOLUME
------
INTERNAL OUT OF PERIOD
GROWTH ADJUSTMENTS(3) RATE NET
- ---------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Interest earned on:
Loans (2) $14,444 $8,365 $(536) $22,273
Taxable investment securities (529) 658 (115) 14
Non-taxable investment securities (2) 1,552 351 292 2,195
Other interest income (22) 232 (26) 184
- ---------------------------------------------------------------------------------------------------------
Total 15,445 9,606 (385) 24,666
- ---------------------------------------------------------------------------------------------------------
Interest paid on:
Savings deposits 2,082 981 1,205 4,268
Time deposits 1,488 3,310 332 5,130
Short-term borrowings 1,201 117 118 1,436
Other borrowings 1,640 132 (135) 1,637
- ---------------------------------------------------------------------------------------------------------
Total 6,411 4,540 1,520 12,471
- ---------------------------------------------------------------------------------------------------------
Net interest income $9,034 $5,066 $(1,905) $12,195
=========================================================================================================
</TABLE>
F-45
<PAGE> 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996 VS. 1995
-----------------------------------------------------------------
INCREASE (DECREASE) DUE TO (1)
-----------------------------------------------------------------
VOLUME
------
INTERNAL OUT OF PERIOD
GROWTH ADJUSTMENTS(3) RATE NET
- --------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Interest earned on:
Loans (2) $6,898 $3,694 $(156) $10,436
Taxable investment securities (819) 503 (16) (332)
Non-taxable investment securities (2) 1,176 73 (192) 1,057
Other interest income 566 34 (72) 528
- --------------------------------------------------------------------------------------------------------
Total 7,821 4,304 (436) 11,689
- --------------------------------------------------------------------------------------------------------
Interest paid on:
Savings deposits 734 782 803 2,319
Time deposits 1,450 1,214 620 3,284
Short-term borrowings 784 81 (59) 806
Other borrowings (490) 0 51 (439)
- --------------------------------------------------------------------------------------------------------
Total 2,478 2,077 1,415 5,970
- --------------------------------------------------------------------------------------------------------
Net interest income $5,343 $2,227 $(1,851) $5,719
========================================================================================================
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) The amount of interest income on nontaxable loans and investment
securities has been adjusted to its fully taxable equivalent.
(3) Out of period adjustments reflect acquisitions in that year for which
prior financial statements were not restated.
F-46
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The following table presents the components of the changes
in the net yield on interest-earning assets (on a fully
tax equivalent basis) for the three-year period ended
December 31, 1997. Because of the increase in the
percentage of assets represented by loans, the Company's
yield on interest-earning assets for 1997 increased from
1996, although the interest rates earned for various
classes of assets decreased slightly during the year. The
Company's effective rate on interest-bearing liabilities
increased in 1997 as compared to 1996, as a result of
increased interest paid on deposits, and slightly lower
rates paid on other borrowings. The increase over the
period is reflected in the 1997 yield on interest-earning
assets which increased by 0.05%, after a decrease of 0.01%
in 1996 and an increase of 0.65% in 1995 respectively. The
effective rate on liabilities as a percentage of
interest-earning assets increased by 0.12% in 1997 and
0.06% in 1996, respectively, producing a negative impact
on net interest margin on interest-earning assets of 0.07%
for both 1997 and 1996. In 1995, net interest margin on
interest-earning assets decreased 0.06%.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------
YIELD/ CHANGE YIELD/ CHANGE YIELD/ CHANGE
RATE FROM 1996 RATE FROM 1995 RATE FROM 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Yield on interest-earning assets 8.70% 0.05% 8.65% (0.01)% 8.66% 0.65%
Effective rate on liabilities as a percent
of interest-earning assets 3.99% 0.12% 3.87% 0.06% 3.81% 0.71%
- ----------------------------------------------------------------------------------------------------------------
Net interest margin on interest-earning assets 4.71% (0.07)% 4.78% (0.07)% 4.85% (0.06)%
================================================================================================================
</TABLE>
F-47
<PAGE> 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The following table sets forth average consolidated balance sheet data and
average yield and rate data on a tax equivalent basis for the periods
indicated.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Loans (1) (2) (3) $1,138,031 $104,866 9.21% $891,220 $82,593 9.27% $776,903 $72,157 9.29%
Taxable investment
securities 159,646 9,830 6.16% 157,492 9,816 6.23% 162,579 10,148 6.24%
Nontaxable investment
securities (2) 121,222 9,709 8.01% 97,369 7,514 7.72% 81,214 6,457 7.95%
Other investments 28,959 1,618 5.59% 25,209 1,434 5.69% 14,731 906 6.15%
---------------------- ---------------------- ----------------------
Total $1,447,858 $126,023 8.70% $1,171,290 $101,357 8.65% $1,035,427 $89,668 8.66%
Non-interest earning assets
Cash and due from banks 39,205 34,286 34,759
Premises & Equip. - net 31,947 26,327 22,296
Other assets 28,215 22,920 19,034
Less: Allowance for loan loss (14,232) (11,014) (9,608)
---------- ---------- ----------
Total $1,532,993 $1,243,809 $1,101,908
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest bearing liabilities
Savings deposits $483,921 $15,453 3.19% $385,830 $11,185 2.90% $331,882 $8,866 2.67%
Time deposits 634,498 36,582 5.77% 550,905 31,452 5.71% 504,325 28,168 5.59%
Short-term borrowings 56,678 3,286 5.80% 33,833 1,850 5.47% 18,062 1,044 5.78%
Other borrowings 42,772 2,524 5.90% 13,014 887 6.82% 20,220 1,326 6.56%
---------------------- -------------------- --------------------
Total $1,217,869 $57,845 4.75% $983,582 $45,374 4.61% $874,489 $39,404 4.51%
Non-interest bearing
liabilities
Demand deposits 157,753 130,030 112,386
Other liabilities 15,890 12,779 11,035
Stockholders' equity 141,481 117,418 103,998
---------- ---------- ----------
Total $1,532,993 $1,243,809 $1,101,908
========== ========== ==========
Net interest income $68,178 $55,983 $50,264
Rate spread 3.95% 4.04% 4.15%
Net interest margin 4.71% 4.78% 4.85%
</TABLE>
(1) For the purposes of these computations, non-accruing loans are included
in the daily average loan amounts outstanding.
(2) The amount of interest income on non-taxable investment securities and
loans has been adjusted to its fully taxable equivalent.
(3) Loan fees are included in total interest income as follows:
1997-$2,163,000; 1996-$1,675,000; 1995-$1,230,000.
F-48
<PAGE> 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The following table sets forth the mix of average interest-earning assets and
average interest-bearing liabilities.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Loans 78.6% 76.1% 75.0%
Taxable investment securities 11.0% 13.4% 15.7%
Non-taxable investment securities 8.4% 8.3% 7.8%
Other investments 2.0% 2.2% 1.5%
- --------------------------------------------------------------------------
100.0% 100.0% 100.0%
- --------------------------------------------------------------------------
Savings deposits 39.7% 39.2% 38.0%
Time deposits 52.1% 56.0% 57.7%
Short-term borrowings 4.7% 3.5% 2.0%
Other borrowings 3.5% 1.3% 2.3%
- --------------------------------------------------------------------------
100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------
</TABLE>
The preceding table reflects the results of Management's strategy to increase
loans as a percent of earning assets coupled with generally strong demand for
loans. It also reflects the effects of pooled acquisitions. Acquired banks
frequently have a lower loan percentage than F&M, which F&M is then able to
increase after acquisition. However, because of pooling accounting, their
percentages may affect F&M's prior periods. Based on the current economic
conditions, management has established a range of average loans to earning
assets of between 70% and 80% which it believes to be the optimum level for
F&M.
Interest rates fluctuated throughout 1997, but remained relatively stable.
Savings deposits increased faster than time deposits, this increase was
partially attributed to the promotion of our money market product (Treasury
Plus) indicating that a larger part of F&M's deposit growth has come from
increase balances of savings deposits. Short-term borrowing increased because
the Company took advantage of the situation in which the short term rates were
more attractive than current deposit rates. The increase in other borrowings is
due to the Company locking historically lower interest rates for a longer
period of time. Increasing long term borrowing, also, balances out the mix of
short term borrowing and long term borrowing. For more information regarding
borrowing, see "Borrowings" below and Notes 11 and 12 of Notes to the Company's
Consolidated Financial Statements.
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 therefore) 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 was $2.8 million in 1997, compared with $2.9
million in 1996 and $1.7 million in 1995. Although total loans grew, the
provision decreased slightly in 1997 because of increased recoveries on charged
off loans and a decrease in non-performing assets. The allowance for loan
losses as a percentage of gross loans outstanding was 1.26% at December 31,
1997, as compared to 1.27% at both December 31, 1996 and 1995. The reduction in
the allowance percentage resulted from the relatively greater increase in the
level of loans as compared to net provision. Net charge-offs as a percentage of
average loans outstanding were 0.12% in 1997, 0.14% in 1996 and 0.12% in 1995.
Charge-offs in 1997 were not concentrated in any industry or business segment.
NON-INTEREST INCOME
The following table presents the major components of non-interest income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service fees $4,430 $3,392 $2,971
Net securities gains 194 59 34
Other operating income 4,190 3,136 2,351
- --------------------------------------------------------------------------------------
Total $8,814 $6,587 $5,356
======================================================================================
</TABLE>
F-49
<PAGE> 70
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The Company stresses the importance of growth in non-interest income as one of
its key long-term strategies. Non-interest income for 1997 increased $2.2
million or 33.8% when compared to 1996. The increase in service fees during
1997 was attributable primarily to increased services (primarily relating to
checking and other depository accounts) sold, along with an increase in the
amount charged for those services. Purchase acquisitions and acquisitions of
banks for which prior periods were not restated also contributed to the
increase of non-interest income.
During all three periods, net security gains were minimal. These gains were
realized as management responded to market conditions and opportunities. For
additional detail see Note 5 of Notes to the Company's Consolidated Financial
Statements.
The increase in other operating income during 1997 was due principally to
increases in secondary market commissions, along with an increase in other
miscellaneous charges. The volume of mortgage refinancings and new home
purchases increased in 1997, in spite of fluctuating interest rate conditions,
and therefore increased the Company's related secondary market commissions. The
increase in the operating income between 1995 and 1996 reflects primarily an
increase in mortgage refinancing (and, therefore, secondary market
commissions).
NON-INTEREST EXPENSE
The following table presents the major components of non-interest expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $22,972 $18,750 $16,438
Occupancy expenses, net 5,823 4,702 4,424
Data processing 1,617 1,533 1,586
Goodwill amortization 689 524 398
FDIC insurance premiums 155 120 1,087
Other operating expenses 10,098 9,191 7,927
- --------------------------------------------------------------------------------------
Total $41,354 $34,820 $31,860
======================================================================================
</TABLE>
The Company's total non-interest expense in 1997 increased $6.5 million, or
18.8%, to $41.4 million from $34.8 million in 1996. The increase was primarily
due to acquisitions in 1997 and 1996, resulting both from the costs of the
acquisitions and increase from those with respect to which prior periods were
not restated. Salary and employee benefits rose due to new locations as well as
increased salary levels. Occupancy expenses increased due to servicing of new
locations and operations. Data processing fees increased slightly, primarily
due to volume. The Company expects to review its data processing arrangements
during 1998, including continuing review of its "year 2000 compliance". While
the Company has not identified expected material expenditures as a result of
"year 2000 compliance"; there can be no assurances that will be the case in
part because certain decisions as to future processing have not been finalized
and certain "year 2000 compliance" issues assume third party resolution. FDIC
deposit insurance premiums increased due to increased deposit levels from
acquisition and internal growth, although remained well below 1995 levels due
to changes in insurance rates in May 1995. The increase in other operating
expenses resulted from a variety of increases in other expense categories,
including increases resulting from acquisitions for which prior periods were
not restated.
The Company's 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 2.14% in 1997, 2.27% in 1996, and 2.41%
in 1995.
Due to the sensitivity of the overhead ratio to changes in the size of 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 53.85% in 1997, 55.70%
in 1996 and 57.32% in 1995. The decreases in this ratio and the overhead ratio
resulted from the various factors set forth above.
F-50
<PAGE> 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
INCOME TAXES
The Company's provision for income taxes in 1997 increased $2.0 million, or
28.9%, to $9.0 million from $7.0 million in 1996. The 1996 level represents a
14.5% increase from $6.1 million in 1995. As a percentage of taxable income,
the effective tax rate was 30.7% in 1997, 31.2% in 1996 and 30.6% in 1995 of
income before taxes. The effective tax rate has remained constant as compared
to 1996. For more information regarding income taxes see Note 13 of Notes to
the Company's Consolidated Financial Statements.
NET INCOME
Net income in 1997 increased by $4.9 million, or 31.9% to $20.3 million from
$15.4 million in 1996. This compares with an increase in income of $1.6
million, or 11.3%, for 1996 from $13.8 million in 1995.
Return on average stockholders' equity was 14.37% in 1997 compared with 13.12%
in 1996 and 13.31% in 1995. The return on average assets was 1.33% in 1997
compared with 1.24% in 1996 and 1.26% in 1995.
Basic net income per share was $2.09 in 1997 compared with $1.73 in 1996 and
$1.59 in 1995. The Company maintains a stock option plan. Fully diluted net
income per share was $2.08 in 1997 compared with $1.73 in 1996 and $1.59 in
1995; the difference from basic net income per share results from the effects
of outstanding stock options.
FINANCIAL CONDITION
In addition, 1997 was a year of growth for F&M in total assets and equity. Year
end total assets in 1997 grew to $1.646 billion, a 23.2% increase from $1.336
billion in 1996. Of the 23.2% increase, approximately 12% growth resulted from
acquisitions for which prior financial statements were not restated, and
approximately 11% resulted from internal growth. Total shareholders' equity at
December 31, 1997 was $149 million, a 21.8% increase from $122 million in 1996.
The balance of this section further discusses changes in the Company's assets,
liabilities and equity.
[BAR GRAPH]
<TABLE>
<CAPTION>
Asset Growth
(Millions)
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
37.1 45.6 56.0 66.2 79.4 140.04 153.36 195.8 257.4 273.3 319.2 451.3 471.3 549.0 776.8 943.1 1,173.5 1646.0
</TABLE>
Note: These figures reflect individual bank assets as of the end of each year.
They do not reflect a restatement for subsequent acquisitions accounted for as
a pooling of interest.
F-51
<PAGE> 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LOAN PORTFOLIO
The following table sets forth the major categories of loans outstanding and
the percentage of total loans for each category at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------------------
(dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $244,629 20.4% $188,952 19.5% $137,109 17.3%
Agricultural 79,351 6.6% 80,245 8.2% 71,895 9.1%
Real estate construction 38,929 3.3% 36,822 3.8% 23,725 3.0%
Real estate mortgage 748,874 62.5% 596,691 61.5% 500,583 63.1%
Installment and other consumer loans 86,112 7.2% 67,844 7.0% 59,874 7.5%
- --------------------------------------------------------------------------------------------------------
Total $1,197,895 100.0% $970,554 100.0% $793,186 100.0%
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------------------
(dollars in thousands) AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $120,988 16.4% $112,799 17.7%
Agricultural 68,116 9.3% 63,023 9.9%
Real estate construction 19,211 2.6% 20,313 3.2%
Real estate mortgage 467,165 63.4% 386,090 60.5%
Installment and other consumer loans 61,082 8.3% 55,884 8.7%
- ----------------------------------------------------------------------------------
Total $736,562 100.0% $638,109 100.0%
==================================================================================
</TABLE>
LOAN PORTFOLIO COMPOSITION
December 31, 1997
[PIE GRAPH]
7% Agriculture
7% Installment and Other Consumer
3% Real Estate Construction
20% Commercial and Industrial
63% Real Estate Mortgage
Loan growth was 23.4% in 1997 compared with 22.4% in 1996. The 1997 and 1996
increase was primarily a result of increased sales efforts at the Company's
subsidiary banks, although approximately $93.0 million in loans (representing
approximately 10% of the increase) resulted from acquisitions in which the
Company did not restate its prior financial statements, with the remaining
balance resulting from internal growth.
During 1997 and 1996 the loan mix in the Company's portfolio remained
relatively constant, with a trend toward commercial loans due to greater demand.
The Company maintains a diversified loan portfolio and therefore, management
believes there is minimal exposure to loan concentration losses. At December
31, 1997, the Company believes that there were no loan concentrations to a
multiple number of borrowers engaged in similar activities which would cause
them to be similarly impacted by economic or other conditions. By maintaining a
diversity of types of borrowers, the Company has attempted to prevent material
losses due to economic difficulties affecting particular industries.
F-52
<PAGE> 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The following table sets forth the scheduled repayments of the loan portfolio
and the sensitivity of loans to interest rate changes at December 31, 1997
(excluding one to four family residential property mortgages and consumer
loans).
<TABLE>
<CAPTION>
MATURITY
----------------------------------------
OVER ONE
ONE YEAR YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Commercial and industrial $171,238 $64,813 $ 8,578
Agricultural l59,944 15,494 3,913
Real estate construction 34,451 4,444 34
- ------------------------------------------------------------------------------
Total $265,633 $84,751 $12,525
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
-----------------------
AMOUNT OF LOANS DUE AFTER ONE YEAR WITH: FIXED VARIABLE
RATE RATE
-----------------------
(In thousands)
<S> <C> <C>
Commercial and industrial $68,333 $5,058
Agricultural 19,130 277
Real estate construction 4,454 24
- ------------------------------------------------------------------------------
Total $91,917 $5,359
==============================================================================
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets are a broad measure of problem loans. 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 as of the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
(dollars in thousands) 1997 % 1996 % 1995 %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans $10,606 0.89% $12,353 1.27% $7,317 0.92%
Loans past due 90 days or more 392 0.03 434 0.04 485 0.06
Restructured loans 0 0.00 216 0.02 706 0.09
- ----------------------------------------------------------------------------------------------------------
Total non-performing loans 10,998 0.92 13,003 1.33 8,508 1.07
Other real estate owned 917 0.08 1,842 0.19 846 0.11
- ----------------------------------------------------------------------------------------------------------
Total non-performing assets $11,915 1.00% $14,845 1.52% $9,354 1.18%
==========================================================================================================
</TABLE>
<TABLE>
<Caption
DECEMBER 31,
--------------------------------------------
(dollars in thousands) 1994 % 1993 %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-accrual loans $6,609 0.90% $ 5,310 0.83%
Loans past due 90 days or more 393 0.05 461 0.07
Restructured loans 255 0.03 494 0.08
- -----------------------------------------------------------------------------------
Total non-performing loans 7,257 0.98 6,265 0.98
Other real estate owned 1,322 0.18 2,614 0.41
- -----------------------------------------------------------------------------------
Total non-performing assets $8,579 1.16% $ 8,879 1.39%
===================================================================================
</TABLE>
Maintaining excellent credit quality continues to be a priority for the
Company. Non-performing assets as a percentage of total loans outstanding
decreased in 1997 to 1.00% compared with 1.52% in 1996 and 1.18% in 1995.
Non-accrual loans decreased in 1997 because of developments with respect to a
number of separate loans, in different locations and industries. The decrease
in 1997 was due largely to the Company's attentive monitoring of the loan
portfolio. Management continues to take an aggressive collection effort on
these assets and regularly reviews and evaluates the non-performing credits to
determine appropriate handling and action.
F-53
<PAGE> 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LOAN QUALITY
[BAR GRAPH]
<TABLE>
<CAPTION>
Non-performing assets to New Charge offs to average Allowance for loan losses to
period end loans loans outstanding period end loans
<S> <C> <C> <C>
93 1.39% 0.13% 1.36%
94 1.16% 0.12% 1.26%
95 1.18% 0.12% 1.27%
96 1.52% 0.14% 1.27%
97 1.00% 0.12% 1.26%
</TABLE>
Non-accrual loans at December 31, 1997 decreased 0.38% as a percentage of total
loans, as compared to 1996. Non-accrual loans are at a level the Company
considers manageable and continues to work at reducing the level of
nonperforming loans. Furthermore, the Company considers its allowance for loan
losses adequate to cover this level of non-accrual loans, although it regularly
reviews the various factors used in determining the provision and allowance for
loan losses.
The gross interest income that would have been recognized on non-accrual loans
in 1997 if the loans had been current in accordance with their original terms
was approximately $1,085,000, of which approximately $369,000 was collected and
included in the Company's income for 1997.
It is the policy of the F&M subsidiary banks to place a loan on non-accrual
status when the loan's principal and accrued interest is not expected to be
collected in full or when the loan becomes contractually past due 90 days or
more as to principal or interest and is not guaranteed by an outside source.
Loans past due 90 days or more may be retained on accrual status if they are
guaranteed by a third party and the bank believes that such guaranty will be
adequate to assure collection.
There were no particular loans as to which payments were current at December
31, 1997, which in the opinion of management, and to its best knowledge, will
not be paid according to their terms.
F-54
<PAGE> 75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loan balances at the end of each period;
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>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balance of loans for period $1,138,031 $891,220 $776,903 $683,384 $582,714
=============================================================================================================================
Allowance for loan losses at beginning of period 12,319 10,060 9,255 8,696 8,071
Allowance for loan losses of banks acquired in
purchase transactions and for which prior
periods are not restated 1,329 587 -- -- --
Loans charged off
Commercial and Industrial 684 698 672 507 389
Agricultural 88 278 117 54 280
Real Estate - Mortgage 308 70 98 169 66
Installments and Other Consumer Loans 667 467 322 385 374
- -----------------------------------------------------------------------------------------------------------------------------
Total charge offs 1,747 1,513 1,209 1,115 1,109
Recoveries on loans previously charged off
Commercial and Industrial 83 118 62 115 141
Agricultural 33 16 45 35 30
Real Estate - Mortgage 8 17 53 17 47
Installment and Other Consumer Loans 239 130 141 109 127
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries 363 281 301 276 345
Net loans charged off 1,384 1,232 908 839 764
Provisions for loan losses 2,826 2,904 1,713 1,398 1,389
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $15,090 $12,319 $10,060 $9,255 $8,696
=============================================================================================================================
Ratio of net charge offs during period to
average loans outstanding 0.12 % 0.14 % 0.12 % 0.12 % 0.13 %
Allowance for loan losses to total loans 1.26 % 1.27 % 1.27 % 1.26 % 1.36 %
</TABLE>
F-55
<PAGE> 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT OF IN EACH AMOUNT OF IN EACH AMOUNT OF IN EACH
RESERVE CATEGORY RESERVE CATEGORY RESERVE CATEGORY
FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL
(dollars in thousands) LOSSES LOANS LOSSES LOANS LOSSES LOANS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, industrial, and agricultural $6,942 27.0% $5,049 27.7% $4,151 26.4%
Real estate - construction 245 3.3 259 3.8 166 3.0
Real estate - mortgage 5,350 62.5 4,613 61.5 3,739 63.1
Installment and other consumer loans 2,553 7.2 2,398 7.0 2,004 7.5
- ----------------------------------------------------------------------------------------------------------
$15,090 100.0% $12,319 100.0% $10,060 100.0%
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
AMOUNT OF IN EACH AMOUNT OF IN EACH
RESERVE CATEGORY RESERVE CATEGORY
FOR LOAN TO TOTAL FOR LOAN TO TOTAL
(dollars in thousands) LOSSES LOANS LOSSES LOANS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, industrial, and agricultural $3,859 25.7% $4,131 27.6%
Real estate - construction 130 2.6 140 3.2
Real estate - mortgage 3,693 63.4 3,130 60.5
Installment and other consumer loans 1,573 8.3 1,295 8.7
- ------------------------------------------------------------------------------------
$9,255 100.0% $8,696 100.0%
====================================================================================
</TABLE>
The allowance for loan losses is maintained at a level sufficient to provide
for estimated loan losses based on evaluating known and inherent risks in the
loan portfolio. 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.
The degree of risk associated with the Company's loans is generally greater in
the commercial, industrial and agricultural categories, representing 27.0% of
total loans at December 31, 1997. Accordingly, management has allocated a
significantly larger portion of the allowance for loan losses to these types of
loans.
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.
F-56
<PAGE> 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
INVESTMENT PORTFOLIO
The following table sets forth the distribution of investment securities
(securities held to maturity and available for sale) and their percentage to
total investment securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
(dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $42,657 13.9% $50,305 20.1% $59,893 24.1%
Obligations of states and political subdivisions 139,363 45.4 118,704 47.5 94,562 38.1
Debt securities issued by foreign government 25 0.0 25 0.0 25 0.0
Mortgage-backed securities 101,894 33.2 64,995 26.0 71,659 28.9
Other securities 22,898 7.5 15,943 6.4 22,164 8.9
- ---------------------------------------------------------------------------------------------------------
Total investments $306,837 100.0% $249,972 100.0% $248,303 100.0%
=========================================================================================================
</TABLE>
During 1997, the investment portfolio make-up changed relative with past years,
with a decrease in U.S. treasuries and agencies and an increase in obligations
of states and political subdivisions and mortgage-backed securities. The
Company took advantage of attractive spread relationships in the non-taxable
market and also lengthened the average maturity in the investment portfolio to
increase yields. Mortgage-back securities increased due to acquisitions for
which prior periods were not restated and more attractive rates than U.S.
treasury securities.
INVESTMENT PORTFOLIO
December 31, 1997
[PIE CHART] [PIE CHART]
Composition Quality
Other 7.5% BAA 1%
Treasuries/Agencies 13.9% AA 2%
Mortgage Backed 33.2% A 5%
Municipals 45.4% Non-rated 12%
Treasuries/Agencies AAA 80%
The following tables show the relative maturities and weighted average interest
rates on a tax equivalent basis of investment securities as of December 31,
1997. Although the maturities of the investment portfolio have lengthened from
1996, the Company feels liquidity remains adequate.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies and
corporations* $23,447 4.95% $26,756 6.41% $21,504 6.26% $72,844 6.32%
States and political
subdivisions (domestic) 11,657 7.01 35,084 7.81 37,585 7.92 55,037 8.39
Other bonds, notes,
and debentures 6,146 5.53 10,533 6.69 1,799 5.26 4,445 6.32
- ---------------------------------------------------------------------------------------------------
Total $41,250 5.62% $72,373 7.13% $60,888 7.26% $132,326 7.18%
===================================================================================================
</TABLE>
*Includes floating rate securities which reprice monthly but which mature
during the indicated time period.
F-57
<PAGE> 78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Inherent in any portfolio which includes mortgage-backed securities, there
exist both prepayment and maturity extension risk. The Company is not immune to
these same type risks. The Company's investments in these type of securities
are predominantly in straight U.S. Agency issued mortgage-backed pass-throughs
and lower risk types of real estate mortgage investments
conduits/collateralized mortgage obligations. The major categories of the
mortgage-backed security portfolio and dollar values as of December 31, 1997,
are as follows: fixed rate mortgage-backed pass-throughs-$10.7 million;
variable rate mortgage-backed pass-thoughs-$7.6 million; fixed rate real estate
mortgage investment conduits/collateralized mortgage obligations-$46.3 million;
and floating rate real estate mortgage investment conduits/collateralized
mortgage obligations-$37.3 million.
For more information regarding the investment portfolio, including the
breakdown between securities held to maturity and available for sale, see Note
5 of Notes to the Company's Consolidated Financial Statements.
DEPOSITS
The following table sets forth average deposits and their percentage to total
average deposits at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
AMOUNTS PERCENT AMOUNTS PERCENT AMOUNTS PERCENT
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 157,753 12.3% $ 130,030 12.2% $112,386 11.8%
Interest-bearing demand 115,703 9.1 104,709 9.8 98,843 10.4
Savings deposits 368,218 8.9 281,121 26.4 233,039 24.6
Time deposits 634,498 9.7 550,905 51.6 504,325 53.2
- ----------------------------------------------------------------------------------------------
Total $1,276,172 100.0% $1,066,765 100.0% $948,593 100.0%
==============================================================================================
</TABLE>
Year-end deposits increased 20.4% in 1997 compared with an increase of 14.8% in
1996 over 1995.
The amount of time certificates of deposit issued in amounts of $100,000 or
more and outstanding as of December 31, 1997 was: $149,642,000. Their maturing
distribution was as follows:
<TABLE>
<S> <C>
--three months or less $66,971,000
--over three months and through twelve months $68,187,000
--over one year $14,484,000
</TABLE>
The increase in time certificates of deposit issued in amounts of $100,000 or
more of approximately $50 million over December 31, 1996 was due primarily to
internal growth, acquisitions for which prior periods were not restated and
purchase transactions. Neither F&M or its subsidiaries have any deposits in
foreign banking offices.
Borrowings
Short-term borrowings at December 31, 1997 were $47.7 million, as compared to
$42.3 million at December 31, 1996. Short-term borrowings consist primarily of
repurchase agreements and federal funds purchased. During 1997, F&M has used
short-term borrowings (along with increased deposits) to fund its increasing
loan demand. Use of short-term funds at year end 1997 reflected the
attractiveness of rates for those funds. Going forward, continued reliance
on short-term borrowings 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 December 31, 1997 and 1996.
These borrowings are secured by pledges of mortgage loans, and totaled $60.9
million at December 31, 1997, compared to $18.2 million at December 31, 1996.
The increase in other borrowings in 1997 was due primarily to attractiveness of
longer term rates and the Company's implementation of a leverage program in
which FHLB borrowings are matched to securities purchased. These borrowings
had original maturities of five months to eight years, with rates at
December 31, 1997 ranging from 5.26% to 7.73%.
F-58
<PAGE> 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
CAPITAL ADEQUACY
Stockholders' equity increased in 1997 by $26.6 million, to $148.8 million.
This increase was a result of net income during the year, along with the net
increase in the fair value of available for sale securities which increased
stockholders' equity by $494,000, offset by dividends of $7.3 million paid to
common stockholders.
Equity
(Thousands)
[LINE CHART]
94 102,126
95 110,919
96 122,678
97 148,822
Numbers exclude FASB 115 adjustment.
Regulatory Capital Ratios
December 31, 1997
[LINE CHART]
Leverage Ratio Tier One Risk Total Risk
Based Capital Ratio Based Capital Ratio
F&M Bancorporation 8.65% 11.35% 12.58%
Well Capitalized 5.00% 6.00% 10.00%
Adequately Capitalized 4.00% 4.00% 8.00%
At December 31, 1997, the risk-based capital ratio for Tier 1 capital was 11.4%
and the total risk-based capital ratio was 12.6%, as compared to minimum
regulatory requirements of 4.0% and 8.0%, respectively. The ratio of average
equity to average assets amounted to 9.23% at December 31, 1997 compared with
9.44% at December 31, 1996 and 9.44% at December 31, 1995. The Company's
leverage ratio at December 31, 1997 was 8.7%, as compared to a minimum
regulatory requirement of 4.0%.
At December 31, 1997, the F&M subsidiary banks in the aggregate could have paid
approximately $45,483,000 of additional dividends to the Company without prior
regulatory approval. The payment of dividends is subject to the statutes
governing its subsidiary chartered banks. At December 31, 1997, each of the F&M
banks was in compliance with all applicable capital requirements, and
management believes that the capital structure of the F&M Banks is adequate.
The Company's common stock dividend payout ratio was 36.0% in 1997, as compared
to 35.2% in 1996 and 31.1% in 1995. These numbers include the dividends
historically paid by CSB, USB, WBC and CNB prior to their acquisitions by the
Company; differences in dividend policies affect the comparability of
information.
F&M's acquisitions of GCB, ETB, CLB, CNB, WBC, and BSW were, and its pending
acquisitions of BSC, and FMS are, stock for stock transactions, and therefore
additive to the Company's capital. The acquisitions which have been consummated
did not significantly affect F&M's capital ratios (and F&M does not expect the
pending acquisitions to do so). F&M's 1998 acquisition of SB was for cash,
financed through existing capital resources.
F&M did not incur any significant capital expenditures in 1997. The Company to
date has not committed to any major commitments to build or purchase in 1998
but also expects to finance future expenditures through earnings and existing
capital resources.
F-59
<PAGE> 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY, INTEREST SENSITIVITY AND MARKET RISK MANAGEMENT
As shown in the Company's Consolidated Statement of Cash Flows for 1997, cash
and cash equivalents increased by $20.6 million during 1997 to $93.3 million at
December 31, 1997. The increase primarily reflected $130.1 million in net cash
provided by financing activities plus $24.5 million in net cash provided by
operating activities offset by $134.0 million in net cash used in investing
activities. Net cash used in investing activities consisted primarily of a net
increase in loans plus necessary capital expenditures. Net cash provided by
operating activities primarily consisted of the Company's net income in 1997,
increased by adjustments for non-cash charges. Net cash provided by financing
activities principally reflected a net increase in deposits and other
borrowings offset in part by payments on the Company's other borrowings, and
dividends paid.
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 marketable assets maturing within one year. At December 31, 1997,
the carrying value of securities maturing within one year was $41.3 million, or
13.4% of the total investment securities portfolio. The Company attempts, when
possible, to match relative maturities of assets and liabilities, while
maintaining the desired net interest margin. Although the percentage of earning
assets represented by loans is increasing, management believes that liquidity
is adequate.
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company does not currently engage in the use of derivative
instruments. In addition, the Company has no market risk sensitive instruments
held for trading purposes.
The Company is, however, party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and credit card commitments. For additional detail
see Note 18 of Notes to the Company's Consolidated Financial Statements.
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.
F-60
<PAGE> 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
A historical tool for measuring interest rate sensitivity is the gap analysis.
The following table shows the Company's approximate consolidated rate
sensitivity gap position at December 31, 1997.
<TABLE>
<CAPTION>
0-90 91-365 1-5 OVER 5
(dollars in thousands) DAYS DAYS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $347,082 $388,105 $393,360 $69,348 $1,197,895
Investment securities 46,795 30,869 91,569 137,604 306,837
Other earnings assets 36,171 0 0 576 36,747
- ------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets(RSA) $430,048 $418,974 $484,929 $207,528 $1,541,479
========================================================================================================================
Savings deposits $336,316 $0 $103 $12,111 $348,530
Time deposits 202,262 323,453 139,513 11 665,239
- ------------------------------------------------------------------------------------------------------------------------
Other non-deposit interest-bearing liabilities 47,913 35,029 14,400 11,272 108,614
- ------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities(RSL) $586,491 $358,482 $154,016 $23,394 $1,122,383
========================================================================================================================
Interest sensitivity gap $(156,443) $60,492 $330,913 $184,134 $419,096
========================================================================================================================
Cumulative interest sensitivity gap $(156,443) $(95,951) $234,962 $419,096
========================================================================================================================
Ratio of cumulative rate sensitivity gap to RSA (36.4)% (11.3)% 17.6% 27.2%
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities 73.3% 89.8% 121.4% 137.3%
</TABLE>
Rate-sensitive liabilities in the preceding table exclude 50% of negotiable
order of withdrawal interest-bearing demand accounts and 70% of regular savings
accounts because management believes, based on the Company's previous
experience, that this treatment more closely approximates actual results due to
the relatively stable nature of these accounts. The F&M banks' regulators have
acknowledged these formulas for examination purposes.
Management's overall strategy is to coordinate the volume of rate-sensitive
assets and liabilities to minimize the impact of interest rate movements on the
net interest margin. The above table reflects a negative gap position for the
90-day interval with a positive position for the longer maturities. A negative
position is favorable in a falling interest rate environment; a positive
position is favorable in a
rising interest rate environment. The gap is within the acceptable range
established by management at each level of maturity. The December 31, 1997 net
interest margin decreased slightly to 4.71% from 4.78% for 1996. Since this is
a dynamic ratio, management has the ability to influence net interest income in
a positive manner when interest rate changes do occur.
The Company's rollover policy is such that loans are written with limited
maturities if they are not in conjunction with amortized payments or otherwise
tied to a variable rate. This allows the F&M banks to restructure the terms and
interest rate of the loan to correspond with the Company's cost of funds.
CHANGES IN ACCOUNTING PRINCIPLES
FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," in June 1996. The Company adopted
the provisions of SFAS No. 125 effective January 1, 1997. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. The statement provides guidelines for
classification of a transfer as a sale. The statement also requires liabilities
incurred or obtained by transferors as part of a transfer of financial assets
be initially recorded at fair value. Subsequent to acquisition, the servicing
assets and liabilities are to be amortized over the estimated net servicing
period.
FUTURE ACCOUNTING CHANGES
In June 1997, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income in a full set of general
purpose financial statements. This statement requires all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement requires
that an enterprise display an amount representing total comprehensive income
for the period in a financial statement, but does not require a specific format
for that financial statement. This statement also requires that an enterprise,
a) classify items of other
F-61
<PAGE> 82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
comprehensive income by their nature in a financial statement and, b) display
the accumulated balance of other comprehensive income separately from retained
earnings and surplus in the equity section of the balance sheet. The statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management, at this time, cannot determine
the effect that adoption of this statement may have on the consolidated
financial statements of the Company as comprehensive income is dependent on the
amount and nature of assets and liabilities held which generate nonincome
changes to equity.
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 and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. 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.
SUMMARY QUARTERLY FINANCIAL INFORMATION
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
1997
<S> <C> <C> <C> <C>
Interest income $28,331 $30,238 $31,496 $32,482
Interest expense 13,361 14,200 14,869 15,415
Net interest income 14,970 16,038 16,627 17,067
Provision for loan losses 382 873 643 928
Net income 4,685 4,965 5,312 5,363
Earnings per share .48 .51 .55 .55
1996
Interest income $23,424 $24,269 $25,129 $26,087
Interest expense 10,668 11,019 11,519 12,168
Net interest income 12,756 13,250 13,610 13,919
Provision for loan losses 434 416 484 1,570
Net income 3,978 3,856 4,334 3,238
Earnings per share .45 .43 .49 .36
</TABLE>
F-62
<PAGE> 83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
F&M BANCORPORATION, INC.
Dated March 24, 1998 By:/s/ John W. Johnson
--------------------
John W. Johnson,
President and Chief
Executive Officer
-------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John W. Johnson, Daniel E. Voet and Janet
M. Lakso, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this report, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any state securities commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
---------------
Pursuant to the requirements of the Securities Act of 1933, this
report has been signed by the following persons in the capacities and on the
dates indicated.*
SIGNATURE AND TITLE
/s/ John W. Johnson /s/ Douglas A. Martin
- ------------------------------------------- ---------------------------
John W. Johnson, President, Chief Executive Douglas A. Martin, Director
Officer and Director
/s/ Daniel E. Voet /s/ Duane G. Peppler
- ------------------------------------------- ---------------------------
Daniel E. Voet, Chief Financial Officer and Duane G. Peppler, Director
Treasurer (also, Principal Accounting Officer)
/s/ Gail E. Janssen /s/ Robert C. Safford
- ------------------------------------------- ---------------------------
Gail E. Janssen, Chairman of the Board Robert C. Safford, Director
and Director
/s/ Otto L. Cox /s/ Glenn L. Schilling
- ------------------------------------------- ---------------------------
Otto L. Cox, Director Glenn L. Schilling, Director
/s/ Paul J. Hernke /s/ Joseph F. Walsh
- ------------------------------------------- ---------------------------
Paul J. Hernke, Director Joseph F. Walsh, Director
- -------------
* Each of the above signatures is affixed as of March 24, 1998.
S-1
<PAGE> 84
F&M BANCORPORATION, INC.
(THE "REGISTRANT")
EXHIBIT INDEX
TO
1997 REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------ ----------- ------------ --------
<S> <C> <C> <C>
2.1 Agreement and Plan of Merger dated X
as of December 1, 1997 among the
Registrant, BancSecurity
Acquisition Corporation and
BancSecurity Corporation*
2.2 Plan and Agreement of Merger and X
Reorganization dated as of December
31, 1997 by and among the
Registrant, F&M Merger Corporation
and Financial Management Services
of Jefferson, Inc.*
3(i) Restated Articles of Incorporation, Exhibit 3(i) to Registrant's Report
as amended through May 7, 1996 on Form 10-Q for the quarter ended
March 31, 1996
3(ii) Bylaws, as amended through February Exhibit 3.2 to Registrant's
4, 1994 Report on Form 10-K for the year
ended December 31, 1993 ("1993
10-K")
10.1** Registrant's 1993 Incentive Stock Exhibit A to Registrant's Proxy
Option Plan Statement for 1993 Annual Meeting
of Shareholders ("1993 Proxy Statement")
10.2** Registrant's 1993 Stock Option Exhibit B to 1993 Proxy
Plan for Non-Employee Directors Statement
</TABLE>
EI-1
<PAGE> 85
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------ ----------- ------------ --------
<S> <C> <C> <C>
10.3** Registrant's Executive Bonus Plan Description thereof under
"Compensation Committee
Report on Executive
Compensation" in the
Registrant's Proxy
Statement for 1996
Annual Meeting of
Shareholders ("1996
Proxy Statement")
10.4** Registrant's Deferred Exhibit 10.6 to
Compensation Agreements with: Registrant's Report on
Form 10-K for the year
ended December 31, 1992
(a) Gail E. Janssen
(b) Duane G. Peppler
10.5** Registrant's Officers' Stock Description thereof under
Purchase Plan "Officers' Stock Purchase
Plan" in 1996 Proxy
Statement
10.6 Noncompetition Agreement dated Exhibit 10.1 to the Registrant's
February 11, 1994 between the Report on Form 8-K dated
Registrant and Robert C. Safford February 11, 1994
10.7 ** Agreement dated November 4, 1993 Exhibit 10.1 to the Registrant's
between Pulaski Bank (n/k/a F&M Bank Report on Form 8-K dated March 21,
Northeast) and John W. Johnson 1994 ("3/21/94 8-K")
[superseded]
10.8a** Option Agreement dated Exhibit 10.2 to 3/21/94
March 17, 1993 between Pulaski 8-K
Bancshares, Inc. and John W.
Johnson, together with the
assumption thereof by the
Registrant dated March 21, 1994
10.8(b)** Employment Agreement between X
the Registrant and John W.
Johnson dated July 14, 1997
("Johnson Employment
Agreement)
10.8(c)** Amendment No. 1 to Johnson
Employment Agreement, dated X
November 3, 1997
</TABLE>
EI-2
<PAGE> 86
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------ ----------- ------------ --------
<S> <C> <C> <C>
10.9 Plan and Agreement of Merger Exhibit 10.12 to 1995
and Reorganization dated as of 10-K
February 22, 1996 by and among
the Registrant, F&M Interim Bank
and Community State Bank*
10.10 Plan and Agreement of Exhibit 10.15 to F&M's
Reorganization and Merger dated Annual Report on Form
as of February 27, 1997 among 10-K for the year ended
the Registrant, Merger Corp. and December 31, 1996
Citizens National Bancorporation, ("1996 10-K")
Inc.*
10.11 Plan and Agreement of Merger Exhibit 10.16 to
and Reorganization dated as of 1996 10-K
March 19, 1997 among the
Registrant, Wisconsin Ban Corp.
and F&M Merger Corporation*
21 List of Subsidiaries X
23 Consent of Wipfli Ullrich Bertelson X
LLP
24 Power of Attorney (contained on X
the Signature Page)
27 Financial Data Schedule X
</TABLE>
- ------------------
* Excluding schedules and exhibits, which are identified in such
documents. The Registrant agrees to furnish supplementally a copy of
any omitted schedule or exhibit to the Commission upon request.
** Designates management contracts or compensatory plans or arrangements
which are filed as exhibits hereto.
EI-3
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
dated as of December 1, 1997
among
F&M BANCORPORATION, INC.
and
BANCSECURITY ACQUISITION CORPORATION
and
BANCSECURITY CORPORATION
<PAGE> 2
TABLE OF CONTENTS TO THE MERGER AGREEMENT
<TABLE>
<S> <C>
MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I - THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III - REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Representations and Warranties of BancSecurity . . . . . . . . . . . . . . . . . . . . . 7
3.2 Representations and Warranties of the Buyer . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IV - COVENANTS OF THE BUYER AND BANCSECURITY . . . . . . . . . . . . . . . . . . . . . . 27
4.1 Covenants of BancSecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.2 Covenants of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.3 Covenants of Buyer and BancSecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE V - ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.1 Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.2 Letters of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.3 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.4 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.6 Additional Agreements; Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . 40
5.7 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE VI - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . . . . . . . . . . . 40
6.2 Conditions to Obligations of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.3 Conditions to Obligations of BancSecurity . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE VII - TERMINATION AND AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VIII - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.1 Non-Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . 47
8.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.5 Entire Agreement: Third Party Beneficiaries; Rights of Ownership . . . . . . . . . . . . 48
8.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.7 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.9 Enforcement of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
</TABLE>
<PAGE> 4
MERGER AGREEMENT
AGREEMENT, dated as of December 1, 1997 (the "AGREEMENT"), by and among
BANCSECURITY CORPORATION ("BANCSECURITY"), an Iowa corporation and bank holding
company; BANCSECURITY ACQUISITION CORPORATION ("ACQUISITION SUBSIDIARY"), an
Iowa corporation; and F&M BANCORPORATION, INC., a Wisconsin corporation and
bank holding company (the "BUYER").
WHEREAS, the Boards of Directors of BancSecurity, Acquisition Subsidiary,
and the Buyer have approved, and deem it advisable and in the best interests of
their respective companies and their stockholders to consummate the business
transaction provided for herein in which Acquisition Subsidiary will be merged
with and into BancSecurity, and BancSecurity thereby becomes a wholly-owned
subsidiary of the Buyer (the "MERGER");
WHEREAS, BancSecurity is the sole owner of all of the outstanding shares
of stock of Security Bank Jasper-Poweshiek, Kellogg, Iowa; Security Bank,
Marshalltown, Iowa; and Story County Bank & Trust, Story City, Iowa (together
the "BANKS");
WHEREAS, Buyer is a multi-bank holding company with a number of bank and
non-bank subsidiaries (hereinafter the term "Buyer" includes Buyer's bank and
non-bank subsidiaries unless the context otherwise requires);
WHEREAS, as a result of the Merger the Buyer will be the parent company of
BancSecurity and the parent bank holding company of the Banks;
WHEREAS, BancSecurity and the Buyer desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "CODE").
NOW, THEREFORE, in consideration of the foregoing representations,
warranties, covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
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1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, articles of merger and accompanying plan of merger in substantially
the form as attached hereto as EXHIBIT A (the "ARTICLES OF MERGER") shall be
duly prepared, executed and acknowledged by BancSecurity and Acquisition
Subsidiary and thereafter delivered for filing to the Iowa Secretary of State,
as provided in the Iowa Business Corporation Act (the "IBCA"), on the Closing
Date (as defined in Section 1.2). The Merger shall become effective at the
effective time and date of the Articles of Merger (the "EFFECTIVE TIME").
Notwithstanding the immediately preceding sentence, however, the parties intend
that the effective date and time of the Closing, as defined in Section 1.2
below, for both financial and tax reporting purposes, shall be as of the close
of business on the Closing Date.
1.2 Closing. Subject to the terms and conditions hereof, the closing of
the Merger (the "CLOSING") will take place after the satisfaction or waiver
(subject to applicable law) of the latest to occur of the conditions set forth
in Article VI hereof (the "CLOSING DATE"), at the offices of Dickinson,
Mackaman, Tyler & Hagen, P.C., Des Moines, Iowa, unless another time, date or
place is agreed to in writing by the parties hereto.
1.3 Effects of the Merger. At the Effective Time: (i) the separate
existence of Acquisition Subsidiary shall cease and Acquisition Subsidiary
shall be merged with and into BancSecurity (the "SURVIVING CORPORATION", after
giving effect to the Merger) and the shares of stock of Acquisition Subsidiary
owned by Buyer prior to the Effective Time will convert into the same number of
shares of stock of the Surviving Corporation as of the Effective Time without
any action on the part of Buyer or the Surviving Corporation; (ii) the Articles
of Incorporation of Acquisition Subsidiary, as amended and restated as a result
of the Merger, shall be the Articles of Incorporation of the Surviving
Corporation until duly amended in accordance with applicable law; (iii) the
By-laws of Acquisition Subsidiary, as in effect immediately prior to the
Effective Time shall be the By-laws of the Surviving Corporation until amended
in accordance with applicable law; (iv) the Buyer, as the holder of all of the
outstanding common stock of the Surviving Corporation, shall be the sole
shareholder of Surviving Corporation; and (v) the holders of certificates
representing shares of BancSecurity Common Stock (as defined in Section 2.1(a)
below) shall cease to have any rights as shareholders of BancSecurity, except
such rights, if any, as they may have pursuant to Division XIII of the IBCA,
and their sole right shall be the right to receive (A) the number of whole
shares of Buyer Common Stock (as defined in Section 2.1(a) below) into which
their shares of BancSecurity Common Stock have been converted in the Merger as
provided herein (together with any dividend payments with respect thereto, to
the extent provided in Section 2.2(c) below), and (B) the cash value of any
fraction of a share of
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<PAGE> 6
the Buyer Common Stock into which their shares of BancSecurity Common Stock
have been converted as provided herein.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock.
(a) Conversion of Common Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of common
stock, $25.00 par value per share, of BancSecurity ("BANCSECURITY COMMON
STOCK"), but subject to Sections 2.2(e) and 6.2(f) hereof, 38,726 issued and
outstanding shares of BancSecurity Common Stock, other than shares of
BancSecurity Common Stock held by persons who have taken all steps required to
perfect their right to be paid the fair value of such shares under Division
XIII of the IBCA, shall be converted into that number of shares of validly
issued, fully paid and nonassessable shares of common stock of Buyer, $1.00 par
value ("BUYER COMMON STOCK") which when multiplied by the average closing
price of Buyer Common Stock on the NASDAQ National Market System for the last
30 trading days in which trades occurred ending at the end of the third trading
day immediately preceding the Closing Date (as appropriately and
proportionately adjusted in the event that, between the date hereof and the
termination of such 30 trading day period, shares of Buyer Common Stock shall
be changed into a different number of shares or a different class of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment or stock dividend) (the "AVERAGE PRICE")
equals the total price of $145,000,000.00 (the "EXCHANGE RATIO"); provided,
however, if the Average Price is equal to or less than $35.80, then the number
of shares of Buyer Common Stock issued will not be further increased and if the
Average Price is equal to or more than $40.00, then the number of shares of
Buyer Common Stock issued will not be further reduced and, provided, further,
in the event the Average Price is less than $32.00, then Buyer must either
increase the number of shares of Buyer Common Stock to be exchanged for
BancSecurity Common Stock so that the aggregate value of the Buyer Common Stock
equals at least $129,600,000.00 or else BancSecurity will have the option to
terminate the transaction.
At the Effective Time, all such shares of BancSecurity Common Stock shall
no longer be outstanding and shall automatically be canceled and retired and
shall cease to exist. Each BancSecurity shareholder's certificate or
certificates previously representing shares of the BancSecurity Common Stock
(each a "BANCSECURITY CERTIFICATE") shall be aggregated (if a single
stockholder holds more than one
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<PAGE> 7
BancSecurity Certificate) and exchanged for a certificate representing whole
shares of Buyer Common Stock and cash in lieu of any fractional share issued in
consideration therefor upon the surrender of such BancSecurity Certificates in
accordance with Section 2.2, without any interest thereon. In the event that,
subsequent to the date of this Agreement but prior to the Effective Time, the
outstanding shares of Buyer Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares or
securities through a reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split, or other similar change in Buyer's
capitalization, then an appropriate and proportionate adjustment shall be made
to the Exchange Ratio, so that the number of shares of Buyer Common Stock into
which a share of BancSecurity Common Stock shall be converted will equal the
number of shares of Buyer Common Stock that the holders of shares of
BancSecurity Common Stock would have received pursuant to such reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar change had the record date therefor been immediately
following the Closing Date.
(b) Shareholders' Right of Dissent. Any holder of shares of
BancSecurity Common Stock who does not vote in favor of the Merger at the
meeting of shareholders of BancSecurity and has given notice in writing to the
presiding officer prior to the Merger vote that he or she intends to demand
payment for his or her shares of BancSecurity Common Stock if the Merger is
effectuated, shall be entitled to receive the value of the Buyer Common Stock
so held by him or her in accordance with Division XIII of the IBCA.
2.2 Exchange of Certificates.
(a) Exchange Agent. At the Closing, Buyer shall deposit with Firstar
Trust Company or such other bank or trust company acceptable to the parties
(the "EXCHANGE AGENT"), for the benefit of the holders of shares of
BancSecurity Common Stock, certificates dated the Closing Date representing the
shares of Buyer Common Stock and the cash to be paid in lieu of fractional
shares to be issued and paid pursuant to Section 2.1(a) in exchange for the
outstanding shares of BancSecurity Common Stock. (Such cash and certificates
for shares of Buyer Common Stock together with any dividends or distributions
with respect thereto, are hereinafter referred to as the "EXCHANGE FUND").
(b) Exchange Procedures. Within five (5) business days after the
Closing Date, Buyer shall cause the Exchange Agent to mail to each holder of
record as of the record date of a BancSecurity Certificate(s) (i) a letter of
transmittal which shall specify that delivery shall be effective, and risk of
loss and title to BancSecurity Certificate(s)
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<PAGE> 8
shall pass, only upon delivery of BancSecurity Certificate(s) to the Exchange
Agent and which shall be in such form and have such other provisions as Buyer
and BancSecurity may reasonably specify not later than five business days
before the Closing Date and (ii) instructions for use in effecting the
surrender of such holder's BancSecurity Certificate(s) in exchange for a
certificate representing shares of Buyer Common Stock and the cash to be paid
in lieu of any fractional share. Upon surrender of a shareholder's
BancSecurity Certificate(s) for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed, the holder of such BancSecurity
Certificate(s) shall be entitled to receive in exchange therefor (1) a
certificate representing the number of whole shares of Buyer Common Stock and
(2) a check representing the amount of the cash to be paid in lieu of a
fractional share, if any, and unpaid dividends and distributions, if any, which
such holder has the right to receive in respect of such holder's BancSecurity
Certificate(s) surrendered, as provided in Section 2.2(c) below, and such
holder's BancSecurity Certificate(s) so surrendered shall forthwith be
canceled. No interest will be paid on the cash in lieu of fractional shares
and unpaid dividends and distributions, if any, payable to holders of
BancSecurity Certificates. In the event of a transfer of ownership of
BancSecurity Common Stock which is not registered in the transfer records of
BancSecurity, a Buyer Certificate representing the proper number of shares of
Buyer Common Stock, and/or a check for the cash to be paid, may be issued to
such a transferee if BancSecurity Certificate(s) representing such BancSecurity
Common Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer. Any applicable stock transfer
taxes shall be paid by Buyer.
(c) Distributions with Respect to Unexchanged Shares; Voting. The
Exchange Agent shall receive and hold, for distribution without interest to the
record holders of the certificate or certificates representing shares of
BancSecurity Common Stock, all dividends and other distributions paid on shares
of Buyer Common Stock held in the Exchange Agent's name as agent. Holders of
unsurrendered BancSecurity Certificates shall not be entitled to vote after the
Closing Date at any meeting of Buyer shareholders until they have exchanged
their BancSecurity Certificates.
(d) Transfers. After the Effective Time, there shall be no transfers on
the stock transfer books of BancSecurity of the shares of BancSecurity Common
Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, BancSecurity Certificates are presented to the
Surviving Corporation, they shall be canceled and exchanged for the shares of
Buyer Common Stock and cash, in amounts as determined in accordance with the
provisions of Sections 2.1(a) and this Section 2.2, deliverable in respect
thereof pursuant to this Agreement. BancSecurity Certificates surrendered for
exchange by any person constituting an "affiliate" of BancSecurity for purposes
of Rule 145(c) under the Securities Act of 1933, as
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<PAGE> 9
amended (the "SECURITIES ACT"), shall not be exchanged until Buyer has received
a written agreement from such person as provided in Section 5.4 of this
Agreement.
(e) Fractional Shares. No fractional shares of Buyer Common Stock shall
be issued pursuant hereto. In lieu of the issuance of any fractional share,
cash adjustments will be paid to holders in respect of any fractional share of
Buyer Common Stock that would otherwise be issuable, and the amount of such
cash adjustment shall be equal to such fractional proportion of the Average
Price of a share of Buyer Common Stock represented by the holder's BancSecurity
Common Stock not eligible to be exchanged for Buyer Common Stock. For purposes
of calculating fractional shares, a holder of BancSecurity with more than one
BancSecurity Certificate shall receive cash only for the fractional share
remaining after aggregating all of its, his or her BancSecurity Common Stock to
be exchanged.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Buyer Common Stock)
that remains unclaimed by the shareholders of BancSecurity for twelve months
after the Closing Date shall be paid to Buyer. Any shareholders of
BancSecurity who have not theretofore complied with this Article II shall
thereafter look only to Buyer for payment of their shares and cash in an amount
as determined in accordance with the provisions of Section 2.1(a) and this
Section 2.2, without any interest thereon. Notwithstanding the foregoing, none
of Buyer, the Exchange Agent nor any other person shall be liable to any former
holder of shares of BancSecurity Common Stock for any amount properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(g) Lost or Destroyed Shares. In the event any BancSecurity Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such BancSecurity Certificate to be lost,
stolen or destroyed and, if required by the Exchange Agent, the posting by such
person of a bond in such amount as Buyer may direct as indemnity against any
claim that may be made against it with respect to such BancSecurity
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed BancSecurity Certificate the shares of Buyer Common Stock, and/or
cash in an amount as determined in accordance with the provisions of Sections
2.1(a), and this Section 2.2, deliverable in respect thereof pursuant to this
Agreement.
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<PAGE> 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of BancSecurity. In order to induce
Buyer to enter into this Agreement, BancSecurity represents and warrants to
Buyer, in all material respects, as of the date of this Agreement (except as
otherwise expressly provided) and except as disclosed on the attached EXHIBIT B
(the "BANCSECURITY DISCLOSURE SCHEDULE") and the schedules thereunder which are
numbered to correspond to the representations set forth below as follows:
(a) Organization, BancSecurity is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Iowa and
is a bank holding company duly registered under the Banks Holding Company Act
of 1956, as amended (the "BHCA"). The Banks are each duly organized, validly
existing and in good standing under the laws of the State of Iowa.
BancSecurity and the Banks each has the corporate power and authority to carry
on its business as it is now conducted and to own, lease and operate its
properties, and is duly qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted or the
properties or assets owned or leased by it makes such qualification necessary,
except where the absence thereof, would not, individually or in the aggregate,
have a Material Adverse Effect as herein as defined in Section 3.1(h), below.
Each Bank's deposits are insured by the Bank Insurance Fund of the FDIC to the
maximum extent permitted by law. Other than the Banks, BancSecurity has no
direct or indirect subsidiaries except Washlin Investment Company and Security
Bancservices Group, Inc. BancSecurity owns 100% of the outstanding shares of
stock of each Bank, free and clear of all claims, liens, mortgages, pledges,
security interests or other encumberances. BancSecurity owns 100% of the
outstanding shares of stock of Washlin Investment Company and Security
Bancservices Group, Inc., free and clear of all claims, liens, mortgages,
pledges, security interests or other encumberances.
(b) Capital Structure.
(i) The authorized capital stock of BancSecurity consists of
1,000,000 shares of BancSecurity Common Stock, $25.00 par value per share
(the "BANCSECURITY COMMON STOCK"). As of the date of this Agreement,
38,726 shares of BancSecurity Common Stock were issued and outstanding.
All outstanding shares of BancSecurity Common Stock are validly, issued,
fully paid and nonassessable and not subject to any preemptive rights.
(ii) BancSecurity is not a party to or bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
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<PAGE> 11
commitments or agreements of any character obligating BancSecurity to
issue, deliver or sell, or cause to be issued, delivered or sold, any
additional shares of capital stock of BancSecurity or obligating
BancSecurity to grant, extend or enter into any such option, warrant,
call, right, convertible securities, commitments or agreements. As of the
date hereof, there are no outstanding contractual obligations of
BancSecurity or the Banks to repurchase, redeem or otherwise acquire any
shares of capital stock of BancSecurity or the Banks, respectively.
(c) Authority. BancSecurity has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement by the requisite vote of the shareholders of BancSecurity and
approval of Regulatory Agencies (as defined in Section 3.1(g)(ii)), to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement, and, subject to the approval of this Agreement by the requisite
vote of the shareholders of BancSecurity and approval of Regulatory Agencies,
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of BancSecurity. This
Agreement has been duly executed and delivered by BancSecurity. Assuming due
execution and delivery by the Acquisition Subsidiary and the Buyer, this
Agreement constitutes a valid and binding obligation of BancSecurity,
enforceable in accordance with its terms subject to applicable conservatorship,
receivership, bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to general
principles of equity, whether applied in a court of law or a court of equity.
(d) Shareholder Approval; Fairness Opinion. The affirmative vote of
three-fourths of the outstanding shares of BancSecurity Common Stock is
required for approval of this Agreement and to consummate the transactions
contemplated hereby. The Board of Directors of BancSecurity has received a
preliminary opinion of Hovde Financial, Inc. to the effect that the Exchange
Ratio is fair, from a financial point of view, to BancSecurity shareholders,
and will receive a final opinion at the time the proxy statement is delivered
to its shareholders.
(e) No Violations. Subject to approval of this Agreement by
BancSecurity's shareholders and the Regulatory Agencies, the execution,
delivery and performance of this Agreement by BancSecurity does not, and the
consummation of the transactions contemplated hereby by BancSecurity will not,
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of BancSecurity or the Banks or to which
BancSecurity or the Banks (or any of their respective properties) is subject,
which breach, violation or default would, individually or in the
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aggregate, have a Material Adverse Effect (as defined herein) on BancSecurity,
(ii) a breach or violation of, or a default under, the articles of
incorporation, association or bylaws of BancSecurity or the Banks or (iii) a
breach or violation of, or a default under (or an event which with due notice
or lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of BancSecurity or the Banks under, any of
the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan agreement or other agreement, instrument or obligation to which
BancSecurity or the Banks is a party, or to which any of their respective
properties or assets may be bound or affected, except for in the case of (iii)
any of the foregoing that, individually or in the aggregate, would not have a
Material Adverse Effect on BancSecurity.
(f) Consents. Except as referred to herein and in connection, or in
compliance, with the provisions of the Securities Act, the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), the BHCA, the rules and
regulations of the Board of Governors of the Federal Reserve System (the
"FRB"), the Iowa Division of Banking (the "DIVISION") and the Federal Deposit
Insurance Corporation (the "FDIC"), as applicable, and the corporation,
securities or "blue sky" laws or regulations of the various states, no filing
or registration with, or authorization, consent or approval of, any public body
or authority is necessary for the consummation by BancSecurity of the Merger or
the other transactions contemplated by this Agreement.
(g) Financial Statements and Reports.
(i) As of their respective dates, neither BancSecurity's Financial
Statements (as defined below), nor any subsequent BancSecurity Financial
Statements prepared subsequent to September 30, 1997 (collectively the
"FINANCIAL STATEMENTS"), contained or will contain any untrue statement of
a material fact or omitted or will omit to state a material fact required
to be stated therein or necessary to make the statements made therein, in
light of the circumstances under which they were made, not misleading;
provided, that no representation is made herein with respect to any
exhibits to the Financial Statements that are not specifically
incorporated by reference therein. Each of the balance sheets of
BancSecurity contained or specifically incorporated by reference in the
Financial Statements (including in each case any related notes and
schedules) fairly presented the financial position of the entity or
entities to which it relates as of its date and each of the statements of
income and of changes in shareholders equity and of cash flows of
BancSecurity, contained or specifically incorporated by reference in the
Financial Statements (including in each case any related notes and
schedules) fairly presented the results of
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operations, shareholders equity and cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end
audit adjustments), in each case in all material respects in accordance
with generally accepted accounting principles ("GAAP") consistently
applied during the period involved, except as may be noted therein.
(ii) BancSecurity has filed all material reports, registrations and
statements together with any amendments required to be made with respect
thereto, that it was required to file since September 30, 1997 with the
FDIC, the FRB or the Division (collectively, the "REGULATORY AGENCIES")
and has paid all fees and assessments due and payable in connection
therewith, except for those reports, registrations and statements and
those fees and assessments that would not have a Material Adverse Effect
on BancSecurity.
(h) Absence of Certain Changes or Events. Except as disclosed in Section
3.1(h) of the BancSecurity Disclosure Schedule, (i) from September 30, 1997 to
the date hereof, BancSecurity and the Banks have not incurred any liability,
other than in the ordinary course of its business consistent with past
practice, and (ii) since September 30, 1997, there has not been any condition,
event, change or occurrence that, individually or in the aggregate, has had, or
is reasonably likely to have, a Material Adverse Effect on BancSecurity.
"MATERIAL ADVERSE EFFECT," with respect to a party to this Agreement, means a
material adverse effect upon (A) the business, properties, assets, financial
condition or results of operations of such party, taken as a whole or (B) the
ability of such party to consummate the transactions contemplated by this
Agreement; it being understood that a Material Adverse Effect shall not
include: (i) a mandatory change with respect to, or effect on, a party
resulting from a change in law, rule, regulation, GAAP or regulatory accounting
principles; (ii) a change with respect to, or effect on, a party resulting from
expenses (such as legal, accounting and investment bankers' fees) incurred in
connection with this Agreement or the transactions contemplated hereby; (iii) a
material change with respect to, or effect on, a party resulting from any other
matter affecting depository institutions generally; (iv) any damage,
destruction or loss covered by insurance with respect to any assets of a party;
(v) actions contemplated by this Agreement; (vi) changes attributable to or
resulting from changes in general economic conditions affecting banks, savings
institutions or their holding companies generally, including changes in the
prevailing level of interest rates; (vii) any declaration, setting aside or
payment of any dividends or distributions in respect of shares of BancSecurity
common stock permitted by Section 4.1(l)(xxii) of this Agreement; (viii) any
adjustments due to the application of FAS 115; (ix) any strike, work stoppage,
slowdown or other labor disturbance, suffered by BancSecurity or the Banks; or
(x) any union organizing relating to the
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<PAGE> 14
employees of BancSecurity or the Banks. Each party agrees to provide written
notification to the other party if an event or series of events occurs which
reduces or is reasonably likely to reduce anticipated earnings in calendar year
1997 or 1998 of BancSecurity by $500,000.00 or more and of Buyer by
$1,000,000.00 or reduces or is reasonably likely to reduce the stockholder's
equity of BancSecurity by $1,000,000.00 or of Buyer by $2,000,000.00. Such
notice shall not, of itself, create any presumption that such reduction or
possible reduction in earnings or capital is a Material Adverse Effect.
(i) Taxes. Except as disclosed in Section 3.1(i) of the BancSecurity
Disclosure Schedule, all federal, state, and local tax returns required to be
filed by or on behalf of BancSecurity and the Banks have been timely filed or
requests for extensions have been timely filed (and any such extension shall
have been granted and not have expired). All taxes, shown on such returns, all
taxes required to be shown on returns for which extensions have been granted,
and any penalties, interest or other governmental charges related thereto have
been paid in full or adequate provision has been made for any such taxes on
BancSecurity's balance sheet as of September 30, 1997 (in all material respects
in accordance with GAAP). As of the date of this Agreement, there is no audit
examination (whether concluded or in progress), deficiency, claim, or refund
litigation with respect to any taxes of BancSecurity or the Banks that could
reasonably be expected to result in a Material Adverse Effect, and no claim or
assessment that could reasonably be expected to result in a Material Adverse
Effect has been made by any authority in a jurisdiction where BancSecurity or
the Banks does not file tax returns and BancSecurity or any of the Banks is
subject to taxation. Neither BancSecurity nor any of the Banks has executed an
extension or waiver of any statute of limitations on the assessment or
collection of any material tax due that is currently in effect. BancSecurity
and the Banks have withheld and paid all taxes required to have been withheld
and paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, shareholder or other third party, and BancSecurity and
the Banks have timely complied with all applicable information reporting
requirements under Part III, Subchapter A of Chapter 61 of the Code and similar
applicable state and local information reporting requirements, except in each
case for such failure to withhold, pay or comply that would not, individually
or in the aggregate result in a Material Adverse Effect on BancSecurity.
Neither BancSecurity nor any of the Banks is responsible for the taxes of any
person other than BancSecurity or the Banks under Treasury Regulation 1.1502-6
or any similar provision of federal, state or foreign law.
(j) Absence of Claims. Except as disclosed in Section 3.1(j) of the
BancSecurity Disclosure Schedule, neither BancSecurity, any of the Banks nor
any of their respective directors and officers, in their respective capacities
as directors and
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<PAGE> 15
officers, is a party to any pending litigation, legal, administrative,
arbitration or other proceeding, before any court or governmental agency
("CLAIM") which is reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect on BancSecurity, and there is no threatened Claim
against BancSecurity or any of the Banks, which is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect.
(k) Absence of Regulatory Actions. Neither BancSecurity nor any of the
Banks is a party to any cease and desist order, written agreement or memorandum
of understanding with, or a party to any commitment letter or similar written
undertaking to, or is subject to any order or directive by, or is a recipient
of any extraordinary supervisory letter from, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depository institution holding companies or engaged in the
insurance of bank deposits nor has either been advised by any Regulatory
Agencies that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar written undertaking.
(l) Agreements. Except for this Agreement and as contemplated thereby
and except as disclosed in Section 3.1(l) of the BancSecurity Disclosure
Schedule, neither BancSecurity nor any of the Banks is a party to a written or,
to BancSecurity's or to any of the Banks' knowledge, oral (A) agreement not
terminable by BancSecurity or any of the Banks, as the case may be, on thirty
(30) days' or less notice, and providing for payments in excess of $50,000.00,
(B) agreement with any executive officer or other key employee of BancSecurity
or any of the Banks the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving
BancSecurity of the nature contemplated by this Agreement, (C) agreement with
respect to any executive officer or key employee of BancSecurity or the Banks
providing for other than at-will employment, (D) agreement or plan, including
any stock option plan, stock appreciation rights plan, restricted stock plan,
stock purchase plan, or any other non-qualified compensation plan, any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement, or (E) agreement containing covenants that limit the ability of
BancSecurity or any of the Banks to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which or
method by which, BancSecurity or any of the Banks (including any successor
thereof) may carry on its business (other than as may be required by law or any
regulatory agency). The Banks and BancSecurity have performed in all material
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<PAGE> 16
respects all obligations required to be performed by them to date, and are not
in material default under, and no event has occurred which, with the lapse of
time or action by a third party, could result in a material default under any
of the afore-described agreements to which any of the Banks or BancSecurity is
a party or by which any of the Banks or BancSecurity is bound.
(m) Labor Matter. Neither BancSecurity nor any of the Banks is a party
to, or is bound by, any collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization with
respect to its employees. Neither BancSecurity nor any of the Banks is the
subject of any proceeding asserting that it has committed an unfair labor
practice or seeking to compel it to bargain with any labor organization as to
wages and conditions of employment, nor is the management of BancSecurity or
any of the Banks aware of any strike, other labor dispute or organizational
effort involving BancSecurity or any of the Banks that is pending or threatened
that individually or in the aggregate would result in a Material Adverse Effect
on BancSecurity.
(n) Employee Benefit Plans.
(i) Section 3.1(n) of the BancSecurity Disclosure Schedule
contains a complete list of all employee, retiree or director pension,
retirement, stock option, stock purchase, restricted stock, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, supplemental income, supplemental retirement, consulting,
bonus, group insurance, key executive officer insurance, severance and any
other benefit plans, employment contracts (providing termination, change
in control, or severance payments), agreements, arrangements, or policies
including, but not limited to, employee benefit plans, as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), incentive and welfare policies, contracts, plans and
arrangements and all trust agreements related thereto, maintained at the
date hereof or at any time within three (3) years prior to the date hereof
with respect to any present or former directors, officers, or other
employees of BancSecurity and the Banks (hereinafter referred to
collectively as the "EMPLOYEE PLANS"). All of the Employee Plans comply
in all material respects with all applicable requirements of ERISA, the
Code and other applicable laws and have been operated in material
compliance with their terms. Neither BancSecurity nor the Banks has
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA
or Section 4975 of the Code) with respect to any Employee Plan which is
likely to result in any material penalties or taxes to BancSecurity or the
Banks under Section 502(i) of ERISA or Section 4975 of the Code. Neither
BancSecurity nor any entity which is considered one
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<PAGE> 17
employer with BancSecurity under Section 4001 of ERISA or Section 414 of
the Code (an "ERISA AFFILIATE") has ever maintained, or contributed to any
plan subject to either Title IV of ERISA or Section 9412 of the Code.
Each Employee Plan of BancSecurity and the Banks which is an employee
"pension benefit plan" (as defined in Section 3(2) of ERISA) and which is
intended to be qualified under Section 401(a) of the Code (a "QUALIFIED
PLAN") has received a favorable determination letter from the Internal
Revenue Service ("IRS") that the pension benefit plan complies with all
applicable legislative and regulatory requirements for tax qualification
that were in effect at the time that the determination letter was issued
and BancSecurity is not aware of any circumstances likely to result in
revocation of any such favorable determination letter. No Employee Plan
is an "employee stock ownership plan" (as defined in Section 4975(e)(7) of
the Code).
(ii) There is no pending or, to BancSecurity's knowledge,
threatened litigation, administrative action or proceeding relating to any
Employee Plan. There has been no announcement or commitment by
BancSecurity to create an additional Employee Plan or to amend an Employee
Plan except for amendments required by applicable law which do not
materially increase the cost of such Employee Plan.
(iii) With respect to each Employee Plan to the extent applicable,
BancSecurity will supply, within 30 days, to Buyer a true and complete
copy of (A) the annual report on the applicable form of the Form 5500
series filed with the IRS with all the attachments filed for 1994, 1995
and 1996 plan years, (B) such Employee Plan, including amendments thereto
(or a copy of the substantive provisions of each Employee Plan for which
no plan document exists), (C) each trust agreement and insurance contract
relating to such Employee Plan, including amendments thereto, (D) the most
recent summary plan description for such Employee Plan, including
amendments thereto, if the Employee Plan is subject to Title I of ERISA,
(E) any material written communication to employees relating to Employee
Plans and (F) the most recent determination letter issued by the IRS if
such Employee Plan is a Qualified Plan.
(o) Title to Assets. Except as set forth in Section 3.1(o) of the
BancSecurity Disclosure Schedule, BancSecurity and the Banks have title to all
material assets and properties, whether real or personal, tangible or
intangible, that they purport to own, including without limitation all real and
personal assets and properties reflected in their Consolidated Reports of
Condition and Income as of September 30, 1997 or acquired subsequent thereto
(except to the extent that such assets and properties have been disposed of for
fair value in the ordinary course of business since September 30,
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<PAGE> 18
1997), subject to no liens, mortgages, security interests, encumbrances or
charges of any kind, except (i) as noted in said Consolidated Reports or the
Schedules thereto; (ii) statutory liens for taxes not yet delinquent; (iii)
security interests granted to secure deposits of funds by federal, state or
other governmental agencies; (iv) minor defects and irregularities in title and
encumbrances that do not materially impair the use thereof for the purposes for
which they are held by the Banks as of the date hereof; and (v) such liens,
mortgages, security interests, encumbrances and charges that are not in the
aggregate material to the assets and properties of BancSecurity and the Banks.
Liens shall mean any claim, encumbrance, or charge on property for payment of a
debt, obligation or duty. Since September 30, 1997, no assets of BancSecurity
or the Banks have sustained (whether or not covered by insurance) any loss,
damage or other destruction that would have a Material Adverse Effect on
BancSecurity. The assets of BancSecurity and the Banks are in good operating
condition, normal wear and tear excepted. The only assets of BancSecurity or
the Banks which are leased are identified in Section 3.1(o) of the BancSecurity
Disclosure Schedule.
(p) Fees. Except as set forth in Section 3.1(p) of the BancSecurity
Disclosure Schedule and other than financial advisory services performed for
BancSecurity by Hovde Financial, Inc., neither BancSecurity nor the Banks, nor
to BancSecurity's or the Banks' knowledge any of their respective officers,
directors, employees or agents, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions, or
finder's fees, and no broker or finder has acted directly or indirectly for
BancSecurity or the Banks, in connection with this Agreement or the
transactions contemplated hereby. Buyer shall not be liable for any financial
services fees incurred by BancSecurity or the Banks, all of which shall be paid
or fully accrued as of the Closing Date. Neither BancSecurity nor the Banks
shall be liable for any financial services advisory fees incurred by Buyer.
(q) Compliance with Laws. BancSecurity and the Banks hold all licenses,
certificates, permits, franchises and rights from all appropriate federal,
state or other public authorities necessary for the conduct of its and their
business as it is presently conducted except where the absence thereof would
not, individually or in the aggregate, have a Material Adverse Effect on
BancSecurity or except where the absence thereof would not delay the Merger.
BancSecurity and the Banks have conducted their business so as to comply in all
respects with all applicable federal, state and local statutes, ordinances,
regulations or rules, except for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect on
BancSecurity; and neither BancSecurity nor the Banks is presently charged with,
or, to BancSecurity's or the Banks' knowledge, under governmental investigation
with respect to, any actual or alleged material violations of any statute,
ordinance, regulation or rule which would have a Material Adverse Effect; and
neither
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<PAGE> 19
BancSecurity nor the Banks is the subject of any pending or, to BancSecurity's
or the Banks' knowledge, threatened material proceeding by any regulatory
authority having jurisdiction over its business, properties or operations which
would have a Material Adverse Effect on BancSecurity.
(r) Environmental Matters.
(i) For purposes of this Agreement, the following terms shall have
the following respective meanings:
(A) "ENVIRONMENTAL LAW(S)" means any law, regulation, rule,
ordinance or similar requirement which governs or protects the
environment enacted by the United States, any state, or any county,
city or agency or subdivision of the United States or any state.
(B) "HAZARDOUS MATERIAL(S)" means any material or substance:
(1) which is a "hazardous substance," "pollutant," or "contaminant,"
pursuant to the Comprehensive Environmental Response Compensation and
Liability Act (42 U.S.C. 9601 et seq.) as amended and regulations
promulgated thereunder; (2) containing gasoline, oil, diesel fuel or
other petroleum products; (3) which is "hazardous waste" pursuant to
the Federal Resource Conservation and Recovery Act (42 U.S.C. Section
6901 et seq.) as amended and regulations promulgated thereunder; (4)
containing polychlorinated biphenyls (PCBs); (5) containing asbestos;
(6) which is radioactive; (7) the presence of which requires
investigation or remediation under any Environmental Law (defined
above); or (8) which is defined or identified as a "hazardous waste,"
"hazardous substance," "pollutant," "contaminant," or "biologically
Hazardous Material" under any Environmental Law.
(C) "PROPERTIES" means (1) the real estate owned or leased by
BancSecurity or the Banks and used as a banking related facility; (2)
other real estate owned ("OREO") by BancSecurity or the Banks as
defined by any other federal or state financial institution regulatory
agency with regulatory authority for BancSecurity or the Banks; (3)
real estate that is in the process of pending foreclosure or forfeiture
proceedings conducted by BancSecurity or the Banks; and (4) real estate
owned or leased by a partnership or joint venture in which BancSecurity
or the Banks has an ownership interest.
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<PAGE> 20
(ii) Except as disclosed in Schedule 3.1(r) of BancSecurity
Disclosure Schedule, to the best of BancSecurity's knowledge there are no
present conditions on the Properties, involving or resulting from a past
or present storage, spill, discharge, leak, emission, injection, escape,
dumping, release or migration of any Hazardous Materials or from any
generation, transportation, treatment, storage, disposal, use or handling
of any Hazardous Materials, that may reasonably be expected to result in a
Material Adverse Effect on BancSecurity.
(iii) To the best of BancSecurity's knowledge BancSecurity and the
Banks are in substantial compliance with all applicable Environmental
Laws. Neither BancSecurity nor the Banks has received notice of, nor are
there outstanding or pending, any public or private claims, lawsuits,
citations, penalties, unsatisfied abatement obligations or notices or
orders of non-compliance relating to the environmental condition of the
Properties or BancSecurity or the Banks's compliance with Environmental
Laws.
(iv) Except as disclosed in Schedule 3.1(r) of BancSecurity
Disclosure Schedule, to the best of BancSecurity's knowledge no Properties
are currently undergoing or are scheduled to undergo remediation or
clean-up of Hazardous Materials or other environmental conditions.
(v) BancSecurity and the Banks have all governmental permits,
licenses, certificates of inspection and other authorizations governing or
protecting the environment necessary to conduct its present business, and
are and at all times have been in material compliance therewith.
(s) Loans and Investments.
(i) Except for matters outside the reasonable knowledge of senior
officers of BancSecurity and except as disclosed in Schedule 3.1(s) of the
BancSecurity Disclosure Schedule, as of the date hereof each outstanding
loan of the Banks as of the date hereof is evidenced by appropriate and
sufficient documentation and constitutes the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with
its terms except to the extent that the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws or equitable principles affecting the rights of creditors generally.
No obligor named therein is seeking to avoid the enforceability of the
terms of any loan under any such laws or equitable principles and no loan
is subject to any defense, offset or counterclaim. The documentation
relating to loans made by the Banks and relating to all security
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<PAGE> 21
interests, mortgages and other liens with respect to all collateral for
such loans, taken as a whole, is adequate for the enforcement of the
material terms of such loans and of the related security interests,
mortgages and other liens.
(ii) In originating, underwriting, servicing, and discharging
loans, mortgages, land contracts, and other contractual obligations,
either for their own account or for the account of others, the Banks have
complied with all applicable terms and conditions of such obligations and
with all applicable laws, regulations, rules, contractual requirements,
and procedures in which failure to do so would have a Material Adverse
Effect on BancSecurity. The terms of such loans and of the related
security interests, mortgages and other liens comply in all material
respects with all applicable laws, rules and regulations (including laws,
rules and regulations relating to the extension of credit).
(t) Allowance for Loan Losses. Except as disclosed in Schedule 3.1(t) of
the BancSecurity Disclosure Schedule, BancSecurity's consolidated allowance
for losses on loans included in the Financial Statements as of September 30,
1997 was $5,517,305.00, representing 1.66% of its total consolidated loans held
in portfolio. In BancSecurity's reasonable judgment, the amount of such
allowance for losses on loans was adequate to absorb reasonably expectable
losses in the loan portfolio of the Banks. To the knowledge of BancSecurity,
there are no facts which would require it to increase the level of such
allowance for losses on loans. There are no loans, leases, other extensions of
credit or commitments to extend credit of the Banks that in the opinion of
management for BancSecurity, should have been or should in accordance with
GAAP, have been classified by the Banks as nonaccrual, as restructured, as 90
days past due, as still accruing and doubtful of collection or any comparable
classification. BancSecurity and the Banks have disclosed to Buyer in writing
prior to the date hereof the amounts of all loans, leases, advances, credit
enhancements, other extensions of credit, commitments and interest-bearing
assets of the Banks that have been classified as of September 30, 1997 as
"Other Loans Specially Mentioned," "Special Mention," "Substandard,"
"Doubtful," "Loss," "Classified," "Criticized," "Delinquent Loans," "Credit
Risk Assets," "Concerned Loans" (in the latter two cases, to the extent
available) or words of similar import. BancSecurity has provided to Buyer such
written information concerning the loan portfolios of the Banks as Buyer has
requested, which information is true, correct and complete in all material
respects. From and after the date hereof, BancSecurity and the Banks promptly
will provide Buyer with a copy of each quarterly classified asset report and a
delinquency trend report it provides to its Board of Directors. The OREO
included in any non-performing assets of BancSecurity is carried net of
reserves at the lower of cost or fair value.
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<PAGE> 22
(u) Material Interests of Certain Persons. No director or executive
officer of BancSecurity or the Banks, nor any holder of ten percent or more of
the outstanding capital stock of BancSecurity, nor any affiliate of such person
as that term is defined under 12 USC 371(c) ("BANK PRINCIPAL") (i) is or has
during the period subsequent to December 31, 1996, been a party (other than as
a depositor) to any transaction with the Banks, whether as a borrower or
otherwise, which (a) was made other than in the ordinary course of business;
(b) was made on other than substantially the same terms, including interest
rate and collateral, as those prevailing at the time for comparable
transactions for other persons; or (c) involves more than the normal risk of
collectibility or presents other unfavorable features; or (ii) is a party to
any loan or loan commitment, whether written or oral, from the Banks involving
an amount in excess of $10,000. Except as set forth in Section 3.1 (u) of
BancSecurity Disclosure Schedule, no Bank Principal holds any position with any
depository organization other than the Banks or BancSecurity. For the purposes
of this provision, the term "depository organization" means a commercial bank,
a savings bank, a trust company, a savings and loan association, a homestead
association, a cooperative bank, an industrial bank, a credit union, or a
depository organization holding company.
(v) Insurance. BancSecurity and the Banks are presently insured, and
since January 1, 1994 each has been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business located in the State of Iowa would, in
accordance with good business practice, customarily be insured. BancSecurity
has not received any notice of lapse or cancellation of any insurance currently
in effect. Since September 30, 1997, no act or omission has occurred which may
cause any lapse in or termination of the insurance maintained by BancSecurity
or the Banks. BancSecurity has delivered to Buyer true, accurate and complete
copies of all insurance policies of BancSecurity and the Banks as of the date
of this Agreement. Each such policy is in full force and effect, with all
premiums due thereon on or prior to the date of this Agreement having been paid
as and when due. The Banks have not filed any claim under their bankers
blanket bond during the past five years. There are no unresolved claims.
(w) Investment Securities. Except as set forth in Section 3.1(w) of the
BancSecurity Disclosure Schedule, none of the investments reflected in the
balance sheet of BancSecurity as of September 30, 1997, and none of such
investments with face value of in excess of $100,000 made by it since September
30, 1997 is subject to any restriction (contractual or statutory), other than
applicable securities laws, that would materially impair the ability of the
entity holding such investment freely to dispose of such investment at any
time, except to the extent any such investments are pledged in the ordinary
course of business (including in connection with hedging arrangements or
programs or reverse repurchase arrangements) consistent with
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<PAGE> 23
prudent banking practice to secure obligations of BancSecurity and the Banks,
as applicable. Since September 30, 1997, BancSecurity and the Banks have not
sold, transferred or otherwise disposed of any securities prior to maturity or
call date.
(x) Registration Obligations. BancSecurity is not under any obligation,
contingent or otherwise, to register any of its securities under the Securities
Act or any state securities laws.
(y) Books. The books and records of BancSecurity and the Banks are
complete and accurate in all material respects and have been, and are being,
maintained in accordance with applicable legal and accounting requirements.
(z) Corporate Documents. BancSecurity and the Banks have delivered to
Buyer true and complete copies of their respective certificate of
incorporation, articles of incorporation and bylaws, as amended to date, which
are currently in full force and effect.
(aa) Absence of Knowledge. As of the date hereof, BancSecurity is not
aware of any reason why it would be unable to obtain all the necessary
approvals required from the Regulatory Agencies in order to consummate the
transactions contemplated by this Agreement.
(bb) Accounting and Tax Treatment. To the knowledge of BancSecurity,
BancSecurity has not engaged in any act that would preclude or adversely affect
the Merger from qualifying as a tax-free reorganization under Section 368 of
the Code or from using the pooling of interests method of accounting for this
transaction, nor has BancSecurity or any of the Banks changed any accounting
policies since December 31, 1996.
(cc) SEC and Regulatory Filings. None of the information regarding
BancSecurity or the Banks which is prepared by or reviewed by BancSecurity or
the Banks for inclusion or included in (i) the proxy or information statement
to be mailed to shareholders of BancSecurity (the "PROXY STATEMENT"), (ii) the
registration statement on Form 4 to be filed with the Securities and Exchange
Commission ("SEC") by Buyer for the purpose of registering the shares of Buyer
Common Stock to be exchanged for shares of BancSecurity Common Stock pursuant
to the provisions of this Agreement (the "REGISTRATION STATEMENT"), if
applicable, or (iii) any other documents to be filed with the SEC or any
Regulatory Agencies in connection with the transactions contemplated hereby
will, at the respective times such documents are filed with the SEC or any
Regulatory Agencies and, in the case of the Registration Statement, if
applicable, when it becomes effective and, with respect to the Proxy Statement,
when
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<PAGE> 24
mailed, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting of BancSecurity stockholders
referred to in Section 4.1(b) of this Agreement, be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of any proxy for such meeting.
(dd) Derivative Contracts. Neither BancSecurity nor the Banks is a party
to or has agreed to enter into an exchange-traded or over-the- counter swap,
forward, future, option, cap, floor or collar financial contract or agreement,
or any other contract or agreement not included in Financial Statements of
BancSecurity which is a financial derivative contract (including various
combinations thereof) ("DERIVATIVE CONTRACTS").
(ee) Deposits. None of the deposits of the Banks are subject to any
encumbrances, legal restraint or other legal process other than in the ordinary
course of business, except as set forth in Section 3.l(ee) of the BancSecurity
Disclosure Schedule, which would have a Material Adverse Effect on
BancSecurity.
(ff) Compensation. Since September 30, 1997, neither BancSecurity nor
any Bank has granted any increase in compensation or benefits except in the
ordinary course of business or as previously announced and disclosed to Buyer
in Section 3.1(ff) of the BancSecurity Disclosure Schedule.
3.2 Representations and Warranties of Buyer. In order to induce
BancSecurity to enter into this Agreement, Buyer represents and warrants to
BancSecurity, in all material respects, as of the date of this Agreement
(except as otherwise expressly provided) as follows, except as disclosed on the
attached EXHIBIT C (the "BUYER DISCLOSURE SCHEDULE") and the schedules
thereunder which are numbered to correspond to the representations set forth
below:
(a) Organization. Buyer is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Wisconsin and is a
bank holding company duly registered under the BHCA. Buyer owns 100% of the
outstanding capital stock of the commercial banks listed on Section 3.2(a) of
the Buyer Disclosure Schedule. Each of its subsidiary banks is duly organized,
validly existing and in good standing under the laws of the State of Wisconsin
or the United States of America. Buyer and its subsidiary banks each have the
corporate power and authority to carry on its business as it is now conducted
and to own, lease and operate its properties, and each is duly qualified to do
business and is in good standing in each jurisdiction
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in which the nature of the business conducted or the properties or assets owned
or leased by it makes such qualification necessary, except where the absence
thereof, would not, individually or in the aggregate, have a Material Adverse
Effect as herein as defined in 3.1(h), above. Each subsidiary bank's deposits
are insured by the Bank Insurance Fund of the FDIC to the maximum extent
permitted by law. Other than the subsidiary banks, Buyer has no direct or
indirect subsidiaries except as listed on Section 3.2(a) of the Buyer
Disclosure Schedule. Acquisition Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Iowa. Buyer owns 100% of the outstanding capital stock of Acquisition
Subsidiary. Acquisition Subsidiary has all requisite corporate power and
authority to enter into this Agreement. The execution, delivery, and
performance of this Agreement by Acquisition Subsidiary and the consummation of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of Acquisition Subsidiary. Subject to approval by the Regulatory
Agencies and other governing bodies having regulatory authority over
Acquisition Subsidiary as may be required by statute or regulation, this
Agreement constitutes a valid and binding obligation of Acquisition Subsidiary,
enforceable against it in accordance with its terms.
(b) Capital Structure.
(i) The authorized capital stock of Buyer consists of 20,000,000
shares of Buyer Common Stock, $1.00 par value per share (the "BUYER COMMON
STOCK"). As of November 30, 1997, 9,749,980 shares of Buyer Common Stock
were issued and outstanding. All outstanding shares of Buyer Common Stock
are validly, issued, fully paid and nonassessable and not subject to any
preemptive rights. Buyer will promptly notify BancSecurity of any changes
or actions to change the number of shares of Buyer's common stock issued
and outstanding.
(ii) Buyer is not a party to or bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating Buyer to issue,
deliver or sell, or cause to be issued, delivered or sold, any additional
shares of capital stock of Buyer or obligating Buyer to grant, extend or
enter into any such option, warrant, call, right, convertible securities,
commitments or agreements except as listed on Section 3.2(b) of the Buyer
Disclosure Schedule. As of the date hereof, there are no outstanding
contractual obligations of Buyer or the subsidiary banks to repurchase,
redeem or otherwise acquire any shares of capital stock of Buyer or the
subsidiary banks, respectively, except as listed on Section 3.2(a) of the
Buyer Disclosure Schedule.
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(c) Reports. Buyer and its subsidiary banks have filed all reports,
registrations and statements, together with any required amendments thereto,
that they were required to file with (i) the SEC, including, but not limited
to, Forms 10-K, Forms 10-Q and proxy statements, (ii) the FRB, (iii) the FDIC,
(iv) the OCC and (v) any applicable state securities or banking authorities.
All such reports and statements filed with any such regulatory body or
authority are collectively referred to herein as the "BUYER REPORTS." As of
their respective dates, the Buyer Reports complied in all material respects
with all the rules and regulations promulgated by the SEC, the FRB, the FDIC,
the OCC and any applicable state securities or banking authorities, as the case
may be, and did not contain any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Buyer has timely filed with the SEC all reports, statements
and forms required to be filed pursuant to the Exchange Act.
(d) Enforceability. Buyer has all requisite corporate power and
authority to enter into this Agreement and the execution, delivery, and
performance of this Agreement by Buyer and the consummation of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
Buyer. Subject to approval by the Regulatory Agencies and other governing
bodies having regulatory authority over Buyer as may be required by statute or
regulation, and subject to approval of this Agreement by the requisite vote of
the shareholders, this Agreement constitutes a valid and binding obligation of
Buyer, enforceable against it in accordance with its terms. The affirmative
vote of a majority of the outstanding shares of Buyer's Common Stock is
required for approval of this Agreement and to consummate the transactions
contemplated hereby.
(e) No Violations. Subject to approval of the Regulatory Agencies,
the execution, delivery and performance of this Agreement by Buyer does not,
and the consummation of the transactions contemplated hereby by Buyer will not,
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of Buyer or to which Buyer (or any of its
properties) is subject, which breach, violation or default would, individually
or in the aggregate, have a Material Adverse Effect on Buyer, (ii) a breach or
violation of, or a default under, the articles of incorporation, association or
bylaws of Buyer or (iii) a breach or violation of, or a default under (or an
event which with due notice or lapse of time or both would constitute a default
under), or result in the termination of, accelerate the performance required
by, or result in the creation of any lien, pledge, security interest, charge or
other encumbrance upon any of the properties or assets of Buyer hereunder, any
of the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan
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agreement or other agreement, instrument or obligation to which Buyer is a
party, or to which any of its properties or assets may be bound or affected,
except for any of the items described in (iii) of this subsection that,
individually or in the aggregate, would not have a Material Adverse Effect on
Buyer.
(f) Consents. Except as referred to herein or in connection, or in
compliance, with the provisions of the Securities Act, the Exchange Act, the
BHCA, the rules and regulations of the FRB, the Division, and the FDIC, as
applicable, and the environmental, corporation, securities or "blue sky" laws
or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any public body or authority is
necessary for the consummation by Buyer of the Merger or the other transactions
contemplated by this Agreement.
(g) Financial Statements and Reports. (i) As of their respective
dates, neither Buyer's Financial Statements (as defined below), nor any
subsequent Buyer Financial Statements prepared subsequent to September 30, 1997
(collectively the "BUYER'S FINANCIAL STATEMENTS"), contained or will contain
any untrue statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading; provided, that no representation is made herein with respect to any
exhibits to the Buyer's Financial Statements that are not specifically
incorporated by reference therein. Each of the balance sheets of Buyer
contained or specifically incorporated by reference in the Buyer's Financial
Statements (including in each case any related notes and schedules) fairly
presented the financial position of the entity or entities to which it relates
as of its date, and each of the statements of income and of changes in
shareholders equity and of cash flows of Buyer, contained or specifically
incorporated by reference in the Buyer's Financial Statements (including in
each case any related notes and schedules) fairly presented the results of
operations, shareholders equity and cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments), in each case in all material respects in accordance with GAAP
consistently applied during the period involved, except as may be noted
therein.
(ii) Buyer has filed all material reports, registrations and statements
together with any amendments required to be made with respect thereto, that it
was required to file since September 30, 1997 with the applicable Regulatory
Agencies and other applicable state regulatory agencies and has paid all fees
and assessments due and payable in connection therewith, except for those
reports, registrations and statements and those fees and assessments that would
not have a Material Adverse Effect on Buyer.
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<PAGE> 28
(h) Absence of Certain Changes or Events. From September 30, 1997 to the
date hereof, Buyer has not incurred any liability, other than in the ordinary
course of its business consistent with past practice, and since September 30,
1997, there has not been any condition, event, change or occurrence that,
individually or in the aggregate, has had, or is reasonably likely to have, a
Material Adverse Effect on Buyer.
(i) Taxes. All federal, state, and local tax returns required to be
filed by or on behalf of Buyer have been timely filed or requests for
extensions have been timely filed (and any such extension shall have been
granted and not have expired). All taxes, shown on such returns, all taxes
required to be shown on returns for which extensions have been granted, and any
penalties, interest or other governmental charges related thereto have been
paid in full or adequate provision has been made for any such taxes on Buyer's
balance sheet as of September 30, 1997 (in all material respects in accordance
with GAAP).
(j) Absence of Claims. Neither Buyer nor any of its directors and
officers, in their capacities as directors and officers, is a party to any
pending litigation, legal, administrative, arbitration or other proceeding,
before any court or governmental agency ("CLAIM"), and to the knowledge of the
executive officers of Buyer, there is no threatened Claim against Buyer which
is reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on Buyer.
(k) Absence of Regulatory Actions. Buyer is not a party to any cease and
desist order, written agreement or memorandum of understanding with, or a party
to any commitment letter or similar written undertaking to, or subject to any
order or directive by, or a recipient of any extraordinary supervisory letter
from any Regulatory Authority, nor has it been advised by any Regulatory
Authority that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar written undertaking.
(l) Compliance with Laws. Buyer and its subsidiaries hold all licenses,
certificates, permits, franchises and rights from all appropriate federal,
state or other public authorities necessary for the conduct of its and their
business as it is presently conducted except where the absence thereof would
not, individually or in the aggregate, have a Material Adverse Effect on Buyer,
or delay the Merger. Buyer has conducted its business so as to comply in all
respects with all applicable federal, state and local statutes, ordinances,
regulations or rules, except for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect on Buyer; and
Buyer is not presently charged with, or, to Buyer's knowledge, under
governmental investigation with respect to, any actual or alleged material
violations
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of any statute, ordinance, regulation or rule, and Buyer is not the subject of
any pending or, to Buyer's knowledge, threatened material proceeding by any
Regulatory Authority having jurisdiction over its business, properties or
operations.
(m) Absence of Knowledge. As of the date hereof, Buyer is not aware of
any reason why it would be unable to obtain all the necessary approvals
required in order to consummate the transactions contemplated by this
Agreement.
(n) Accounting and Treatment. To the knowledge of Buyer, Buyer has not
engaged in any act that would preclude or adversely affect the Merger from
qualifying as a tax-free reorganization under Section 368 of the Code or from
using the pooling of interests method of accounting for this transaction.
(o) Information Supplied. None of the information supplied or to be
supplied by Buyer for inclusion or incorporation by reference in (i) the
Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading and (ii) the Proxy Statement
and any amendment or supplement thereto will, at the date of mailing to the
BancSecurity stockholders and at the time of the meeting of stockholders of the
BancSecurity to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The Registration Statement will comply as to form in all material
respects with applicable law.
(p) No Plan to Transfer Assets. Buyer has no plan or intention to sell
or otherwise dispose of any of the assets of the BancSecurity to be acquired in
the Merger, except for dispositions in the ordinary course of business or
transfers to controlled subsidiaries as described in Section 368(a)(2)(C) of
the Code.
ARTICLE IV
COVENANTS OF BANCSECURITY AND BUYER
4.1 Covenants of BancSecurity. During the period from the date of this
Agreement and continuing until the Effective Time, BancSecurity agrees as
follows:
(a) Ordinary Course. Except as otherwise required under this Agreement
or consented to by Buyer, BancSecurity and the Banks will carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner
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as heretofore conducted and use all reasonable efforts to preserve intact their
present business organizations, maintain their rights and franchises and
preserve their relationships with customers, suppliers and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall not be impaired in any material respect. BancSecurity shall
not, nor shall it permit the Banks to (i) enter into any new material line of
business, (ii) increase or decrease the current number of the directors of
BancSecurity and the Banks, (iii) change its or the Banks's lending,
investment, liability management or other banking policies in any respect that
would have a Material Adverse Effect with respect to such party; or (iv) incur
or commit to any capital expenditures (or any obligations or liabilities in
connection therewith) other than capital expenditures (and obligations or
liabilities in connection therewith) committed to prior to the date of this
Agreement unless otherwise permitted by this Agreement.
(b) Shareholder Meeting. BancSecurity will cause to be duly called, and
will cause to be held not later than forty-five (45) days following the
effective date of the Registration Statement, a meeting of its shareholders and
will direct that this Agreement be submitted to a vote at such meeting.
BancSecurity will (i) cause proper notice of such meeting to be given to its
shareholders in compliance with the IBCA and other applicable laws and
regulations; (ii) recommend by the affirmative vote of a majority of the Board
of Directors a vote in favor of approval of this Agreement; and (iii) use its
best efforts to solicit from its shareholders proxies in favor thereof.
(c) Registration Statement. BancSecurity will promptly furnish or cause
to be furnished to Buyer all of the information concerning BancSecurity and the
Banks required for inclusion in, and will cooperate with Buyer in the
preparation of, the Registration Statement and Proxy Statement (including
audited financial statements, prepared in accordance with generally accepted
accounting principles, in form suitable for inclusion in the Registration
Statement and Proxy Statement), or any statement or application made by Buyer
to any governmental body in connection with the Merger. BancSecurity agrees
promptly to advise Buyer if at any time prior to the Effective Date of the
Merger, any information provided by or on behalf of BancSecurity becomes
incorrect or incomplete in any material respect and to provide the information
needed to correct such inaccuracy or omission. At the time of mailing thereof
to BancSecurity shareholders, at the time of BancSecurity shareholders's
meeting referred to in Section 4.1 (b) hereof and at the Effective Time of the
Merger, the Proxy Statement included as part of the Registration Statement or
any amendment thereof or supplement thereto, will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements contained therein, in light of the circumstances under
which they are made, not misleading or omit to state a material fact necessary
to correct any statement in any earlier communication with respect to
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<PAGE> 31
the solicitation of any proxy for BancSecurity shareholders' meeting; provided,
however, that none of the provisions of this subparagraph shall apply to
statements in or omissions from the Registration Statement or the Proxy
Statement made in reliance upon and in conformity with information furnished by
Buyer for use in the Registration Statement or the Proxy Statement.
(d) Confidential Information. BancSecurity will hold in confidence all
documents and nonpublic information concerning Buyer and its subsidiaries
furnished to BancSecurity and its representatives in connection with the Merger
and will not release or disclose such information to any other person, except
as required by law and except to BancSecurity's outside professional advisers
in connection with this Agreement, with the same undertaking from such
professional advisers. If the Merger contemplated by this Agreement shall not
be consummated, such confidence shall be maintained and such information shall
not be used in competition with Buyer (except to the extent that such
information can be shown to be previously known to BancSecurity, in the public
domain, or later acquired by BancSecurity from other legitimate sources) and,
upon request, all such documents, any copies thereof and extracts therefrom
shall immediately thereafter be returned to Buyer.
(e) Benefit Plans. BancSecurity and the Banks will, to the extent
legally permissible, take all action necessary or required (i) to terminate or
amend, if requested by Buyer and at Buyer's cost, all qualified pension and
welfare benefit plans and all non-qualified benefit plans and compensation
arrangements as of the Effective Time; (ii) to amend the Plans to comply with
the provisions of the Tax Reform Act of 1986, as amended, and regulations
thereunder and other applicable law as of the Effective Time; and (iii) to
submit application to the IRS for a favorable determination letter for each of
the Plans which is subject to the qualification requirements of Section 401 (a)
of the Code prior to the Effective Time. With respect to each such Plan to the
extent applicable, to the best knowledge of BancSecurity the termination of the
Plan will not result in an unfunded or underfunded liability that will result
in a Material Adverse Effect with respect to BancSecurity.
Except as otherwise required pursuant to this Section 4.1(e), BancSecurity
agrees as to itself and the Banks that it will not, without the prior written
consent of Buyer, (i) enter into, adopt, amend (except as may be required by
law) or terminate any Plan, as the case may be, or any other employee benefit
plan or any agreement, arrangement, plan or policy between BancSecurity or any
of the Banks and one or more of its directors or officers; provided, however,
that BancSecurity or the Banks may amend any of the Plans to reduce or
eliminate a requirement of mandatory periodic contributions.
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<PAGE> 32
(f) Compensation. Except for normal increases in the ordinary course of
business consistent with past practice, neither BancSecurity nor any of the
Banks shall increase the compensation of any officer, director, or employee or
enter into or renew any contract, agreement, commitment or arrangement
providing for the payment to any director, officer or employee of BancSecurity
or the Banks of compensation or benefits contingent, or the terms of which are
materially altered, upon the occurrence of the Merger. BancSecurity will
notify Buyer if there is an increase in the aggregate compensation of the
officers, directors, and employees of BancSecurity or the Banks which exceeds
four percent (4%) of the aggregate compensation of such individuals as of
September 30, 1997 or, in the case of any one individual, exceeds six percent
(6%) of his or her compensation as of September 30, 1997. Such notification in
and of itself does not necessarily mean that the increase is outside the
ordinary course of business or inconsistent with past practice.
(g) No Solicitations. BancSecurity shall not nor shall it permit the
Banks to, authorize or permit any of its or their officers, directors or
employees or any investment banker, financial advisor, attorney, accountant or
other representative or agent retained by it or the Banks to solicit, or take
any other action to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any takeover
proposal (as defined below), or agree or endorse any takeover proposal, or
participate in any discussions or negotiations, or provide third parties with
any nonpublic information, relating to any such inquiry or proposal.
BancSecurity shall promptly advise Buyer orally and in writing of any such
inquiries or proposals, including all of the material terms thereof. As used
in this Agreement, "takeover proposal" shall mean any tender or exchange offer,
proposal for a merger, consolidation or other business combination involving
BancSecurity or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of BancSecurity
other than the transactions contemplated or permitted by this Agreement.
(h) No Acquisitions. BancSecurity shall not, nor shall it permit the
Banks to, acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, limited
liability company, partnership, association or division thereof or otherwise
acquire or agree to acquire any substantial amount of assets in each case;
provided, however, that the foregoing shall not prohibit (i) internal
reorganizations, consolidations or dissolutions involving only the Banks as
permitted or directed by this Agreement, (ii) foreclosures and other
acquisitions related to previously contracted debt, in each case in the
ordinary course of business, or (iii) acquisitions of BancSecurity assets in
each case in the ordinary course of business.
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<PAGE> 33
(i) Insurance. BancSecurity and the Banks shall maintain the insurance
coverage (or coverage of a like kind and amount) referenced in Section 3.1(v)
through the Effective Time.
(j) Pooling Restrictions. From and after the date of this Agreement,
neither BancSecurity nor the Banks shall take any action which, with respect to
BancSecurity, would disqualify the Merger as a "pooling of interests" for
accounting purposes.
(k) Financial Statements. BancSecurity shall prepare, file and submit to
Buyer all quarterly and management prepared financial statements for any
periods ending at least 30 days before the Closing Date.
(l) Additional Covenants of BancSecurity. From the date of this
Agreement to the Closing Date, BancSecurity, except with the prior written
consent of Buyer which will not be unreasonably withheld, or as specifically
required under the Agreement, shall not, nor shall it allow the Banks to:
(i) Issue, sell or commit to issue or sell any shares of capital
stock of BancSecurity or the Banks, securities convertible into or
exchangeable for capital stock of BancSecurity or the Banks, warrants,
options or other rights to acquire such stock, or enter into any agreement
with respect to the foregoing other than issuance by the Banks of capital
stock to BancSecurity;
(ii) Redeem, purchase or otherwise acquire (except for trust
account shares) directly or indirectly, any shares of capital stock of
BancSecurity or the Banks or any securities convertible or exercisable for
any shares of capital stock of BancSecurity or the Banks;
(iii) Split, combine or reclassify any capital stock of BancSecurity
or the Banks or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for shares of
capital stock of BancSecurity or the Banks;
(iv) Assume, guarantee, endorse or otherwise as an accommodation
become responsible for the obligations of any other individual,
corporation or other entity, in any material amount except for letters of
credit or other similar instruments in the normal course of business;
(v) Other than in the ordinary course of business, discharge or
satisfy any material lien or encumbrance on the properties or assets of
the Banks or pay any material liability;
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<PAGE> 34
(vi) Mortgage, pledge or subject to any lien or other encumbrance
any of its assets, except (A) in the ordinary course of business, (B)
liens and encumbrances for current property taxes not yet due and payable,
and (C) liens and encumbrances which do not materially affect the value or
interfere with the current use or ability to convey the property subject
thereto or affected thereby;
(vii) Other than the sale of its former bank office premises in
Ames, Iowa, sell, assign or transfer any tangible or intangible assets
including but not limited to any securities prior to maturity or call date
with a book value greater than $250,000.00, except in the ordinary course
of business (which includes the sale of the guaranteed portions of
government guaranteed loans);
(viii) Enter into any individual employment, agency or other contract
or arrangement for the performance of personal services for an amount in
excess of $100,000.00 (except for service agreements in the ordinary
course of business). BancSecurity agrees to give Buyer prior written
notice of all individual employment, agency or other written contract or
arrangement for the performance of personal services of $50,000.00 or
more;
(ix) Amend the Banks' or BancSecurity's Articles of Incorporation,
Bylaws, or other governing documents;
(x) Cancel any material debt or claim or waive any right of
material value, except in the ordinary course of business;
(xi) Repurchase or enter into any agreement to repurchase all or
any portion of any loan previously participated to any other financial
institution other than loans repurchased in compliance with all applicable
laws and regulations;
(xii) Originate any loan which is thereafter participated to another
financial institution providing for payment upon default on any basis
other than pro rata;
(xiii) Make or agree to make any loan to any Bank Principal or any
person, corporation or entity in violation of any state or federal law or
regulation;
(xiv) Incur any obligation or liability with respect to capital
expenditures which exceeds $400,000.00 in the aggregate. BancSecurity
agrees to give Buyer prior notice of any purchase of a capital item that
exceeds $25,000.00,
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<PAGE> 35
the acquisition of which or obligation to pay therefor was not previously
committed as of the date of this Agreement.
(xv) Fail to timely pay and discharge all federal and state taxes
and other accounts payable for which it is liable, provided, that the
Banks may contest liability for such taxes or accounts payable and deposit
an amount equal to any such taxes, in lieu of the payment thereof, into a
reserve account, determined consistently with prior practices, from which
such taxes will be paid when and to the extent they are found to be
properly due and payable;
(xvi) Except as provided in Section 4.1(f) of the BancSecurity
Disclosure Schedules, pay or commit to pay any additional salary or other
compensation to any of the Bank's officers, directors or employees;
(xvii) Except as otherwise required pursuant to Section 4.1(e), enter
into, adopt, amend (except as may be required by law), terminate or make
or grant any increase above current funding levels in any of the Plans
(other than normal premium increases on current health care insurance);
(xviii) Fail to charge and pay interest rates on loans and deposits,
respectively, not materially consistent with practices in the Banks'
marketplace;
(xix) Fail to use its reasonable efforts to comply with any law,
rule, regulation or order applicable to the Banks and/or BancSecurity if
such failure would have a Material Adverse Effect upon BancSecurity;
(xx) Fail to make all appropriate and required transfers to the
Banks' loan loss reserves based upon existing policies of the Banks or at
the request of any regulatory agency;
(xxi) Change any accounting methods, practices or procedures with
respect to the accumulation and presentation of financial information,
except as directed by applicable law or regulation or to conform with
applicable accounting standards;
(xxii) Declare or pay any dividends or distributions with respect to
its Common Stock in excess of (a) $43.00 per common share of stock on or
about January 1998 for the calendar year 1997, (b) a quarterly dividend in
the first quarter of 1998 equal to $10.75 per common share of stock, and
(c) in each calendar quarter thereafter a quarterly dividend in an amount
equal to the dividend the BancSecurity shareholders would have received
had they been
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shareholders of Buyer in the event either the Closing does not occur in
the pertinent quarter or the Closing Date is after the record date for the
holders of Buyer's Common Stock to receive a quarterly dividend in the
pertinent quarter, provided, that in the case of each dividend payment the
availability of the pooling of interests accounting treatment will not be
adversely effected; or
(xxiii) Fail to use its reasonable efforts to obtain the consent or
approval of each person other than the government authorities referred to
in Section 6.l(c) whose consent or approval is required in order to permit
a succession by the Surviving Corporation pursuant to the Merger to any
obligation, right or interest of BancSecurity or the Banks under any loan
or credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument.
(xxiv) Shall not create any indebtedness other than (i) short term
indebtedness incurred in the normal course of business, (ii) indebtedness
incurred pursuant to an existing contract previously disclosed to Buyer,
(iii) indebtedness to the FHLB, or (iv) indebtedness other than as
necessary to do the acts and things contemplated by this Agreement.
(xxv) Shall promptly notify Buyer of any lawsuits, claims,
proceedings, regulatory actions or investigations that may be threatened,
brought, asserted or commenced against it or by its officers, directors,
employees or agents involving in any way the business, properties or
assets of BancSecurity or any of the Banks which would have a Material
Adverse Effect on BancSecurity.
(xxvi) Sell, transfer or otherwise dispose of any investment
securities prior to maturity or call date.
(xxvii) Maintain a consolidated allowance for losses on loans based on
required reserves determined pursuant to quarterly loan loss analysis
consistent with past practices and procedures. As of September 30, 1997,
this amount was $5,017,033.
4.2 Covenants of Buyer. During the period from the date of this
Agreement and continuing until the Effective Time (except for subsection (i)
which covenant shall survive the Effective Time), Buyer agrees as follows:
(a) Ordinary Course. Buyer shall carry on its business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted.
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(b) Application. Subject to the required cooperation of BancSecurity and
its affiliates, Buyer shall use its reasonable efforts to prepare and submit
within thirty (30) days of the date hereof an application to the Federal
Reserve Bank of Chicago for prior approval pursuant to Section 3(a)(5) of the
BHCA of the proposed transaction, and to prosecute all required federal and
state applications. Buyer shall provide BancSecurity and its counsel, copies
of all applications as filed and any correspondence exchanged with appropriate
federal and state regulatory agencies.
(c) Cooperation. Buyer will furnish to BancSecurity all the information
concerning Buyer required for inclusion in, and will cooperate in the
preparation of, the Proxy Statement to be sent to the shareholders of
BancSecurity. Buyer agrees promptly to advise BancSecurity if at any time
prior to the Effective Date of the Merger, any information provided by Buyer in
the Proxy Statement becomes incorrect or incomplete in any material respect and
to provide the information needed to correct such inaccuracy or omission.
(d) Registration Statement. As promptly as practicable after the
execution of this Agreement, Buyer will file with the SEC the Registration
Statement and any other applicable documents, which will include a prospectus
and joint Proxy Statement, and will use its best efforts to cause the
Registration Statement to become effective under the Securities Act and
applicable state securities laws as soon as practicable. Buyer shall advise
BancSecurity promptly when the Registration Statement has become effective and
of any supplements or amendments thereto, and Buyer shall furnish BancSecurity
with copies of all such documents. At the time the Registration Statement
becomes effective, the Registration Statement and the Proxy Statement will
comply in all material respects with the provisions of the Securities Act and
the published rules and regulations thereunder, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they are made, not misleading. At the time of
mailing thereof to BancSecurity shareholders, at the time of BancSecurity
shareholders's meeting referred to in Section 4.1(b) hereof and at the
Effective Time of the Merger, the Proxy Statement included as part of the
Registration Statement or any amendment thereof or supplement thereto, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements contained therein, in light of the
circumstances under which they are made, not misleading or omit to state a
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for BancSecurity shareholders'
meeting; provided, however, that none of the provisions of this subparagraph
shall apply to statements in or omissions from the Registration Statement or
the Proxy Statement made in reliance upon and in conformity with information
furnished by BancSecurity
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or the Banks for use in the Registration Statement or the Proxy Statement.
Buyer shall bear the costs of all SEC filing fees with respect to the
Registration Statement, the costs of printing the Proxy Statement, and the
costs of qualifying the shares of Buyer Common Stock under state blue sky laws
as necessary.
(e) Listing. Buyer will file all documents required to be filed to
obtain approval for listing the Buyer Common Stock to be issued pursuant to the
Merger on the NASDAQ National Market System and use its best efforts to effect
said listing.
(f) Shares to be Issued. The shares of Buyer Common Stock to be issued
by Buyer to the shareholders of BancSecurity pursuant to this Agreement will,
upon such issuance and delivery to said shareholders pursuant to the Agreement,
be duly authorized, validly issued, fully paid and nonassessable except as
otherwise provided by Section 180.0622 of the Wisconsin Business Corporation
Act. The shares of Buyer Common Stock to be delivered to the shareholders of
BancSecurity pursuant to this Agreement are and will be free of any preemptive
rights of the stockholders of Buyer.
(g) Blue Sky. Buyer will file all documents required to obtain prior to
the Effective Time of the Merger all necessary Blue Sky permits and approvals,
if any, required to carry out the transactions contemplated by this Agreement,
will pay all expenses incident thereto and will use its best efforts to obtain
such permits and approvals.
(h) Confidential Information. Buyer will hold in confidence all
documents and information concerning BancSecurity and the Banks furnished to it
and its representatives in connection with the transactions contemplated by
this Agreement and will not release or disclose such information to any other
person, except as required by law and except to its outside professional
advisers in connection with this Agreement, with the same undertaking from such
professional advisers. If the transactions contemplated by this Agreement
shall not be consummated, such confidence shall be maintained and such
information shall not be used in competition with BancSecurity or the Banks
(except to the extent that such information can be shown to be previously known
to Buyer, in the public domain, or later acquired by Buyer from other
legitimate sources) and, upon request, all such documents, copies thereof or
extracts therefrom shall immediately thereafter be returned to BancSecurity.
(i) Indemnification. From and after the Effective Time through the tenth
anniversary of the Effective Time, Buyer shall indemnify and hold harmless each
present and former director, officer and employee of BancSecurity and the Banks
and each officer or employee of BancSecurity and the Banks that is serving or
has served as a director or trustee of another entity expressly at
BancSecurity's or a Bank's
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request or direction (each, an "INDEMNIFIED PARTY"), against any costs or
expenses (including reasonable attorneys' fees), judgment, fines, losses,
claims, damages or liabilities (collectively, the "COSTS") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, and whether or not the
Indemnified Party is a party thereto, arising out of matters existing or
occurring at or prior to the Effective Time (including the transactions
contemplated by this Agreement), whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent then permitted under applicable
law and regulation; provided that Buyer shall not be obligated to provide any
indemnification under this subsection for any acts or omissions which are the
result of any conduct which is fraudulent or grossly negligent, violates any
state or federal criminal statute, or outside the scope of such officer's,
director's or employee's scope of employment, office or duties. Subject to any
prohibition or restriction under applicable law or regulation, Buyer further
agrees to advance any such costs to each Indemnified Party as they are from
time to time incurred (subject to receipt of an undertaking to repay such
advances if it is ultimately judicially determined that such Indemnified Party
is not entitled to indemnification).
(j) Indemnification Contracts. Buyer agrees to honor without reservation
and, after the Effective Time, to cause its BancSecurity subsidiary to honor
without reservation the individual indemnification agreements by and between
certain directors and officers of BancSecurity and the Banks.
(k) Employment Contracts and Benefits. Buyer agrees to honor without
reservation and, after the Effective Time, to cause its BancSecurity subsidiary
to honor without reservation all existing written employment, supplemental
retirement and salary continuation contracts and will provide the same employee
benefits currently offered by Buyer to its employees.
4.3 Covenants of Buyer and BancSecurity. During the period from the date
of this Agreement and continuing until the Effective Time, Buyer and
BancSecurity agree as to themselves and their subsidiaries that, except as
expressly contemplated or permitted by this Agreement, or to the extent that
the parties shall otherwise consent in writing:
(a) Governing Documents. No party shall amend its Certificate or
Articles of Incorporation or Bylaws.
(b) Other Actions. Unless such action is required by law or sound
banking practice, no party knowingly and intentionally shall, or shall permit
any of its subsidiaries to, take any action that (i) is intended to result in
any of its representations
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and warranties set forth in this Agreement being or becoming untrue in any
material respect, or in any of the conditions to the Merger set forth in
Article VI not being satisfied or in a violation of any provision of this
Agreement, or (ii) would adversely affect the ability of any of them to obtain
any of the Requisite Regulatory Approvals (as defined in Section 5.1(b))
without imposition of a condition or restriction of the type referred to in
Section 6.1(f) hereof except, in every case, as may be required by applicable
law or this Agreement.
(c) Advice of Changes; Government Filings. Each party shall promptly
advise the other orally and in writing of any change or event constituting a
material breach of any of the representations, warranties or covenants of such
party contained herein. Buyer shall file all reports required to be filed by
it with the SEC between the date of this Agreement and the Effective Time and
shall deliver to BancSecurity copies of all such reports promptly after the
same are filed. BancSecurity, Buyer and each subsidiary of BancSecurity or
Buyer that is a bank shall file all reports with the appropriate Regulatory
Agencies and all other reports, applications and other documents required to be
filed with the appropriate Regulatory Agencies between the date hereof and the
Closing Date and shall make available to the other party copies of all such
reports promptly after the same are filed.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Regulatory Matters.
(a) Buyer shall use its reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing, and, following the record date for the
stockholder meeting of BancSecurity, thereafter mail the Proxy Statement to the
stockholders of BancSecurity.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all necessary applications, notices, petitions,
filings and other documents, and to obtain as promptly as practicable all
necessary permits, consents, and authorizations of all governmental entities
necessary to consummate the Merger ("REQUISITE REGULATORY APPROVALS"). Subject
to applicable laws relating to the exchange of information, BancSecurity and
Buyer shall have the right to review in advance, and to the extent practicable
each will consult the other on all the information relating to BancSecurity or
Buyer, as the case may be, and any of their respective subsidiaries, which
appear in any filing made with, or written materials submitted to any
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governmental entity in connection with the Merger. In exercising the foregoing
right, each of the parties hereto shall act reasonably and as promptly as
practicable.
(c) BancSecurity and Buyer shall promptly furnish each other with copies
of written communications received by BancSecurity or Buyer, as the case may
be, or any of their respective Subsidiaries, Affiliates or Associates (as such
items are deemed 12b-2 under the Exchange Act as in effect on the date hereof)
from, or delivered by any of the foregoing to, any governmental entity in
respect of the Merger.
5.2 Letters of Officers. BancSecurity shall cause to be delivered to
Buyer a letter of BancSecurity's chief executive officer in substantially the
form shown on EXHIBIT 5.2A dated (i) the date on which the Registration
Statement shall become effective and (ii) the business day prior to the Closing
Date, and addressed to Buyer.
Buyer shall cause to be delivered to BancSecurity a letter of Buyer's
chief financial officer in substantially the form shown on EXHIBIT 5.2B dated
(i) the date on which the Registration Statement shall become effective and
(ii) the business day prior to the Closing Date, and addressed to BancSecurity.
5.3 Access to Information. Upon reasonable notice and subject to
applicable laws relating to the exchange of information, BancSecurity and Buyer
shall each (and cause each of its subsidiaries to) afford to the officers,
employees, accountants, counsel and other representatives of the other party,
access during normal business hours during the period prior to the Effective
Time, to all its properties, books, contracts, commitments and records for the
purpose of updating any review of such items performed prior to the date of
this Agreement and, during such period. BancSecurity and Buyer shall (and
shall cause each of its subsidiaries to) make available to the other: (a) a
copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of federal or
state securities laws or federal or state banking laws (other than reports or
documents which either party is not permitted to disclose under applicable
law); and (b) all other information concerning its business, properties and
personnel as either party may reasonably request. It is the intention of the
parties that Buyer shall conduct an examination of BancSecurity and the Banks
prior to the Closing Date in order to confirm compliance with the
representations, warranties and covenants set forth in this Agreement. It is
the intention of the parties that BancSecurity shall conduct an examination of
Buyer and its subsidiaries prior to the Closing Date in order to confirm
compliance with the representations, warranties and covenants set forth in this
Agreement. No investigation by either party shall affect the representations
and warranties set forth herein or waive any right or remedy hereunder.
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5.4 Employee Benefit Plans. Each person who is an employee of the Banks
as of the Effective Time ("BANK EMPLOYEES") shall be a participant in the
employee welfare plans, and shall be eligible for participation in the pension
plans of Buyer, as in effect from time to time, subject to any eligibility
requirements (with full credit for years of past service to any of the Banks,
or to any predecessor-in- interest of the Banks to the extent such service is
presently given credit under the Plans of the Banks described in Section 3.1
(n) hereof, for the purpose of satisfying any eligibility and vesting periods)
applicable to such plans (but not subject to any preexisting condition
exclusions) and shall either continue to be covered by the current welfare plan
or enter each welfare plan immediately after the Effective Time, subject to
such eligibility requirements, and shall enter, subject to such eligibility
requirements, each pension plan not later than January 1 of the year after the
Effective Time. For the purpose of determining each Bank Employee's benefit for
the year in which the merger occurs under the Buyer vacation program, vacation
taken by a Bank Employee prior to the Effective Time shall be deducted from the
Bank Employee's entitlement under the BancSecurity vacation program; vacation
taken by the Bank Employee after the Effective Time shall be deducted from his
or her entitlement under the Buyer vacation program, which commences at the
Effective Time. Any vacation days of a Bank Employee under the BancSecurity
program which are accrued and unused as of the Effective Time shall be in
addition to the Bank Employee's entitlement under Buyer's vacation program and
shall be taken not later than June 30, 2000. Each Bank Employee shall be
eligible for participation, as a new employee with the credit for past service
described above, in the Buyer Plans under the terms thereof.
5.5 Expenses. Except as otherwise stated herein, whether or not the
Merger is consummated, all costs and expenses incurred in connection with this
Agreement, and the transactions contemplated hereby shall be paid by the party
incurring such expense, except that the expenses of printing and filing the
Registration Statement and the Proxy Statement/Prospectus and all SEC and other
regulatory filings incurred in connection herewith shall be born solely by the
Buyer. "Expenses" as used in this agreement shall include all reasonable
out-of-pocket expenses (including, without limitation, all fees and expenses of
consul, accountants, investment bankers, experts and consultants to the party
and its affiliates) incurred by a party or on its behalf in connection with or
related to the authorization, preparation and execution of this agreement, the
solicitation of shareholder approvals and all other matters related to the
closing of the transactions contemplated hereby.
5.6 Additional Agreements: Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its
reasonable efforts to take all actions and to do all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions
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contemplated by this Agreement, including, without limitation, cooperating
fully with the other party hereto, providing the other party hereto with any
appropriate information and making all necessary filings in connection with the
Requisite Regulatory Approvals.
5.7 Affiliates. BancSecurity and Buyer shall use their reasonable
efforts to cause each director, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act) of BancSecurity
or Buyer to deliver to the other party hereto, as soon as practicable after the
date hereof, and at least 32 days prior to the Closing Date, a written
agreement substantially in the form of EXHIBIT 5.7.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of three-fourths of the
outstanding shares of BancSecurity Common Stock entitled to vote thereon and by
the affirmative vote of the holders of a majority of the outstanding shares of
Acquisition Subsidiary entitled to vote thereon and the holders of a majority
of the outstanding shares of Buyer entitled to vote thereon.
(b) NASDAQ Listing. The shares of Buyer Common Stock issuable to
BancSecurity stockholders pursuant to this Agreement shall have been approved
for listing on the NASDAQ National Market System, upon notice of issuance.
(c) Other Approvals. Other than the filing provided for by Section 1.1,
all consents, orders or approvals of, or declarations or filings with, and all
expirations of waiting periods imposed by, any governmental entity
(collectively, the "CONSENTS") that are prescribed by law as necessary for the
consummation of the Merger and the other transactions contemplated hereby
(other than immaterial Consents) shall have been filed, occurred or been
obtained and all such Requisite Regulatory Approvals shall be in full force and
effect.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of
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the Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "INJUNCTION") preventing the consummation of the
Merger or any of the transactions contemplated hereby shall be in effect, nor
shall any proceeding by any governmental entity seeking any such Injunction be
pending. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, or enforced by any governmental entity which prohibits,
restricts or makes illegal consummation of the Merger.
(f) No Unduly Burdensome Condition. There shall not be any action taken
by any person or entity not a party to this Agreement, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger or any of the transactions contemplated hereby, by any federal or state
governmental entity which, in connection with the grant of a Requisite
Regulatory Approval, imposes any condition or restriction upon Buyer,
BancSecurity, or any of their subsidiaries which would cause a Material Adverse
Effect on the economic or business benefits of the transactions contemplated by
this Agreement as to render inadvisable, in the reasonable business judgment of
the Board of Directors of either Buyer or BancSecurity, the consummation of the
Merger.
(g) Election of New Director. Immediately following the Closing Date
Ronald E. Fenton will be added to the Board of Directors of the Buyer in
accordance with the terms and conditions of a resolution of the Buyer's Board
of Directors adopted prior to the Closing Date electing Ronald E. Fenton to the
Board of Directors of the Buyer contingent only upon (i) the Closing having
occurred; and (ii) Ronald E. Fenton having agreed in writing to serve as a
director of the Buyer following the Closing Date.
(h) In addition to and not in substitution of the indemnification
contracts with certain directors and officers of BancSecurity, prior to the
Effective Time BancSecurity shall use its best efforts, subject to availability
and reasonable premium charges, to purchase, and for a period of ten (10) years
after the Effective Time, the Buyer shall maintain, directors and officers
liability insurance "tail" or "runoff" coverage of the same type and coverage
provided by Buyer to the officers and directors of its subsidiaries with
respect to wrongful acts and/or omissions committed or allegedly committed
prior to the Effective Time. Such coverage shall have an aggregate coverage
limit over the term of such policy in an amount no less than the annual
aggregate coverage limit provided by Buyer under its existing directors and
officers liability policy, as adjusted from time to time, and in all other
respects shall be at least
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comparable to such existing policy to the same extent such coverage is provided
to Buyer's officers and directors.
In the event the Buyer or the Surviving Corporation of any of its
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially all
of its properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors and assigns of the Buyer or the
Surviving Corporation, as the case may be, assume the obligations set forth in
this subsection.
In addition to the other indemnification obligations set forth in this
subsection, the Buyer will fulfill the obligations to indemnify directors and
officers of BancSecurity contained in BancSecurity's and the Banks' respective
Articles of Incorporation and in those indemnification contracts with certain
directors and officers of BancSecurity.
The provisions of this Subsection are intended to be for the benefit of,
and shall be enforceable by, each indemnified party and his or her heirs and
representatives.
6.2 Conditions to Obligations of Buyer. The obligation of Buyer to
effect the Merger are also subject to the satisfaction or waiver by Buyer prior
to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of BancSecurity set forth in this Agreement shall be true and correct in all
material respects as of the date of the Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on the Closing Date, except where the failure to be
true and accurate in all material respects would not have or would not be
reasonably expected to have a Material Adverse Effect on BancSecurity, and
Buyer shall have received a certificate signed on behalf of BancSecurity by the
Chief Executive Officer of BancSecurity to such effect.
(b) Performance of Obligations of BancSecurity. BancSecurity shall have
performed in all materials respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Buyer shall have
received a certificate signed on behalf of BancSecurity by the Chief Executive
Officer of BancSecurity to such effect.
(c) Pooling Letter. Buyer shall have received a letter from its
accountants, in form and substance reasonably satisfactory to Buyer, approving
the accounting
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treatment of the Merger as a "pooling of interests" in accordance with
generally accepted accounting principles, as of a date no more than five
business days prior to the Closing Date; in support of the its accountants
pooling letter, its accountants and Buyer shall have received a letter from
BancSecurity's accountants, in form and substance reasonably satisfying to its
accountants, confirming certain facts on behalf of BancSecurity.
(d) Legal Opinion. Buyer shall have received the opinion of Dickinson,
Mackaman, Tyler & Hagen, P.C., counsel to BancSecurity, dated the Closing Date,
in substantially the form attached as EXHIBIT 6.2(D), and such opinion shall
not have been withdrawn prior to the Effective Time.
(e) Dissenting Shareholders. Holders of less than ten percent (10%) of
the shares of BancSecurity Common Stock shall have exercised their dissenter's
rights under Division XIII of the IBCA.
(f) Minimum Capital. BancSecurity's equity as of March 31, 1998,
determined in accordance with generally accepted accounting principles,
assuming the payment of the proposed January, 1998 dividend of $43.00 per share
and excluding year-end accounting adjustments requested by Buyer, the costs
related to this transaction, and any adjustment (positive or negative) to such
equity pursuant to FASB 115 (the "ACCOUNTING ADJUSTMENTS"), must, as of the
last day of the month prior to the Effective Time, be equal to or greater than
the sum of Fifty- three Million Dollars ($53,000,000.00) plus Five Hundred
Ninety Thousand Dollars ($590,000.00) per month for each month from April 1,
1998 to the Effective Time less any quarterly dividends declared for and
payable after the first quarter of 1998 as permitted by Section 4.1(l)(xxii)
of this Agreement (the "MINIMUM EQUITY"). If BancSecurity's actual equity at
the Effective Time after making the Accounting Adjustments is less than the
Minimum Equity, then the total price under Section 2.1(a) of this Agreement
shall be reduced by an amount equal to the difference between BancSecurity's
actual equity at the Effective Time, after making the Accounting Adjustments,
and the Minimum Equity multiplied by one hundred and fifty percent (150%).
6.3 Conditions to Obligations of BancSecurity. The obligation of
BancSecurity to effect the Merger is also subject to the satisfaction or waiver
by BancSecurity prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Buyer set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on the
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Closing Date, except as otherwise contemplated by this Agreement, and
BancSecurity shall have received a certificate signed on behalf of Buyer by the
Chairman and Chief Executive Officer of Buyer to such effect.
(b) Performance of Obligations of Buyer. Buyer and the Acquisition
Subsidiary shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the Closing
Date, and BancSecurity shall have received a certificate signed on behalf of
Buyer and the Acquisition Subsidiary by the Chairman and Chief Executive
Officer of Buyer to such effect.
(c) Consents Under Agreements. Buyer shall have obtained the consent or
approval of each person whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or credit
agreement, note, mortgage, indenture, lease, license or other agreement or
instrument to which Buyer or any of its subsidiaries is a party or is otherwise
bound, except those for which failure to obtain such consents and approvals
would not, in the reasonable opinion of BancSecurity, individually or in the
aggregate, have a material adverse effect on Buyer or upon the consummation of
the transactions contemplated hereby.
(d) Tax Opinion. BancSecurity and Buyer shall have received the opinion
of McCarty, Curry, Wydeven, Peeters & Haak, counsel to Buyer, dated the Closing
Date, to the effect that (i) the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
(ii) BancSecurity and Buyer will each be a party to that reorganization within
the meaning of Section 368(b) of the Code, (iii) shareholders of BancSecurity
who exchange their shares of BancSecurity Common Stock for shares of Buyer
Common Stock will not recognize gain or loss, for purposes of federal income
tax, except to the extent of the cash received in lieu of fractional shares,
and (iv) BancSecurity will not recognize gain or loss, for purposes of federal
income tax, as a result of consummation of the Merger.
(e) Legal Opinion. BancSecurity shall have received the opinion of
McCarty, Curry, Wydeven, Peeters & Haak, counsel to Buyer, dated the Closing
Date, in substantially the form shown on EXHIBIT 6.3(E), and such opinion shall
not have been withdrawn prior to the Effective Time.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated in writing at any time
prior to the Effective Time, whether before or after approval of the Merger by
the stockholders of Buyer or BancSecurity, only in the following circumstances:
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(a) by mutual consent of BancSecurity and Buyer in a written instrument,
if the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either BancSecurity or Buyer if (i) any Requisite Regulatory
Approval shall have been denied; or (ii) any governmental entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement;
(c) by either BancSecurity or Buyer if the Merger shall not have been
consummated on or before August 31, 1998; provided, however, that all parties
shall use their respective reasonable efforts to consummate the transaction as
soon as practicable, it being the desire of Buyer and BancSecurity that the
transaction be completed by June 30, 1998, unless extended for not more than
three (3) months by mutual written consent of parties as provided for in
Section 7.4. This right of termination shall be unavailable to a party if the
failure of consummation shall be due to the failure of the party seeking to
terminate to perform or observe in all material respects the covenants and
agreements hereunder to be performed or observed by such party; or
(d) by either BancSecurity or Buyer if there shall have been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the other party, which breach shall not have been cured before the
Closing or within twenty (20) business days following receipt by the breaching
party of written notice of such breach from the other party, whichever occurs
first.
7.2 Effect of Termination. In the event of termination of this Agreement
by either BancSecurity or Buyer as provided in Section 7.1, this Agreement
shall forthwith become void and have no effect except that the obligations
under Sections 4.1(d), 4.2(h), 5.5 and 7.2 shall survive termination of this
Agreement; provided, however, that no party shall be relieved or released from
any liabilities or damages arising out of the willful breach by such party of
any provision of this Agreement. As used herein, a failure of any of the
representations and warranties set forth in Section 3.1 or Section 3.2, as the
case may be, shall not constitute a "willful breach" of the Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of Buyer and BancSecurity, provided, however, that after
any such approval, no amendment shall be made which by law requires further
approval by such
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stockholders, without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto; (ii) waive any inaccuracies in the representations and warranties
contained herein or in any of the Schedules; and (iii) waive compliance with
any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. No representation,
warranty, or covenant contained in this Agreement shall survive the Merger or
the termination of this Agreement (except for Section 4.2(i) which covenant
shall survive the Effective Time).
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when received by the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to BancSecurity
or the Banks, to: Ronald E. Fenton
BancSecurity Corporation
11 N First Avenue
PO Box 370
Marshalltown IA 50158-0370
with a copy to: Howard O. Hagen
Dickinson, Mackaman, Tyler & Hagen P.C.
699 Walnut, Suite 1600
Des Moines IA 50309-3986
and
(b) if to Buyer, to: Gail E. Janssen
F&M Bancorporation, Inc.
One Bank Avenue
PO Box 920
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Kaukauna, WI 54130-0920
with copies to: Randall A. Haak
McCarty, Curry, Wydeven, Peeters & Haak
120 East Fourth Street
PO Box 860
Kaukauna, WI 54130-0860
8.3 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
8.4 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
8.5 Entire Agreement; Third Party Beneficiaries; Rights of Ownership.
This Agreement (including the documents and the instruments referred to herein)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder, except
that Sections 3.2 and 4.2 are intended for the benefit of BancSecurity
shareholders; and Section 5.4 is intended for the benefit of employees of the
Bank. Buyer shall be liable to such third-party beneficiaries for damages
caused by the breach of such Sections. No party shall have the right to
acquire or shall be deemed to have acquired shares of common stock of the other
party pursuant to the Merger until consummation thereof.
8.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Iowa.
8.7 Publicity. Except as otherwise required by law or the rules of the
NASDAQ or the National Association of Securities Dealers, so long as this
Agreement is in effect, neither BancSecurity nor Buyer shall, nor shall either
of them permit any of its subsidiaries to, issue or cause the publication of
any press release or other public announcement with respect to the transactions
contemplated by this Agreement
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without the consent of the other party, which consent shall not be
unreasonably withheld.
8.8 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior written consent of
the other parties. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
8.9 Enforcement of Agreement. Each of the parties hereto agrees that it
will not object if the other party seeks to obtain an injunction to prevent
breaches of this Agreement or to enforce specifically the terms and provision
hereof in any court in the United States or any state have jurisdiction. The
enforcing party shall be entitled to recover its attorneys fees incurred in the
successful enforcement of the terms and provisions of this Agreement.
IN WITNESS WHEREOF, BancSecurity and Buyer have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the date
first above written.
BANCSECURITY CORPORATION F&M BANCORPORATION, INC.
By:/s/ Ronald E. Fenton By: /s/ Gail E. Janssen,
----------------------------- ---------------------------------
Ronald E. Fenton, President Gail E. Janssen, Chairman of the
Board
BANCSECURITY ACQUISITION CORPORATION
By: /s/ John W. Johnson,
-------------------------------
John W. Johnson, President
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TABLE OF EXHIBITS
EXHIBIT A -- Articles of Merger and Plan of Merger
EXHIBIT B -- BancSecurity Disclosure Schedule
EXHIBIT C -- Buyer Disclosure Schedule
EXHIBIT 5.2A -- Letter of BancSecurity Chief Financial Officer
EXHIBIT 5.2B -- Letter of Buyer Chief Financial Officer
EXHIBIT 5.7 -- Affiliate Agreement
EXHIBIT 6.2(d) -- Dickinson Opinion
EXHIBIT 6.3(e) -- McCarty Opinion
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EXHIBIT A
ARTICLES OF MERGER
OF
BANCSECURITY ACQUISITION CORPORATION
INTO
BANCSECURITY CORPORATION
BancSecurity Corporation, an Iowa corporation, hereby certifies as
follows:
First: A Plan of Merger among the constituent corporations (the "PLAN OF
MERGER") is attached hereto;
Second: Shareholder approval was required.
Third: The Plan of Merger was approved by the shareholders of the
constituent corporations. The shares outstanding and entitled to vote
separately on the plan as to BancSecurity Corporation was 38,726. The
shares outstanding and entitled to vote separately on the plan as to
BancSecurity Acquisition Corporation was 1,000. The number of votes cast
for the plan by the sole shareholder of BancSecurity Acquisition
Corporation was 1,000. The number of votes cast for the plan by the
shareholders of BancSecurity Corporation was _______ . The number of
votes cast for the plan by each voting group eligible to vote separately
on the merger was sufficient for approval by that voting group.
Fourth: The Articles of Merger shall be effective at ______ a.m., CST, on
_________________________, 1998.
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IN WITNESS WHEREOF, the constituent corporations have caused this
Certificate to be signed by their respective duly-authorized officers this
_________ day of _______________, 1998.
BANCSECURITY CORPORATION BANCSECURITY ACQUISITION
CORPORATION
By_______________________________ By____________________________
Ronald E. Fenton, President John W. Johnson, President
F&M BANCORPORATION, INC.
By_______________________________
Gail E. Janssen,
Chairman of the Board
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<PAGE> 55
PLAN OF MERGER
OF
BANCSECURITY ACQUISITION CORPORATION
WITH AND INTO
BANCSECURITY CORPORATION
I. CORPORATIONS PARTICIPATING IN THE MERGER.
BancSecurity Acquisition Corporation, an Iowa corporation (the "MERGING
CORPORATION") shall merge with and into BancSecurity Corporation, an Iowa
corporation ("BANCSECURITY" or the "SURVIVING CORPORATION").
II. NAME OF SURVIVING CORPORATION.
Upon the effectiveness of the merger ("EFFECTIVE TIME"), the name of
the Surviving Corporation shall be BancSecurity Corporation.
III. TERMS AND CONDITIONS OF THE MERGER.
Subject to the terms of the Merger Agreement dated December 1, 1997 by
and among Surviving Corporation, Merging Corporation, and F&M Bancorporation,
Inc. ("F&M") (the "AGREEMENT"), at the Effective Time: (i) the separate
existence of Merging Corporation shall cease and Merging Corporation shall be
merged with and into the Surviving Corporation and the shares of stock of
Merging Corporation owned by F&M prior to the Effective Time will convert into
the same number of shares of stock of the Surviving Corporation as of the
Effective Time without any action on the part of F&M or the Surviving
Corporation; (ii) the Articles of Incorporation of Merging Corporation, as in
effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation and shall be amended and restated as
set forth in EXHIBIT A hereto; (iii) the By-laws of Merging Corporation, as in
effect immediately prior to the Effective Time shall be the By-laws of the
Surviving Corporation; (iv) the holder of all of the outstanding common stock
of the Surviving Corporation after the Effective Time shall be the sole
shareholder of Surviving Corporation; and (v) the holders of certificates
representing shares of Surviving Corporation common stock prior to the
Effective Time (as defined in Section 2.1(a) of the Agreement) shall cease to
have any rights as shareholders of Surviving Corporation, except such rights,
if any, as they may have pursuant to Division XIII of the Iowa Business
Corporation Act ("IBCA"), and their sole right shall be the right to receive
(A) the number of whole shares of F&M common stock (as defined in Section
2.1(a) of the Agreement) into which their shares of Surviving Corporation
common
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stock have been converted in the merger as provided in the Agreement (together
with any dividend payments with respect thereto, to the extent provided in
Section 2.2(c) of the Agreement), and (B) the cash value of any fraction of a
share of F&M common stock into which their shares of Surviving Corporation
common stock have been converted as provided herein.
IV. EFFECTIVENESS OF THE MERGER.
The merger shall be effective as provided in the Articles of Merger.
V. CONVERSION OF COMMON STOCK.
(a) At the Effective Time, by virtue of the merger and without any
action on the part of any holder of shares of common stock, $25.00 par value
per share, of BancSecurity ("BANCSECURITY COMMON STOCK"), but subject to
paragraph (c) hereof, 38,726 issued and outstanding shares of BancSecurity
Common Stock, other than shares of BancSecurity Common Stock held by persons
who have taken all steps required to perfect their right to be paid the fair
value of such shares under Division XIII of the IBCA, shall be converted into
that number of shares of validly issued, fully paid and nonassessable shares of
common stock of F&M, $1.00 par value ("F&M COMMON STOCK") which when multiplied
by the average closing price of F&M Common Stock on the NASDAQ National Market
System for the last 30 trading days in which trades occurred ending at the end
of the third trading day immediately preceding the Closing Date (as
appropriately and proportionately adjusted in the event that, between the date
hereof and the termination of such 30 trading day period, shares of F&M Common
Stock shall be changed into a different number of shares or a different class
of shares by reason of any reclassification, recapitalization, split-up,
combination, exchange of shares or readjustment or stock dividend) (the
"AVERAGE PRICE") equals at least $145,000,000.00 (the "EXCHANGE RATIO");
provided, however, if the Average Price is equal to or less than $35.80, then
the number of shares of F&M Common Stock issued will not be further increased
and if the Average Price is equal to or more than $40.00, then the number of
shares of F&M Common Stock issued will not be further reduced and, provided,
further, in the event the Average Price is less than $32.00, then F&M must
either increase the number of shares of F&M Common Stock to be exchanged for
BancSecurity Common Stock so that the aggregate value of the F&M Common Stock
equals at least $129,600,000.00 or else BancSecurity will have the option to
terminate the transaction.
(b) At the Effective Time, all such shares of BancSecurity Common
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist. Each BancSecurity shareholder's certificate
or certificates previously
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EXHIBIT C
AGREEMENT OF MERGER AND REORGANIZATION
Agreement of Merger and Reorganization (hereinafter referred to as
"Agreement"), made as of the 31st day of December, 1997, by and between F & M
Bancorporation, Inc., a Wisconsin corporation, Financial Management Services of
Jefferson, Inc., a Wisconsin corporation and F & M Merger Corporation, a
Wisconsin corporation.
1. Definitions.
The following definitions shall apply in this Agreement:
1.1 "Agreement" shall mean this Agreement of Merger and
Reorganization.
1.2 "BANK" shall mean The Farmers & Merchants Bank of Jefferson, 106
South Main Street, Jefferson, Wisconsin 53549.
1.3 "BANK Stock" shall mean BANK's voting capital stock $100 par
value.
1.4 "Closing Date" shall mean the date set by mutual agreement of
FMS and F & M and will not occur prior to the satisfaction or the waiver of all
of the conditions to the transaction.
1.5 "Effective Time" shall mean the date on which the Articles of
Merger are received for filing by the State of Wisconsin Department of
Financial Institutions. The Articles of Merger shall be filed as soon as
possible after the conditions precedent to this merger have been met or waived
by F & M and FMS, but not prior to the Closing Date.
1.6 "FMS" shall mean Financial Management Services of Jefferson,
Inc., 106 South Main Street, Jefferson, Wisconsin 53549.
1.7 "FMS Common" shall mean FMS's voting common stock, no par value.
1.8 "Exchange Ratio" shall mean the ratio determined as set forth in
paragraph 3.3(b).
1.9 "FMS Counsel" shall mean Godfrey & Kahn, S.C., 780 North Water
Street, Milwaukee, Wisconsin 53202, Attn: Elliot H. Berman, Esq.
1.10 "FMS Shareholders" shall mean the shareholders of FMS shown on
the list previously delivered to F&M as such list may be updated from time to
time; a copy of the current list is attached hereto as Exhibit 1.10.
1.11 "F & M" shall mean F & M Bancorporation, Inc., One Bank Avenue,
Kaukauna, Wisconsin 54130.
1.12 "F & M Common" shall mean F & M's voting common stock, $1.00 par
value.
1.13 "F & M Common Price" shall mean the average closing price, as
quoted on the NASDAQ National Market System ("NASDAQ"), for F & M Common for
the fifteen (15) trading days on which F & M Common is actually traded,
immediately preceding the five (5) calendar days prior to the Closing Date of
the transaction.
1.14 "F & M Counsel" shall mean McCarty, Curry, Wydeven, Peeters &
Haak, 120 East Fourth Street, P.O. Box 860, Kaukauna, Wisconsin 54130-0860,
Attn: Randall A. Haak, Esq.
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1.15 "Plan of Merger" shall mean the Plan of Merger to be attached
to, and filed with, the Articles of Merger.
1.16 "Securities Counsel" shall mean Quarles & Brady, 411 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202-4497, Attn: Kenneth V. Hallett,
Esq.
1.17 "Subsidiary" shall mean F & M Merger Corporation, One Bank
Avenue, Kaukauna, Wisconsin 54130.
1.18 "Registration Statement" shall mean the Registration Statement
of F & M pursuant to which the shares of F & M Common to be issued in the
merger will be registered with the Securities and Exchange Commission ("SEC"),
and which shall include the prospectus of F & M relating to the F & M Common
issuable in the transaction and the proxy statement of FMS to its shareholders
relating to approval of the merger (the "Prospectus/Proxy Statement").
1.19 "F & M Stock Offer" shall mean the quotient set forth in
paragraph 3.3(b).
1.20 "JII" shall mean Jefferson Investment, Inc., a Nevada
corporation and wholly owned subsidiary of BANK.
2. Preamble.
F & M and Subsidiary are multi-bank holding companies. Subsidiary is a
wholly-owned subsidiary of F & M. FMS is a one-bank holding company which
presently owns 100% of the issued and outstanding stock of BANK. F & M,
Subsidiary and FMS, by their respective employees and agents have had the
opportunity to make such review and investigation of the other as they deem
appropriate and to negotiate the terms and conditions of this Agreement. F &
M, Subsidiary and FMS each believe that this transaction is in their best
interests and in the best interests of their shareholders and desire to set
forth their agreement and understanding in this Agreement.
The parties have considered the proposed merger and believe that a
merger between FMS and Subsidiary will be in the best interest of their
respective corporations and shareholders. The merger of FMS into Subsidiary is
intended to constitute a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended.
In consideration of the foregoing and the terms, conditions and
covenants of this Agreement and in reliance on the warranties and
representations contained herein, the parties adopt this Plan and Agreement of
Merger and Reorganization and agree as follows:
3. Merger of FMS into Subsidiary.
3.1 Surviving Corporation. At the Effective Time of the merger, FMS
shall be merged into Subsidiary in accordance with the laws of the State of
Wisconsin. Subsidiary will be the surviving corporation and the separate
corporate existence, identity and organization of FMS, except as specifically
provided by law and this Agreement, shall cease. As the surviving corporation,
Subsidiary shall succeed to and possess all the assets, properties, powers,
privileges, rights and immunities of FMS and shall be subject to all
liabilities, obligations, limitations and duties of FMS as described in this
Agreement.
3.2 Subsidiary Stock Subscription. Subject to fulfilling of the
conditions precedent to the closing of this transaction set forth below, F & M
will transfer to Subsidiary such shares of F & M Common and cash as may be
necessary to effect the merger, as described under paragraph 3.3 below.
3.3 Exchange of FMS Common. At the Effective Time, the shares of
the FMS Common shall be converted into shares of F & M Common as follows:
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(a) All FMS Shareholders will receive shares of F & M
Common based upon the Exchange Ratio. The Exchange Ratio shall be
calculated by dividing the F & M Stock Offer by the number of
outstanding shares of FMS Common issued and at the Effective Time
(excluding any treasury shares), rounded to three (3) decimal places.
The Exchange Ratio shall be multiplied by the number of shares of FMS
Common held by each FMS Shareholder on the Closing Date to determine the
number of shares of F & M Common to be issued to that FMS Shareholder.
All treasury shares shall be canceled as of the Effective Time.
(b) Subject to F & M's right to adjust the Exchange Ratio
under paragraph 3.4 below, the F&M Stock Offer is Six Hundred Forty-one
Thousand Nine Hundred Seventy-five (641,975). The F & M Stock Offer
shall be adjusted proportionately as necessary to reflect any stock
dividends, stock split, recapitalization, or other adjustment in the
capital structure F & M which becomes effective between the date of this
Agreement and the Closing Date.
(c) No fractional shares of F & M Common shall be issued;
all fractional shares will be converted to cash in an amount equal to
the fractional share determined in accordance with the formula set forth
above multiplied by F & M Common Price.
(d) In the event that F & M declares a stock dividend or a
stock split in the form of a stock dividend with respect to F & M
Common, the record date for which is prior to the Closing Date, the F &
M Stock Offer will be adjusted proportionately to reflect such stock
dividend. For example, if F & M declared a ten percent (10%) stock
dividend, the F & M Stock Offer shall be increased by ten percent (10%)
from Six Hundred Forty-one Thousand Nine Hundred Seventy-five
(641,975) to Seven Hundred Six Thousand One Hundred Seventy-three
(706,173).
3.4 Adjustment to F & M Stock Offer. The F & M Stock Offer is
subject to adjustment as of the Closing Date by an amount equal to one and
five tenths (1.5) times the sum of all amounts determined under subparagraphs
(a) through (h) divided by the F & M Common Price, rounded to the nearest whole
number. If the sum is a negative number, the quotation thus determined shall
be subtracted from the F & M Stock Offer. The adjustment factors to be
determined as of the Closing Date are as follows:
(a) The amount by which BANK's reserve for loan and lease
losses is less than one and three-tenths percent (1.3%) of total loans
and leases.
(b) The amount by the expenses of this transaction whether
incurred by BANK or FMS [as set forth in paragraph 4.4(e)] exceed the
limit established under paragraph 4.4(e).
(c) The amount by which the BANK's equity as of the Closing
Date, determined in accordance with generally accepted accounting
principles (except that no adjustment shall be made as required by FASB
115) is less than Thirteen Million Four Hundred Eighty Thousand and
00/100 Dollars ($13,480,000.00) (the "Beginning Equity") plus the
Cumulative Minimum Earnings as shown on the attached Exhibit 3.4(c) for
each full month in 1998 prior to the Closing Date, less the sum of (i)
quarterly dividends for each calendar quarter prior to the Closing Date,
not to exceed Two and 50/100 Dollars ($2.50) per share, and (ii) the
expenses of this transaction [as defined in paragraph 4.4(e)], and (iii)
any increase to the BANK's reserve for loan and lease losses requested
by F & M in excess of one and three-tenths percent (1.30%) of loan and
leases or other accounting adjustments requested by F & M (the "BANK's
Minimum Equity"). The Beginning Equity reflects the dividend of $4.00
per share declared by BANK in December, 1997.
(d) By the amount of any unfunded or underfunded liability
under any pension benefit plan maintained by BANK, assuming the complete
termination of such plan on or prior to the Closing Date and all
expenses of such termination.
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(e) For any loans or leases, where the outstanding
principal balance outstanding on December 11, 1997, exceeded $25,000.00,
which are considered as, or have the probability of becoming, losses as
a result of an adverse change in the condition of such loans after
December 11, 1997, as mutually agreed upon by F & M and FMS.
(f) As the result of a material adverse change in the
business of FMS or BANK or an increase in their liabilities (exclusive
of deposits) which accrues after December 11, 1997, which is not
otherwise reflected in either the calculation of BANK's Adjusted Equity
or FMS's stated liabilities as of the Closing Date. The parties
agreement as to the amount of any such adjustment shall be a condition
precedent to the parties' obligation to close.
(g) The amount of any obligation to any employee, officer,
director or shareholder which may become payable after the Closing Date
at the option of the employee, officer, director or shareholder as a
result of the transaction contemplated by this Agreement.
(h) For the amount of any expenses incurred by FMS or BANK
in connection with this transaction which have not been accrued and
accounted for prior to the Closing Date.
3.5 Articles of Incorporation. The Articles of Incorporation of
Subsidiary in effect immediately prior to the Effective Time of the merger
shall continue in full force and effect as the Articles of Incorporation of the
surviving corporation.
3.6 Bylaws. The Bylaws of Subsidiary in effect immediately prior to
the Effective Time of the merger, shall continue in full force and effect as
the bylaws of the surviving corporation.
3.7 Officers, Directors and Employees. The present members of
BANK's Board of Directors will be retained by F & M as directors of the
surviving corporation provided that continued membership on the board is
consistent with safe and sound banking practices and is in the best interest of
F & M and BANK. Retirement from the Board of Directors will occur at age
seventy (70), as provided by F & M policy, provided that any director who is
age seventy (70) at the time of consummation of the acquisition of BANK by F &
M may remain a director until the earlier of either two (2) years from the
Effective Date or the annual shareholders' meeting of the BANK to be held in
the year 2000. F & M shall also enter into Employment Agreements with Sandi M.
Clark and Henry A. Fischer, in the forms attached as Exhibits 3.7A and 3.7B,
respectively, for the terms described in such Employment Agreements. F & M
also contemplates that BANK's current officers and employees will continue to
be responsible for the BANK's operations in general, subject to review and
supervision by F & M, as determined by F & M to be consistent with safe and
sound banking practices and the best interest of F & M and BANK. The salaries
and benefits to be offered will be consistent with those currently received by
the employees of F & M or its subsidiary banks holding similar positions.
Years of service with BANK shall, to the extent permitted by applicable law, be
counted as years of service with F & M. In the unlikely event positions with
the BANK are eliminated as a result of the transaction contemplated by this
Agreement, the employees affected by such action will be covered by F & M's
severance plan, applicable to their position at the time the positions are
eliminated, based upon their years of service with BANK.
F & M will allow BANK to continue to pay the BANK's portion of the cost
of medical insurance premiums for the three (3) retirees who are currently
covered by the BANK's existing retiree medical benefit plan (the "Plan") and
for one current employee who is covered by the Plan who is expected to retire
in 1998 (with the same benefits as the three present retirees) for the
remainder of their lifetimes. F & M will also pay the BANK's portion of the
cost of medical insurance premiums for a period of three (3) years from the
date of retirement (but not beyond age 65) for the nine (9) current BANK
employees who are covered by the Plan and who are 50 years of age or older and
who elect to retire after 1998 but before age 65.
4. Representations and Warranties of FMS. FMS, by its duly
authorized officers, directors or other agents makes the following
representations and warranties to F & M each of which is true and correct as of
the date
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hereof, and shall remain true and correct to and including the Closing Date,
and shall be unaffected by any investigation heretofore or hereafter made by or
any notice to F & M. These representations and warranties shall not survive
the closing.
4.1 Ownership and Authority. The current FMS Shareholders are
listed on the list referred in paragraph 1.10.
4.2 FMS Organization and Authority.
(a) FMS is a corporation duly organized, validly existing
and in good standing under the laws of the State of Wisconsin with all
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted and to
enter into and perform its obligations under this Agreement upon
receiving the necessary shareholder and regulatory approval. FMS is
duly registered and authorized to operate as a bank holding company.
FMS is only qualified to do business in the State of Wisconsin.
(b) FMS has good and marketable title to Thirty-seven
Thousand Eight Hundred (37,800) shares of BANK Stock, free and clear of
any and all claims, mortgages, liens, security interests, pledges or
other encumbrances of any kind whatsoever.
(c) FMS is presently authorized to issue Thirty-nine
Thousand (39,000) shares of FMS Common. FMS presently has Thirty-
seven Thousand Forty (37,040) shares of FMS Common validly and legally
issued and outstanding, all of which are fully paid and nonassessable,
except as provided by Wis. Stats. Section 180.0622(2)(b) and judicial
interpretations thereof. FMS has not issued, and does not have
outstanding, any option, warrant or convertible securities or other
right to purchase or convert any obligation into such corporation's
securities and has not agreed to issue or sell any additional securities
of any type.
(d) The execution, delivery and performance of this Agreement
and the consummation of the transaction contemplated under it have been
duly authorized by appropriate corporate approval and will not violate
any provision of FMS's articles of incorporation or bylaws or any
provisions of, or result in the acceleration of any obligation under any
mortgage, lien, lease, agreement, instrument, court order, arbitration
award, judgment or decree to which FMS is a party, or by which FMS is
bound and will not require the consent, authorization or approval of any
other public or private person or entity other than the approval by
FMS's shareholders and the appropriate federal and state securities and
banking regulatory agencies and will not violate any other restriction
of any kind or character to which FMS is subject.
4.3 BANK Organization and Authority.
(a) BANK is duly organized, validly existing and in good
standing under the laws of the State of Wisconsin and has all requisite
banking and corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted. BANK
has its main office and a branch office in Jefferson, Wisconsin. All
necessary corporate approval and authorization and regulatory approval
for BANK's present operations has been given and remains in full force
and effect and in good standing. BANK owns one hundred percent (100%)
of JII, its operating investment subsidiary.
(b) BANK is authorized to issue Thirty-seven Thousand
Eight Hundred (37,800) shares of BANK Stock, BANK's only class of stock.
BANK has Thirty-seven Thousand Eight Hundred (37,800) shares of BANK
Stock issued and outstanding, all of which are legally and validly
issued, fully paid and nonassessable.
(c) BANK has not issued and does not have outstanding any
option, warrant or convertible securities or other right to purchase or
convert any obligation into BANK's securities and has not agreed to
issue or sell any additional securities of any type.
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(d) The execution, delivery and performance of this
Agreement and the consummation of the transaction contemplated under it
have been duly authorized by appropriate corporate approval and will not
violate any provision of BANK's articles of incorporation or bylaws or
any provisions of, or result in the acceleration of any obligation under
any mortgage, lien, lease, agreement, instrument, court order,
arbitration award, judgment or decree to which BANK is a party, or by
which BANK is bound and will not require the consent, authorization or
approval of any other public or private person or entity other than the
approval by BANK's shareholders and the appropriate federal and state
bank regulatory agencies and will not violate any other restriction of
any kind or character to which BANK is subject.
4.4 Financial Matters.
(a) True copies of FMS's consolidated financial statements,
consisting of consolidated balance sheets, consolidated statements of
operations, consolidated statements of cash flow and consolidated
statements of stockholders' equity as of the close of business on
December 31, 1996, 1995, and 1994 have been delivered by FMS to F & M
("FMS's Financial Statements"). To the best knowledge of FMS's officers
and directors, after due and diligent inquiry all of FMS's Financial
Statements are true and correct in all material respects and present an
accurate and complete disclosure of the financial condition of FMS as of
their respective dates, and the earnings for the periods covered, all
determined in accordance with accepted accounting standards applicable
to preparation of Reports of Condition to be filed with the Federal
Deposit Insurance Corporation ("FDIC") ("RAP"), applied on a consistent
basis.
(b) To the best of BANK's knowledge, after due and diligent
inquiry, BANK does not have any loans presently outstanding which are
not in compliance with the requirements of federal or state banking laws
or regulations, except as set forth in Exhibit 4.4(b), which present any
greater than normal risk of collection or which were not made in the
normal course of business. BANK's last examination by the FDIC was as
of March 31, 1997 and by the State of Wisconsin Department of Financial
Institutions, Division of Banking ("Division") June 17, 1996. FMS's
last examination by the Federal Reserve Bank of Chicago (the "FRB") was
December 31, 1994. Since the dates of these examinations, FMS and BANK,
after making due and diligent inquiry, are not aware of any outstanding
loans which are or may be subject to adverse classification except as
set forth in BANK's watch list as of November 30, 1997, a copy of which
is included in Exhibit 4.4(b), or of any adverse regulatory action or
proceeding against BANK, FMS or their respective officers, directors, or
employees, except as shown in the examination reports prepared by the
FDIC, the Division and the FRB as a result of their most recent
examinations.
(c) FMS, BANK and JII have good marketable title to all of
their assets, business and properties including, without limitation, all
such properties reflected in the FMS's Financial Statements as of
December 31, 1996, free and clear of any mortgage, lien, pledge,
security interest, assessment, levy, charge, claim or other encumbrance,
except for real estate and personal property taxes for 1997 which are
not yet due. FMS and BANK do not have any notice of any special
assessment which will be levied or assessed against any real property
owned or leased by them. To the best knowledge of FMS's officers and
directors, after due and diligent inquiry all real property owned,
operated and leased by FMS, BANK and JII except as set forth in Exhibit
4.4(c) is in full compliance in all material respects with all
applicable federal, state and local statutes and regulations including,
but not limited to, any building codes, safety codes, OSHA regulations,
environmental laws and regulations, the Americans with Disabilities Act,
zoning ordinances and other similar codes, ordinances, and regulations
and neither FMS nor BANK has received any citations, notices, charges or
other complaints claiming a violation of the foregoing nor are FMS or
BANK aware of any investigation of any alleged violation.
(d) All property and assets owned or currently in use by
FMS, BANK and JII, or in which they have an interest (excluding
interests which arise in collateral given to secure loans made by BANK
or because of a security interest granted to BANK) or which are in their
depreciable possession, are in good operating condition and repair
subject only to normal wear and tear. A schedule of all real and
depreciable
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personal property owned by FMS, BANK and JII is attached as Exhibit
4.4(d). If FMS or BANK lease any real or personal property, a separate
schedule clearly identifying such leased property will be included as a
part of Exhibit 4.4(d). As of the Closing Date, all such property and
assets will be in the condition represented above.
(e) For the period from January 1, 1998 to the Closing
Date, BANK has projected in good faith that its ordinary earnings
determined in accordance with RAP, applied on a consistent basis, net of
tax effect, shall be as set forth in the attached Exhibit 3.4(c). The
expenses of this transaction are those incurred by BANK for legal, tax
opinion, accounting and/or auditing or investment banking and/or
brokerage fees or expenses associated with the acquisition of BANK by F
& M and will be reasonable and customary and will not in any event
exceed One Hundred Thousand and 00/100 Dollars ($100,000.00).
4.5 Changes Since Specific Dates. Since December 31, 1996, with
respect to FMS, BANK and JII there have not been:
(a) Any loss, damage, destruction or failure to maintain
the tangible assets of FMS, BANK and JII (whether or not covered by
insurance), or affecting their business or properties, which will
materially adversely affect the financial condition or operations FMS or
BANK.
(b) Any lapse, revocation, failure to maintain in full
force and effect or other event which, through the passage of time or
the giving of notice, or both could render any insurance coverage
previously maintained by FMS, BANK and JII ineffective in whole or in
part.
(c) Any acquisition by FMS, BANK and JII of a capital asset
at a cost in excess of Ten Thousand Dollars ($10,000.00) without prior
approval of F & M, except as shown on the attached Exhibit 4.5(c).
(d) Any amendment to their Articles of Incorporation or
Bylaws.
(e) Any change in accounting procedures, practices or
methods from those used by FMS and BANK in prior years, except those
approved in writing in advance by F & M.
(f) Any issuance, or agreement to issue, on or before the
Closing Date or thereafter, directly or indirectly, any additional
shares of stock of FMS, BANK and JII.
(g) Any declaration, setting aside or payment of any
dividend or any distribution in respect to FMS's stock or any
redemption, purchase or other acquisition by FMS or BANK of any stock or
any other repayments to the shareholders of FMS or BANK in excess of
Eight Dollars ($8.00) per share for the 1997 fiscal year and as
permitted for 1998 as described in paragraph 6.2 (e).
(h) Any sale, transfer, or other disposition, prior to
maturity, of any security or other earning asset (exclusive of loans and
leases), except as approved in writing by F & M.
(i) Any borrowings or other indebtedness (excluding deposit
liabilities) the balance of which currently exceeds the amounts
disclosed by FMS's December 31, 1996 Financial Statements.
(j) Any mortgage, lien, pledge, security interest,
assessment, levy, charge, claim or other encumbrance made with respect
to any of the properties or assets of FMS or BANK except as disclosed by
FMS's December 31, 1996 Financial Statements.
(k) Any sale, transfer or other disposition of assets of
FMS, BANK and JII except (i) the buildings directly to the east of the
main BANK building on Racine Street owned by the BANK (the "Racine
Street Properties") and (ii) in the normal course of business and
consistent with past practices, provided,
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however, that FMS, BANK and JII may not dispose of any securities prior
to maturity without the prior consent of F & M.
(l) Any material change in the manner in which business was
being conducted by FMS, BANK and JII prior to December 31, 1996, or
other material failure by FMS, BANK and JII to use their best efforts to
maintain their present business organization (subject to the terms of
this Agreement), employees and customers.
(m) Any loan or commitment to make a loan by BANK with an
interest rate, repayment term, collateral or security requirements or
other conditions which are materially different from those upon which
BANK made loans prior to December 31, 1996, except to the extent such
difference is in response to competitive conditions encountered by BANK.
(n) Any other material adverse change in the prospects,
financial condition, assets, liabilities, properties or business of FMS,
BANK or JII.
4.6 Liabilities.
(a) Neither FMS, BANK or JII have any liabilities, whether
accrued, absolute, contingent or otherwise, which arose or relate to any
transaction or occurrence involving FMS or BANK or their respective
officers, directors, employees, agents or servants prior to the date of
this Agreement which are not disclosed in FMS Financial Statements
described above. To the best of their knowledge, after due and diligent
inquiry, as of the date hereof, no known circumstances, conditions,
happenings, events or arrangements, contractual or otherwise, exist
which may hereafter give rise to any such liabilities of FMS, BANK and
JII.
(b) To the best of their knowledge, all parties with whom
FMS, BANK and JII have contractual arrangements are in compliance
therewith. Neither FMS, BANK and JII has declared, and is not prepared
to declare, any such parties in default under any such contractual
arrangements. Neither FMS, BANK and JII is in default in any material
respect under any contracts to which it is a party, nor has any event
occurred, which through the passage of time or the giving of notice or
both, would constitute a default under any such contract or obligation
or cause the acceleration of any obligation of FMS, BANK and JII or
result in the creation of a lien, charge, assessment, encumbrance or
other claim whatsoever upon any asset of FMS, BANK and JII. None of
the contracts to which FMS, BANK and JII is a party will be adversely
affected by the transaction contemplated by this Agreement.
(c) To the best of their knowledge, FMS, BANK and JII are
in compliance in all material respects with all applicable federal,
state, county and local statutes, ordinances, regulations, decrees,
orders, or other laws. Neither FMS, BANK and JII has received notice of
any alleged violation of any such statutes, ordinances, regulations,
decrees, orders or other laws.
(d) No legal, administrative or other proceedings,
investigations or inquiries or other claims, judgments, consent decrees,
stipulations, injunctions or restrictions are either pending or
outstanding, or to the best of their knowledge, threatened against or
involving FMS, BANK and JII or affecting their assets, properties or
business. FMS, BANK and JII do not know, or have any grounds to know of
any basis for any such proceedings, investigations or inquiries or other
claims, judgments, consent decrees, stipulations, injunctions or
restrictions, except for normal foreclosure, repossession and collection
litigation described in the attached Exhibit 4.6(d).
(e) The assets and liabilities or potential liabilities of
FMS, BANK and JII are fully insured (except for the deductible
thereunder), except for taxes, deposits, repurchase agreements or other
similar deposit-type instruments, and all policies of insurance carried
by FMS, BANK and JII are in full force and all premiums thereon have
been paid in a timely manner and are paid to date and all bonds have
been acquired
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and maintained on all employees, agents, officers and directors of FMS,
BANK and JII required to be bonded. The limits of coverage, deductibles
and other material nonstandard provisions of such insurance and bonds
are disclosed in the attached Exhibit 4.6(e). Said insurance and bonds,
including but not limited to, general comprehensive (commercial) public
liability insurance covering personal injuries, death and property
damage, fidelity bonds and worker's compensation insurance have been
acquired and maintained for at least the past five (5) years.
4.7 Taxes. FMS, BANK and JII have filed all federal, state and
local tax returns and reports covering income, sales, use, real or personal
property or other taxes of any type required to be filed and have paid all
taxes including any interest, penalties and assessments which are due and
required to be paid. The taxes provided for in FMS's Financial Statements and
which will be accrued prior to the Closing Date will be adequate for the
payment of any unpaid taxes as of the Closing Date. None of the income tax
returns of FMS, BANK or JII have been audited in the last seven (7) years.
Neither FMS, BANK and JII has waived any restrictions on the assessment or
collection of taxes or consented to the extension of any statute of limitations
relating to any tax liability. Neither FMS, BANK and JII have determined or
been advised that they may be liable for a material deficiency or other
liability in respect to any state or federal income tax returns or other tax
returns previously filed by FMS, BANK and JII.
4.8 Contracts and Commitments. Neither FMS, BANK and JII have any
contracts or commitments, either oral or written, with any officer, director,
shareholder, employee, customer, depositor, supplier of goods or services or
any other entity or person which contain any terms or conditions which are not
usual and customary under the circumstances and which may have a material
adverse effect on the operations, profitability or net worth of FMS, BANK and
JII.
4.9 Reporting and Withholding on Payment of Interest. To the best
of their knowledge, after due and diligent inquiry, FMS, BANK and JII have
fully complied with the Internal Revenue Code (the "Code"), and all rules and
regulations of the Internal Revenue Service ("IRS") issued thereunder, with
respect to the reporting of payments of interest and other payments by them,
and have complied with all provisions requiring the withholding for income
taxes on such amounts when required. FMS and BANK have instituted adequate
procedures to assure compliance with such provisions. To the best of their
knowledge, all reporting to the IRS required of FMS and BANK has been done in a
timely manner via proper medium. Neither FMS nor BANK have been advised of any
violation or potential violation with respect to such reporting requirements.
4.10 Employees and Employee Benefits.
(a) FMS and BANK are not parties to or bound by any written
or oral (i) employment or employment-related consulting contract which
is not terminable at will by FMS or BANK, as the case may be without
penalty or (ii) plan or agreement providing for any employee bonus,
deferred compensation, pension, profit sharing, retirement benefits,
stock purchase, stock option, employee pension benefit plan or employee
welfare benefit plan except as set forth in the attached Exhibits
4.10(b) and 4.10(c).
(b) All pension, profit sharing, or other employee pension
benefit plans of FMS and BANK ("the Plans") are described in Exhibit
4.10(b) and are now, and will continue until the Closing Date to be,
qualified Plans under Section 401(a) of the Code, in full compliance
with the Employee Retirement Income Security Act of 1974 as amended
("ERISA"). To FMS's and BANK's best knowledge, after due and diligent
inquiry, all premiums, notices, reports and other filings required to be
delivered or filed under applicable law with respect to such Plans have
been duly and timely delivered or filed. Neither FMS nor BANK have
knowledge of any fact or circumstance which would materially and
adversely affect such Plans' qualified status or compliance as above
described, or of any "reportable event" (as such term is defined in
Section 4043(c) of ERISA) or any "prohibited transaction" (as such term
is defined in Section 406 of ERISA and Section 4975(c) of the Code)
which has occurred since the date on which said sections first became
applicable to the Plans. The Plans satisfy the minimum funding
standards set forth in the Code and ERISA. As of the Closing Date there
will be no unfunded vested liability of the Plans, except for the
obligation of
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FMS and BANK for contributions for the current year which are not yet
due and payable but for which adequate amounts are being accrued on a
monthly basis.
(c) All employee welfare benefit plans of FMS and BANK (the
"Welfare Plans") are described in Exhibit 4.10(c) and are now, and will
continue until the Closing Date to be, in full compliance with the Code
and the Employee Retirement Income Security Act of 1974 as amended
("ERISA"). To FMS's and BANK's best knowledge, all notices, reports and
other filings required to be delivered or filed under applicable law
with respect to such Welfare Plans have been duly and timely delivered
or filed. Neither FMS nor BANK have knowledge of any fact or
circumstance which would adversely affect such Welfare Plans' compliance
as above described or any "prohibited transaction" (as such term is
defined in Section 406 of ERISA and Section 4975(c) of the Code) which
has occurred since the date on which said sections first became
applicable to the Welfare Plans.
(d) No person or governmental agency has any pending or
threatened claim against FMS or BANK or their directors, officers,
employees or agents arising out of any statute, ordinance or regulation
alleging that FMS or BANK (i) has discriminated against applicants for
employment, employees or the public, (ii) has any employment practices,
policies or procedures which are discriminatory or have been breached,
(iii) has failed to comply with federal and state wage and hour laws,
rules or regulations, (iv) has violated occupational safety and health
statutes, regulations or standards or (v) has committed an unfair labor
practice(s).
4.11 Environmental Matters.
(a) To the knowledge of FMS and BANK, there has been no
release of any hazardous substance, as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA") nor any release of oil or hazardous substance as provided
under Wis. Stats. Section 144.76, on, upon or into the real property
owned by or leased to FMS or BANK or, to the best of FMS's and BANK's
knowledge, upon any real estate or property which secures any loan made
by FMS or BANK or which FMS or BANK have a right to acquire upon
foreclosure or otherwise, except as set forth in Exhibit 4.4(c).
(b) To the knowledge of FMS and BANK, there have been no
such releases on, upon or into any real property adjoining or in the
vicinity of the property described in paragraph 4.11(a) above, which
through air, soil or groundwater migration could have come to be located
upon any property owned or leased by FMS or BANK, or which secures a
loan made by FMS or BANK or may be acquired by FMS or BANK in
foreclosure.
4.12 Accuracy of All Statements. No representation or warranty by
FMS, BANK or JII in this Agreement or otherwise, in the FMS Financial
Statements, or in any other statement, certificate, schedule or exhibit hereto
furnished or to be furnished by or on behalf of FMS, BANK or JII pursuant to
this Agreement, nor any document or certificate delivered to F & M pursuant to
this Agreement or in connection with actions contemplated hereby, contains or
shall contain any untrue statement of material fact or omits or shall omit a
material fact necessary to make the statement contained therein not misleading.
4.13 Prospectus/Proxy Statement. The parts of the Prospectus/Proxy
Statement which were provided or reviewed by FMS and BANK with respect to FMS
and BANK will not, at the date it is first mailed or delivered to FMS's
Shareholders, and will not, at the date or dates of the meeting of FMS's
Shareholders called to approve the Merger, as then amended or supplemented,
contain any statements that are, at the time at which, and in light of the
circumstances under which they are made, false or misleading with respect to
any material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not false or
misleading.
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Notwithstanding the foregoing, FMS makes no representation or warranty
regarding and shall have no responsibility for the accuracy of any information
with respect to F & M or Subsidiary or any of their affiliates or subsidiaries
contained in the Prospectus/Proxy Statement.
4.14 Financial Adviser. FMS has not engaged, consented to engage, or
authorized any financial adviser, broker, investment banker, or similar third
party to act on its behalf, directly or indirectly, in connection with the
transaction contemplated by this Agreement, except for Robert W. Baird & Co.
Incorporated.
5. Representations and Warranties of F & M.
F & M, by its duly authorized officers, employees or other agents makes
the following representations to FMS, each of which is true and correct as of
the date hereof and shall remain true and correct to and including the Closing
Date, shall be unaffected by any investigation heretofore or hereafter made by
or any notice to FMS except as set forth herein. These representations and
warranties shall not survive the closing.
5.1 Organization and Authority.
(a) F & M is a corporation duly organized, validly existing
and in good standing under the laws of the State of Wisconsin with all
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now being conducted and to
enter into and perform its obligations under this Agreement, upon
receiving the necessary approval from the federal and state regulatory
authorities. F & M is only qualified to do business in the State of
Wisconsin and has received approval from the Federal Reserve Bank of
Chicago to engage in business as a bank holding company.
(b) Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the State of Wisconsin
will all requisite corporate power and authority to own, operate and
lease its properties and to carry on its business as now being conducted
and to enter into and perform its obligations under this Agreement, upon
receiving the approval of its shareholders and the federal and state
regulatory authorities. Subsidiary is only qualified to do business in
the State of Wisconsin.
(c) F & M is authorized to issue Twenty Million
(20,000,000) shares of F & M Common and as of November 30, 1997, has
Nine Million Seven Hundred Forty-nine Thousand, Nine Hundred Eighty
(9,749,980) shares issued and outstanding. F & M anticipates that
additional shares of F & M Common will be issued by it prior to the
Closing Date. F & M also anticipates that prior to the Closing Date it
will amend its Articles of Incorporation to increase the number of
authorized shares. All outstanding shares are legally and validly
issued and fully paid and nonassessable except as provided by Wis.
Stats. Section 180.0622(2)(b) and judicial interpretations thereof.
5.2. Performance of this Agreement. The execution and performance of
this Agreement and the consummation of the transaction contemplated under it
have been duly authorized by appropriate corporate approval and will not
violate any provision of F & M's or Subsidiary's articles of incorporation or
bylaws or any provision of, or result in the acceleration of any obligation
under any mortgage, lien, lease, agreement, instrument, court order,
arbitration award, judgment or decree to which F & M or Subsidiary is a party,
or by which F & M or Subsidiary is bound and will not require the consent,
authorization or approval of any other public or private person or entity other
than the approval by F & M as the sole shareholder of Subsidiary and the
appropriate federal and state securities and banking regulatory agencies and
will not violate any other restriction of any kind or character to which F & M
or Subsidiary are subject except as set forth in this Agreement.
5.3 Legality of Shares to be Issued. The shares of F & M Common to
be delivered pursuant to this Agreement, when so delivered, will have been duly
and validly authorized and issued by F & M and will be fully paid and
nonassessable, except as provided by Wis. Stats. Section 180.0622(2)(b) and
judicial interpretations thereof.
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5.4 Financial Statements. True copies of the audited consolidated
financial statements of F & M consisting of consolidated balance sheets,
consolidated statements of income, consolidated statements of stockholder's
equity and consolidated statements of cash flows as of the close of business on
December 31, 1996, 1995, and 1994, have been delivered by F & M to FMS ("F &
M's Financial Statements"). All of F & M's Financial Statements are true and
correct in all material respects and present an accurate and complete
disclosure of the financial condition of F & M as of their respective dates and
of the earnings for the periods covered, in accordance with generally accepted
accounting principles applied on a consistent basis.
5.5 Litigation. There are no legal, administrative or other
proceedings, investigations or inquiries or other claims, judgments, consent
decrees, stipulations, injunctions or restrictions which may have a material
adverse effect on F & M and F & M's subsidiaries and affiliates taken as a
whole either threatened, pending or outstanding against or involving F & M or
Subsidiary, nor do F & M or Subsidiary know, or have reasonable grounds to
know, of any basis for any such proceedings, investigations or inquiries, or
other claims, judgments, consent decrees, stipulations, injunctions or
restrictions.
5.6 Directors, Officers and Employees of BANK. Neither F & M or its
directors, officers, employees, agents, attorneys or accountants have made or
will make any representations or warranties as to any further positions with
BANK or F & M following the consummation of the transaction contemplated by
this Agreement to any director, officer or employee of FMS or BANK, except as
set forth in written agreements between BANK and any of its employees as
disclosed to F & M and except as provided in paragraph 3.7.
5.7 Accuracy of All Statements. No representation or warranty by F
& M or Subsidiary in this Agreement or otherwise, nor any financial statements,
statement, certificate, schedule or exhibit hereto furnished or to be furnished
by or on behalf of F & M or Subsidiary pursuant to this Agreement, nor any
document or certificate delivered to FMS pursuant to this Agreement or in
connection with actions contemplated hereby, contains or shall contain any
untrue statement of material fact or omits or shall omit a material fact
necessary to make the statement contained therein not misleading.
5.8 Prospectus/Proxy Statement. The Prospectus/Proxy Statement
will not, at the date it is first mailed or delivered to FMS's shareholders,
and will not, at the date or dates of the meeting of the FMS Shareholders
called to approve the Merger, as then amended or supplemented, contain any
statements that are at the time at which, and in light of the circumstances
under which they are made, false or misleading with respect to any material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not false or misleading.
Notwithstanding the foregoing, F & M and Subsidiary make no representation or
warranty and shall have no responsibility for the accuracy of any information
contained in or omitted from the Prospectus/Proxy Statement in so far as it
describes the FMS and BANK.
5.9 No Broker. All negotiations relative to this Agreement and the
transaction contemplated hereby have been carried on directly by F & M and
Subsidiary with FMS without the intervention of any broker or third party on
behalf of F & M and Subsidiary. F & M and Subsidiary have not engaged,
consented to engage, or authorized any broker, investment banker, or third
party to act on its behalf, directly or indirectly, in any capacity in
connection with the transaction contemplated by this Agreement.
6. Covenants of FMS.
FMS hereby covenants and agrees as follows:
6.1 Access to Information. F & M and its authorized representatives
shall have full access during normal business hours to all properties, books,
records, contracts and documents of FMS and BANK and FMS and BANK shall furnish
or cause to be furnished to F & M or its authorized representatives all
information with respect to the affairs and business of FMS as F & M may
reasonably request.
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6.2 Actions Prior to Closing. From and after the date of this
Agreement and until the Closing Date, FMS, BANK and JII:
(a) Shall carry on their business diligently and
substantially in the same manner as heretofore and FMS and BANK shall
not engage in or institute any unusual or novel methods of doing
business and shall inform F & M in advance before either introducing any
new products or services or modifying any existing products or services
other than changes in interest rates paid or charged in response to
changes in competitive or market conditions.
(b) Shall not (i) grant any increase in the rates of pay,
salary, or compensation provided to its officers, directors or employees
which become effective on or after January 1, 1998, without the advance
written consent of F & M (ii) for the fiscal year ended December
31, 1997, increase the amount of any bonus paid by BANK in excess of the
amount paid by BANK for the year ended December 31, 1996, (iii) pay any
bonuses for the 1998 fiscal year, and (iv) increase or decrease the
benefits provided under, the contribution to, or the cost sharing
allocation of any employee fringe benefit or any of the benefit plans
described in Exhibits 4.10(b) and 4.10(c), except for normal adjustments
imposed by third party providers.
(c) Shall not enter into any contract or commitment or
engage in any transaction which is not in the normal course of business
and which is not consistent with FMS's, BANK's or JII's past business
practices.
(d) Shall not create any indebtedness without the prior
written consent of F & M other than (i) short term indebtedness
incurred in the normal course of business, (ii) indebtedness incurred
pursuant to an existing contract previously disclosed to F & M, or (iii)
indebtedness incurred to do the acts and things contemplated by this
Agreement.
(e) Shall not declare or pay any cash dividend, stock
dividend or make any other distribution in respect of its stock, or
directly or indirectly redeem, purchase or otherwise acquire any of its
own stock, or grant any stock warrant, stock options or issue directly
or indirectly any shares of common or preferred stock or any other
security of any type whatsoever or in any way dispose of any shares of
its own stock or any other security, except for the payment of dividends
from BANK to FMS for FMS's normal operations consistent with past
practices and for quarterly dividends to the F & M's Shareholders
declared and payable in 1998 for any calendar quarter prior to the
Effective Tine in which the FMS Shareholders will not be entitled to
receive a dividend as F & M Shareholders, not to exceed Two and 50/100
Dollars ($2.50) per share per quarter. Notwithstanding the immediately
preceding sentence, it is the intent of the parties that the FMS
Shareholders receive a dividend for each calendar quarter in 1998. The
parties agree to adjust the limitations in this paragraph to the extent
necessary to carry out this intent.
(f) Shall not amend their Articles of Incorporation or
Bylaws or make any changes in authorized or issued stock.
(g) Shall maintain current insurance in effect and acquire
such additional insurance as may be reasonably required by increased
business and risks, and operate, maintain and repair all property in a
normal business manner.
(h) Shall make adequate provision for any income and
property (real and personal) taxes which will be due with respect to any
1998 earnings and shall file all tax reports or returns and pay all
income, franchise, real estate, personal property, sales, use, excise or
other taxes on or before the date on which such reports, returns, or
payments are due.
(i) Shall pay all liabilities in a timely manner on or
before their due dates and shall make adequate provision or accruals for
all liabilities of FMS, BANK and JII.
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(j) Shall use their best efforts (without making any
commitments on behalf of F & M) to preserve their business organization
intact, to keep available to F & M the present key officers and
employees of FMS and BANK and to preserve for F & M the present
relationships of FMS and BANK with their suppliers, customers and others
having business relations with them.
(k) Shall not sell or dispose of any property or assets
except (i) the Racine Street Properties and (ii) in the normal course of
business, including but not limited to, selling or disposing of any
securities held by FMS or BANK prior to their normal maturity dates.
(l) Shall promptly notify F & M of any lawsuits, claims,
proceedings, regulatory actions or investigations that may be
threatened, brought, asserted or commenced against it or its officers,
directors, employees or agents involving in any way the business,
properties or assets of FMS or BANK, except for routine collection
litigation which is initiated by BANK and is not expected to result in
any loss to BANK, provided that if any counterclaim, cross-claim or
third-party claim is asserted in such litigation, F & M shall be given
notice thereof.
(m) Shall not make loans or grant credit to any customer on
terms materially more favorable than those which are available under
BANK's current underwriting guidelines. F & M, FMS and BANK understand
that BANK, in order to meet market conditions may need to offer terms
more favorable than those currently offered but that BANK will not be a
market leader in this regard.
(n) Shall not allow BANK's primary capital to asset ratio
(12 C.F.R. Part 325 method), determined in accordance with accepted
accounting standards applicable to preparation of Reports of Condition
required to be filed with the Federal Deposit Insurance Corporation,
applied on a consistent basis, to drop by more than 25 basis points
unless BANK has disclosed the reason for the decline to F & M in advance
and F & M has consented in writing to the adjustment causing such
decline.
(o) Shall remain in compliance with all agreements,
commitments, understandings, undertakings or other obligations to the
Director, the FDIC or any other regulatory agency having jurisdiction
over FMS and BANK.
(p) Shall cooperate fully and completely with F & M in the
preparation and filing of the Registration Statement, and shall provide
to F & M such information as may be required for use therein pertaining
to FMS and BANK, or their businesses or operations.
(q) Shall not take any action which would be reasonably
likely to make unavailable either the pooling of interest accounting
treatment of the merger or to cause the merger not to qualify as a
tax-free reorganization.
6.4 Stock Records. Prior to the special shareholders meeting to
approve the Merger, the Board of Directors of FMS, in accordance with its
bylaws, shall take such steps as are necessary to close its stock transfer
books and establish a record date for such meeting after the close of the
transfer books, furnish F & M with a current shareholder list as of such record
date and validly call a special shareholders' meeting or obtain unanimous
consent of shareholders as provided by statute and FMS's bylaws.
6.5 Audited Financial Statements. If audited financial statements of
FMS and/or BANK are required to permit the shares of F & M Common to be
registered with the SEC, FMS agrees to furnish such statements for the required
years to F & M.
6.6 Reserves for Loan and Lease Losses. BANK shall take such action
as may be necessary to maintain its reserve for loan and lease losses at one
and 3/10 percent (1.30%) of loans and leases until the Closing Date, or shall
have the prior written consent of F & M to establish a lower reserve for loan
and lease losses.
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6.7 Fairness Opinion. Shall proceed diligently to obtain an opinion
from Robert W. Baird & Co. Incorporated that the proposed transaction is fair,
from a financial perspective, to the shareholders of FMS.
6.8 1997 Financial Statements. As soon as FMS's 1997 financial
statements have been completed, FMS will deliver copies to F & M.
6.9 Affiliates. FMS shall have taken all reasonable steps to obtain
affiliate's undertakings pursuant to SEC Rule 145 from its directors, officers
and shareholders who own five percent (5%) or more of its outstanding stock.
7. Covenants of F & M. F & M and Subsidiary hereby covenant and agree as
follows:
(a) As promptly as practicable after the execution of this
Agreement, F & M and Subsidiary, with the cooperation of FMS, shall
prepare and file with the SEC the Registration Statement. As promptly
as practicable after comments, if any, are received from the SEC on such
preliminary Registration Statement, F & M and Subsidiary, with the
cooperation of FMS, shall file with the SEC an amendment to the
Registration Statement responding to such comments, and shall seek to
have such Registration Statement declared effective. F & M and
Subsidiary shall also use their best efforts to qualify under the blue
sky laws of the various states in which common shareholders of FMS are
located the shares of F & M Common Stock to be issued pursuant to this
transaction and shall file the NASD Listing Application in a timely
manner. F & M and Subsidiary shall pay the expenses of preparing and
delivering the joint Prospectus/Proxy Statement for FMS's Shareholders.
(b) As promptly as practicable after the execution of this
Agreement, F & M and Subsidiary shall take action to obtain regulatory
approval of this transaction.
(c) Shall not take any action which would be reasonably
likely to make unavailable either the pooling of interest accounting
treatment of the merger or to cause the merger not to qualify as a
tax-free reorganization.
(d) Notify FMS, at the time of any public announcement, of
any tender offer by another financial institution or holding company to
acquire F & M Common, or of F & M's intention to enter into a merger
agreement with another financial institution or holding company.
(e) Within ten (10) days after its audited financial
statements are in final form and publicly announced, F & M shall deliver
a copy thereof to FMS.
(f) Upon execution of this Agreement, F & M will
investigate the availability of directors and officers' liability
insurance coverage under its policy covering the directors and officers
of F & M and its Subsidiaries and will promptly notify FMS of the
availability and coverage under such insurance for the directors and
officers of FMS and BANK upon consummation of the acquisition.
8. Conditions Precedent to F & M's Obligation. Each and every obligation
of F & M and Subsidiary to be performed on the Closing Date shall be subject to
the satisfaction prior thereto of the following conditions:
8.1 Truth of Representations and Warranties. The representations
and warranties made in this Agreement or given on behalf of FMS and BANK
hereunder, shall have been continuously true and correct from the date of
execution of this Agreement to the Closing Date, and shall be true and correct
on and as of the Closing Date with the same effect as though such
representations and warranties had been made or given on and as of the Closing
Date and FMS and BANK shall have complied with all other terms, conditions and
covenants of this Agreement.
8.2 Compliance with Covenants. Except as expressly set forth in
paragraph 8.7, FMS, BANK and JII shall have performed all of their obligations,
and complied with all of the covenants under this Agreement which are
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to be performed or complied with by them from the date of this Agreement
through and as of the Closing Date, including the delivery of the closing
documents specified in paragraph 10.3.
8.3 Absence of Suit. No action, suit or proceeding before any court
or any governmental or regulatory authority shall have been commenced or
threatened, and no investigation by any governmental or regulatory authority
shall have been commenced, against F & M, Subsidiary, FMS or BANK, or any of
the affiliates, associates, officers, directors or employees of any of them,
seeking to restrain, prevent or change the transaction contemplated hereby, or
questioning the validity or legality of any such transaction, or seeking
damages in connection with any of such transaction.
8.4 FMS's Director and Shareholder Authorization. The merger
contemplated by this Agreement shall have been duly and validly authorized by
FMS's directors and shareholders in accordance with the laws of the State of
Wisconsin.
8.5 Receipt of Approvals. All approvals, consents and/or waivers,
including any approvals required by any federal or state governmental
regulatory agency, that are necessary to effect the transactions contemplated
hereby shall have been received and all waiting periods thereunder shall have
expired.
8.6 Accuracy of Financial Statements. F & M and Subsidiary and
their representatives shall be reasonably satisfied as to the accuracy of all
year end and interim period balance sheets, statements of income and other
financial statements of FMS or BANK furnished to F & M and Subsidiary for
periods ended after December 31, 1996.
8.7 BANK Minimum Equity. BANK will have equity as of the Closing
Date, determined in accordance with generally accepted accounting principles
at least equal to the "BANK's Minimum Equity", provided that in making this
determination, FASB 115 shall not be considered.
8.8 BANK Earnings. The Actual Earnings of BANK from January 1, 1998
through the month end prior to the month in which closing occurs, determined in
accordance with RAP applied on a consistent basis shall not be less than the
Cumulative Minimum Earnings [as defined in paragraph 3.5(d)] from January 1,
1998 through the month end prior to the month in which closing occurs.
8.9 Legal Opinion. F & M shall have received the opinion of FMS
Counsel referred to in subparagraph 10.3(e).
8.10 Time Limit on Closing. Closing shall have taken place by August
31, 1998.
8.11 Proceedings and Instruments Satisfactory; Certificates. All
proceedings, corporate or otherwise, to be taken in connection with the
transactions contemplated by this Agreement shall have occurred and all
appropriate documents incident thereto as F & M and Subsidiary may reasonably
request shall have been delivered to F & M and Subsidiary. FMS and BANK shall
have delivered certificates in such detail as F & M may reasonably request as
to compliance with the conditions set forth in this Article 8.
8.12 Securities Matters. The Registration Statement shall have been
declared effective under the Securities Act of 1933 by the SEC. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall, to the knowledge
of F & M or Subsidiary, on or prior to the Effective Time, have been initiated
or threatened by the SEC. F & M and Subsidiary shall have received all other
federal or state securities permits exemptions, registrations or other
authorizations necessary to issue the F & M Common in exchange for the FMS
Stock to consummate the merger.
8.13 Prospectus/Proxy Statement. The Prospectus/Proxy Statement will
not contain any untrue statement of a material fact or omit any material fact
regarding FMS or BANK required to be stated therein or necessary to make the
statements contained therein, in the light of the circumstances under which
they were made, not misleading.
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8.14 Exchange of Stock Certificates. As a condition of delivery of
the consideration required by this Agreement, the FMS Shareholders shall have
executed and delivered documents assigning their shares of FMS Common Stock to
F & M and/or Subsidiary containing appropriate representations regarding tax
matters, ownership, authority to act, residency and such other matters as F & M
shall request.
8.15 Affiliates of FMS. Each person who shall be deemed to be an
"affiliate" of FMS within the meaning of the Securities Act of 1933 and Rule
145 promulgated by the SEC thereunder shall have executed and delivered to F &
M an Affiliate's Undertaking, in the form attached hereto as Exhibit 8.15,
dated as of the Effective Time.
8.16 Pooling Accounting. The merger contemplated herein shall be
treated as and qualify for accounting using the pooling of interests method
provided that this condition shall be deemed waived if the disqualification is
the result of an omission by F & M.
8.17 Tax Status. F & M shall have delivered to FMS an opinion of legal
counsel selected by F & M to the effect that the shares of F & M Common to be
issued in this transaction in exchange for shares of FMS Common Stock will be
issued as part of a tax-free reorganization. F & M covenants to proceed
diligently and in good faith to obtain such opinion as soon as practically
possible.
8.18 Dissenters' Rights. That no more than ten percent (10%) of the
total consideration paid by F & M in this transaction, determined in accordance
with the accounting rules applicable to the pooling of interests accounting
treatment, shall be paid in cash, including amounts paid for fractional shares
and amounts paid to FMS Shareholders who exercise their dissenters rights under
Wis. Stats. Section Section 180. 1301 et seq.
8.19 F & M Common Price. The F & M Common Price shall be less than
or equal to Forty-six Dollars ($46.00).
9. Conditions Precedent to FMS's Obligations.
Each and every obligation of FMS to be performed on the Closing Date
shall be subject to the satisfaction prior thereto of the following conditions:
9.1 Truth of Representations and Warranties. The representations
and warranties made by F & M and Subsidiary in this Agreement or given on their
behalf hereunder, shall be true and correct on and as of the Closing Date with
the same effect as though such representations and warranties had been made or
given on and as of the Closing Date.
9.2 F & M's and Subsidiary's Compliance. F & M and Subsidiary shall
have performed and complied with all of its obligations under this Agreement
which are to be performed or complied with by them prior to or as of the
Closing Date, including delivery of the closing documents.
9.3 Absence of Suit. No action, suit or proceeding before any court
or any governmental or regulatory authority shall have been commenced or be
threatened and, no investigation by any governmental or regulatory authority
shall have been commenced, against F & M, Subsidiary, FMS or BANK, or any of
the affiliates, associates, officers, directors, or employees of any of them,
seeking to restrain, prevent, or change the transactions contemplated hereby,
or questioning the validity or legality of any such transactions, or seeking
damages in connection with any of such transactions.
9.4 Proceedings and Instruments Satisfactory; Certificates. All
proceedings, corporate or otherwise, to be taken by F & M and Subsidiary in
connection with the transaction contemplated by this Agreement shall have
occurred and all appropriate documents incident thereto as FMS may reasonably
request shall have been delivered to FMS. F & M and Subsidiary shall have
delivered certificates in such detail as FMS may reasonably request to comply
with the conditions set forth in this Article 9.
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9.5 Receipt of Approvals. All approvals, consents and or waivers,
including any approvals required by any federal or state governmental
regulatory agency and shareholder approval which FMS shall make a good faith,
best effort to obtain, that are necessary to effect the transactions
contemplated hereby shall have been received, and all waiting periods shall
have expired provided the failure to obtain the same was not the result of an
act or omission by FMS or BANK.
9.6 Time Limit on Closing. Closing shall have taken place by August
31, 1998.
9.7 Legal Opinion. FMS shall have received the opinion of F & M
Counsel referred to in subparagraph 10.4(d).
9.8 Prospectus/Proxy Statement. The Prospectus/Proxy Statement will
not contain any untrue statement of material fact or omit any material fact
required to be stated therein or necessary to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading.
9.9 Tax Status. FMS shall have received an opinion of FMS Counsel
to the effect that the transaction contemplated by this Agreement will be
tax-free reorganization to those FMS Shareholders who receive F & M Common in
exchange for their FMS Common (excluding fractional or dissenting shares) in
connection with rendering this opinion F & M and subsidiary agree to execute
certificates reasonably requested by the issuer of the opinion. F & M
covenants to proceed diligently and in good faith to obtain such opinion as
soon as practically possible.
9.10 Directors and Officers Liability Insurance. F & M shall furnish
evidence to FMS that the directors and officers of FMS and BANK are covered
under the directors and officers liability insurance provided to the directors
and officers of F & M and its subsidiaries, which coverage shall include
coverage in accordance with the standard terms and conditions of such policy
for claims based upon occurrences which occurred prior to F & M acquisition of
FMS. In the event such coverage is not available, F & M may satisfy this
condition by offering separate coverage to FMS's directors and officers which
is substantially equivalent to the coverage carried by FMS as of the date of
this Agreement.
9.11 F & M Common Price. The F & M Common Price shall be greater to
or equal to Thirty-five Dollars ($35.00).
9.12 Fairness Opinion. The Board of Directors of FMS shall have
received, not later than January 31, 1998, an opinion from Robert W. Baird &
Co. Incorporated ("Baird") to the effect that the consideration to be received
by the FMS Shareholders in the transaction contemplated in this Agreement is
fair from a financial point of view. FMS shall fully cooperate and take all
action necessary to allow Baird to complete its review and issue its opinion in
a timely manner.
10. Closing.
10.1 Time and Place. The closing of this transaction ("Closing")
shall take place at the offices of F & M (or such other place as the parties
may agree) on the Closing Date.
10.2 Rights of FMS Shareholders After the Effective Time. After the
Effective Time and until the surrender of a stock certificate representing
shares of FMS Common, each such outstanding certificate, which prior to the
Effective Time represented shares of FMS Common shall be deemed for all
purposes, subject to the further provisions of this Agreement, to evidence the
ownership of the number of full shares of F & M Common or cash into which such
shares have been converted as provided in this Agreement; provided, however,
that unless and until any such certificates representing FMS Common shall be so
surrendered, the cash or stock certificate representing the shares, any
interest
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dividends or other distributions of any kind payable shall be withheld by F &
M. Upon the subsequent surrender and exchange of such FMS Common certificates,
such holder of record of the certificates formerly representing shares of FMS
Common (or such holder's assignee) shall be paid the amount of any such cash
dividends or other distributions, without interest, which became payable under
this Agreement. Delivery of certificates representing shares of F & M Common or
cash payment to former FMS Shareholders who have tendered their certificates
for their shares of FMS Common at or before the Effective Time shall be made as
soon as reasonably possible after the Effective Time.
10.3 Documents to be Delivered by FMS. At the time of or prior to
the closing, FMS shall deliver the following documents:
(a) Certificates by the chairman, vice-chairman or
president of FMS and BANK (i) that the representations and warranties
made by FMS or BANK as the case may be in this Agreement are true and
correct in all material respects on as of the Closing Date with the same
effect as though such representations and warranties had been made on or
given on and as of the Closing Date, (ii) that FMS and BANK have
performed and complied with all of their covenants and obligations under
this Agreement which are to be performed or complied with by or prior to
or on the Closing Date, (iii) that all conditions of this transaction
required to be met with respect to FMS have been met or are waived by
FMS, and (iv) that all Schedules and Exhibits delivered by FMS to F & M
prior or as of the Closing Date are true, correct and complete as of the
Closing Date.
(b) An Incumbency Certificate for the officers executing
the documents in connection with the transaction contemplated hereby.
(c) Copies of the Articles of Incorporation and Bylaws of
FMS and BANK, duly certified by their respective custodians as true,
correct and complete copies thereof, including any amendments as of the
Closing Date.
(d) A written opinion from FMS Counsel dated as of the
Closing Date addressed to F & M and F & M Counsel, that the matters set
forth in paragraphs 4.2, 4.3, 4.4(c), 4.5(d), 4.5(f), 4.5(j) and 4.6(d)
are true and correct as represented in the form attached hereto as
Exhibit 10.3(d).
(e) Certified copies of resolutions adopted by FMS's board
of directors to the effect that the execution, delivery and performance
of this Agreement and the transactions contemplated by it have been duly
and validly authorized in accordance with the laws of the State of
Wisconsin.
(f) Such other documents of transfer, certificates or
authority and other documents as F & M may reasonably request.
10.4 Documents to be Delivered by F & M and Subsidiary. As of the
Closing Date, F & M and Subsidiary shall deliver the following documents:
(a) Certificates for shares of F & M Common and cash
payments as determined under Article 3 of this Agreement. Such checks
or certificates will be in the name of FMS Shareholders entitled to the
same in accordance with their interest in FMS as of the Effective Time
provided, however, that such cash and any certificates need not be
delivered until such time as the provisions of paragraph 10.2 have been
complied with by such Shareholders.
(b) An Incumbency Certificate relating to all parties
executing documents relating to any of the transactions contemplated
hereby on behalf of F & M and Subsidiary.
(c) Certificates by an officer of F & M and Subsidiary
that, to the best of such officer's knowledge, (i) the representations
and warranties made by F & M and Subsidiary in this Agreement are true
and correct as of the Closing Date, (ii) that F & M and Subsidiary have
performed and complied with all of their covenants and obligations which
are to be performed or complied with by or prior to or as of the Closing
Date, (iii) that all conditions of this transaction required to be met
with respect to FMS and
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Subsidiary have been met or are waived by F & M and Subsidiary, and (iv)
that all Schedules and Exhibits delivered by F & M to FMS are true,
correct and complete as of the Closing Date.
(d) A written opinion from counsel for F & M and Subsidiary
dated as of the Closing Date addressed to FMS and FMS Counsel that the
matters set forth in paragraphs 5.1, 5.2, and 5.3 are true and correct
as represented in the form attached hereto as Exhibit 10.4(d).
(e) Certified copies of the resolutions adopted by F & M's
and Subsidiary's boards of directors to the effect that the execution,
delivery and performance of this Agreement and the transactions
contemplated by it have been duly and validly authorized in accordance
with the laws of the State of Wisconsin.
11. Law Governing.
This Agreement shall be construed and interpreted according to the laws
of the State of Wisconsin.
12. Assignment.
This Agreement may not be assigned in whole or in part without the
written consent of all parties, provided, however, that Subsidiary's
participation in this transaction shall not require any further consent or
authorization.
13. Amendment and Modification.
This Agreement may only be amended or modified by a written agreement
signed by the duly authorized representatives of F & M, Subsidiary and FMS.
14. Abandonment.
This Agreement may be terminated and the transaction provided for by
this Agreement may be abandoned at any time before the Closing Date:
(a) By mutual consent of F & M, Subsidiary and FMS;
(b) By F & M and Subsidiary, or if any of the conditions
provided for in Article 8 of this Agreement have not been met and have
not been waived in writing by F & M or Subsidiary.
(c) By FMS if any of the conditions provided for in Article
9 of this Agreement have not been met and have not been waived in
writing by FMS.
(d) In the event of a breach of this Agreement, by notice
from the non-breaching party to the breaching party as set forth below.
In the event of termination and abandonment by any party as provided in
this Article, written notice shall be given to the other party setting forth
the breach of this Agreement or the default in performance which has occurred,
or the condition which has not been met. The party to whom the notice is
directed shall, if such party is able to effect a satisfaction or cure, have
ten (10) days after such notice is given to satisfy such condition or cure such
breach or default, provided that if such ten (10) day period is not sufficient
and the party is making a diligent effort to satisfy such condition or cure
such breach or default, the time to do so may be extended for such period as
the parties may agree, not to exceed thirty (30) days, provided however, that
the F & M Common Price shall be the higher of the price as of the date of the
notice or as of the date on which the default is satisfied or cured. The
termination and/or abandonment of this Agreement shall not alter or diminish
the liability of the party that failed to comply with the conditions of this
Agreement. Each party shall pay its own expenses incident to preparation for
the consummation of this Agreement and the transactions contemplated hereunder.
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15. Notices.
All notices, requests, demands, and other communications hereunder shall
be deemed to have been duly given, upon actual delivery, if delivered by hand;
or upon receipt by the addressee, if given by mail (certified mail - return
receipt requested with postage prepaid is required for notice by mail); or upon
receipt by the addressee, if by private courier; or upon receipt of the
transmission by the addressee if by telecopy (with a copy sent by first class
mail):
(a) If to FMS, to Financial Management Services of
Jefferson, Inc., 106 South Main Street, Jefferson, Wisconsin 53549,
Attn: Henry A. Fischer, President and Chairman of the Board, FAX:
920-674-3710,- with a copy to Godfrey & Kahn, S.C., Attn: Elliot H.
Berman, Esq., 780 North Water Street, Milwaukee, Wisconsin 53202 FAX:
414-273-5198.
(b) If to F & M or Subsidiary, to Mr. Gail E. Janssen, One
Bank Avenue, Kaukauna, Wisconsin 54130, FAX: 920-766-5628, with a copy
to Randall A. Haak, Esq., McCarty, Curry, Wydeven, Peeters & Haak, P.O.
Box 860, Kaukauna Wisconsin 54130, FAX: 920-766-4756.
The place to which notice is to be given may be changed by notice given
in accordance with this Article.
16. Entire Agreement.
This Agreement with Exhibits embodies the entire agreement between the
parties hereto with respect to the transaction contemplated herein and
supersedes all prior agreements, written or oral, express or implied and all
negotiations, discussions or other matters between the parties and there have
been and are no agreements representations or warranties between the parties
other than those set forth or provided for herein.
17. Counterparts.
This Agreement may be executed in two (2) or more partially or fully
executed counterparts, each of which shall be deemed an original and shall bind
the signatory, but all of which together shall constitute but one and the same
instrument.
18. Binding Effect.
This Agreement shall inure to the benefit of and bind the parties and
their respective heirs, beneficiaries, transferees, successors, and assigns.
19. Headings.
The headings of this Agreement are inserted for convenience only and
shall not constitute a part hereof.
20. Confidentiality.
Except as necessary to take action pursuant to this Agreement, each
party agrees that all information and documents received from the other party
regarding the proposed transaction shall be held in confidence and that all
documents containing such information will be returned upon request if the
parties abandon the transaction. The parties further agree to use such
information only in connection with the proposed transaction contemplated by
this Agreement. This paragraph shall not apply to information or documents
which are, or by law must be made, publicly available. The parties agree to
not publicly disclose this Agreement or its Exhibits or any of the provisions
hereof, except as a part of regulatory filings or pursuant to press releases
and other public statements approved by F & M and FMS.
21. Further Documents.
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F & M, Subsidiary, and FMS agree to execute any and all other documents
and to take such other action or corporate proceedings as may be reasonably
necessary or desirable to carry out the terms hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
F & M BANCORPORATION, INC. ("F & M")
By:_____/s/_________________________
Gail E. Janssen, Chairman of the Board
ATTEST:
By:_____/s/_________________________
Janet M. Lakso Secretary
F & M MERGER CORPORATION ("SUBSIDIARY")
By:_____/s/_________________________
Gail E. Janssen, President
ATTEST:
By:_____/s/_________________________
Daniel E. Voet, Secretary
FINANCIAL MANAGEMENT SERVICES OF JEFFERSON,
INC. ("FMS")
By:_____/s/_________________________
Henry A. Fischer, President and Chairman
of the Board
ATTEST:
By:_____/s/_________________________
Sandi M. Clark, Secretary
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT effective as of July 14, 1997, by and between F & M
Bancorporation, Inc., (hereafter referred to as "F & M"), and John W. Johnson,
of Pulaski, Wisconsin (hereinafter referred to as "Employee"), witnesseth:
WHEREAS, F & M is planning for the retirement of its CEO and Chairman
of the Board, Gail E. Janssen, and as a part of that planning is seeking an
individual to serve as its President and COO and as an prospective successor to
Gail E. Janssen, and
WHEREAS, F & M seeks to employ Employee as its President and COO and
Employee desires to accept such employment and the parties desire by this
Agreement to provide for Employee's employment by F & M.
NOW, THEREFORE, in consideration of the promises and covenants
contained herein, the parties mutually agree as follows:
1. Employment. F & M hereby employs Employee and Employee
hereby accepts such employment, upon the terms and conditions hereinafter set
forth, provided, however, that during the balance of 1997, F & M may contract
with Employee's employer, F & M Bank-Northeast, for his services.
2. Duties and Responsibilities. During the term of this
Agreement, Employee shall act as President and Chief Operating Officer of F & M
and shall continue to engage in those activities and perform those services as
may be assigned to him by the Board of Directors, including, but not be limited
to the following: the day to day operations of F & M and its subsidiaries and
for the general supervision of the various departments and vice-presidents of F
& M. In addition, Employee hereby agrees to perform such other duties for F &
M and F & M's subsidiaries and divisions as may be assigned to him by the Board
of Directors of F & M. With regard to all duties and responsibilities provided
for in this paragraph, Employee shall devote his full time and best efforts to
this employment and to the success of F & M.
<PAGE> 2
3. Scope of Authority. The Employee agrees to act in
accordance with the scope of authority previously delegated to him and as may
be delegated to him from time to time by F & M and pursuant to this
Agreement in accordance with the policies, procedures and authorizations given
by F & M. The Employee will observe and abide by any limitation placed upon
such authority from time to time by F & M. No latitude, indulgence, or
forbearance granted by F & M to the Employee shall be deemed a relinquishment
of its right to direct his activities or a waiver of their rights to require
performance and fulfillment of the duties and responsibilities of his
employment and this Agreement.
4. Term. Employment hereunder shall be effective as of
July 14, 1997, and shall continue for a term of two (2) years, unless sooner
terminated as hereinafter set forth (the "Term"). Employee acknowledges that
no representation or promise has been made to Employee about continued
employment beyond the term hereof.
5. Compensation. F & M shall pay to the Employee a base
annual salary of One Hundred Sixty Thousand and 00/100 Dollars ($160,000.00).
This salary shall be prorated for any partial years based on actual time worked
in such partial year. This salary may be adjusted at such intervals and in an
amount to be determined by F & M, consistent with adjustments received by other
employees of F & M and duties of Employee's position, based on, among other
things, the performance of the Employee, the performance of F & M and its
subsidiaries, competitive practices and economic conditions. Employee's base
annual salary will be increased to not less than Two Hundred Thousand and
00/100 Dollars ($200,000.00) upon Employee's designation as the Chief Executive
Officer of F & M. Employee will also be eligible to participate in bonus, stock
option or incentive plans of F & M for his position.
6. Benefits. F & M will offer Employee the employee benefits,
including major medical and hospitalization insurance, disability benefits,
life insurance, vacation, severance pay and retirement benefits at levels
substantially equal to the levels currently provided by F & M to its executive
officers.
7. Expenses. The Employee may incur reasonable expenses for
promoting the F & M's business, including expenses for entertainment, travel,
and similar items. F & M will reimburse the Employee in accordance with F &
M's policies and procedures for all such expenses upon the Employee's periodic
presentation of an itemized account of such expenditures.
2
<PAGE> 3
8. Extent of Services. The Employee shall devote his entire
time, attention and energies to the business of F & M and shall not during the
term of this Agreement be engaged in any other business activity, without the
written consent of F & M, whether or not such business activity is pursued for
gain, profit or other pecuniary advantage. This shall not be construed as
preventing the Employee from investing his assets in such a manner as will not
require any services on the part of the Employee in the operation of the
affairs of the companies if such investments are made.
9. Years of Service. F & M agrees to count all prior years of
service of Employee to F & M Bank-Northeast and its predecessors as years of
service for eligibility purposes under the terms of such plan to the full
extent permitted by law and the terms of the plan. For purposes of vacation
eligibility, Employee shall be deemed to have eleven (11) years of service with
F & M.
10. Termination. Employee's employment hereunder during the Term
may be terminated, subject to payment of the compensation and other benefits
described below, upon the occurrence of any of the events described below. In
case of such termination, the date on which Employee ceases to be employed
under this Agreement, after giving effect to any prior notice requirement set
forth below, is referred to as the "Termination Date."
(a) Death; Disability. Employee's employment hereunder
shall terminate upon his death or disability or retirement.
As used in this Agreement, "Disability" shall mean Employee's
inability, as a result of physical or mental incapacity, to substantially
perform his duties with F & M for a period of one hundred eighty (180)
consecutive days. Any question as to the existence of Employee's Disability
upon which Employee and F & M cannot agree shall be determined by a qualified
independent physical mutually agreeable to Employee and F & M or, if the
parties are unable to agree upon a physician within ten (10) days after notice
from either to the other suggesting a physician, by a physician designated by
the then president of the medical society for Outagamie County, Wisconsin, upon
the request of either party. The costs of any such medical examination shall
be shared equally by Bank and Employee.
(b) Termination of Employee for Cause. Bank may
terminate Employee's employment under this Agreement for Cause (as hereinafter
defined) at any time and thereafter Bank's obligations pursuant to Sections 5
and 6 of this Agreement shall cease and terminate.
3
<PAGE> 4
Notwithstanding anything to the contrary contained in this Agreement, if
Employee's employment is terminated for Cause, Employee shall receive all
compensation and other benefits to which he was entitled under Sections 5 and 6
only through the Termination Date, and, shall receive all accrued benefits
available to him under F & M's or Bank's benefit plans as in effect on and
effective through the Termination Date in accordance with their terms.
As used herein, "Cause" shall mean (i) any willful act by
Employee which is fraudulent or illegal and which is materially injurious to
F & M or any of F & M's subsidiaries, monetarily or otherwise, (ii) the
continued failure by Employee to substantially perform either his duties with
F & M as may be assigned to him from time to time, or his obligation under this
Agreement (other than any such failure resulting from Employee's incapacity due
to Disability), or to follow the policies and procedures of F & M, (iii) the
dishonesty, fraud, or other conduct which constitutes a crime under laws,
statutes, regulations, rulings, administrative code, policy or procedure of the
State of Wisconsin or any local subdivision thereof or the United States of
America or of any administrative agency of the State of Wisconsin or any
subdivision thereof or of the United States of America, or (iv) "Misconduct" as
set forth in Wis. Stats. Section 108.04(5), the Wisconsin Unemployment
Compensation Law and the decisions thereunder.
Termination may be without notice for violations of paragraphs 10(b)
(i), (iii) or (iv). In the event of a proposed termination for the reasons set
forth in the subpart (ii) of paragraph 10(b), the Employee shall be entitled to
written notice and thirty (30) days opportunity to explain and cure such breach
or failure to the satisfaction of F & M. If Employee has explained and/or
cured such breach or failure within such thirty (30) day period, the notice of
termination shall be rescinded and Employee shall remain employed hereunder,
subject to such further terms or conditions as the parties may establish by
mutual agreement.
(c) Voluntary Termination by Employee. Employee may
voluntarily terminate his employment under this Agreement at any time by giving
at least thirty (30) days prior written notice to F & M. In such event,
Employee shall receive all compensation and other benefits to which he was
entitled under Sections 5 and 6 in the amount and at the times provided in
Section 5 through the date of voluntary termination set forth in the Employee's
notice and, in addition, shall receive all other benefits available to him
under F & M's benefit plans as in effect on the Termination Date in accordance
with their terms through such voluntary termination date.
4
<PAGE> 5
(d) Termination by F & M Other than due to Death,
Disability, or Cause. F & M may terminate this Agreement without cause,
provided F & M agrees to pay the Employee the compensation and benefits (at the
intervals paid to all other employees) as set forth below. In effect, F & M
may elect not to use the services of Employee during the term of this
Agreement, provided F & M pays the compensation and provides the benefits
hereunder. Employee acknowledges F & M's right to terminate without cause and
agrees that if such termination occurs that Employee's sole and exclusive claim
against F & M or its subsidiaries or their respective officers, directors,
employees or agents shall be for the payment of the unpaid compensation and
benefits under this Agreement as follows:
(i) In lieu of any further salary payments,
severance pay or other cash compensation to Employee, Employee be paid for the
then remaining unexpired portion of the Term or the payments established by the
Restated F & M Bancorporation, Inc., Executive Severance Plan (the "Severance
Plan"), whichever is greater, in the amount and at the times provided in
Section 5.
(ii) Employee shall be entitled to receive all
benefits otherwise payable to Employee under paragraph 6 for the unexpired
portion of the Term or one (1) year, whichever is greater, provided, however,
that Employee shall not be entitled to any vacation pay, holiday pay, severance
pay or other cash compensation beyond the amounts specified under subparagraph
(i) above.
(iii) The payments under subparagraphs (i) and
(ii) shall be in lieu of any other payments, claims or damages or other
obligations by F & M or Bank to Employee.
11. Waiver of Breach. The waiver by F & M of a breach of any
provision of this Agreement by the Employee shall not operate or be construed
as a waiver of any subsequent breach of the same or any other provision of this
Agreement by the Employee.
12. Assignment. The rights and obligations of F & M under this
Agreement may be assigned to any other subsidiary of F & M by a separate
instrument evidencing such assignment, provided, however, that no such
assignment may be made without Employee's prior written consent if the
assignment is to be made to a subsidiary which has its main office located
outside a thirty (30) mile radius of Kaukauna, Wisconsin. However, assignment
by F & M shall not
5
<PAGE> 6
relieve it of the responsibility to perform the duties of this Agreement.
Employee may not assign this Agreement.
13. Relocation to Kaukauna, Wisconsin. Employee shall relocate
to the Kaukauna, Wisconsin area within twelve (12) months of the date of this
Agreement.
14. Paragraph Headings. Paragraph headings are inserted
primarily for convenience, and if they conflict with the text in the
construction of this Agreement, the text shall control.
15. Applicable Law. This Agreement shall be governed by the laws
of the State of Wisconsin.
16. Entire Agreement. This Agreement contains the entire
agreement between the parties. No representations, promises, understandings or
agreements exist except as expressly set forth herein. This Agreement
supersedes all prior representations, promises, understandings or agreements.
This Agreement may only be amended by a written amendment signed by both
parties.
17. Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
beneficiaries, successors and assigns, specifically including any successor to
the F & M, whether arising by merger, consolidation or otherwise.
F & M BANCORPORATION, INC.
By: /s/ Gail E. Janssen
----------------------------
Gail E. Janssen, Chairman
EMPLOYEE:
/s/ John W. Johnson
--------------------------------
John W. Johnson
6
<PAGE> 1
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
The Amendment No. 1 to Employment Agreement is made as of
November 3, 1997, by and between F & M Bancorporation, Inc., ("F & M") and
John W. Johnson of Kaukauna, Wisconsin ("Employee").
WHEREAS, Employee has served as President and Chief Operating Officer
of F & M; and
WHEREAS, Employee has been elected as Chief Executive Officer of F & M
by its Board of Directors as of November 3, 1997; and
THEREFORE, the parties agree as follows:
1. Change in Title. Employee's title is changed to President
and Chief Executive Officer effective November 3, 1997.
2. No Other Changes. Except as modified herein, the Employment
Agreement between the parties effective as of July 14, 1997, remains unchanged
and in full force and effect.
F & M BANCORPORATION, INC.
By: /s/ Gail E. Janssen
--------------------------------
Gail E. Janssen, Chairman
of the Board
EMPLOYEE
By: /s/ John W. Johnson
--------------------------------
John W. Johnson
<PAGE> 1
Exhibit 21 1997 10-K
F&M BANCORPORATION, INC.
List of Subsidiaries
F&M Merger Corporation
F&M Bank-Cannon Valley
F&M Bank-Central*
F&M Bank-Darlington, National Association*
F&M Bank-East Troy*
F&M Bank-Grant County*
F&M Bank-Kiel*
F&M Bank-Lakeland*
F&M Bank-Landmark*
F&M Bank-Northeast*
F&M Bank-Prairie du Chien*
F&M Bank-Superior*
F&M Bank-Winnebago County*
Bank of South Wayne
F&M Bank-Algoma*
F&M Bank-Appleton*
F&M Bank-Brodhead*
F&M Bank-Hilbert*
F&M Bank-Kaukauna*
F&M Bank-New London*
F&M Bank-Waushara County*
F&M Trust Company
Each of the above named subsidiaries is organized and existing under
the laws of the State of Wisconsin, except that F&M Bank-Darlington,
National Association is a national bank and F&M Bank-Cannon Valley is a
Minnesota state bank.
__________________
*Each of these banks has a subsidiary organized and existing under
the laws of the State of Nevada which holds and manages that bank's investments.
<PAGE> 1
[Wipfli Ullrich Bertelson LLP letterhead]
Exhibit 23
1997 10-K
Independent Accountants' Consent
We consent to incorporation by reference in the Registration Statement on Form
S-4 (No. 333-26373), the Registration Statement on Form S-3 (No. 33-45385), and
the Registration Statements on Form S-8 (Nos. 33-81178, 33-81180, 33-81182 and
333-01937) of F&M Bancorporation, Inc. of our report dated January 23, 1998,
relating to the consolidated balance sheets of F&M Bancorporation, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, which report is
included in the December 31, 1997 annual report on Form 10-K of F&M
Bancorporation, Inc., and to the continued references to our firm as experts in
those Registration Statements.
/s/ Wipfli Ullrich Bertelson LLP
--------------------------------
Certified Public Accountants
Appleton, Wisconsin
March 24, 1998
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0
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<INCOME-PRE-EXTRAORDINARY> 29,336
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<LOANS-NON> 10,606
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<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
RESTATED TO REFLECT THE 1997 ACQUISITIONS OF WISCONSIN BANCORP AND CITIZENS
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</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<CASH> 49,406
<INT-BEARING-DEPOSITS> 196
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<INVESTMENTS-CARRYING> 95,030
<INVESTMENTS-MARKET> 96,824
<LOANS> 970,554
<ALLOWANCE> 12,319
<TOTAL-ASSETS> 958,235
<DEPOSITS> 1,140,371
<SHORT-TERM> 42,263
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0
0
<COMMON> 8,173
<OTHER-SE> 114,032
<TOTAL-LIABILITIES-AND-EQUITY> 1,335,902
<INTEREST-LOAN> 82,330
<INTEREST-INVEST> 15,145
<INTEREST-OTHER> 1,434
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<INCOME-PRETAX> 22,398
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<EXTRAORDINARY> 0
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<NET-INCOME> 15,406
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 4.78
<LOANS-NON> 12,353
<LOANS-PAST> 434
<LOANS-TROUBLED> 216
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
RESTATED TO REFLECT THE 1997 ACQUISITIONS OF WISCONSIN BANCORP AND CITIZENS
NATIONAL BANCORPORATION, INC. AND THE 1996 ACQUISITION OF COMMUNITY STATE BANK.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 45,196
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 31,213
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 182,354
<INVESTMENTS-CARRYING> 65,949
<INVESTMENTS-MARKET> 67,545
<LOANS> 793,185
<ALLOWANCE> 10,060
<TOTAL-ASSETS> 1,148,871
<DEPOSITS> 993,715
<SHORT-TERM> 12,627
<LIABILITIES-OTHER> 13,285
<LONG-TERM> 17,771
0
0
<COMMON> 7,378
<OTHER-SE> 103,906
<TOTAL-LIABILITIES-AND-EQUITY> 1,148,871
<INTEREST-LOAN> 71,938
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