<PAGE> 1
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, 1998
For the fiscal year ended.....................................................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................to.....................
Commission file number......000-14553......
F & M BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1365327
........................... ........................................
(State of incorporation) (I.R.S. Employer Identification No.)
ONE BANK AVENUE, KAUKAUNA, WISCONSIN 54130
............................................ .....................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 766-1717
...................
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, 1999, there were 15,506,076 shares of Common Stock outstanding,
and the aggregate market value of the Common Stock (based upon the $33.75
closing sale price on that date on the NASDAQ National Market) held by
non-affiliates (excludes a total of 819,800 outstanding shares reported as
beneficially owned by directors and officers -- does not constitute an admission
as to affiliate status) was approximately $495 million.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH
DOCUMENT PORTIONS OF DOCUMENTS ARE INCORPORATED
Proxy Statement for Annual Meeting Part III
of Shareholders on or about April
27, 1999
<PAGE> 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K, and in the documents
incorporated in it by reference, which are not historical statements contain
forward-looking statements that involve risks and uncertainties. "Statements
which are not historical statements" include those in the future tense or which
use terms such as "believe," "expect" and "anticipate". F&M's actual future
results could differ in important and material ways from those discussed. Many
factors could cause or contribute to such differences. These factors include:
- F&M's future lending and collection experience
- The effects of acquisitions, and F&M's ability to integrate
acquired operations
- Competition from other institutions
- Changes in the banking industry and regulation of the industry
- Needs for technological change, including "Year 2000
compliance"
- Other factors, including those discussed or described:
- in F&M's Management's Discussion and Analysis (see
Item 7), or
- in other places in this Report.
* * *
PART I
ITEM 1. BUSINESS.
F&M Bancorporation, Inc. ("F&M" or the "Company") was formed in 1980 to
acquire the shares of 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 $2.4 billion
at December 31, 1998.
Unless otherwise indicated, all 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, June 1997 and September 1998.
Recent Developments
- -------------------
Pending Acquisition
-------------------
On July 21, 1998, F&M entered into an agreement, as amended November
30, 1998, providing for the acquisition of CBE, Inc., a Wisconsin corporation
("CBE") and its wholly-owned subsidiary, Community Bank of Elkhorn, a Wisconsin
state bank. CBE has one service office in Elkhorn, Wisconsin, and the
acquisition of CBE will enhance F&M's presence in south central Wisconsin. F&M
will issue a certain number of F&M Common as consideration in the acquisition of
CBE. The number of shares of F&M Common Stock to be issued to shareholders of
CBE will be determined pursuant to an exchange ratio set forth in the definitive
agreement. The total value of F&M Common issued is expected to be approximately
$21 million.
At December 31, 1998, CBE had total assets of $109.5 million, net loans
of $62.6 million, total deposits of $100.0 million and shareholders equity of
$8.5 million. For the year ended December 31, 1998, CBE had net income of $1.1
million.
The acquisition of CBE is subject to regulatory approvals and other
customary contingencies. Applications for federal and state regulatory approvals
have been filed. While there can be no assurances, the parties expect that the
CBE transaction will be consummated in the second quarter of 1999. F&M
management does not expect that the CBE acquisition will have a material effect
upon F&M because of the relative size of CBE as compared to F&M, and the
proposed acquisition price as compared to F&M's total equity.
<PAGE> 3
1998 Acquisitions
-----------------
Iowa. On July 1, 1998, F&M acquired BancSecurity Corporation
("BancSecurity") of Marshalltown, Iowa, the holding company for three banks
located in Iowa. These Banks, with 14 offices in central Iowa, are now being
operated under the names F&M Bank - Iowa Central, F&M Bank - Story County and
F&M Bank - Iowa South Central. F&M is in the process of combining these banks
under the charter of F&M Bank - Iowa Central. F&M issued approximately 3,990,000
shares of F&M Common Stock in exchange for all of the outstanding shares of
BancSecurity.
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 accounted for the transaction using the pooling
of interests method of accounting, and has restated prior periods to reflect the
acquisition.
Jefferson. On May 28, 1998, F&M acquired 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. F&M exchanged approximately 706,000 shares
of F&M Common Stock for all of the Jefferson stock.
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 accounted for the transaction using the pooling of
interests method of accounting, although periods prior to January 1, 1998 are
not being restated because of the relatively small size of Jefferson as compared
to F&M.
Dundas, Minnesota. 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 represented 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 in cash. F&M accounted 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. 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 158,000 shares of F&M Common. F&M
accounted 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 has
subsequently combined the operations of BSW and F&M Bank - Darlington.
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.
Other Recent Developments
-------------------------
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. By early 1999, the Company has consolidated trust operations of its
Wisconsin banks with trust operations in F&M Trust Company. F&M intends to
expand the operations of F&M Trust
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Company to other communities served by F&M subsidiary banks. F&M Bank-Iowa
Central continues to maintain separate trust operations.
Additional Locations. In 1998, F&M opened four new offices in
Wisconsin. F&M Bank-Central opened new Supermarket Banks in Stevens Point and
Wausau, F&M Bank-Northeast opened a new office in DePere, and F&M Bank-Superior
opened a new office on the UW-Superior campus in the Rothwell Student Center.
The Company also closed one office of F&M Bank-Northeast due to highway
construction, and intends to relocate its Suamico office. F&M Bank-Waushara
County also closed an office in 1998.
Subsidiary Banks
- ----------------
At February 28, 1999, F&M owned 23 subsidiary banks (the "Banks" or the
"F&M Banks"). All but four of the Banks are Wisconsin state banks; F&M Bank-Iowa
Central, F&M Bank-Story Country and F&M Bank Iowa South Central are Iowa state
banks, and F&M Bank-Cannon Valley is a Minnesota state bank. Each of the F&M
Banks 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 F&M 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>
NO. OF FULL TOTAL
YEAR SERVICE OFFICES ASSETS
BANK ACQUIRED (1) AT 2/28/99 (2) AT 12/31/98
---- ------------ --------------- -----------
(in millions)
<S> <C> <C> <C>
F&M Bank-Kaukauna 1980 5 $156.2
F&M Bank-Appleton 1981 4 74.7
F&M Bank-Hilbert 1983 3 34.3
F&M Bank-Winnebago County 1985 3 101.2
F&M Bank-New London 1987 1 38.8
F&M Bank-Central 1987 5 124.4
F&M Bank-Grant County 1988 4 136.1
F&M Bank-Lakeland 1991 7 170.2
F&M Bank-Kiel 1991 1 43.4
F&M Bank-Northeast 1994 12 320.1
F&M Bank-Waushara County 1995 4 112.3
F&M Bank-Superior 1996 2 35.0
F&M Bank-Algoma 1996 2 71.2
F&M Bank-East Troy 1997 2 58.0
F&M Bank-Brodhead 1997 1 30.9
F&M Bank-Prairie du Chien 1997 5 100.9
F&M Bank-Landmark 1997 4 43.6
F&M Bank-Darlington 1997 3 97.9
F&M Bank-Jefferson 1998 1 98.9
F&M Bank-Cannon Valley 1998 1 30.6
F&M Bank-Iowa Central (3) 1998 7 329.4
F&M Bank-Story County (3) 1998 3 87.8
F&M Bank-Iowa South Central (3) 1998 4 122.1
</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 86 ATM locations, certain of
which are located at the full-service offices.
(3) F&M intends to combine these banks under the name F&M Bank-Iowa Central
in 1999.
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. 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's business operations are concentrated in Wisconsin and neighboring
states. At February 28, 1999 F&M Banks provided services through a total of 84
full-service bank offices in 54 Wisconsin communities, 12 Iowa communities and
one Minnesota community. F&M is susceptible to economic factors specifically
affecting this region because of the concentration. The effect of local economic
factors may be more pronounced than if F&M had operations over a larger
geographic area.
F&M believes that its service area provides a mixed base of cities,
smaller communities and rural areas. Communities served by F&M range in
population from almost 100,000 to less than 500. Many of the communities in
which F&M Banks are located are relatively small, but they generally have
diverse economies with businesses in many industry groups. These businesses are
a diverse mix of manufacturing, service, retailing, agricultural and other
businesses; they are not concentrated in any particular product or service line.
In many communities, F&M Banks have the only commercial bank office. F&M does
not believe that its market area is sensitive to developments in any particular
industry or related groups of industries. F&M believes that its individual
customers also have a wide diversity of occupations.
In recent years, the economic and business environment in the State of
Wisconsin and nearby states has been relatively strong and stable. The area's
unemployment rate has been low. However, F&M cannot assure that the region's
economic health will continue, that developments in some industry might not
affect F&M, or that diverse market areas will continue. Also, investors might
achieve a greater diversity by investment in an institution with a more
extensive geographical market area.
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 the midwest.
F&M has recently begun making out-of-state acquisitions, with 1998 acquisitions
in Iowa and Minnesota. 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 $50 million or more in assets, although it would consider acquiring a
smaller institution if the Company would be able conveniently and economically
to operate it as a branch of a nearby Bank or other attractive factors exist.
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<PAGE> 6
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.
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.
F&M has grown significantly through acquisitions of other financial
institutions. F&M's strategy to continue to make acquisitions depends upon its
ability to continue to identify acquisition targets and to complete transactions
on terms which are acceptable to F&M. F&M's success in the future also will
depend upon its ability to integrate the operations of acquired financial
institutions into F&M and to manage them over time. F&M has acquired 15
financial institutions or offices within the past four years, including one
acquisition in 1995, four in 1996, six in 1997 and four in 1998.
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Business Planning and Marketing
- -------------------------------
Company-wide plans are set each year, both for F&M and for its 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 subsidiary banks better serve their customers and communities. F&M
instituted a related sales and service training program in 1998, for all
employees. F&M intends to continue that program in 1999.
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 states in which the F&M
Banks are located.. 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.
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, 1998, residential, commercial and
agricultural real estate loans represented approximately 58.7% of loans
outstanding, the majority of which consists of residential real estate first
mortgages. Real estate construction loans approximated an additional 3.6% 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.
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<PAGE> 8
Commercial and Industrial Loans. Loans in this category principally
include loans to service, retail, wholesale and manufacturing businesses. At
December 31, 1998, approximately 22.9% 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, 1998,
approximately 7.2% of loans outstanding were made to agricultural producers,
excluding agricultural real estate lending which constitutes an additional
approximately 4.7% 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 recent relative health of Wisconsin's and Iowa'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, 1998, approximately 7.6% 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 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,
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, certain subsidiary banks had offered trust services. F&M
also provides trust services in Iowa through the Trust Department of F&M
Bank-Iowa Central. At
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December 31, 1998, F&M Trust Company and F&M Bank-Iowa Central together had
approximately $238.3 million in assets under management.
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 grouped its bank subsidiaries under five
regions, with teams of bank and holding company officers to oversee the
operations of the Banks within those regions.
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, Technology and Information Systems and Year 2000
Compliance. F&M has contracted with outside providers 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 operates an item processing
center/backroom operation in Kaukauna, servicing nine member banks. Functions
performed by the center include inclearing processing, encoding, capture and
transmission of data to processors, cash letter preparation, research, exception
processing, item sorting, storage and statement rendering. The remaining banks
currently encode, capture and transmit to processing from their locations.
Backroom processing and statement handling is performed at the main banking
location. F&M is in the process of outsourcing and/or centralizing to create a
more efficient operating environment.
During 1998 F&M evaluated various options for its data processing
services that could be implemented corporate wide. F&M chose to expand a current
arrangement with one of its current vendors. The arrangement calls for twelve of
F&M's subsidiary banks to convert to the new system throughout 1999, in addition
to the eight banks currently on the system. F&M has determined the expansion of
this arrangement is more efficient, economical and creates more consistencies
throughout the organization, although data processing conversions have an
inherent chance for complications.
8
<PAGE> 10
Like all other businesses, F&M must assure that its computer and other
systems are "year 2000 compliant." "Year 2000 compliant" means being 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. Therefore, a significant part of F&M being year 2000 compliant
requires such compliance by the third parties.
F&M's Year 2000 efforts are ongoing. Whether F&M is successful in its
Year 2000 compliance will depend on future events and activities. However, F&M
currently believes that it will be able to be Year 2000 compliant on a timely
basis, to avoid material operational disruptions and to comply with its
regulators' requirements. This conclusion is based in part on information
received from third parties, such as the companies which process data for F&M.
To date, F&M has not identified material expenditures which will be required to
become year 2000 compliant. However, it is possible that F&M may identify or
experience material operational difficulties or expenditures in the future. See
"Managements Discussion and Analysis of Results of Operations and Financial
Condition - Year 2000" for further information.
The banking industry is undergoing rapid technological changes.
Financial institutions frequently introduce new technology-driven products and
services. Better technology can increase efficiency, and enable financial
institutions to reduce costs and better serve customers. Even though F&M's
stresses "traditional" personal service in its community banking strategy, F&M's
future success depends in part on its ability to use new technology. If F&M
cannot successfully use new technology, it may not be able to meet the needs of
its customers or satisfy customer demands for convenience. Also, failure to use
technology well may have economic costs in F&M's operations. Many of F&M's
competitors have substantially greater resources to invest in technological
improvements than F&M has.
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
- -----------
Banks actively compete with other financial institutions and
businesses. This competition includes both attracting and retaining deposits and
making loans. This is the same for the F&M Banks. F&M's competitors include
financial institutions such as banks, savings banks, savings and loan
associations and credit unions. Some other competitors are insurance companies,
securities brokerage firms, trust companies and investment management firms.
Many of F&M's bank office locations are the only commercial bank office in their
community; F&M believes this provides F&M a competitive advantage. However,
competition with other financial institutions and businesses, and the pricing
levels of their products and services, can affect the F&M Banks' ability to
obtain and retain customers. F&M believes its focus on establishing continuing
banking relationships and on individualized customer service also provides it a
competitive advantage.
F&M also competes with other companies in seeking institutions to
acquire. The midwest banking markets in which F&M operates have recently
experienced a significant consolidation. Many large holding companies with
greater resources than F&M are also actively pursuing acquisitions in this area.
This competition affects the available acquisition opportunities for F&M and can
affect the costs of these 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
-9-
<PAGE> 11
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 four 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 "Wisconsin Department") through its Division of Banking. The other F&M
Banks are chartered in Iowa and Minnesota, and are subject to the supervision
and regulation by the Iowa Division of Banking and the Minnesota Department of
Commerce, respectively.
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 Wisconsin 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 Wisconsin 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 Wisconsin Department. Similar
laws apply in Iowa and Minnesota. 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, bank holding companies,
including F&M, are 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 any state. Wisconsin, Iowa and Minnesota law generally
requires the approval of the Department for all acquisitions of banks in those
states, whether by in-state or out-of-state entities. Interstate bank mergers,
under specified circumstances, are permitted. Wisconsin, Iowa and Minnesota law
permit establishment of full service bank branch offices statewide.
General economic conditions, particularly in F&M's service areas, also
affect F&M. The relationship between the cost of funds (primarily deposits) and
the yield on earning assets (loans and investments) also substantially affects
F&M's earnings. This relationship, known as the "interest rate margin," can
fluctuate. Regulatory, economic and competitive factors can also influence
interest rates, the volume of interest on interest-earning assets and
interest-bearing liabilities, and the level of non-performing assets, and
therefore affect F&M's results.
-10-
<PAGE> 12
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 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans
and short-term investments 76.4% 76.3% 74.5%
Interest on securities 15.2 16.4 18.6
Non-interest income 8.4 7.3 6.9
Total operating income (in thousands) 199,251 175,625 148,560
F&M and its subsidiaries do not have any material foreign deposits, loans or operations.
</TABLE>
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.
<TABLE>
<S> <C>
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."
</TABLE>
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.
-11-
<PAGE> 13
<TABLE>
<S> <C>
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 - Non-Performing Assets."
D. OTHER INTEREST BEARING ASSETS
None
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
</TABLE>
The Companies average balances of deposits and the average rate paid on these
deposits during the years ended December 31, 1998, 1997 and 1996 are:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS BALANCE RATE BALANCE RATE Balance Rate
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits $231,652 $191,805 $162,368
Interest bearing demand deposits 158,366 1.93% 153,395 1.88% 142,903 1.97%
Saving deposits 606,059 3.77 503,533 3.88 406,140 3.59
Time deposits 925,507 5.71 863,429 5.76 785,478 5.73
- -----------------------------------------------------------------------------------------------------------------------------
Total $1,921,584 $1,712,162 $1,496,889
=============================================================================================================================
</TABLE>
The amount of time certificates of deposit issued in amounts of $100,000 or more
and outstanding as of December 31, 1998 is: $168,148,000. Their maturing
distribution is as follows:
<TABLE>
<S> <C>
-- three months or less $56,780,000
-- over three months and through twelve months $86,918,000
-- over one year $24,450,000
</TABLE>
Neither F&M or its subsidiaries have any deposits in foreign banking offices.
-12-
<PAGE> 14
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.
VII. SHORT-TERM BORROWINGS
The comparison of short-term borrowings as of each indicated December 31
follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities
sold under repurchase agreement $60,847 $74,770 $67,987
Other short-term borrowings 0 0 0
------- ------- -------
- ---------------------------------------------------------------------------------------------------
Totals $60,847 $74,770 $67,987
===================================================================================================
</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 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of end of year:
Weighted average rate 4.84 6.62 6.37
For the year:
Maximum amount outstanding 73,744 105,205 70,990
Average amount outstanding 72,233 80,773 56,499
Weighted average rate 5.26 5.61 5.25
</TABLE>
ITEM 2. PROPERTIES.
Of the F&M subsidiary banks' 84 total offices, 72 are located in
buildings which are owned by the respective Banks. Nine grocery store or market
offices and three 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, which was expanded in 1998.
All of the owned facilities are designed for commercial banking
operations. All facilities used by the Company and the Banks are considered by
management suitable for their current and anticipated future 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.
-13-
<PAGE> 15
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 1998.
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 3/15/99 POSITION(S)
- ---- ------- -----------
<S> <C> <C>
John-W. Johnson 44 President, Chief Executive Officer
and Director
Gail E. Janssen 68 Chairman of the Board and Director
Douglas A. Martin 47 Vice President and Director
Daniel E. Voet 35 Chief Financial Officer and Treasurer
Thomas M. Beyer 46 Vice President-Sales
Donna R. Habert 46 Vice President-Data Processing
Janet M. Lakso 56 Vice President-Administration and
Secretary
Bartholomew Salazar 35 Vice President-Investments
Linda K. Seefeldt 44 Vice President-Marketing
Peter H. Smaby 37 Vice President-Credit Administration
Darlene M. Vanden Boogart 40 Vice President-Audit
Constance M. Verbruggen 39 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 CEO 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 in 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 served as President of F&M from its inception until 1996,
and as Chief Executive Officer of F&M from its inception until 1997.
Mr. Martin became a Vice President of F&M in 1992. Mr. Martin has been
President and Chief Executive Officer of F&M Bank-Grant County since 1985, and
its Chairman in 1994, 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 joined F&M in 1991
Mr. Beyer became F&M's Vice President-Sales in October 1998. Mr. Beyer
joined F&M Trust Company in 1997 as its trust officer for employee benefits; he
previously was a vice president with M&I Trust Co.
Ms. Habert became Vice President-Data Processing of F&M in 1993. Ms.
Habert had been employed by F&M or 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 has been employed by F&M or F&M
Bank-Kaukauna since 1970.
-14-
<PAGE> 16
Mr. Salazar became F&M's Vice President-Investments in 1993. Mr.
Salazar has been employed by F&M since 1992.
Ms. Seefeldt joined F&M as its Vice President-Marketing in 1990.
Mr. Smaby became Vice President-Credit Administration in 1993. Mr.
Smaby has been employed by F&M since 1987.
Ms. Vanden Boogart became Vice President-Audit in 1993. Ms. Vanden
Boogart has been employed by F&M or F&M Bank-Kaukauna since 1976.
Ms. Verbruggen joined F&M as Vice President-Human Resources in March
1995. Ms. Verbruggen was a human resources director of other organizations prior
to that time, most recently at Shawano Community Hospital from 1993 to 1995.
F&M and its subsidiaries employed approximately 987 persons on a
full-time equivalent basis at December 31, 1998.
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 3,360 shareholders of record at
March 1, 1999. 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
------------------------- ---- --- --------------
<C> <C> <C> <C> <C>
1997 1st quarter 26.45 23.55 .165
2nd quarter 36.59 23.96 .165
3rd quarter 35.91 30.91 .182
4th quarter 37.73 33.18 .182
1998 1st quarter 39.09 32.95 .20
2nd quarter 38.41 35.68 .20
3rd quarter 37.95 32.50 .22
4th quarter 33.25 28.25 .22
</TABLE>
F&M has paid quarterly or annual cash dividends since it was formed.
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 1999, F&M has paid a
dividend of $.24 per share.
-15-
<PAGE> 17
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 14 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-45 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-46 through F-69 of this report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Incorporated by reference to Qualitative and Quantitative Disclosures
about Market Risk appearing at pages F-64 through F-66 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-44 of this report on Form 10-K, and to Summary
Quarterly Financial Information appearing at page F-69 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 April 27, 1999 ("1999 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 1999 Proxy Statement.
-16-
<PAGE> 18
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 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to "Transactions with the Corporation" in the
1999 Proxy Statement.
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 1998.
-17-
<PAGE> 19
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATION
Years Ended December 31, 1998, 1997 And 1996
PAGE
----
<S> <C>
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-45
Management's Discussion and Analysis.................................................... F-46
Summary Quarterly Financial Information................................................. F-69
</TABLE>
-18-
<PAGE> 20
[WIPFLI ULLRICH BERTELSON LLP LETTERHEAD]
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
----------------------------------
Wipfli Ullrich Bertelson LLP
February 4, 1999
Green Bay, Wisconsin
F-1
<PAGE> 21
F&M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
1998 1997
---- ----
<S> <C> <C>
Cash and due from banks $ 81,865 $ 70,006
Federal funds sold 77,548 39,222
----------- -----------
Cash and cash equivalents 159,413 109,228
Investments:
Interest-bearing deposits in other financial
institutions 196 825
Investment securities available for sale -
Stated at fair value 354,436 292,625
Investment securities held to maturity -
Fair value of $168,419 in 1998 and
$200,321 in 1997 160,132 192,184
Total loans 1,680,195 1,532,611
Allowance for credit losses (23,291) (21,099)
----------- -----------
Net loans 1,656,904 1,511,512
Premises and equipment 49,732 43,818
Other assets 48,838 41,511
----------- -----------
TOTAL ASSETS $ 2,429,651 $ 2,191,703
=========== ===========
</TABLE>
F-2
<PAGE> 22
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---- ----
<S> <C> <C>
Liabilities:
Non-interest-bearing deposits $ 278,314 $ 219,801
Interest-bearing deposits 1,730,649 1,600,166
----------- -----------
Total deposits 2,008,963 1,819,967
Short-term borrowings 60,847 74,770
Other borrowings 95,234 71,026
Other liabilities 25,188 25,007
----------- -----------
Total liabilities 2,190,232 1,990,770
----------- -----------
Commitments and contingent liabilities (Note 17)
Stockholders' equity:
Common stock - $1 par value:
Authorized - 50,000,000 shares
Issued - 15,608,657 and 13,404,043 shares
at December 31, 1998 and 1997, respectively 15,609 13,404
Capital surplus 144,922 87,653
Retained earnings 77,016 98,472
Accumulated other comprehensive income 3,489 1,796
Less - Common stock held in treasury, at cost -
49,415 and 24,020 shares at December 31,
1998 and 1997, respectively (1,617) (392)
----------- -----------
Total stockholders' equity 239,419 200,933
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,429,651 $ 2,191,703
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 23
F&M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands, Except Earnings Per Share)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $149,032 $132,070 $108,778
Interest on investment securities:
Taxable 20,914 20,265 20,230
Tax-exempt 9,368 8,488 7,411
Other interest income 3,113 2,022 1,942
-------- -------- --------
Total interest income 182,427 162,845 138,361
-------- -------- --------
Interest expense:
Deposits 78,642 72,155 62,389
Short-term borrowings 3,802 4,534 2,966
Other borrowings 4,795 3,147 1,338
-------- -------- --------
Total interest expense 87,239 79,836 66,693
-------- -------- --------
Net interest income 95,188 83,009 71,668
Provision for credit losses 2,438 5,179 3,599
-------- -------- --------
Net interest income after provision
for credit losses 92,750 77,830 68,069
-------- -------- --------
Other income:
Service fees 6,365 6,114 5,047
Net security gains 331 215 216
Other operating income 10,128 6,451 4,936
-------- -------- --------
Total other income 16,824 12,780 10,199
-------- -------- --------
Other expenses:
Salaries and employee benefits 33,898 30,121 25,119
Net occupancy expense 8,304 7,632 6,213
Acquisition fees -0- 1,895 -0-
Data processing 1,890 1,617 1,533
Goodwill amortization 1,167 689 524
Other operating expenses 16,467 14,617 13,015
-------- -------- --------
Total other expenses 61,726 56,571 46,404
-------- -------- --------
</TABLE>
F-4
<PAGE> 24
F&M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands, Except Earnings Per Share)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income before provision for income
taxes $47,848 $34,039 $31,864
Provision for income taxes 14,351 10,656 9,685
------- ------- -------
Net income $33,497 $23,383 $22,179
======= ======= =======
Earnings per share - Basic $ 2.15 $ 1.59 $ 1.61
======= ======= =======
Earnings per share - Diluted $ 2.15 $ 1.58 $ 1.61
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 25
F&M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Capital
-------------------------
Shares Amount Surplus
------ ------ -------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 7,377,812 $ 7,377 $ 44,019
Pooling of interests - BancSecurity Corporation 3,638,392 3,638 1,325
------------ ----------- -----------
Balance, January 1, 1996, as restated 11,016,204 11,015 45,344
Acquisition of Monycor Bancshares, Inc. 157,563 158 649
Ten percent stock dividend 637,880 638 15,900
Cash dividends declared
Exercise of stock options (31)
Purchase and retirement of common stock (7,395) (7) (3)
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income ------------ ----------- -----------
Balance, December 31, 1996 11,804,252 11,804 61,859
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
Ten percent stock dividend 821,875 822 22,193
Cash dividends declared
Exercise of stock options (42)
Purchase and retirement of common stock (6,084) (6) (3)
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income ------------ ----------- -----------
Balance, December 31, 1997 13,404,043 13,404 87,653
Acquisition of Bank of South Wayne 143,792 144 3,006
Acquisition of Financial Management Services
of Jefferson, Inc. 641,854 642
Ten percent stock dividend 1,418,968 1,419 54,397
Cash dividends declared
Exercise of stock options (134)
Purchase of treasury shares
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income ------------ ----------- -----------
Balance, December 31, 1998 $ 15,608,657 $ 15,609 $ 144,922
============ =========== ===========
</TABLE>
F-6
<PAGE> 26
<TABLE>
<CAPTION>
Accumulated Other
Retained Comprehensive Treasury
Earnings Income Stock Total
-------- ------ ----- -----
<S> <C> <C> <C>
$ 60,347 $ 44 $ (824) $ 110,963
38,862 355 44,180
---------------- -------------------- ------------ ---------------
99,209 399 (824) 155,143
838 1,645
(16,538) -0-
(6,917) (6,917)
163 132
(82) (92)
22,179 22,179
1,153 1,153
---------------
23,332
---------------- -------------------- ------------ ---------------
98,689 1,552 (661) 173,243
6,788 7,722
1,437 3,237
256 1,952
(23,015) -0-
(8,984) (8,984)
269 227
(82) (91)
23,383 23,383
244 244
---------------
23,627
---------------- -------------------- ------------ ---------------
98,472 1,796 (392) 200,933
1,293 4,443
12,142 12,784
(55,816) -0-
(12,572) (12,572)
638 504
(1,863) (1,863)
33,497 33,497
1,693 1,693
---------------
35,190
---------------- -------------------- ------------ ---------------
$ 77,016 $ 3,489 $ (1,617) $ 239,419
================ ==================== ============ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 27
F&M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 33,497 $ 23,383 $ 22,179
--------- --------- ---------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and net
amortization 4,788 3,366 3,892
Provision for credit losses 2,438 5,179 3,599
Provision (credit) for deferred income
taxes 137 (967) (976)
Net security gains (331) (215) (216)
Gain on sale of premises and
equipment and other real estate (465) (242) (5)
Loans originated for sale (219,269) (51,510) (28,397)
Proceeds from loan sales 219,269 51,510 28,397
Change in other assets (1,608) (2,461) (2,902)
Change in other liabilities (3,191) 2,835 (1,602)
--------- --------- ---------
Total adjustments 1,768 7,495 1,790
--------- --------- ---------
Net cash provided by operating activities 35,265 30,878 23,969
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits in other financial institutions 629 (215) 447
Proceeds from sale of securities
available for sale 2,486 8,815 7,945
Proceeds from maturities of securities:
Available for sale 126,037 90,711 83,389
Held to maturity 28,330 20,782 19,067
Payment for purchases of securities:
Available for sale (131,337) (126,651) (59,454)
Held to maturity (12,311) (25,485) (36,162)
Net increase in loans (61,530) (157,657) (154,197)
Capital expenditures (7,473) (7,933) (10,550)
Proceeds from sale of premises and
equipment and other real estate 1,602 3,568 602
Acquisition of stock in subsidiary banks -
Net of cash received 6,302 44,816 (484)
--------- --------- ---------
Net cash used in investing activities (47,265) (149,249) (149,397)
--------- --------- ---------
</TABLE>
F-8
<PAGE> 28
F&M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 70,033 $ 99,956 $ 95,609
Net increase (decrease) in short-term
borrowings (14,423) 6,583 34,429
Proceeds from other borrowings 51,706 197,979 132,270
Principal payments on other
borrowings (31,200) (155,859) (132,334)
Proceeds from exercise of stock options 504 227 132
Purchase of common stock (1,863) (91) (92)
Dividends paid (12,572) (8,812) (6,755)
--------- --------- ---------
Net cash provided by financing activities 62,185 139,983 123,259
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 50,185 21,612 (2,169)
Cash and cash equivalents at beginning 109,228 87,616 89,785
--------- --------- ---------
Cash and cash equivalents at end $ 159,413 $ 109,228 $ 87,616
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 87,606 $ 78,996 $ 66,808
Income taxes 14,388 12,396 10,880
Noncash investing and financing activities:
Loans transferred to other real estate $ 4,696 $ 1,351 $ 1,580
</TABLE>
See Note 3 for details of noncash consideration paid in acquisitions which
occurred in 1998, 1997, and 1996.
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 29
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 multibank holding company. Its subsidiary banks
provide a full range of commercial and retail banking services to customers
throughout the Midwest. 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
directly 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, 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 accumulated other
comprehensive income within stockholders' equity until realized.
F-10
<PAGE> 30
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.
Loan Sales and Servicing Rights
Gains and losses on the sales of loans are determined using the
specific-identification method. When servicing is retained, the servicing rights
are amortized in proportion to, and over the period of, estimated net servicing
revenues. Impairment of 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 loans were sold.
F-11
<PAGE> 31
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 10 to 15 years.
Other Real Estate
Other real estate is carried at the lower of cost or fair value, less estimated
sales costs. Other real estate is included with other assets on the consolidated
balance sheet. The balances of other real estate and the related expenses were
immaterial to the consolidated financial statements.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains on securities available for
sale which are recognized as a separate component of equity, accumulated other
comprehensive income.
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> 32
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred.
Future Accounting Change
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. The statement is
effective for fiscal years beginning after June 15, 1999. Management, at this
time, cannot determine the effect adoption of this statement may have on the
consolidated financial statements of the Company as the accounting for
derivatives is dependent on the amount and nature of derivatives in place at the
time of adoption.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which was issued in June 1997. In accordance with this
statement, the Company reports those items defined as comprehensive income in
the statement of changes in stockholders' equity. The adoption of SFAS No. 130
did not have an impact on the Company's financial position or results of
operations.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which was issued in June
1997. This statement establishes new standards for reporting information about
operating segments in annual and interim financial statements. The standard also
requires descriptive information about the way operating segments are
determined, the products and services provided by the segments, and the nature
of differences between reportable segment measurements and those used for the
consolidated enterprise. The disclosure requirements had no impact on the
Company's financial position or results of operations.
F-13
<PAGE> 33
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits," which was issued
in February 1998. This statement standardizes employers' disclosures regarding
pension and other postretirement benefit plans. The statement did not change the
measurement or recognition of pensions and other postretirement benefit plans.
The statement had no impact on the Company's financial position or results of
operations.
NOTE 3 - BUSINESS COMBINATIONS
The Company has consummated the following business combinations (dollars in
thousands):
<TABLE>
<CAPTION>
Consideration
-------------
Shares of
Common Method of
Organization Date Consummated Cash Stock Accounting Goodwill
- ------------ ---------------- ---- ----- ---------- --------
<S> <C> <C> <C> <C> <C>
BancSecurity Corporation July 1, 1998 3,987,404 Pooling
Financial Management
Services of Jefferson, Inc. May 28, 1998 706,039 Pooling
Bank of South Wayne February 9, 1998 158,171 Pooling
Sentry Bancorp, Inc. January 27, 1998 $ 5,365 Purchase $ 2,834
Citizens National
Bancorp, Inc. August 14, 1997 635,212 Pooling
Clear Lake Bancorp, Inc. August 12, 1997 177,144 Pooling
Wisconsin Ban Corp. May 30, 1997 700,711 Pooling
Green County Bank February 27, 1997 221,390 Pooling
East Troy Bancshares, Inc. January 10, 1997 532,392 Pooling
Community State Bank June 28, 1996 512,038 Pooling
Bradley Bank May 13, 1996 6,595 Purchase 3,192
Monycor Bancshares, Inc. February 5, 1996 209,716 Pooling
</TABLE>
All financial information included in the consolidated financial statements and
notes thereto have been restated to include the results of BancSecurity
Corporation, Citizens National Bancorp, Inc., Wisconsin Ban Corp., and Community
State Bank. Prior consolidated financial statements have not been restated for
the other pooling transactions as the transactions were not material to the
Company's consolidated financial statements.
F-14
<PAGE> 34
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)
The following summarizes the separate results of operations of the Company and
BancSecurity Corporation (through the acquisition date noted above) for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands, Except Earnings Per Share)
<S> <C> <C> <C>
Net interest income:
F&M Bancorporation, Inc. $ 85,978 $ 64,702 $ 53,535
BancSecurity Corporation 9,210 18,307 18,133
---------------- ---------------- ----------------
Combined and restated $ 95,188 $ 83,009 $ 71,668
================ ================ ================
Net income:
F&M Bancorporation, Inc. $ 29,479 $ 20,325 $ 15,406
BancSecurity Corporation 4,018 3,058 6,773
---------------- ---------------- ----------------
Combined and restated $ 33,497 $ 23,383 $ 22,179
================ ================ ================
Earnings per share - Basic:
F&M Bancorporation, Inc. $ 2.17 $ 1.90 $ 1.58
================ ================ ================
Combined and restated $ 2.15 $ 1.59 $ 1.61
================ ================ ================
Earnings per share - Diluted:
F&M Bancorporation, Inc. $ 2.16 $ 1.89 $ 1.57
================ ================ ================
Combined and restated $ 2.15 $ 1.58 $ 1.61
================ ================ ================
</TABLE>
NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $8,391,000 are restricted at December
31, 1998, to meet the reserve requirements of the Federal Reserve System.
F-15
<PAGE> 35
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)
1998
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies $ 49,385 $ 455 $ 8 $ 48,938
Obligations of states and
political subdivisions 6,893 74 6,819
Mortgage-related securities 247,185 1,795 785 246,175
Other securities 50,973 4,452 176 46,697
---------------- ---------------- --------------- ----------------
Total investment securities
available for sale $ 354,436 $ 6,776 $ 969 $ 348,629
================ ================ =============== ================
Investment securities held
to maturity - Obligations of
states and political subdivisions $ 168,419 $ 8,291 $ 4 $ 160,132
================ ================ =============== ================
</TABLE>
F-16
<PAGE> 36
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
<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 $ 87,723 $ 188 $ 65 $ 87,600
Obligations of states and
political subdivisions 12,608 35 22 12,595
Mortgage-related securities 155,980 794 828 156,014
Other securities 36,314 2,793 30 33,551
---------------- ---------------- --------------- ----------------
Total investment securities
available for sale $ 292,625 $ 3,810 $ 945 $ 289,760
================ ================ =============== ================
Investment securities held to maturity:
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies $ 2,094 $ 11 $ $ 2,083
Obligations of states and
political subdivisions 162,423 6,776 9 155,656
Mortgage-related securities 35,804 1,392 33 34,445
---------------- ---------------- --------------- ----------------
Total investment securities
held to maturity $ 200,321 $ 8,179 $ 42 $ 192,184
================ ================ =============== ================
</TABLE>
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.
F-17
<PAGE> 37
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
The estimated fair value and amortized cost of investment securities (available
for sale and held to maturity) at December 31, 1998, 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 $ 21,406 $ 21,436 $ 905 $ 902
Due after three months through
one year 15,639 15,535 15,949 15,813
Due after one year through
five years 36,651 32,104 45,550 43,581
Due after five years through
ten years 12,440 12,480 65,675 62,035
Due after ten years 21,115 20,899 40,340 37,801
---------------- ---------------- --------------- ----------------
107,251 102,454 168,419 160,132
Mortgage-related securities 247,185 246,175
---------------- ---------------- --------------- ----------------
Total $ 354,436 $ 348,629 $ 168,419 $ 160,132
================ ================ =============== ================
</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>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Proceeds from sales of investment
securities $ 2,486 $ 8,815 $ 7,945
Gross gains on sales 354 228 308
Gross losses on sales 23 13 92
</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 $101,836,000 and $101,927,000, respectively, as of December 31,
1998.
F-18
<PAGE> 38
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, 1998, the total carrying value of nonrated obligations
of states and political subdivisions was $54,020,000.
NOTE 6 - LOANS
The composition of loans at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Commercial, industrial, and financial $ 384,205 $ 299,316
Agricultural 121,477 103,082
Real estate:
Construction 59,899 42,486
Mortgage 987,122 966,814
Installment 127,492 120,913
---------------- ----------------
Total loans $ 1,680,195 $ 1,532,611
================ =================
</TABLE>
The aggregate amount of nonperforming loans was $15,024,000 and $17,810,000 at
December 31, 1998 and 1997, 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. The
interest income recorded and that which would have been recorded had nonaccrual
and renegotiated loans been current, or not troubled, are not material to the
consolidated financial statements for the years ended December 31, 1998, 1997,
and 1996.
The recorded investment in loans considered to be impaired was $7,639,000 and
$10,968,000 of which $3,747,000 and $9,420,000 was on a nonaccrual basis at
December 31, 1998 and 1997, respectively. The related allowance for credit
losses on impaired loans was $2,305,000 and $2,733,000 as of December 31, 1998
and 1997, respectively. The average recorded investment in impaired loans was
$9,623,000 and $13,345,000 during 1998 and 1997, respectively. The interest
income recognized on an accrual basis and the interest income received on a cash
basis on impaired loans was not material to the consolidated financial
statements for the years ended December 31, 1998, 1997, and 1996.
F-19
<PAGE> 39
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 1998 is
summarized below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Loans outstanding, January 1, 1998 $ 24,879
New loans 25,288
Repayment (21,766)
----------------
Loans outstanding, December 31, 1998 $ 28,401
================
</TABLE>
An analysis of the allowance for credit losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, January 1 $ 21,099 $ 16,863 $ 14,726
Provision for credit losses 2,438 5,179 3,599
Allowance for credit losses of banks
acquired at date of acquisition 1,745 1,329 587
Recoveries on loans 425 623 437
Loans charged off (2,416) (2,895) (2,486)
---------------- ---------------- ----------------
Balance, December 31 $ 23,291 $ 21,099 $ 16,863
================ ================ ================
</TABLE>
The consolidated financial statements do not include loans serviced for others,
which totaled $285,740,000 and $134,491,000 at December 31, 1998 and 1997,
respectively. A mortgage servicing rights asset is generated on loans originated
and subsequently sold. The balance of mortgage servicing rights is included with
other assets on the consolidated balance sheets and is immaterial to the
consolidated balance sheets as of December 31, 1998 and 1997. There was no
impairment of mortgage servicing rights, and the carrying value of mortgage
servicing rights approximates the fair market value at December 31, 1998 and
1997.
F-20
<PAGE> 40
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PREMISES AND EQUIPMENT
An analysis of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Land $ 6,717 $ 6,212
Buildings and improvements 45,305 41,869
Furniture and equipment 29,664 24,890
Construction in progress 2,280 211
------- -------
Totals 83,966 73,182
Less - Accumulated depreciation and amortization 34,234 29,364
------- -------
Net book value $49,732 $43,818
======= =======
</TABLE>
Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $3,868,000 in 1998, $3,585,000 in 1997, and $2,856,000 in
1996.
NOTE 8 - DEPOSITS
The distribution of deposits at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Non-interest-bearing demand deposits $ 278,314 $ 219,801
Interest-bearing demand deposits 172,438 151,895
Savings deposits 244,964 175,528
Money market deposits 418,530 381,223
Time deposits 894,717 891,520
---------- ----------
Total deposits $2,008,963 $1,819,967
========== ==========
</TABLE>
Time deposits of $100,000 or more were $168,148,000 and $182,967,000 at December
31, 1998 and 1997, respectively. Interest expense on time deposits of $100,000
or more was $12,309,000, $9,388,000, and $7,262,000 for the years ended December
31, 1998, 1997, and 1996, respectively.
F-21
<PAGE> 41
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHORT-TERM BORROWINGS
The short-term borrowings of $60,847,000 and $74,770,000 at December 31, 1998
and 1997, 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>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
As of year-end - Weighted average rate 4.84% 6.62% 6.37%
For the year:
Highest month-end balance $ 73,744 $ 105,205 $ 70,990
Daily average balance 72,233 80,773 56,499
Weighted average rate 5.26% 5.61% 5.25%
</TABLE>
F-22
<PAGE> 42
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Federal Home Loan Bank advances (a) $ 95,234 $ 70,629
Notes payable to individuals (b) 397
---------------- ----------------
Totals $ 95,234 $ 71,026
================ ================
</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 $425,841,000) and FHLB stock. At
December 31, 1998, the subsidiaries' outstanding advances had original
maturities ranging from three months to fifteen years and fixed and
adjustable rates ranging from 4.75% to 7.73%. Interest is payable monthly.
(b) Unsecured notes payable with original maturities in excess of five years
and rates ranging from 7.0% to 8.0%.
The scheduled principal maturities of other borrowings at December 31, 1998, are
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
1999 $ 1,229
2000 18,200
2001 200
2002 13,900
2003 2,500
Thereafter 59,205
----------------
$ 95,234
================
</TABLE>
F-23
<PAGE> 43
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES
The components of the provision for income taxes are as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 12,005 $ 9,506 $ 8,766
State 2,209 2,117 1,895
-------- -------- --------
Total current 14,214 11,623 10,661
-------- -------- --------
Deferred tax provision (credit) 201 (965) (992)
-------- -------- --------
Subtotals 14,415 10,658 9,669
Change in valuation allowance (64) (2) 16
-------- -------- --------
Total provision for income taxes $ 14,351 $ 10,656 $ 9,685
======== ======== ========
</TABLE>
F-24
<PAGE> 44
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (CONTINUED)
As of December 31, 1998 and 1997, 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>
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 8,676 $ 7,177
Deferred compensation 533 223
Net operating losses 955 1,183
Pension 146 233
Other 858 726
---------------- ----------------
11,168 9,542
Valuation allowance (800) (864)
---------------- ----------------
Deferred tax assets 10,368 8,678
---------------- ----------------
Deferred tax liabilities:
Depreciation (1,823) (1,829)
Mortgage servicing rights (1,033) (249)
Other (587) (191)
Unrealized gain on securities available for sale (2,316) (1,069)
---------------- ----------------
Deferred tax liabilities (5,759) (3,338)
---------------- ----------------
Net deferred tax assets $ 4,609 $ 5,340
================ ================
</TABLE>
The change in net deferred assets in 1998 includes $653,000 related to
acquisitions.
F-25
<PAGE> 45
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (CONTINUED)
The Company and one of its subsidiaries have separate Wisconsin net operating
loss carryforwards totaling $15,350,000 at December 31, 1998. These net
operating loss carryforwards begin to expire in 1999. 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.
Two subsidiaries have Wisconsin net operating loss carryforwards of $2,960,000.
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 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>
1998 1997 1996
---------------------- ----------------------- ---------------------
% 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 $ 16,268 34.0 $ 11,573 34.0 $ 10,834 34.0
Increase (decrease)
in taxes resulting
from:
Tax-exempt interest (3,137) (6.6) (2,925) (8.6) (2,518) (7.9)
State income taxes 1,423 3.0 1,266 3.7 1,133 3.6
Goodwill
amortization 259 0.5 195 0.6 178 0.6
Other (462) (0.9) 547 1.6 58 0.1
-------- ---- -------- ---- -------- ----
Provision for income
taxes $ 14,351 30.0 $ 10,656 31.3 $ 9,685 30.4
======== ==== ======== ==== ======== ====
</TABLE>
F-26
<PAGE> 46
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - 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&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 184,741 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, 1998.
BancSecurity Corporation, F&M Bank - Jefferson, and F&M Bank - Cannon Valley
sponsor defined contribution 401(k) retirement savings plans which cover
substantially all of their respective employees. The contributions to these
plans for 1998 were made in accordance with the terms of the individual plans.
It is expected that the assets of these plans will be transferred into the
Company's plan during 1999.
Retirement plan contribution expense charged to operations for all plans
(excluding the defined benefit pension plans discussed below) totaled
$1,792,000, $1,452,000, and $1,149,000 for 1998, 1997, and 1996, respectively.
F&M Bank - Waushara County and BancSecurity Corporation sponsored defined
benefit plans covering substantially all employees prior to the respective
acquisitions by the Company. Subsequent to the acquisitions, plan participants
do not accrue any additional benefit for service. The funding policy is to make
contributions on an annual basis to the extent allowed for tax purposes. Details
regarding the defined benefit pension plans obligations and related benefit
costs are outlined in the tables below.
F-27
<PAGE> 47
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT PLANS (CONTINUED)
The following tables provide a reconciliation of changes in the defined benefit
pension plan's obligations and the fair value of assets for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
F&M Bank - Waushara County BancSecurity Corporation
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Reconciliation of benefit
obligations:
Obligation at January 1 $(2,109) $(2,227) $(6,754) $(5,868)
Service cost (354) (330)
Interest cost (126) (126) (509) (434)
Benefit payments 251 247 234 172
Actuarial gain (loss) (64) (3) 459 (294)
------- ------- ------- -------
Obligation at December 31 $(2,048) $(2,109) $(6,924) $(6,754)
======= ======= ======= =======
Reconciliation of fair value plan assets:
Fair value of plan assets at
January 1 $ 1,398 $ 1,464 $ 6,629 $ 6,285
Return on plan assets, net of
administrative expenses 67 82 505 516
Employer contributions 116 99
Benefit payments (251) (247) (234) (172)
------- ------- ------- -------
Fair value of plan assets
at December 31 $ 1,330 $ 1,398 $ 6,900 $ 6,629
======= ======= ======= =======
</TABLE>
F-28
<PAGE> 48
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT PLANS (CONTINUED)
The following table provides the components of net periodic benefit cost of the
plans for the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
F&M Bank - Waushara County BancSecurity Corporation
---------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost $ $ $ $ 354 $ 330 $ 305
Interest cost 126 126 128 509 434 391
Return on plan assets (67) (82) (90) (505) (516) (443)
Net amortization and
deferral (42) (21) (12) (31) (15) (35)
-------- --------- --------- --------- --------- ---------
Net periodic pension cost $ 17 $ 23 $ 26 $ 327 $ 233 $ 218
======== ========= ========= ========= ========= =========
</TABLE>
The assumptions used in the measurement of the Company's benefit obligations are
shown in the following table:
<TABLE>
<CAPTION>
F&M Bank - Waushara County BancSecurity Corporation
-------------------------- ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.0% 6.0% 6.0% 5.9% 7.3% 7.5%
Expected return on plan assets 7.5% 7.5% 7.5% 8.5% 8.5% 8.5%
Rate of compensation increases 0.0% 0.0% 0.0% 0.0% 5.5% 5.5%
</TABLE>
F-29
<PAGE> 49
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income and accumulated other comprehensive income are shown in the
consolidated statements of stockholders' equity. The Company's accumulated other
comprehensive income is comprised of the unrealized gain or loss on securities
available for sale. The following shows the activity in accumulated other
comprehensive income:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Accumulated other comprehensive
income at beginning $ 1,796 $ 1,552 $ 399
------------ ------------ ------------
Activity:
Unrealized gain on securities
available for sale 3,185 637 2,158
Tax impact (1,274) (255) (863)
------------ ------------ ------------
Net unrealized gain on securities
available for sale 1,911 382 1,295
------------ ------------ ------------
Reclassification adjustment for
realized gains on securities
available for sale (331) (215) (216)
Tax impact 113 77 74
------------ ------------ ------------
Net reclassification adjustment (218) (138) (142)
------------ ------------ ------------
Net change in accumulated other
comprehensive income 1,693 244 1,153
------------ ------------ ------------
Accumulated other comprehensive
income at end $ 3,489 $ 1,796 $ 1,552
============ ============ ============
</TABLE>
F-30
<PAGE> 50
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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
September 1, 1998, 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>
1998
Earnings per share - Basic $ 33,497 15,578,621 $ 2.15
==========
Effect of stock options - Net 32,963
----------- -------------
Earnings per share - Diluted $ 33,497 15,611,584 $ 2.15
=========== ============= ==========
1997
Earnings per share - Basic $ 23,383 14,707,409 $ 1.59
==========
Effect of stock options - Net 52,828
----------- -------------
Earnings per share - Diluted $ 23,383 14,760,237 $ 1.58
=========== ============= ==========
1996
Earnings per share - Basic $ 22,179 13,766,973 $ 1.61
==========
Effect of stock options - Net 33,008
----------- -------------
Earnings per share - Diluted $ 22,179 13,799,981 $ 1.61
=========== ============= ==========
</TABLE>
On September 1, 1998, the Company issued 1,418,968 shares of common stock as a
10% stock dividend. These shares had a value of $55,816,000 at the date of
issuance. All references to the number of shares of common stock in the
footnotes have been restated for the stock dividends; however, on the
consolidated financial statements, these shares are recognized as having been
issued in 1998.
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 consolidated financial
statements, these shares are recognized as having been issued in 1997.
F-31
<PAGE> 51
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
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 consolidated financial
statements, these shares are recognized as having been issued in 1996.
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, 1998, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
F-32
<PAGE> 52
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
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>
1998
------------------------------------------------
For Capital
Actual Adequacy Purposes
------------------------ -----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 247,079 13.21% > $ 149,605 > 8.0%
- -
Tier I capital (to risk-weighted assets) $ 223,788 11.97% > $ 74,802 > 4.0%
- -
Tier I capital (to average assets) $ 223,788 9.45% > $ 94,719 > 4.0%
- -
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------
For Capital
Actual Adequacy Purposes
------------------------ -----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 208,746 13.49% > $ 123,751 > 8.0%
- -
Tier I capital (to risk-weighted assets) $ 189,388 12.24% > $ 61,875 > 4.0%
- -
Tier I capital (to average assets) $ 189,388 8.81% > $ 86,013 > 4.0%
- -
</TABLE>
Banking subsidiaries are restricted by banking regulations from making dividend
distributions above prescribed amounts. At December 31, 1998, the Company's
subsidiaries could have paid $44,813,000 of additional dividends to the Company
without prior regulatory approval.
F-33
<PAGE> 53
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - 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 199,650 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 2.00% 2.00% 2.76%
Risk-free interest rate 4.85% 5.46% 5.13%
Weighted average expected life (years) 4.5 4.4 4.3
Expected volatility 35.10% 37.20% 23.44%
</TABLE>
The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $6.65, $5.22, and $2.46 per share
for options granted in 1998, 1997, and 1996, respectively.
F-34
<PAGE> 54
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - 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>
1998 1997 1996
---- ---- ----
(Dollars in Thousands, Except Earnings Per Share)
<S> <C> <C> <C>
Net income:
As reported $ 33,497 $ 23,383 $ 22,179
============= ============= =============
Pro forma $ 33,376 $ 23,296 $ 22,145
============= ============= =============
Earnings per share - Basic:
As reported $ 2.15 $ 1.59 $ 1.61
============= ============= =============
Pro forma $ 2.14 $ 1.58 $ 1.61
============= ============= =============
Earnings per share - Diluted:
As reported $ 2.15 $ 1.58 $ 1.61
============= ============= =============
Pro forma $ 2.14 $ 1.58 $ 1.60
============= ============= =============
</TABLE>
Following is a summary of stock option transactions for the years ended December
31:
<TABLE>
<CAPTION>
Number of Options
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 95,300 82,280 58,219
Granted during the year 33,561 26,990 29,761
Exercised during the year (at prices
ranging from $15.03 to $24.90 per share) (30,034) (13,970) (5,700)
Canceled during the year (2,981)
----------- ----------- -----------
Outstanding at end of year 95,846 95,300 82,280
=========== =========== ===========
Weighted average exercise price per share
granted during the year $ 36.07 $ 24.53 $ 19.74
=========== =========== ===========
Available for grant at end of year 49,600 80,180 107,170
=========== =========== ===========
</TABLE>
Options granted under these plans expire ten years after the grant date.
F-35
<PAGE> 55
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
Following is a summary of the options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise
Price Range Number Life - Years Price
------------------ ----------- ------------ -----------
<S> <C> <C> <C>
$15.03 to $16.15 29,728 5.7 $ 15.61
$19.68 to $19.91 16,979 7.1 19.75
$24.38 to $24.90 18,559 8.1 24.57
$35.85 to $36.76 30,580 9.1 36.05
----------- ----------- -----------
Totals 95,846 7.5 $ 24.60
=========== =========== ===========
</TABLE>
All options outstanding at December 31, 1998, were exercisable.
In connection with an acquisition in 1994, an unexercised option under a
separate stock option plan was converted into an option for 16,524 shares of the
Company's common stock with an exercise price of $7.02 per share. During 1998,
1997, and 1996, the option was exercised for 3,000, 1,500, and 2,000 shares,
respectively. The option remains outstanding for 4,724 shares as of December 31,
1998. The option expires December 15, 2002.
NOTE 16 - SEGMENT INFORMATION
F&M Bancorporation, Inc., through a branch network of its subsidiary Banks,
provides a full range of consumer and commercial banking services to
individuals, businesses, and farms in Wisconsin and Iowa. These services include
demand, time, and savings deposits; safe deposit services; credit cards; notary
services; night depository; money orders, traveler's checks, and cashier's
checks; savings bonds; secured and unsecured consumer, commercial, and real
estate loans; ATM processing; cash management; and financial planning.
While the Company's chief decision makers monitor the revenue streams of various
Company products and services, operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
F-36
<PAGE> 56
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - 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 consolidated balance
sheets.
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, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Commitments to extend credit $ 238,778 $ 151,629
Standby letters of credit 6,293 2,291
Credit card commitments 43,351 35,620
------------- -------------
$ 288,422 $ 189,540
============= =============
</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.
F-37
<PAGE> 57
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
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.
Concentration of Credit Risk
The Company's subsidiary banks grant residential, commercial, agricultural, and
consumer loans in the Midwest. Due to the diversity of locations, the ability of
debtors to honor their contracts is not tied to any particular economic sector.
NOTE 18 - PENDING ACQUISITIONS
On July 21, 1998, the Company signed a Plan and Agreement of Merger and
Reorganization to acquire 100% of the outstanding shares of CBE, Inc. in
exchange for company stock. CBE, Inc. owns 100% of Community Bank of Elkhorn.
This transaction is subject to regulatory and stockholder approval. The
transaction is expected to be completed in the second quarter of 1999.
F-38
<PAGE> 58
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - 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-39
<PAGE> 59
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for financial instruments at December
31:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ----------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 159,413 $ 159,413 $ 109,228 $ 109,228
Investment securities 514,764 523,051 485,634 493,771
Net loans 1,656,904 1,728,392 1,511,512 1,554,105
----------------- ----------------- ------------------ -----------------
Total financial assets $ 2,331,081 $ 2,410,856 $ 2,106,374 $ 2,157,104
================= ================= ================== =================
Financial liabilities:
Deposits $ 2,008,963 $ 2,010,827 $ 1,819,967 $ 1,819,145
Short-term and other
borrowings 156,081 159,711 145,796 145,749
----------------- ----------------- ------------------ -----------------
Total financial
liabilities $ 2,165,044 $ 2,170,538 $ 1,965,763 $ 1,964,894
================= ================= ================== =================
</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-40
<PAGE> 60
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 11,118 $ 7,088
Investments 642 3,312
Investment in subsidiaries 234,488 191,608
Loans 1,723 957
Premises and equipment - Net 2,005 1,393
Other assets 133 1,912
---------------- ----------------
TOTAL ASSETS $ 250,109 $ 206,270
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 690 $ 5,108
Other borrowings 10,000 229
---------------- ----------------
Total liabilities 10,690 5,337
Total stockholders' equity 239,419 200,933
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 250,109 $ 206,270
================ ================
</TABLE>
F-41
<PAGE> 61
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends received from subsidiaries $ 7,825 $ 9,585 $ 12,302
Interest and dividends 443 524 118
Data processing fees 1,713 1,606 1,463
Management and service fees 3,775 2,654 2,067
Gains on sale of securities 249 81 183
---------------- ---------------- ----------------
Total income 14,005 14,450 16,133
---------------- ---------------- ----------------
Expenses:
Salaries and benefits 2,279 1,968 1,807
Interest 12 141 297
Other 3,022 4,656 2,867
---------------- ---------------- ----------------
Total expenses 5,313 6,765 4,971
---------------- ---------------- ----------------
Income before provision (credit) for income
taxes and equity in undistributed net
income of subsidiaries 8,692 7,685 11,162
Provision (credit) for income taxes 310 89 (380)
---------------- ---------------- ----------------
Income before equity in undistributed
net income of subsidiaries 8,382 7,596 11,542
Equity in undistributed net income of
subsidiaries 25,115 15,787 10,637
---------------- ---------------- ----------------
Net income $ 33,497 $ 23,383 $ 22,179
================ ================ ================
</TABLE>
F-42
<PAGE> 62
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 33,497 $ 23,383 $ 22,179
------------- ------------- -------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Gain on sale of investments
available for sale (249) (81) (183)
Provision for depreciation and
amortization 247 223 245
Equity in undistributed net income
of subsidiaries (25,115) (15,787) (10,637)
Change in other assets 1,523 3,106 (90)
Change in accrued expenses 158 1,172 438
------------- ------------- -------------
Total adjustments (23,436) (11,367) (10,227)
------------- ------------- -------------
Net cash provided by operating
activities 10,061 12,016 11,952
------------- ------------- -------------
Cash flows from investing activities:
Capital contributed to subsidiaries (2,000)
Purchase of stock in subsidiary banks (48)
Payment for purchase of securities
available for sale (1,676) (726)
Proceeds from sales and maturities of
investment securities available for sale 1,406 337 726
Net (increase) decrease in loans (766) (493) 68
Capital expenditures (835) (41) (214)
Decrease in interest-bearing deposits 407 331
------------- ------------- -------------
Net cash provided by (used in) investing
activities (1,871) (1,790) 137
------------- ------------- -------------
</TABLE>
F-43
<PAGE> 63
F&M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of
stock options $ 504 $ 227 $ 132
Proceeds from other borrowings 10,000 119
Principal payments on other
borrowings (229) (2,811) (33)
Purchase of shares of treasury
common stock (1,863) (91) (92)
Dividends paid (12,572) (8,812) (6,755)
---------------- ---------------- ----------------
Net cash used in financing activities (4,160) (11,487) (6,629)
---------------- ---------------- ----------------
Net increase (decrease) in cash and
cash equivalents 4,030 (1,261) 5,460
Cash and cash equivalents at beginning 7,088 8,349 2,889
---------------- ---------------- ----------------
Cash and cash equivalents at end $ 11,118 $ 7,088 $ 8,349
================ ================ ================
Supplemental cash flow information:
Cash received during the year for
income taxes $ 10,591 $ 7,800 $ 6,144
Cash paid during the year for:
Interest 12 171 226
Income taxes 12,147 7,661 5,800
</TABLE>
F-44
<PAGE> 64
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, 1998. 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,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations (1)
Interest income $ 182,427 $ 162,845 $ 138,361 $ 125,397 $ 106,379
Interest expense 87,239 79,836 66,693 60,209 45,245
---------- ---------- ---------- ---------- ----------
Net interest income 95,188 83,009 71,668 65,188 61,134
Provision for loan losses 2,438 5,179 3,599 2,806 2,268
Non-interest income 16,824 12,780 10,199 8,760 7,859
Net income 33,497 23,383 22,179 19,892 15,868
Net income applicable to
common stock 33,497 23,383 22,179 19,892 15,846
Period end balance sheet data
Total assets 2,429,651 2,191,703 1,867,542 1,660,344 1,533,005
Net loans 1,656,904 1,511,512 1,272,036 1,079,101 1,003,751
Total deposits 2,008,963 1,819,967 1,577,282 1,421,965 1,316,921
Short-term borrowings 60,847 74,770 67,988 32,371 39,873
Other borrowings 95,234 71,026 27,906 28,697 29,291
Stockholders' equity 239,419 200,933 173,243 155,143 135,835
Per share data (2)
Net income per common share-basic 2.15 1.59 1.61 1.47 1.17
Net income per common
share-fully diluted 2.15 1.58 1.61 1.47 1.17
Cash dividends (3) .84 .69 .55 .45 .36
</TABLE>
(1) Except as indicated, the data have been restated to reflect the Company's
acquisitions of F&M Bank-Northeast in 1994, F&M Bank-Waushara County in
1995, F&MBank-Algoma in 1996, F&MBank-Prairie du Chien and
F&MBank-Darlington in 1997 and BancSecurity Corporation ("BSC") in 1998,
all using the pooling of interests method of accounting. See Note 3 of
Notes to the Company's Consolidated Financial Statements. The
F&MBank-Superior acquisition in 1996, the 1997 acquisitions of F&MBank-East
Troy, F&MBank-Brodhead and F&MBank-Landmark, and the 1998 acquisitions of
Bank of South Wayne ("BSW") and Financial Management Services of Jefferson
("FMS"), 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, the 1997 acquisition of the Security office
in Antigo and the 1998 acquisition of Sentry Bancorp ("SB"), were accounted
for using the purchase method of accounting; accordingly, the financial
data includes results of operations only since the dates of acquisition.
(2) 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, June 9, 1997, and September 1, 1998.
(3) Cash dividends per common share are not restated to reflect the
acquisitions accounted for using the pooling of interests method of
accounting.
F-45
<PAGE> 65
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, 1998, 1997 and 1996. These statements have been restated to reflect
the acquisitions of: Community State Bank ("CSB") acquired June 28, 1996;
Wisconsin Ban Corp ("WBC"), acquired on May 30, 1997; Citizen's National
Bancorp. ("CNB"), acquired on August 14, 1997; and BancSecurity Corporation
("BSC"), acquired on July 1, 1998. These transactions have been accounted for
using the pooling of interests method of accounting. Monycor Bancshares, Inc.
("MB"), acquired on February 5, 1996, East Troy Bancshares ("ETB"), acquired on
January 10, 1997, Green County Bank ("GCB"), acquired on February 27, 1997,
Clear Lake Bancorp, Inc. ("CLB"), acquired on August 12, 1997, Bank of South
Wayne ("BSW"), acquired on February 9, 1998, and Financial Management Services
of Jefferson ("FMS"), acquired on May 28, 1998, accounted for as pooling of
interests, were not material to prior years' reported operating results;
accordingly, previous years' results have not been restated. The acquisitions of
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, and
Sentry Bancorp, acquired on January 27, 1998, were accounted for using the
purchase method of accounting; accordingly, the Company's financial data
includes results of operations of these entities only since the dates of
acquisition. All per share information has been adjusted to reflect the 10%
stock dividends, paid to shareholders on June 10, 1996, June 9, 1997, and
September 1, 1998.
The Company has also announced one pending acquisition: Community Bank of
Elkhorn ("Bank"). This acquisition will be accounted for using the pooling of
interests method of accounting. The Bank, which has assets of approximately $100
million and one location in Elkhorn, Wisconsin, is a wholly-owned subsidiary of
CBE, Inc. Although the pending acquisition is expected to be consummated in the
second quarter of 1999, it 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 and the ability to integrate acquired
operations, competition from other institutions, changes in the banking industry
and its regulation, and needs for technological change (including Year 2000
compliance), including those described in this Management's Discussion and
Analysis and elsewhere in this report.
DESCRIPTION
The following discussion will cover results of operations, asset quality,
financial position, liquidity, interest rate sensitivity and capital resources
for the years 1996 through 1998. The information included in this discussion is
intended to assist readers in their analysis of, and should be read in
conjunction with, the consolidated financial statements and related notes and
other supplemental information presented elsewhere in this report.
RESULTS OF OPERATIONS
F&M reported net income of $33.5 million in 1998, an increase of $10.1 million
or 43.3%, from $23.4 million in 1997 (compared with $22.2 million in 1996). Net
interest income in 1998 increased $12.2 million, or 14.7% to $95.2 million from
$83.0 million in 1997 (compared with $71.7 million in 1996).
Basic net income per common share was $2.15 in 1998, compared with $1.59 in 1997
and $1.61 in 1996. Fully diluted net income per common share was $2.15 in 1998,
compared with $1.58 in 1997 and $1.61 in 1996.
Return on average assets was 1.43% in 1998, compared with 1.13% in 1997 and
1.26% in 1996. Return on average common stockholders' equity was 14.58% in 1998,
compared with 11.90% in 1997 and 13.43% in 1996.
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.
F-46
<PAGE> 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The remainder of this section provides a more detailed explanation of factors
affecting the results of operations.
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 non-taxable earning assets.
Net interest income in 1998 increased $12.2 million, or 14.7%, to $95.2 million
from $83.0 million in 1997. 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 for which prior periods
were not restated and relative stability of the Company's net interest margin
(4.52%, 4.46%, and 4.51% at December 1998, 1997 and 1996, respectively). See the
following table for the relative effects of these factors. Net interest income
in 1997 increased 15.8% from $71.7 million in 1996, also attributable to the
increase in asset volume.
In 1998, interest expense increased due to increases in deposits, mainly due to
acquisitions, and increased other borrowings. In 1997, the increase was due to
increase in deposits, both internally generated and due to acquisitions, and
increase in rates on 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 1998 and 1997, the
Company experienced its greatest assets 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 non-performing assets, together with interest lost and recovered on
those assets, also affect comparisons of net interest income.
F-47
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The following table presents the relative contribution of changes in volume and
interest rates on changes in net interest income for the periods indicated using
average balances.
<TABLE>
<CAPTION>
Year ended December 31, 1998 vs. 1997
-----------------------------------------------------------------------
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) $ 9,112 $ 8,155 $ (292) $ 16,975
Taxable investment securities (337) 1,500 (515) 648
Non-taxable investment securities (2) 838 874 (332) 1,380
Other interest income 1,088 266 (263) 1,091
--------------- --------------- --------------- ---------------
Total 10,701 10,795 (1,402) 20,094
--------------- --------------- --------------- ---------------
Interest paid on:
Savings deposits 2,446 1,173 (200) 3,419
Time deposits (161) 3,669 (440) 3,068
Short-term borrowings (587) 127 (272) (732)
Other borrowings 1,674 304 (331) 1,647
--------------- --------------- --------------- ---------------
Total 3,372 5,273 (1,243) 7,402
--------------- --------------- --------------- ---------------
Net interest income $ 7,329 $ 5,522 $ (159) $ 12,692
=============== =============== =============== ===============
</TABLE>
<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) $ 15,749 $ 8,365 $ (723) $ 23,391
Taxable investment securities (598) 658 (25) 35
Non-taxable investment securities (2) 1,482 351 140 1,973
Other interest income (68) 231 (82) 81
--------------- --------------- --------------- ---------------
Total 16,565 9,605 (690) 25,480
--------------- --------------- --------------- ---------------
Interest paid on:
Savings deposits 2,650 981 1,399 5,030
Time deposits 1,190 3,309 237 4,736
Short-term borrowings 1,235 117 216 1,568
Other borrowings 1,795 132 (117) 1,810
--------------- --------------- --------------- ---------------
Total 6,870 4,539 1,735 13,144
--------------- --------------- --------------- ---------------
Net interest income $ 9,695 $ 5,066 $ (2,425) $ 12,336
=============== =============== =============== ===============
</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 non-taxable loans and investment
securities has been adjusted to its fully taxable equivalent.
(3) Out of period adjustment reflects acquisitions in that year for which
prior financial statements were not restated.
F-48
<PAGE> 68
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 taxable equivalent basis) for the three-year
period ended December 31, 1998. Because of the drop in interest rates in 1998,
the Company's yield on interest-earning assets decreased from 1997. The
Company's effective rate on interest-bearing liabilities also decreased in 1998
as compared to 1997, as a result of decreased interest paid on deposits, and
lower rates paid on borrowings. The decrease over the period is reflected in the
1998 yield on interest-earning assets which decreased by 0.07%, after an
increase of 0.03% in 1997, and a decrease of 0.04% in 1996, respectively. The
effective rate on liabilities as a percentage of interest-earning assets
decreased by 0.13% in 1998 and increased by 0.08% in 1997, respectively,
producing a positive impact on net interest margin on interest-earning assets of
0.06% in 1998 and a negative impact on net interest margin on interest-earning
assets of (0.05)% for 1997. In 1996, net interest margin on interest-earning
assets decreased 0.03%.
NET INTEREST MARGIN
[CHART]
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------
Yield/ Change Yield/ Change Yield/ Change
Rate from 1997 Rate from 1996 Rate from 1995
---- --------- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Yield on interest-earning assets 8.47% (0.07)% 8.54% 0.03% 8.51% (0.04)%
Effective rate on liabilities as a
percent of interest-earning assets 3.95% (0.13)% 4.08% 0.08% 4.00% (0.01)%
---- ----- ---- ---- ---- -----
Net interest margin on
interest-earning assets 4.52% 0.06% 4.46% (0.05)% 4.51% (0.03)%
==== ==== ==== ===== ==== =====
</TABLE>
F-49
<PAGE> 69
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>
1998 1997 1996
---------------------------------------------------------------------------------------
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) $1,652,772 $149,441 9.04% $1,462,855 $132,466 9.06% $1,196,383 $109,075 9.12%
Taxable investment
securities 331,128 20,913 6.32% 312,667 20,265 6.48% 311,885 20,230 6.49%
Non-taxable investment
securities (2) 168,319 13,865 8.24% 147,619 12,485 8.46% 125,942 10,512 8.35%
Other investments 60,372 3,113 5.16% 34,548 2,022 5.85% 31,807 1,941 6.10%
---------- -------- ---------- -------- ---------- --------
Total $2,212,591 $187,332 8.47% $1,957,689 $167,238 8.54% $1,666,017 $141,758 8.51%
Non-interest
earning assets
Cash and due
from banks 54,570 49,102 43,604
Premises &
Equip. - net 47,854 41,574 33,630
Other assets 50,743 38,958 32,807
Less: Allowance for
loan loss (23,222) (19,095) (16,021)
---------- ---------- ----------
Total $2,342,536 $2,068,228 $1,760,037
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Interest bearing liabilities
Savings deposits $764,425 $ 25,834 3.38% $656,928 $ 22,415 3.41% $ 549,043 $ 17,385 3.17%
Time deposits 925,507 52,808 5.71% 863,429 49,740 5.76% 785,478 45,004 5.73%
Short-term borrowings 72,233 3,802 5.26% 80,773 4,534 5.61% 56,499 2,966 5.25%
Other borrowings 90,176 4,795 5.32% 53,484 3,148 5.89% 20,881 1,338 6.41%
---------- -------- ---------- -------- ---------- --------
Total $1,852,341 $ 87,239 4.71% $1,654,614 $ 79,837 4.83% $1,411,901 $ 66,693 4.72%
Non-interest
bearing liabilities
Demand deposits 231,652 191,805 162,368
Other liabilities 28,810 25,282 20,682
Stockholders' equity 229,733 196,527 165,086
---------- -------- ---------- -------- ---------- --------
Total $2,342,536 $2,068,228 $1,760,037
========== ========== ==========
Net interest income $100,093 $ 87,401 $ 75,065
Rate spread 3.76% 3.71% 3.79%
Net interest margin 4.52% 4.46% 4.51%
</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:
1998-$2,592,000; 1997-$2,727,000; 1996-$2,292,000.
F-50
<PAGE> 70
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,
---------------------------------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Loans 74.7% 74.7% 71.8%
Taxable investment securities 15.0% 16.0% 18.7%
Non-taxable investment securities 7.6% 7.5% 7.6%
Other investments 2.7% 1.8% 1.9%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Savings deposits 41.3% 39.7% 38.9%
Time deposits 50.0% 52.2% 55.6%
Short-term borrowings 3.9% 4.9% 4.0%
Other borrowings 4.8% 3.2% 1.5%
----- ----- -----
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. The effect was particularly pronounced in 1998 as a
result of BSC's relatively lower loan percentages. 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 primarily decreased throughout 1998, while 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 decreased slightly because the Company took
advantage of the situation in which the long-term borrowing rates were more
attractive than short-term borrowing 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 led to an overall increase in
non-deposit borrowing in 1998. For more information regarding borrowing, see
"Borrowings" below and Notes 9 and 10 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 $2.4 million in 1998, compared with $5.2
million in 1997 and $3.6 million in 1996. Although total loans grew, the
provision decreased in 1998 because of a higher than normal loan loss provision
taken by BSC in 1997 in anticipation of certain charge-offs, recoveries on
charged-off loans, and a decrease in non-performing assets. The year-end
allowance for loan losses as a percentage of gross loans outstanding was 1.39%
at December 31, 1998, as compared to 1.38% and 1.31% at December 31, 1997 and
1996, respectively. The increase in the allowance percentage resulted from the
relatively greater increase in the level to net provision as compared to loans
and the effect of the reserves of acquired banks for which financial statements
were not restated. Net charge-offs as a percentage of average loans outstanding
were 0.12% in 1998, 0.16% in 1997 and 0.17% in 1996. Charge-offs in 1998 were
not concentrated in any industry or business segment.
F-51
<PAGE> 71
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
NON-INTEREST INCOME
The following table presents the major components of non-interest income.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service fees $ 6,365 $ 6,114 $ 5,047
Net securities gains 331 215 216
Other operating income 10,128 6,451 4,936
------- ------- -------
Total $16,824 $12,780 $10,199
======= ======= =======
</TABLE>
The Company stresses the importance of growth in non-interest income as one of
its key long-term strategies. Non-interest income for 1998 increased $4.0
million or 31.6% when compared to 1997. The increase in service fees during 1998
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. 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 1998 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 1998, resulting from the decrease in interest rates in
1998, and therefore increased the Company's related secondary market
commissions. The increase in the operating income between 1997 and 1996 reflects
primarily an increase in 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) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Salaries and employee benefits $33,898 $30,121 $25,119
Occupancy expenses, net 8,304 7,632 6,213
Data processing 1,890 1,617 1,533
Acquisition fees 0 1,895 0
Goodwill amortization 1,167 689 524
Other operating expenses 16,467 14,617 13,015
------- ------- -------
Total $61,726 $56,571 $46,404
======= ======= =======
</TABLE>
The Company's total non-interest expense in 1998 increased $5.2 million, or
9.1%, to $61.7 million from $56.6 million in 1997. The increase was primarily
due to acquisitions in 1998 and 1997, resulting both from the costs of the
acquisitions and increase from those with respect to which prior periods were
not restated (additional staffing, data processing fees, occupancy expense,
etc.). Salary and employees benefits rose due to new locations as well as
increased salary levels due to normal increases in salaries and employee
benefits. Occupancy expenses increased due to servicing of new locations and
operations. Acquisition fees in 1997 were attributed to various BSC expenses in
its fees and the acquisition by the Company. Data processing fees increased
slightly, primarily due to volume and acquisitions. The Company expects to
finish reviewing and testing its data processing arrangements during 1999,
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 testing has not been finalized and certain "year 2000 compliance" issues
assume third party resolution. The increase in other operating
F-52
<PAGE> 72
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 1.93% in 1998, 2.13% in 1997, and 2.07% in
1996.
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 non-recurring
items. The efficiency ratio was 52.94% in 1998, 56.59% in 1997 and 54.56% in
1996. The decreases in this ratio and the overhead ratio resulted from the
various factors set forth above.
INCOME TAXES
The Company's provision for income taxes in 1998 increased $3.7 million, or
34.7%, to $14.4 million from $10.7 million in 1997. The 1997 level represents a
10.0% increase from $9.7 million in 1996. As a percentage of taxable income, the
effective tax rate was 30.0% in 1998, 31.3% in 1997 and 30.4% in 1996 of income
before taxes. The effective tax rate has remained constant as compared to 1997.
For more information regarding income taxes see Note 11 of Notes to the
Company's Consolidated Financial Statements.
NET INCOME
Net income applicable to common stock in 1998 increased by $10.1 million, or
43.3% to $33.5 million from $23.4 million in 1997. This compares with an
increase in income of $1.2 million, or 5.4%, for 1997 from $22.2 million in
1996.
Return on average common stockholders' equity was 14.58% in 1998, compared with
11.90% in 1997 and 13.43% in 1996. The return on average assets was 1.43% in
1998, compared with 1.13% in 1997 and 1.26% in 1996.
Basic net income per common share was $2.15 in 1998 compared with $1.59 in 1997
and $1.61 in 1996. The Company maintains a stock option plan. Fully diluted
earnings per common share were $2.15 in 1998, compared with $1.58 in 1997 and
$1.61 in 1996. The difference from basic net income per share results from the
effects of outstanding stock options.
Earnings per share are based on weighted average number of common shares
outstanding restated to reflect the 10% stock dividends paid to stockholders on
June 10, 1996, June 9, 1997 and September 1, 1998. The following shows the
computation of the basic and diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996.
F-53
<PAGE> 73
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
<TABLE>
<CAPTION>
Weighted Average
Number of Earnings Per
Net Income Shares Share
---------- ------ -----
<S> <C> <C> <C>
(dollars in thousands)
1998
Earnings per share-Basic $33,497 15,578,621 $2.15
Effect of stock options 32,963
------- ---------- -----
Earnings per share-Diluted $33,497 15,611,584 $2.15
======= ========== =====
1997
Earnings per share-Basic $23,383 14,707,409 $1.59
Effect of stock options 52,828
------- ---------- -----
Earnings per share-Diluted $23,383 14,760,237 $1.58
======= ========== =====
1996
Earnings per share-Basic $22,179 13,766,973 $1.61
Effect of stock options 33,008
------- ---------- -----
Earnings per share-Diluted $22,179 13,799,981 $1.61
======= ========== =====
</TABLE>
FINANCIAL CONDITION
In addition, 1998 was a year of growth for F&M in total assets and equity.
Year-end total assets in 1998 grew to $2.430 billion, a 10.9% increase from
$2.192 billion in 1997. Total shareholders' equity at December 31, 1998 was $239
million, a 19.2% increase from $201 million in 1997. The balance of this section
further discusses changes in the Company's assets, liabilities and equity.
F-54
<PAGE> 74
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, 1998 December 31, 1997 December 31, 1996
-------------------------------------------------------------------------
(dollars in thousands) Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 384,205 22.9% $ 299,316 19.5% $ 243,857 18.9%
Agricultural 121,477 7.2% 103,082 6.7% 101,646 7.9%
Real estate construction 59,899 3.6% 42,486 2.8% 41,796 3.2%
Real estate mortgage 987,122 58.7% 966,814 63.1% 796,951 61.9%
Installment and other
consumer loans 127,492 7.6% 120,913 7.9% 103,755 8.1%
---------- ----- ---------- ----- ---------- -----
Total $1,680,195 100.0% $1,532,611 100.0% $1,288,005 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-----------------------------------------------
(dollars in thousands) Amount % Amount %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Commercial and industrial $ 193,143 17.7% $ 189,386 18.6%
Agricultural 91,656 8.4% 89,804 8.8%
Real estate construction 27,950 2.5% 21,576 2.1%
Real estate mortgage 675,772 61.8% 610,978 60.1%
Installment and other
consumer loans 105,307 9.6% 105,147 10.4%
---------- ----- ---------- -----
Total $1,093,828 100.0% $1,016,891 100.0%
========== ===== ========== =====
</TABLE>
Loan growth was 9.6% in 1998, compared with 19.0% in 1997. The 1998 increase was
primarily a result of increased sales efforts at the Company's subsidiary banks;
although approximately $89.2 million in loans (representing approximately 5.8%
of the 9.6% increase) resulted from acquisitions in which the Company did not
restate its prior financial statements with the balance coming from internal
growth. The 1997 increases resulted from similar factors. In addition, the banks
acquired by the Company frequently have lower percentages of loans than the
Company's banks. Therefore, even in the case of pooled acquisitions, an increase
in loans at these banks through internal growth to levels to mirror the
Company's other banks increases the percent of loans.
During 1998 and 1997, the loan mix in the Company's portfolio remained
relatively constant, with a trend toward commercial loans accelerating in 1998
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,
1998, 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
F-55
<PAGE> 75
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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.
The following table sets forth the scheduled repayments of the loan portfolio
and the sensitivity of loans to interest rate changes at December 31, 1998
(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 $192,969 $157,197 $34,039
Agricultural 77,477 29,182 14,818
Real estate construction 52,213 7,434 252
-------- -------- -------
Total $322,659 $193,813 $49,109
======== ======== =======
</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 $143,337 $47,899
Agricultural 33,287 10,713
Real estate construction 5,844 1,842
-------- -------
Total $182,468 $60,454
======== =======
</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) 1998 % 1997 % 1996 %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans $13,351 0.79% $15,973 1.04% $20,169 1.57%
Loans past due 90 days or more 1,673 0.10 1,837 0.12 899 0.07
Restructured loans 0 0.00 0 0.00 216 0.01
------- ---- ------- ---- ------- ----
Total non-performing loans 15,024 0.89 17,810 1.16 21,284 1.65
Other real estate owned 3,243 0.19 1,521 0.10 1,878 0.15
------- ---- ------- ---- ------- ----
Total non-performing assets $18,267 1.08% $19,331 1.26% $23,162 1.80%
======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(dollars in thousands) 1995 % 1994 %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Non-accrual loans $11,470 1.05% 7,348 0.72%
Loans past due 90 days or more 753 0.07 1,159 0.11
Restructured loans 706 0.06 255 0.03
------- ---- ------- ----
Total non-performing loans 12,929 1.18 8,762 0.86
Other real estate owned 1,223 0.11 1,437 0.14
------- ---- ------- ----
Total non-performing assets $14,152 1.29% $10,199 1.00%
======= ==== ======= ====
</TABLE>
F-56
<PAGE> 76
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Maintaining excellent credit quality continues to be a priority for the Company.
Non-performing assets as a percentage of total loans outstanding decreased in
1998 to 1.08%, compared with 1.26% in 1997 and 1.80% in 1996. The decrease in
1998 was due largely to the Company's management continued monitoring of the
loan portfolio and continuing to take an aggressive collection effort on these
assets. Management regularly reviews and evaluates the non-performing credits,
to determine appropriate handling and action. Non-accrual loans decreased in
1997 because of developments with respect to a number of separate loans, in
different locations and industries.
Non-accrual loans at December 31, 1998 decreased 0.25% as a percentage of total
loans, as compared to 1997. Non-accrual loans are at a level the Company
considers manageable and continues to work at reducing the level of
non-performing 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.
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, 1998, which in the opinion of management,
and to its best knowledge, will not be paid according to their terms.
F-57
<PAGE> 77
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>
Years ended December 31,
---------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average balance of loans for period $1,652,772 $1,462,855 $1,196,383 $1,067,146 $950,016
========== ========== ========== ========== ========
Allowance for loan losses at
beginning of period 21,099 16,863 14,726 13,140 12,041
Allowance for loan losses of banks
acquired in transactions and for
which prior periods are not restated 1,745 1,329 587 - -
Loans charged-off
Commercial and Industrial 1,045 1,695 1,422 961 704
Agricultural 305 88 340 208 234
Real Estate - Mortgage 93 320 72 98 169
Installments and Other
Consumer Loans 973 792 652 477 484
---------- ---------- ---------- ---------- ----------
Total charge-offs 2,416 2,895 2,486 1,744 1,591
Recoveries on loans previously
charged-off
Commercial and Industrial 108 234 152 114 182
Agricultural 67 80 104 159 43
Real Estate - Mortgage 14 10 17 53 42
Installment and Other
Consumer Loans 236 299 164 198 155
---------- ---------- ---------- ---------- ----------
Total recoveries 425 623 437 524 422
Net loans charged-off 1,991 2,272 2,049 1,220 1,169
Provisions for loan losses 2,438 5,179 3,599 2,806 2,268
---------- ---------- ---------- ---------- ----------
Allowance for loan losses
at end of period $ 23,291 $ 21,099 $ 16,863 $ 14,726 $ 13,140
========== ========== ========== ========== ==========
Ratio of net charge-offs during
period to average loans outstanding 0.12% 0.16% 0.17% 0.11% 0.12%
Allowance for loan losses to total loans 1.39% 1.38% 1.31% 1.35% 1.29%
</TABLE>
F-58
<PAGE> 78
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, 1998 December 31, 1997 December 31, 1996
-----------------------------------------------------------------------------
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 $11,162 30.1% $10,731 26.2% $ 7,313 26.8%
Real estate - construction 415 3.6 280 2.8 309 3.2
Real estate - mortgage 7,661 58.7 7,125 63.1 6,366 61.9
Installment and other
consumer loans 4,053 7.6 2,963 7.9 2,875 8.1
------- ----- ------- ----- ------- -----
$23,291 100.0% $21,099 100.0% $16,863 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
--------------------------------------------------
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 $ 6,703 26.1% $ 5,802 27.4%
Real estate - construction 230 2.5 172 2.1
Real estate - mortgage 5,189 61.8 5,010 60.1
Installment and other
consumer loans 2,604 9.6 2,156 10.4
------- ----- ------- -----
$14,726 100.0% $13,140 100.0%
======= ===== ======= =====
</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 30.1% of
total loans at December 31, 1998. These types of loans increased as a percentage
of the total loan portfolio in 1998. Accordingly, management has allocated a
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-59
<PAGE> 79
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,
-----------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
(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 $ 49,385 9.6% $ 89,806 18.5 % $ 85,272 19.6%
Obligations of states and
political subdivisions 167,025 32.4 168,264 34.6 145,253 33.4
Debt securities issued by
foreign government 0 0.0 25 0.0 25 0.0
Mortgage-backed securities 247,185 48.0 190,424 39.2 171,893 39.5
Other securities 51,169 10.0 37,115 7.7 32,478 7.5
-------- ----- -------- ----- -------- -----
Total investments $514,764 100.0% $485,634 100.0 % $434,921 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
During 1998, the investment portfolio make-up changed relative with past years,
with a decrease in U.S. treasuries and agencies and an increase in
mortgage-backed securities. Mortgage-back securities increased due to
acquisitions for which prior periods were not restated and more attractive rates
than U.S. treasury securities.
The following table shows the relative maturities and weighted average interest
rates on a tax equivalent basis of investment securities as of December 31,
1998. Although the maturities of the investment portfolio have lengthened from
1997, the Company feels liquidity remains adequate.
<TABLE>
<CAPTION>
Within After one but After five but After
one year within five years within 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* $36,373 5.64% $ 83,360 6.86% $ 75,745 5.87% $101,092 5.88%
States and political
subdivisions (domestic) 19,426 7.09 47,450 8.72 62,139 8.10 38,010 8.05
Other bonds, notes,
and debentures 7,815 5.10 26,574 5.98 1,967 6.38 14,813 5.81
------- --- -------- ---- -------- ---- -------- ----
Total $63,614 6.02% $157,384 7.27% $139,851 6.87% $153,915 6.41%
======= ==== ======== ==== ======== ==== ======== ====
</TABLE>
* Includes floating rate securities which reprice monthly but which mature
during the indicated time period.
F-60
<PAGE> 80
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, 1998, are as follows: fixed rate
mortgage-backed pass-throughs-$29.7 million; variable rate mortgage-backed
pass-throughs-$51.3 million; fixed rate real estate mortgage investment
conduits/collateralized mortgage obligations-$130.9 million; and floating rate
real estate mortgage investment conduits/collateralized mortgage
obligations-$35.3 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,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 231,652 12.1% $ 191,805 11.2 % $ 162,368 10.9%
Interest-bearing demand 158,366 8.2 153,395 9.0 142,903 9.5
Savings deposits 606,059 31.5 503,533 29.4 406,140 27.1
Time deposits 925,507 48.2 863,429 50.4 785,478 52.5
---------- ----- ---------- ----- ---------- -----
Total $1,921,584 100.0% $1,712,162 100.0 % $1,496,889 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
Year-end deposits increased 10.4% in 1998, compared with an increase of 15.4% in
1997 over 1996.
The amount of time certificates of deposit issued in amounts of $100,000 or more
and outstanding as of December 31, 1998 was $168,148,000. Their maturing
distribution was as follows:
<TABLE>
<S> <C>
--three months or less $56,780,000
--over three months and through twelve months $86,918,000
--over one year $24,450,000
</TABLE>
Neither F&M or its subsidiaries have any deposits in foreign banking offices.
BORROWINGS
Short-term borrowings at December 31, 1998, were $60.8 million, as compared to
$74.8 million at December 31, 1997. Short-term borrowings consist primarily of
repurchase agreements and federal funds purchased. During 1998, F&M used
short-term borrowings (along with increased deposits and other borrowings) to
fund its increasing loan demand. The reduction of short-term funds at year-end
1998 reflected the relative attractiveness of rates for longer term borrowings
as discussed below. 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.
F-61
<PAGE> 81
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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, 1998 and 1997.
These borrowings are secured by pledges of mortgage loans, and totaled $95.2
million at December 31, 1998, compared to $71.0 million at December 31, 1997.
The increase in other borrowings in 1998 was due primarily to attractiveness in
long-term rates and the Company's implementation of a leverage program in which
long-term debt is matched to securities purchased. These borrowings had original
maturities of three months to fifteen years, with rates at December 31, 1998,
ranging from 4.75% to 7.73%.
CAPITAL ADEQUACY
Stockholders' equity increased in 1998 by $38.5 million, to $239.4 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 $1.7 million, offset by dividends of $12.6 million paid
to common stockholders.
At December 31, 1998, the risk-based capital ratio for Tier 1 capital was 12.0%
and the total risk-based capital ratio was 13.2%, as compared to minimum
regulatory requirements of 4.0% and 8.0%, respectively. The ratio of average
equity to average assets amounted to 9.81% at December 31, 1998, compared with
9.50% at December 31, 1997 and 9.38% at December 31, 1996. The Company's
leverage ratio at December 31, 1998 was 9.5%, as compared to a minimum
regulatory requirement of 3.0%.
At December 31, 1998, the F&M subsidiary banks in the aggregate could have paid
approximately $44,813,000 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, 1998, 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 36.2% in 1998, as compared to 38.4% in
1997 and 31.2% in 1996. These numbers include the dividends historically paid by
CSB, WBC, CNB, and BSC prior to their acquisitions by the Company. Differences
in dividend policies affect the comparability of information.
F-62
<PAGE> 82
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
At December 31, 1998, the Company had loaned its officers an aggregate of $1.7
million to fund their purchase of Company common stock pursuant to a stock
ownership plan approved by Company shareholders in 1996. At December 31, 1997,
the total loans were $957,000.
F&M's 1998 acquisitions of BSW, FMS and BSC were, and its pending acquisition of
CBE is, 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 1998. The Company to
date has not committed to any major commitments to build or purchase in 1999 but
also expects to finance future expenditures through earnings and existing
capital resources.
LIQUIDITY AND INTEREST SENSITIVITY MANAGEMENT
As shown in the Company's Consolidated Statement of Cash Flow for 1998, cash and
cash equivalents increased by $50.2 million during 1998 to $159.4 million at
December 31, 1998. The increase primarily reflected $62.2 million in net cash
provided by financing activities plus $35.3 million in net cash provided by
operating activities offset by $47.3 million in net cash used in investing
activities. Net cash used in investing activities consisted of securities
purchased, primarily those available for sale, and net increase in loans. Net
cash provided by operating activities primarily consisted of the Company's net
income in 1998, increased by adjustments for non-cash credits. 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,
short-term 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, 1998,
the carrying value of securities maturing within one year was $63.6 million or
12.4% 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.
F-63
<PAGE> 83
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, 1998.
<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 $ 431,637 $387,387 $570,956 $290,215 $1,680,195
Investment securities 75,634 102,016 166,312 170,802 514,764
Other earnings assets 77,548 0 0 0 77,548
--------- -------- -------- -------- ----------
Total rate-sensitive assets(RSA) $ 584,819 $489,403 $737,268 $461,017 $2,272,507
========= ======== ======== ======== ==========
Savings deposits $ 400,417 $ 26 $ 111 $177,968 $ 578,522
Time deposits 252,447 406,120 228,866 7,666 895,099
Other non-deposit
interest-bearing liabilities 58,518 8,634 16,735 72,195 156,082
--------- -------- -------- -------- ----------
Total rate-sensitive liabilities(RSL) $ 711,382 $414,780 $245,712 $257,829 $1,629,703
========= ======== ======== ======== ==========
Interest sensitivity gap $(126,563) $ 74,623 $491,556 $203,188 $ 642,804
========= ======== ======== ======== ==========
Cumulative interest sensitivity gap $(126,563) $(51,940) $439,616 $642,804
========= ======== ======== ======== ==========
Ratio of cumulative rate
sensitivity gap to RSA (21.6)% (4.8 )% 24.3% 28.3%
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities 82.2% 95.4 % 132.0% 139.4%
</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, 1998, net interest margin indicates that the actual decrease in
interest rates for the year resulted in a slight increase in the margin to 4.52%
from 4.46% for 1997. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities. Managing interest rate risk is fundamental to banking.
Banking institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking lines of business to achieve a
desired interest rate sensitivity position and to limit their exposure to
interest rate risk. The Company manages its balance sheet to achieve
F-64
<PAGE> 84
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
maximum shareholder value within the constraints of its interest rate risk
discipline, the maintenance of high credit quality, and sound leverage and
liquidity positions. Both the interest rate sensitivity and liquidity position
of the Company are reviewed regularly. The primary objective of interest rate
sensitivity management is to maintain net interest income growth, while reducing
exposure to the risks inherent in interest rate movements.
The Company's Asset and Liability Management Committee ("ALCO") attempts to
structure the Company's balance sheet to provide for an approximately equal
amount of rate sensitive assets and rate sensitive liabilities. In addition to
facilitating liquidity needs, this strategy assists management in maintaining
relative stability in net interest income despite unexpected fluctuations in
interest rates. The Company believes its market risk exposure, based on the
potential of near-term losses in future earnings, fair values, and cash flows
from reasonably possible near-term changes in market rates or prices, is
acceptable at this time.
The Company employs various strategies to reduce its exposure to interest rate
fluctuations. These strategies include: selling longer term maturity mortgages
to the secondary market, utilizing the Federal Home Loan Bank and other sources
to fund assets, and applying various asset positioning strategies consistent
with the overall needs of the Company at any given time. Management has chosen
to sell 15 year and 30 year mortgages to the secondary market as a means of
removing such a long original stated maturity asset off of the Company's balance
sheet and reduce the accompanying interest rate risk associated with the assets.
Instead, member banks are encouraged to retain adjustable rate mortgages with
one to five year rate locks on their balance sheets. Federal Home Loan Bank
membership by affiliate banks has enabled banks to diversify their funding
maturity options as well as employ match funding strategies for longer duration
assets. Depending on the interest rate risk position of the Company, the ALCO,
which meets quarterly, implements strategies to re-balance the Company to its
desired position. When the Company is overly liability sensitive,
floating/variable rate commercial loans by subsidiary banks are encouraged by
management. Furthermore, the purchase of floating/variable rate investment
securities are directly coordinated through the Company's investment department
when loan demand for this loan type is not present. To help offset longer
assumed maturity core deposits or to extend the duration of the Company's assets
at any given time, longer term securities are purchased directly through the
Company's investment department. In addition to these strategies, the Company
has chosen to offer a premium rate money market deposit product to customers
maintaining average balances exceeding $10,000. The rate on the product is tied
directly to the weekly average auction rate on the three month United States
Treasury Bill, which management believes positions the Company competitively in
the market.
The method of analysis presented is "earnings at risk" ("EAR"). While the model
employed by the Company is capable of both EAR and "value at risk" ("VAR"), it
has chosen to place greater emphasis on EAR because the measurement is believed
to be of greatest concern to Company shareholders, as evidenced by the
marketplace's focus on quarterly and annual earnings. Furthermore, an immediate
rate shock of up or down 100-200 basis points is likely to have a more visible,
immediate impact on the Company's earnings as compared to its market value.
Nevertheless, EAR has shortcomings inherent in its analysis. First, the whole
issue as to what maturity should be assigned to the Company's core deposits is
one that can vastly impact the results that the model produces. The model
employed assumes a longer duration assignment to these liabilities based off of
historical experience. Second, the model assumes a normal bell-shaped curve
distribution, although this assumption is elusive in volatile financial markets.
Frequently, the extreme may be the reality as evidenced by the experience seen
in the early 1980s. Third, the model assumes fairly normal correlation patterns.
In reality, however, correlation structures are unstable over time. Fourth, most
EAR approaches measure risk over less than two years; however, this is likely
not enough time to detect structural relationships between variables. And fifth,
the model assumes theoretical pricing based off of a linear relationship between
market rates and earnings. This relationship actually has more of a curvature
relationship based off of the inherent convexity present in all fixed rate
F-65
<PAGE> 85
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
instruments having a defined maturity. In other words, a fixed rate instrument
will appreciate by a greater amount than it will decline.
Based on the model utilized, the interest rate risk of the Company expressed as
a percentage change in net interest income over a one-year time horizon due to
changes in interest rates, at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Basis Point Change
---------------------------------------------------
+200 +100 -100 -200
---- ---- ---- ----
<S> <C> <C> <C> <C>
Percentage change in net interest income
due to an immediate change in interest
over a one-year time horizon (7.44%) (3.72%) 3.29% 5.57%
</TABLE>
Management continues to closely monitor the company's interest rate risk
position by utilizing both EAR and traditional RSA/RSL measurements. Because EAR
remains a relatively new measurement for the Company, no target ranges have yet
been established.
YEAR 2000
Like other financial institutions (and businesses of all kinds), F&M must assure
that its computers and other systems are "year 2000 compliant." "Year 2000
compliant" means being capable of operating, and accurately recognizing dates
and processing information, in and after the year 2000, and recognizing the leap
year which will occur in 2000. To help assure that F&M's systems are year 2000
compliant on a timely basis, F&M began a focused compliance program primarily
using F&M personnel. As the program has continued, F&M has identified certain
functions and roles in which the use of outside consultants or experts would
help F&M address year 2000 issues on a more expedited basis or in more depth.
Therefore, in addition to the designation of particular F&M employees to
coordinate F&M's year 2000 compliance efforts, F&M has retained outside
assistance.
Federal financial institution regulators, which are coordinating efforts to
assure year 2000 compliance, have identified five major phases to the Year 2000
compliance efforts. The phases are generally summarized as: Awareness,
Assessment, Renovation, Validation (testing), and Implementation. F&M is keying
its compliance efforts to those phases. Currently, F&M has completed its review
process, and has begun testing and implementing solutions where necessary.
Further information as to F&M's Year 2000 expected schedule for efforts by
phase, and its estimates of the percentage of completion of those phases at
December 31, 1998, is set forth in the following chart:
<TABLE>
<CAPTION>
Estimated Estimated
Completion Completion
Phase Schedule Percentage
- -----------------------------------------------------------------------
<S> <C> <C>
Awareness 09/30/97 100%
Assessment 09/30/97 100%
Renovation 12/31/98 100%
Validation 03/31/99 50%
Implementation 10/30/99 45%
</TABLE>
F&M has to date budgeted $1.5 million for its compliance efforts, and expended
$850,000 through December 31, 1998.
As part of its 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. Therefore, a significant part of F&M being year
2000 compliant requires such compliance by the third parties, and F&M is subject
to their achievement of appropriate year 2000 compliance on a timely basis. F&M
regularly receives updates from its "mission-critical" suppliers (such as data
processors) as to their year 2000 compliance efforts. F&M has identified its
data processing function as one
F-66
<PAGE> 86
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
particularly critical function. Based upon information obtained from its two
primary data processing suppliers, F&M believes that these systems are year 2000
compliant. In the event that one or both of these processors would not achieve
year 2000 compliance on a timely basis (which F&M believes unlikely), F&M has
written business resumption plans to address possible problems in the future and
expects to monitor developments carefully and adjust and reform its plans
accordingly. F&M's plans also include contingency plans, developed by F&M's
outside processors, which provides alternative operating procedures in the event
unforeseen problems arise.
In addition, F&M has completed its review of internal computers and data
processing equipment and systems. Based upon that review, F&M believes that all
problems have been identified and will be able to be corrected on a timely basis
before the year 2000. As part of its remediation plans, F&M intends to transfer
data processing for its 12 bank subsidiaries which are not currently being
processed by one of the two primary data processing suppliers to one of its
processors. F&M has agreed with the processor to convert these banks over a
period from 2/19/99 to 10/22/99. While data processing conversions have an
inherent risk of complications, F&M believes this to be the most sound means of
addressing the needs of these banks.
F&M's internal and third party reviews also include areas which are not
specifically "technology-related" but are also affected by year 2000 compliance
issues. For example, much of F&M's equipment (including building equipment and
systems such as security systems, HVAC, elevators, vaults and the like) includes
imbedded microchips which could be affected by year 2000 related problems. As to
equipment owned by F&M, F&M has assessed and identified non-compliant equipment
and is in the process of working on solutions to correct them. As to services
supplied to F&M, F&M has contacted service providers and suppliers and obtained
assurance from them. Further testing with suppliers and providers will be done
in 1999. In particular, F&M has monitored compliance efforts by utilities and
others who provide services to large areas or customer groups including F&M. In
many of these cases, F&M is not sufficiently large a customer or user that it
can demand special treatment, assurances or information from the providers. In
those cases, F&M employees have monitored public statements by those providers
for their state of readiness, attempted to identify any clear issues, and
attempted to make appropriate arrangements to the extent any reasonable concerns
have been identified.
The credit-worthiness of F&M's customers could also be affected by the year 2000
compliance efforts and failures. F&M loan officers and others are continuing to
review year 2000 efforts and compliance levels of F&M's commercial credit
customers. The failure of these customers to be year 2000 compliant could
adversely affect those businesses, which would, in turn, pose credit risks which
could have a material effect on F&M. F&M has reviewed information obtained from
approximately 50% of its commercial credit customers. Specific guidelines were
used to identify which customers were selected for the review. Based upon that
review, F&M believes that further review and careful monitoring of customers
will be required in the future. While F&M also recognizes that loans to
individuals could be affected by year 2000 issues (for example, loss of
employment due to an employer's year 2000 related failure), F&M does not believe
there is any practical means to gather such information, which would provide
little practical benefit even if it could be obtained. F&M is also attempting to
meet customer needs stemming from possible year 2000 related disruptions by
creating awareness now to help resolve their potential future problems.
Because of their concern for the integrity of the financial institutions
systems, federal regulators such as the Federal Reserve Board (which regulates
F&M and most of its subsidiary banks) and the FDIC (which insures deposits at
all F&M banks) have paid close attention to institutions' year 2000 compliance
efforts. F&M and its subsidiaries have had such examinations, and have had to
address the personnel and other needs to facilitate the examinations. Because of
the regulators' stated desire that acquisition activity not interfere with year
2000 readiness, F&M believes that it is possible that regulators may become more
reticent to approve additional acquisitions prior to 2000, which could
particularly affect F&M due to its historically active pattern of acquisitions.
Other than those possible effects, F&M does not
F-67
<PAGE> 87
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
believe that it has had, or is likely to have, other material projects or
initiatives delayed or affected because of the need to focus on year 2000
compliance.
Like many businesses, F&M is making contingency plans for year 2000 related
disruptions. The precise plans utilized would, of course, depend upon the exact
problems which develop. Disruptions could range from discreet
application-specific problems, which can be easily resolved, to systematic
failures affecting the banking industry (or other industries) as a whole, or all
persons in large geographical areas. F&M cannot identify every disruption that
may affect it, but it has identified critical problems that may arise. Loss of
electricity or disruption of computer systems if F&M is not able to successfully
complete its year 2000 remediation plans are the most likely "worst case"
scenarios identified by F&M. F&M has developed and adopted business resumption
plans to operate off line or without certain services to minimize disruption of
services provided to our customers. Contingency plans of F&M would include,
depending upon the magnitude of the problems actually experienced: the
processing plans discussed above; additional vault cash reserves; additional
funding lines of credit for liquidity; preparing pre 2000 documents on paper to
verify post 2000 validity of information; and paper-based systems for the
short-term until corrected. Occurrences such as area-wide utility failures may
cause businesses, including F&M, to temporarily cease operations at affected
locations until the problem is rectified.
F&M's year 2000 compliance efforts are ongoing, and certain matters and issues
remain to be addressed, reviewed, tested and/or finally implemented. However,
based in part upon information being received from the third parties providing
services to F&M, F&M currently believes that it will be year 2000 compliant in a
timely basis to avoid material operational disruptions and to comply in material
respects with the requirements of its regulators. To date, F&M has not
identified material extraordinary expenditures which will be required to become
year 2000 compliant, although further expenditures remain to be incurred and the
use of outside personnel or other factors may increase the costs of year 2000
compliance beyond F&M's current budget.
As indicated, certain year 2000 remediation efforts remain to be completed. Some
are under F&M's control, but many efforts are those of third parties (such as
suppliers or customers), which are not under F&M's control. The failure to
successfully complete year 2000 remediation efforts by F&M, or by third parties,
could materially adversely affect F&M. While F&M has attempted to monitor
efforts by others, those efforts may not ultimately be satisfactory, and
information given to F&M may not be accurate.
No one, including F&M, can conclusively predict exactly what year 2000 related
problems will eventually occur, or the degree of their impact. However, it is
all but certain that there will be at least some year 2000 related problems that
are not solved on a timely basis, and some of these will affect F&M. The nature
and the degree of impact on F&M would, of course, vary according to the problem
or problems which develop. For example, failure of mission-critical functions
such as data processing or year 2000 failures affecting large groups, such as
utility failures or failures by others affecting the banking industry as a
whole, could cause F&M to limit (or even curtail) its operations in affected
areas until such time as the problems are cured. Similarly, failures either
particular to customers or affecting geographical areas or business segments
generally would affect customers, and the degree of disruption would affect
credit losses. F&M is unable to predict the magnitude of any such disruptions,
or the period of time during which they would affect F&M, although it expects
the effects would be most pronounced in the period of time shortly after January
1, 2000.
Statements which are not historical fact (including completion schedules,
expectations of future developments, results or scenarios, and cost estimates)
are forward-looking statements, and actual results may differ due to factors
including those discussed above.
F-68
<PAGE> 88
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
ACCOUNTING CHANGES AND FUTURE ACCOUNTING CHANGES
See Note 1 - Summary of Significant Accounting Policies and Note 2 - Changes in
Accounting Principles, of Notes to the Company's Consolidated Financial
Statements, for discussion on future accounting changes and changes in
accounting principles. Management believes that these new and future statements
are not expected to have a material affect 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, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Interest income $45,122 $45,635 $45,920 $45,750
Interest expense 22,051 22,041 22,014 21,133
Net interest income 23,071 23,594 23,906 24,617
Provision for loan losses 693 763 357 625
Net income 7,697 8,346 8,586 8,868
Earnings per share (diluted) .50 .53 .55 .57
1997
Interest income $38,173 $40,445 $41,554 $42,673
Interest expense 18,656 19,711 20,380 21,089
Net interest income 19,517 20,734 21,174 21,584
Provision for loan losses 460 969 737 3,013
Net income 6,542 6,799 7,105 2,937
Earnings per share (diluted) .44 .46 .48 .20
</TABLE>
F-69
<PAGE> 89
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<S> <C>
F&M BANCORPORATION, INC.
Dated: March 23, 1999 By: /s/ John W. Johnson
- -------------------------------------- ------------------------------------
John W. Johnson,
President and Chief Executive Officer
</TABLE>
---------------
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 Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.*
SIGNATURE AND TITLE
<TABLE>
<S> <C>
/s/ John W. Johnson
- ------------------------------------------------- ----------------------------------
John W. Johnson, President, Chief Executive Paul J. Hernke, Director
Paul J. Hernke, Director
/s/ Daniel E. Voet /s/ Douglas A. Martin
- ------------------------------------------------- ----------------------------------
Daniel E. Voet, Chief Financial Officer and Douglas A. Martin, 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
- ------------------------------------------------- ----------------------------------
Otto L. Cox, Director Glenn L. Schilling, Director
/s/ Ronald E. Fenton /s/ Joseph F. Walsh
- ------------------------------------------------- ----------------------------------
Ronald E. Fenton, Director Joseph F. Walsh, Director
</TABLE>
- -------------
* Each of the above signatures is affixed as of March 23, 1999.
S-1
<PAGE> 90
<TABLE>
<CAPTION>
F&M BANCORPORATION, INC.
(THE "REGISTRANT")
EXHIBIT INDEX
TO
1998 REPORT ON FORM 10-K
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------- ----------- ------------------- --------
<S> <C> <C> <C>
2.1(a) Agreement of Merger and Exhibit 2.1 to the Registrant's
Reorganization dated as of July 22, Report on Form 10-Q for the
1998 among the Company, CBE, Inc. quarter ended June 30,1998
and F&M Merger Corporation* ("6/30/98 10-Q")
2.1(b) Amendment No. 1 thereto, dated X
November 30, 1998
3(i) Restated Articles of Incorporation, Exhibit 3(i) to 6/30/98 10-Q
as amended through July 22, 1998
(composite copy)
3(ii) Restated Bylaws, as amended through X
January 28, 1999
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 Plan Exhibit B to 1993 Proxy
for Non-Employee Directors Statement
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 Compensation Exhibit 10.6 to Registrant's
Agreement with Gail E. Janssen Report on Form 10-K for the
year ended December 31, 1992
10.5** Registrant's Officers' Stock Purchase Description thereof under
Plan "Officers' Stock Purchase
Plan" in 1996 Proxy Statement
</TABLE>
EI-1
<PAGE> 91
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------- ----------- ------------------- --------
<S> <C> <C> <C>
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** Option Agreement dated March 17, Exhibit 10.2 to the Registrant's
1993 between Pulaski Bancshares, Inc. Report on Form 8-K dated
and John W. Johnson, together with the March 21, 1994
assumption thereof by the Registrant
dated March 21, 1994
10.8(a)** Employment Agreement dated as of Exhibit 10.1 to Registrant's
August 1, 1998 between the Registrant Report on Form 10-Q for the
and John W. Johnson quarter ended September 30,
1998 ("9/30/98 10-Q")
10.8(b)** Employment Agreement between the Exhibit 10.8(b) to the
Registrant and John W. Johnson dated Registrant's Report on Form
July 14, 1997 ("Former Employment 10-K for the year ended
Agreement) (superseded) December 31, 1997 ("1997
10-K")
10.8(c)** Amendment No. 1 to Former Exhibit 10.8(c) to 1997 10-K
Employment Agreement, dated
November 3, 1997 (superseded)
10.9** Employment Agreement dated as of Exhibit 10.2 to 9/30/98 10-Q
August 1, 1998 between the Registrant
and Daniel E. Voet
10.10 Agreement and Plan of Merger dated Exhibit 10.15 to the
as of February 27, 1997 among the Registrant's Report on
Registrant, F&M Merger Corporation Form 10-K for the year
and Citizens National Bancorporation, ended December 31, 1996
Inc. ("1996 10-K")
10.11 Plan and Agreement of Merger and Exhibit 10.16 to 1996 10-K
Reorganization dated as of March 19,
1997 among the Registrant, Wisconsin
Ban Corp. and F&M Merger
Corporation*
10.12 Agreement and Plan of Merger dated as Exhibit 2.1 to 1997 10-K
of December 1, 1997 among the
Registrant, BancSecurity Acquisition
Corporation and BancSecurity
Corporation*
21.1 List of Subsidiaries X
23 Consent of Wipfli Ullrich Bertelson LLP X
24 Power of Attorney (contained on the
Signature Page) X
</TABLE>
EI-2
<PAGE> 92
<TABLE>
<CAPTION>
Exhibit Incorporated Herein Filed
Number Description By Reference Herewith
- ------- ----------- ------------------- --------
<S> <C> <C> <C>
27 Financial Data Schedules X
- ------------------------
* 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.
</TABLE>
EI-3
<PAGE> 1
Exhibit 2.1(b)
FMBK 1998 10-K
AMENDMENT NO. 1 TO THE
AGREEMENT OF MERGER AND REORGANIZATION
This Amendment No. 1 between F&M Bancorporation, Inc., a Wisconsin
corporation ("F&M"), and CBE, Inc., a Wisconsin corporation ("CBE"), is made
this 30 day of November, 1998, to amend the Agreement of Merger and
Reorganization (the "Agreement") between them as of the 21st day of July, 1998.
WHEREAS, the parties to the Agreement have discovered that the closing
date of January, 1999, will in all probability not be met.
In consideration of the foregoing, the parties hereby agree to amend
the Agreement as follows:
1. Sections Amended. Sections 8.10 and 9.6 are amended to delete
the date of January 31, 1999, and replace it with the date of June 30, 1999.
2. Section 7.1. Section 7.1 of the Agreement is created to read
as follows:
"7.1. Dividends in Anticipation of Closing. F&M
covenants and agrees that in the event this transaction is
closed after January 31, 1999, through no fault of CBE or
BANK, CBE may pay to its shareholders a dividend equal to the
dividend which would have been payable to the CBE
Shareholders, if the merger had been completed on or before
January 31, 1999. For purposes of calculating this dividend,
the parties shall agree upon an Exchange Ratio which shall be
used only for purposes of calculating the dividend payment.
If no agreement can be reached, the Exchange Ratio shall be
based upon the closing price of the F&m Stock as of the record
ate for F&M's dividend and the CBE Stock Price calculated as
provided in paragraphs 3.3 and 3.4."
<PAGE> 2
3. Other Provisions Unaffected. Except as expressly amended by
this Amendment No. 1, the Agreement shall remain in full force and effect
without modification. Terms defined in the Agreement shall have the same meaning
in this Amendment No. 1.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to be duly executed as of the day and year first above written.
F&M BANCORPORATION, INC.
By: /s/ Gail E. Janssen
---------------------------------------
Gail E. Janssen, Chairman of the Board
ATTEST:
By: /s/ Janet M. Lakso
---------------------------------------
Janet M. Lakso, Secretary
CBE, INC.
By: /s/ Earl A. Paddock
---------------------------------------
Earl A. Paddock, President and
Chairman of the Board
ATTEST:
By: /s/ Audrey Peterson
---------------------------------------
Audrey Peterson, Secretary
<PAGE> 1
EXHIBIT 3(ii)
RESTATED
BY-LAWS
OF
F & M BANCORPORATION, INC.
(A WISCONSIN CORPORATION)
<PAGE> 2
ARTICLE I. OFFICES
1.01. Principal and Business Offices. The corporation may have such
principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
1.02. Registered Office. The registered office of the corporation
required by the Wisconsin Business Corporation Law to be maintained in the State
of Wisconsin may be, but need not be, identical with the principal office in the
State of Wisconsin, and the address of the registered office may be changed from
time to time by the Board of Directors or by the registered agent. The business
office of the registered agent of the corporation shall be identical to such
registered office.
1.03. Corporate Records. The following documents and records shall be
kept at the corporation's principal office or at such other reasonable location
as may be specified by the corporation:
(a) Minutes of shareholders' and Board of Directors'
meetings and any written notices thereof.
(b) Records of actions taken by the shareholders or
directors without a meeting.
(c) Records of actions taken by committees of the Board
of Directors.
(d) Accounting records.
(e) Records of its shareholders.
(f) Current Bylaws.
(g) Written waivers of notice by shareholders or
directors (if any).
(h) Written consents by shareholders or directors for
actions without a meeting (if any).
(i) Voting trust agreements (if any).
(j) Stock transfer agreements to which the corporation is a
party or of which it has notice (if any)
ARTICLE II. SHAREHOLDERS
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<PAGE> 3
2.01. Annual Meeting. The annual meeting of the shareholders shall be
on the fourth Tuesday of April at such time and place as shall be designated by
the Board of Directors, or at such other time and date within thirty days before
or after said date as may be fixed by or under the authority of the Board of
Directors, for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the day fixed for the annual
meeting shall be a legal holiday in the State of Wisconsin, such meeting shall
be held on the next succeeding business day. If the election of directors shall
not be held on the day designated herein, or fixed as herein provided, for any
annual meeting of the shareholders, or at any adjournment thereof, the Board of
Directors shall cause the election to be held at a special meeting of the
shareholders as soon thereafter as conveniently may be.
2.02. Special Meeting. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the President or the Board of Directors or by the person designated in the
written request of the holders of not less than one-tenth of all shares of the
corporation entitled to vote at the meeting.
2.03. Place of Meeting. The Board of Directors may designate any place,
either within or without the State of Wisconsin, as the place of meeting for any
annual meeting or for any special meeting called by the Board of Directors. A
waiver of notice signed by all shareholders entitled to vote at a meeting may
designate any place, either within or without the State of Wisconsin, as the
place for the holding of such meeting. If no designation is made, or if a
special meeting be otherwise called, the place of meeting shall be the principal
business office of the corporation in the State of Wisconsin or such other
suitable place in the county of such principal office as may be designated by
the person calling such meeting, but any meeting may be adjourned to reconvene
at any place designated by vote of a majority of the shares represented thereat.
2.04. Notice of Meeting.
(a) Required Notice. Written notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten (10) days
(unless a longer period is required by law or the articles of incorporation) not
more than fifty (50) days before the date of the meeting, either personally or
by mail, by or at the direction of the President, or the Secretary, or other
B -3-
<PAGE> 4
officer or persons calling the meeting, to each shareholder of record entitled
to vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, addressed to the shareholder at his
address as it appears on the stock record books of the corporation, with postage
thereon prepaid.
(b) Adjourned Meeting. Except as provided in the next
sentence, if any shareholder meeting is adjourned to a different date, time, or
place, notice need not be given of the new date, time, and place, if the new
date, time, and place is announced at the meeting before adjournment. If a new
record date for the adjourned meeting is or must be fixed, then notice must be
given pursuant to the requirements of paragraph (a) of this Section 2.04, to
those persons who are shareholders as of the new record date.
(c) Contents of Notice. The notice of each special shareholder
meeting shall include a description of the purpose or purposes for which the
meeting is called, and only business within the purpose described in the meeting
notice may be conducted at a special shareholders' meeting. Except as otherwise
provided in subsection (e) of this Section 2.04, in the Articles of
Incorporation, or in the Wisconsin Business Corporation Law, the notice of an
annual shareholders' meeting need not include a description of the purpose or
purposes for which the meeting is called.
2.05. Closing of Transfer Books or Fixing of Record Date. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not to
exceed, in any case, seventy days. If the stock transfer books shall be closed
for the purpose of determining shareholders entitled to notice of or to vote at
a meeting of shareholders, such books shall be closed for at least ten days
immediately preceding such meeting. In lieu of closing the stock transfer books,
the Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than seventy
days and, in case of a meeting of shareholders, not less than ten days prior to
the date on which the particular action, requiring such determination of
shareholders, is to be taken. If the stock transfer books are not closed and no
record date is fixed for the determination of shareholders entitled to notice
B -4-
<PAGE> 5
of or to vote at a meeting of shareholders, or shareholders entitled to receive
payment of a dividend, the close of business on the date on which notice of the
meeting is mailed or on the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall be applied to any adjournment
thereof except here the determination has been made through the closing of the
stock transfer books and the stated period of closing has expired.
2.06. Voting Records. The officer or agent having charge of the stock
transfer books for shares of the corporation shall, before each meeting of
shareholders, make a complete record of the shareholders entitled to vote at
such meeting, or any adjournment thereof, with the address of and the number of
shares held by each. Such record shall be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any shareholder
during the whole time of the meeting for the purposes of the meeting. The
original stock transfer books shall be prima facie evidence as to who are the
shareholders entitled to examine such record or transfer books or to vote at any
meeting of shareholders. Failure to comply with the requirements of this section
shall not affect the validity of any action taken at such meeting.
2.07. Quorum. Except as otherwise provided in the articles of
incorporation, a majority of the shares entitled to vote, represented in person
or by proxy, shall constitute a quorum at a meeting of shareholders. If a quorum
is present, the affirmative vote of the majority of the shares represented at
the meeting and entitled to vote on the subject matter shall be the act of the
shareholders unless the vote of a greater number or voting by classes is
required by law or the articles of incorporation. Though less than a quorum of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified.
2.08. Conduct of Meeting. The Chairman of the Board, and in his
absence, the President, and in his absence, a Vice-President in the order
provided under Section 4.06, and in their absence, any person chosen by the
shareholders present shall call the meeting of the
B -5-
<PAGE> 6
shareholders to order and shall act as chairman of the meeting, and the
Secretary or Assistant Secretary of the corporation shall act as secretary of
all meetings of the shareholders, but, in their absence , the presiding officer
may appoint any other person to act as secretary of the meeting.
2.09. Proxies. At all meetings of shareholders, a shareholder entitled
to vote may vote in person or by proxy appointed in writing by the shareholder
or by his duly authorized attorney in fact. Such proxy shall be filed with the
Secretary of the corporation before or at the time of the meeting. Unless
otherwise provided in the proxy, a proxy may be revoked at any time before it is
voted, either by written notice filed with the Secretary or the acting secretary
of the meeting or by oral notice given by the shareholder to the presiding
officer during the meeting. The presence of a shareholder who has filed his
proxy shall not of itself constitute a revocation. No proxy shall be valid after
eleven months from the date of its execution, unless otherwise provided in the
proxy. The Board of Directors shall have the power and authority to make rules
establishing presumptions as to the validity and sufficiency of proxies.
2.10. Voting of Shares. Each outstanding share shall be entitled to one
vote upon each matter submitted to a vote at a meeting of shareholders, except
to the extent that the voting rights of the shares of any class or classes are
enlarged, limited or denied by the articles of incorporation, or by applicable
law. Cumulative voting shall not be permitted.
2.11. Voting of Shares by Certain Holders.
(a) Other Corporations. Shares standing in the name of another
corporation may be voted either in person or by proxy, by the president of such
corporation or any other officer appointed by such president. A proxy executed
by any principal officer of such other corporation or assistant thereto shall be
conclusive evidence of the signer's authority to act, in the absence of express
notice to this corporation, given in writing to the Secretary of this
corporation, of the designation of some other person by the board of directors
or the by-laws of such other corporation.
(b) Legal Representatives and Fiduciaries. Shares held by any
administrator, executor, guardian, conservator, trustee in bankruptcy, receiver,
or assignee for creditors may be voted by him, either in person or by proxy,
without a transfer of such shares into his name provided that there is filed
with the Secretary before or at the time of meeting proper evidence of his
incumbency and the number of shares held. Shares standing in the name of a
fiduciary may
B -6-
<PAGE> 7
be voted by him, either in person or by proxy. A proxy executed by a fiduciary,
shall be conclusive evidence of the signer's authority to act, in the absence of
express notice to this corporation, given in writing to the Secretary of this
corporation, that such manner of voting is expressly prohibited or otherwise
directed by the document creating the fiduciary relationship.
(c) Pledgees. A shareholder whose shares are pledged shall be entitled
to vote such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
(d) Treasury Stock and Subsidiaries. Neither treasury shares, nor
shares held by another corporation if a majority of the shares entitled to vote
for the election of directors of such other corporation is held by this
corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares entitled to vote, but shares of its own issue held
by this corporation in a fiduciary capacity, or held by such other corporation
in a fiduciary capacity, may be voted and shall be counted in determining the
total number of outstanding shares entitled to vote.
(e) Minors. Shares held by a minor may be voted by such minor in person
or by proxy and no such vote shall be subject to disaffirmance or avoidance,
unless prior to such vote the Secretary of the corporation has received written
notice or has actual knowledge that such shareholder is a minor.
(f) Incompetents and Spendthrifts. Shares held by an incompetent or
spendthrift may be voted by such incompetent or spendthrift in person or by
proxy and no such vote shall be subject to disaffirmance or avoidance, unless
prior to such vote the Secretary of the corporation has actual knowledge that
such shareholder has been adjudicated an incompetent or spendthrift or actual
knowledge of filing of judicial proceedings for appointment of a guardian.
(g) Joint Tenants. Shares registered in the names of two or more
individuals who are named in the registration as joint tenants may be voted in
person or by proxy signed by any one or more of such individuals if either (i)
no other such individual or his legal representative is present and claims the
right to participate in the voting of such shares or prior to the vote files
with the Secretary of the corporation a contrary written voting authorization or
direction or written denial of authority of the individual present or signing
the proxy proposed to be voted or (ii) all such other individuals are deceased
and the Secretary of the corporation has no actual
B -7-
<PAGE> 8
knowledge that the survivor has been adjudicated not to be the successor to the
interests of those deceased.
2.12. Waiver of Notice by Shareholders. Whenever any notice whatever is
required to be given to any shareholder of the corporation under the articles of
incorporation or by-laws or any provision of law, a waiver thereof in writing,
signed at any time, whether before or after the time of meeting, by the
shareholder entitled to such notice, shall be deemed equivalent to the giving of
such notice; provided that such waiver in respect to any matter of which notice
is required under any provision of the Wisconsin Business Corporation Law, shall
contain the same information as would have been required to be included in such
notice, except the time and place of meeting.
2.13. Unanimous Consent without Meeting. Any action required or
permitted by the articles of incorporation or by-laws or any provision of law to
be taken at a meeting of the shareholders, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all
the shareholders entitled to vote with respect to the subject matter thereof
2.14. Prior Notice of Shareholder Nominations and/or Proposals.
(a) Prior Notice of Annual Meetings. Except with respect to nominations
or proposals adopted or recommended by the Board of Directors for inclusion in
the corporation's proxy statement for its annual meeting, a shareholder entitled
to vote at a meeting may nominate a person or persons for election as directors
or propose action(s) to be taken at a meeting only if written notice of any
shareholder nomination and/or proposal to be considered for a vote at an annual
meeting of shareholders is delivered personally or mailed by certified mail
return receipt requested at least ninety (90) days but not more than one hundred
fifty (150) days before the scheduled date of such meeting to the Secretary of
the corporation at the principal business office of the corporation. If the
corporation has not announced a scheduled meeting date, such notice must be
received at least ninety (90) days prior to the date of the previous year's
annual meeting.
(b) Nominations. With respect to shareholder nomination(s) for election
of directors, each such notice shall set forth:
B -8-
<PAGE> 9
(1) the name and address of the shareholder who intends to
make the nomination(s), of any beneficial owner of shares on whose behalf such
nomination is being made, and of the person(s) to be nominated;
(2) a representation that the shareholder is a holder of
record of stock of the corporation entitled to vote at such meeting (including
the number of shares the shareholder owns and the length of time the shares have
been held) and that the shareholder intends to appear in person or by proxy at
the meeting to nominate the person(s) specified in the notice;
(3) a description of all arrangements and understandings
between the shareholder or any beneficial holder on whose behalf it holds such
shares, and their respective affiliates, of each nominee and any other
person(s), naming such person(s), pursuant to which the nominations(s) are to be
made by the shareholder;
(4) such other information regarding each nominee proposed by
such shareholder which would have been required to be included in the proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, whether or not such rules are applicable, had such nominee been
nominated by the Board of Directors; and
(5) the consent of each nominee to serve as a director of the
corporation.
(c) Proposals. With respect to shareholder proposal(s) for action to be
taken at the annual meeting of shareholders, the notice shall clearly set forth;
(1) the name and address of the shareholder who intends to
make the proposal(s);
(2) a representation that the shareholder is a holder of
record of stock of the corporation entitled to vote at such meeting (including
the number of shares the shareholder owns and the length of time the shares have
been held) and that the shareholder intends to appear in person or by proxy at
the meeting to make the proposal(s) specified in the notice;
(3) the proposal(s) and a brief supporting statement of such
proposal(s); and
(4) such other information regarding the proposal(s) as would
have been required to be included in a proxy statement filed pursuant to the
rules of the Securities and Exchange Commission, whether or not such rules are
applicable.
(d) Prior Notice for Special Meetings. Except with respect to the
nomination(s) or proposal(s) adopted or recommended by the Board of Directors
for inclusion in the notice to
B -9-
<PAGE> 10
shareholders for a special meeting of the shareholders, a shareholder entitled
to vote at a special meeting may nominate a person or persons for election as
director(s) and/or propose action(s) to be taken at a special meeting only if
written notice of any shareholder nomination(s) and/or proposal(s) to be
considered for a vote at the special meeting is delivered personally or mailed
by certified mail return receipt requested to the Secretary of the corporation
at the principal office of the corporation so that it is received within ten
(10) days after the announcement of the special meeting and only if such
nomination or proposal is within the purposes described in the notice to
shareholders of the special meeting. All of the notice requirements regarding
shareholder nominations and/or proposals applicable to annual meetings shall
also apply to nominations and/or proposals for special meetings.
(e) Role of Chair. The chair of the meeting may refuse to acknowledge
any nomination and/or proposal of any person made without compliance with the
foregoing procedures. This section shall not affect the corporation's rights or
responsibilities with respect to its proxies or proxy statement for any meeting.
(f) Adjournment. The adjournment of an annual meeting or a special
meeting of the shareholders shall not commence a new time period for the giving
of the notices by shareholders as set forth above.
ARTICLE III. BOARD OF DIRECTORS
3.01. General Powers and Number. The business and affairs of the
corporation shall be managed by its Board of Directors. The number of directors
of the corporation shall be nine (9).
3.02. Tenure and Qualifications. The directors shall be divided into
three (3) classes; each member of class shall be elected to a three (3) year
term. If a new directorship is created, the Board of Directors shall have the
right to determine the class and length of term for this new directorship. The
effect of the staggered terms shall be that the first class of directors shall
consist of three directors, the second class shall consist of three directors
and the third class shall consist of three directors. Each class of directors
shall hold office until their respective successors have been elected or until
his prior death, resignation or removal. A director may be removed from office
by affirmative vote of a majority of the outstanding shares entitled to vote for
the election of such director, taken at a meeting of shareholders called for
that purpose. A
B -10-
<PAGE> 11
director may resign at any time by filing his written resignation with the
Secretary of the Corporation. Directors need not be residents of the State of
Wisconsin or shareholders of the corporation. Upon reaching age 70, a director
shall retire from the Board of Directors. Any vacancy upon the Board of
Directors created by this retirement, may be filled by the Board of Directors
for the balance of the term of the retiring director. This retirement policy
shall be effective for directors whose terms expire at or after the annual
shareholders meeting to be held in 1994.
3.03. Regular Meetings. Regular meetings of the Board of Directors
shall be held quarterly at such time, date and location as may be established by
the Chairman of the Board or the President at the prior quarterly meeting. No
further notice of a regular meeting shall be required. The regular quarterly
meeting held after the annual shareholders' meeting shall be deemed the annual
meeting of the Board of Directors. Notice may also be delivered, but is not
required, for a regular quarterly meeting of the Board of Directors.
3.04. Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the President, Secretary or any two directors.
The President or Secretary calling any special meeting of the Board of Directors
may fix any place, either within or without the State of Wisconsin, as the place
for holding any special meeting of the Board of Directors called by them, and if
no other place is fixed the place of the meeting shall be the principal business
office of the corporation in the State of Wisconsin.
3.05 Notice; Waiver. Notice of each meeting of the Board of Directors
shall be given by written notice delivered personally or by mail, telecopy,
e-mail, overnight courier or telegram to each director at his business address
or at such other address as such director shall have designated in writing filed
with the Secretary. Notice by mail shall be delivered at least seventy-two (72)
hours before the meeting. Notice by telecopy, e-mail, overnight courier or
telegram shall be delivered at least twenty-four (24) hours before the meeting.
Notice by mail shall be deemed delivered when deposited in the United States
mail so addressed, with postage thereon prepaid. Notice by telecopy or e-mail
shall be deemed delivered when transmitted. Notice by overnight courier shall be
deemed delivered when delivered to the courier. Notice by telegram shall be
deemed to be delivered when the telegram is delivered to the telegraph company.
Whenever any notice whatever is required to be given to any director of the
corporation under
B -11-
<PAGE> 12
the articles of incorporation or by-laws or any provision of law, a waiver
thereof in writing, signed at any time, whether before or after the time of
meeting, by the director entitled to such notice, shall be deemed equivalent to
the giving of such notice. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting and objects thereat to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
3.06. Quorum. Except as otherwise provided by law or by the articles of
incorporation or these by-laws, a majority of the number of directors as
provided in Section 0.03 shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but a majority of the
directors present (though less than such quorum) may adjourn the meeting from
time to time without further notice.
3.07. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless the act of a greater number is required by law or by the
articles of incorporation or these by-laws.
3.08. Meetings by Telephone or Other Communication Technology.
(a) Any or all directors may participate in a regular or
special meeting or in a committee meeting of the Board of Directors by, or
conduct the meeting through the use of, telephone or any other means of
communication by which either: (i) all participating directors may
simultaneously hear each other during the meeting or (ii) all communication
during the meeting is immediately transmitted to each participating director,
and each participating director is able to immediately send messages to all
other participating directors.
(b) If a meeting will be conducted through the use of any
means described in paragraph (a), all participating directors shall be informed
that a meeting is taking place at which official business may be transacted. A
director participating in a meeting by any means described in paragraph (a) is
deemed to be present in person at the meeting.
3.09. Conduct of Meetings. The Chairman of the Board, and in his
absence, the President, and in his absence, a Vice-President in the order
provided under Section 4.06, and in their absence, any director chosen by the
directors present, shall call meetings of the Board of
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Directors to order and shall act as chairman of the meeting. The Secretary of
the corporation shall act as secretary of all meetings of the Board of Directors
but in the absence of the Secretary the presiding officer may appoint any
Assistant Secretary or any director or other person present to act as secretary
of the meeting.
3.10. Vacancies. Any vacancy occurring in the board of directors,
including a vacancy created by an increase in the number of directors, may be
filled for the balance of the unexpired term of the vacant directorship by the
affirmative vote of a majority of the directors then in office, though less than
a quorum of the board of directors; provided, that in case of vacancy created by
the removal of a director by vote of the shareholders, the shareholders shall
have the right to fill such vacancy at the same meeting or any adjournment
thereof.
3.11. Compensation. The Board of Directors, by affirmative vote of a
majority of the directors then in office, and irrespective of any personal
interest of any of its members, may establish reasonable compensation of all
directors for services to the corporation as directors, officers or otherwise,
or may delegate such authority to an appropriate committee. The Board of
Directors also shall have authority to provide for or delegate authority to an
appropriate committee to provide for reasonable pensions, disability or death
benefits, and other benefits or payments, to directors, officers and employees
and to their estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees to the corporation.
3.12. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors or a committee thereof of which
he is a member at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the Secretary of the corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
3.13. Committees. The Board of Directors by resolution adopted by the
affirmative vote of a majority of the members of the Board of Directors may
designate one or more committees, each committee to consist of three or more
directors elected by the Board of
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Directors, which to the extent provided in said resolution as initially adopted,
and as thereafter supplemented or amended by further resolution adopted by a
like vote, shall have and may exercise when the Board of Directors is not in
session, the powers of the Board of Directors in the management of the business
and affairs of the corporation, except action in respect to dividends to
shareholders, election of the principal officers or the filling of vacancies in
the Board of Directors or committees created pursuant to this section. The Board
of Directors may elect one or more of its members as alternate members of any
such committee who may take the place of any absent member or members at any
meeting of such committee, upon request by the President or upon request by the
chairman of such meeting. Each such committee shall fix its own rules governing
the conduct of its activities and shall make such reports to the Board of
Directors of its activities as the Board of Directors may request.
3.14. Unanimous Consent without Meeting. Any action required or
permitted by the articles of incorporation or by-laws or any provision of law to
be taken by the Board of Directors at a meeting or by resolution may be taken
without a meeting if one or more written consents setting forth the action so
taken, shall be signed by all of the directors then in office. Action taken
hereunder is effective when the last director signs the consent, unless the
consent specifies a different effective date. A consent signed hereunder has the
effect of an unanimous vote taken at a meeting at which all directors or
committee members were present, and may be described as such in any document.
ARTICLE IV. OFFICERS
4.01. Number. The principal officers of the corporation shall be a
Chairman of the Board, a President, such number and designations of
vice-presidents (i.e. Executive Vice-President, Senior Vice-President,
Vice-President, Vice-President-__________, Assistant Vice-President) as may be
designated by the Board of Directors from time to time , a Secretary, and a
Treasurer, each of whom shall be elected by the Board of Directors. Such other
officers and assistant officers as may be deemed necessary may be elected or
appointed by the Board of Directors. Any two or more officers may be held by the
same person.
4.02. Election and Term of Office. The officers of the corporation to
be elected by the Board of Directors shall be elected annually by the Board of
Directors at the first meeting of the
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Board of Directors held after each annual meeting of the shareholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as conveniently may be. Each officer shall hold office
until his successor shall have been duly elected or until his prior death,
resignation or removal.
4.03. Removal. Any officer or agent may be removed by the Board of
Directors whenever in its judgment the best interests of the corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment shall not of
itself create contract rights.
4.04. Vacancies. A vacancy in any principal office because of death,
resignation, removal, disqualification or otherwise, shall be filled by the
Board of Directors for the unexpired portion of the term.
4.045. Chairman of the Board. The Chairman of the Board, when present,
shall preside over all meetings of the Board of Directors and shareholders. The
Chairman shall have such other duties as may be designated from time to time by
the Board of Directors.
4.05. President. The President shall be the principal executive
officer of the corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the corporation. He shall, when present, and the Chairman of the
Board is not, preside at all meetings of the shareholders and of the Board of
Directors. He shall have authority, subject to such rules as may be prescribed
by the Board of Directors, to appoint such agents and employes of the
corporation as he shall deem necessary, to prescribe their powers, duties and
compensation, and to delegate authority to them. Such agents and employes shall
hold office at the discretion of the President. He shall have authority to sign,
execute and acknowledge, on behalf of the corporation, all deeds, mortgages,
bonds, stock certificates, contracts, leases, reports and all other documents or
instruments necessary or proper to be executed in the course of the
corporation's regular business, or which shall be authorized by resolution of
the Board of Directors; and, except as otherwise provided by law or the Board of
Directors, he may authorize any Vice-President or other officer or agent of the
corporation to sign, execute and acknowledge such documents or instruments in
his place and stead. In general he shall perform all duties incident to the
office of the President and such other duties as may be prescribed by the Board
of Directors from time to time.
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4.06. The Vice-Presidents. In the absence of the President or in the
event of his death, inability or refusal to act, or in the event for any reason
it shall be impracticable for the President to act personally, the
Vice-President (or in the event there be more than one Vice-President, the
Vice-Presidents in the order designated by the Board of Directors, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. Any Vice-President
may sign, with the Secretary or Assistant Secretary, certificates for shares of
the corporation; and shall perform such other duties and have such authority as
from time to time may be delegated or assigned to him by the President or by the
Board of Directors. The execution of any instrument of the corporation by any
Vice-President shall be conclusive evidence, as to third parties, of his
authority to act in the stead of the President.
4.07. The Secretary. The Secretary shall: (a) keep the minutes of the
meeting of the shareholders and of the Board of Directors in one or more books
provided for the purpose; (b) see that all notices are duly given in accordance
with the provisions of these by-laws or as required by law; (c) be custodian of
the corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all documents the execution of which on behalf
of the corporation under its seal is duly authorized; (d) keep or arrange for
the keeping of a register of the post office address of each shareholder which
shall be furnished to the Secretary by such shareholder; (e) sign with the
President, or a Vice-President, certificates for shares of the corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors; (f) have general charge of the stock transfer books of the
corporation; and (g) in general perform all duties incident to the office of
Secretary and have such other duties and exercise such authority as from time to
time may be delegated or assigned to him by the President or by the Board of
Directors.
4.08. The Treasurer. The Treasurer shall: (a) have charge and custody
of and be responsible for all funds and securities of the corporation; (b)
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Section 5.04; and (c) in general perform all
of the duties incident to the office of Treasurer and have such other duties and
exercise such
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other authority as from time to time may be delegated or assigned to him by the
President or by the Board of Directors. If required by the Board of Directors,
the Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board of Directors shall determine.
4.09. Assistant Secretaries and Assistant Treasurers. There shall be
such number of Assistant Secretaries and Assistant Treasurers as the Board of
Directors may from time to time authorize. The Assistant Secretaries may sign
with the President or a Vice-President certificates for shares of the
corporation the issuance of which shall have been authorized by a resolution of
the Board of Directors. The Assistant Treasurers shall respectively, if required
by the Board of Directors, give bonds for the faithful discharge of their duties
in such sums and with such sureties as the Board of Directors shall determine.
The Assistant Secretaries and Assistant Treasurers, in general, shall perform
such duties and have such authority as shall from time to time be delegated or
assigned to them by the Secretary or the Treasurer, respectively, or by the
President or the Board of Directors.
4.10. Other Assistants and Acting Officers. The Board of Directors
shall have the power to appoint any person to act as assistant to any officer,
or as agent for the corporation in his stead, or to perform the duties of such
officer whenever for any reason it is impracticable for such officer to act
personally, and such assistant or acting officer or other agent so appointed by
the Board of Directors shall have the power to perform all the duties of the
office to which he is so appointed to be an assistant, or as to which he is so
appointed to act, except as such power may be otherwise defined or restricted by
the Board of Directors.
4.11. Salaries. The salaries of the principal officers shall be fixed
from time to time by the Board of Directors or by a duly authorized committee
thereof, and no officer shall be prevented from receiving such salary by reason
of the fact that he is also a director of the corporation.
ARTICLE V. CONTRACTS, LOANS, CHECKS
AND DEPOSITS; SPECIAL CORPORATE ACTS
5.01. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute or deliver any
instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific
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instances. In the absence of other designation, all deeds, mortgages or
instruments of assignment or pledge made by the corporation shall be executed in
the name of the corporation by the President or one of the Vice-Presidents and
by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer; the Secretary or an Assistant Secretary, when necessary or required,
shall affix the corporate seal thereto; and when so executed no other party to
such instrument or any third party shall be required to make any inquiry into
the authority of the signing officer or officers.
5.02. Loans. No indebtedness for borrowed money shall be contracted on
behalf of the corporation and no evidences of such indebtedness shall be issued
in its name unless authorized by or under the authority of a resolution of the
Board of Directors. Such authorization may be general or confined to specific
instances.
5.03. Checks, Drafts, etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
or under the authority of a resolution of the Board of Directors.
5.04. Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as may be selected by or under the
authority of a resolution of the Board of Directors.
5.05. Voting of Securities Owned by this Corporation. Subject always to
the specific directions of the Board of Directors, (a) any shares or other
securities issued by any other corporation and owned or controlled by this
corporation may be voted at any meeting of security holders of such other
corporation by the President of this corporation if he be present, or in his
absence by any Vice-President of this corporation who may be present, and (b)
whenever, in the judgment of the President, or in his absence, of any
Vice-President, it is desirable for this corporation to execute a proxy or
written consent in respect to any shares or other securities issued by any other
corporation and owned by this corporation, such proxy or consent shall be
executed in the name of this corporation by the President or one of the
Vice-Presidents of this corporation, without necessity of any authorization by
the Board of Directors, affixation of corporate seal or countersignature or
attestation by another officer. Any person or persons
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designated in the manner above stated as the proxy or proxies of this
corporation shall have full right, power and authority to vote the shares or
other securities issued by such other corporation and owned by this corporation
the same as such shares or other securities might be voted by this corporation.
ARTICLE VI. CERTIFICATES FOR SHARES AND
THEIR TRANSFER
6.01. Certificates for Shares. Certificates representing shares of the
corporation shall be in such form, consistent with law, as shall be determined
by the Board of Directors. Such certificates shall be signed by the President or
a Vice-President and by the Secretary or an Assistant Secretary. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the corporation. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except as provided in Section 6.06.
6.02. Facsimile Signatures and Seal. The seal of the corporation on any
certificates for shares may be a facsimile. The signature of the President or
Vice-President and the Secretary or Assistant Secretary upon a certificate may
be facsimiles if the certificate is manually signed on behalf of a transfer
agent, or a registrar, other than the corporation itself or an employee of the
corporation.
6.03. Signature by Former Officers. In case any officer, who has signed
or whose facsimile signature has been placed upon any certificate for shares,
shall have ceased to be such officer before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer at
the date of its issue.
6.04. Transfer of Shares. Prior to due presentment of a certificate for
shares for registration of transfer the corporation may treat the registered
owner of such shares as the person exclusively entitled to vote, to receive
notifications and otherwise to have and exercise all the rights and power of an
owner. Where a certificate for shares is presented to the corporation with a
request to register for transfer, the corporation shall not be liable to the
owner or any other
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person suffering loss as a result of such registration of transfer if (a) there
were on or with the certificate the necessary endorsements, and (b) the
corporation had no duty to inquire into adverse claims or has discharged any
such duty. The corporation may require reasonable assurance that said
endorsements are genuine and effective and compliance with such other
regulations as may be prescribed by or under the authority of the Board of
Directors.
6.05. Restrictions on Transfer. The face or reverse side of each
certificate representing shares shall bear a conspicuous notation of any
restriction imposed by the corporation upon the transfer of such shares.
6.06. Lost, Destroyed or Stolen Certificates. Where the owner claims
that his certificates for shares has been lost, destroyed or wrongfully taken, a
new certificate shall be issued in place thereof if the owner (a) so requests
before the corporation has notice that such shares have been acquired by a bona
fide purchaser, and (b) files with the corporation a sufficient indemnity bond,
and (c) satisfies such other reasonable requirements as may be prescribed by or
under the authority of the Board of Directors.
6.07. Consideration for Shares. The shares of the corporation may be
issued for such consideration as shall be fixed from time to time by the Board
of Directors, provided that any shares having a par value shall not be issued
for a consideration less than the par value thereof. The consideration to be
paid for shares may be paid in whole or in part, in money, in other property,
tangible or intangible, or in labor or services actually performed for the
corporation. When payment of the consideration for which shares are to be issued
shall have been received by the corporation, such shares shall be deemed to be
fully paid and nonassessable by the corporation. No certificate shall be issued
for any share until such share is fully paid.
6.08. Stock Regulations. The Board of Directors shall have the power
and authority to make all such further rules and regulations not inconsistent
with the statutes of the State of Wisconsin as it may deem expedient concerning
the issue, transfer and registration of certificates representing shares of the
corporation.
ARTICLE VII. SEAL
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7.01. The Board of Directors shall provide a corporate seal which shall
be circular in form and shall have inscribed thereon the name of the corporation
and the state of incorporation and the words, "Corporate Seal."
ARTICLE VIII. AMENDMENTS
8.01. By Shareholders. These by-laws may be altered, amended or
repealed and new by-laws may be adopted by the shareholders by affirmative vote
of not less than a majority of the shares present or represented at any annual
or special meeting of the shareholders at which a quorum is in attendance.
8.02. By Directors. These by-laws may also be altered, amended or
repealed and new by-laws may be adopted by the Board of Directors by affirmative
vote of a majority of the number of directors present at any meeting at which a
quorum is in attendance; but no by-law adopted by the shareholders shall be
amended or repealed by the Board of Directors if the by-laws so adopted so
provides.
8.03. Implied Amendments. Any action taken or authorized by the
shareholders or by the Board of Directors, which would be consistent with the
by-laws then in effect but is taken or authorized by affirmative vote of not
less than the number of shares or the number of directors required to amend the
by-laws so that the by-laws would be consistent with such action, shall be given
the same effect as though the by-laws had been temporarily amended or suspended
so far, but only so far, as is necessary to permit the specific action so taken
or authorized.
ARTICLE IX. FISCAL YEAR
9.01. The fiscal year of the corporation shall begin on the first day
of January and end on the 31st day of December in each year.
ARTICLE X. INDEMNIFICATION OF DIRECTORS AND OFFICERS
10.01. Mandatory Indemnification. The corporation shall, in accordance
with the provisions of Section 180.0851(1) of the Wisconsin Statutes, indemnify
a director or an officer of the corporation to the extent that he or she has
been successful on the merits or otherwise in the defense of a proceeding for
all reasonable expenses incurred in the proceeding if he or she was a
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party because he or she is a director or officer of the corporation. A director
or officer who seeks indemnification under this Article X shall make a written
request to the corporation.
10.02. Additional Indemnification. In cases not included under Section
10.01, the corporation shall, in accordance with Section 180.0851(2)(a) of the
Wisconsin Statutes, indemnify a director or officer of the corporation against
liability incurred by such director or officer in a proceeding to which such
director or officer was a party because he or she is a director or officer of
the corporation, unless liability was incurred because the director or officer
breached or failed to perform a duty he or she owes to the corporation and the
breach or failure to perform constitutes any of the following:
(1) A willful failure to deal fairly with the corporation in
connection with a matter in which the director, officer, employee or agent has a
material conflict of interest.
(2) A violation of criminal law, unless the director, officer,
employee or agent had reasonable cause to believe that his or her conduct was
lawful or no reasonable cause to believe that his or her conduct was unlawful.
(3) A transaction from which the director, officer, employee
or agent derived improper personal profit.
(4) Willful misconduct.
The determination of whether indemnification is required under Section
10.02 shall be made under Section 180.0855 of the Wisconsin Statutes. The
termination of a proceeding by judgment, order, settlement or conviction, or
upon a plea of no contest or an equivalent plea, does not, by itself, create a
presumption that indemnification of the director or officer is not required
under this Section 10.02.
10.03. Allowance of expenses as incurred. The corporation may, in
accordance with Section 180.0853 of the Wisconsin Statutes, make allowance for
reasonable expenses of a director or officer of the corporation as such expenses
are incurred provided the officer or director provides the corporation with all
of the following:
(1) A written affirmation of his or her good faith belief that
he or she has not breached or failed to perform his or her duties to the
corporation.
(2) A written undertaking, executed personally or on his or
her behalf, to repay the allowance and, if required by the corporation, to pay
reasonable interest on the
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allowance to the extent that it is ultimately determined under Section 180.0855
of the Wisconsin Statutes that indemnification under Section 180.0851(2) of the
Wisconsin Statutes is not required and that indemnification is not ordered by a
court under Section 180.0854(2)(b) of the Wisconsin Statutes. The undertaking
shall be an unlimited general obligation of the director or officer and may be
accepted without reference to his or her ability to repay the allowance. The
undertaking may be secured or unsecured.
10.04. Additional rights to indemnification and allowance of expenses.
The corporation may, in accordance with Section 180.0858 of the Wisconsin
Statutes, grant additional rights to indemnification and allowance of expenses.
10.05. Determination of right to indemnification. Unless otherwise
provided by the articles of incorporation or bylaws of the corporation or by
written agreement between the director or officer and the corporation, the
director or officer seeking indemnification under Section 180.0851(2) of the
Wisconsin Statutes shall select one of the following means for determining his
or her right to indemnification:
(1) By a majority vote or a quorum of the board of directors
consisting of directors who are not at the time parties to the same or related
proceedings. If a quorum of disinterested directors cannot be obtained, by
majority vote of a committee duly appointment by the board of directors and
consisting solely of 2 or more directors who are not at the time parties to the
same or related proceedings may participate in the designation of members of the
committee.
(2) By independent legal counsel selected by a quorum of the
board of directors or its committee in the manner prescribed in sub.(1) or, if
unable to obtain such a quorum or committee, by a majority vote of the full
board of directors, including directors who are parties to the same or related
proceedings.
(3) By a panel of three arbitrators consisting of one
arbitrator selected by those directors entitled under sub.(2) to select
independent legal counsel, one arbitrator selected by the director or officer
seeking indemnification and one arbitrator selected by the two arbitrators
previously selected.
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The fees for the arbitrators shall be paid by the corporation. If the
officer or director is granted indemnification, the expenses and fees he or she
incurred in the arbitration shall be paid by the corporation.
(4) By an affirmative vote of shares as provided in Section
180.0725 of the Wisconsin Statutes. Shares owned by or voted under the control
of, persons who are at the times parties to the same or related proceedings,
whether as plaintiffs or defendants or in any other capacity, may not be voted
in making the determination.
(5) By a court under Section 180.0854 of the Wisconsin
Statutes.
(6) By any other method provided for in any additional right
to indemnification permitted under Section 180.0858 of the Wisconsin Statutes.
10.06. Insurance. As provided in Section 180.0857 of the Wisconsin
Statutes, the corporation may purchase and maintain insurance on behalf of an
individual who is a director or officer of the corporation against liability
asserted against or incurred by the individual in his or her capacity as a
director or officer of the corporation or arising from his or her status as a
director or officer of the corporation, regardless of whether the corporation is
required or authorized to indemnify or allow expenses to the individual against
the same liability under this Article X.
10.07. Extension of Indemnification. Indemnification shall extend to
those who, at the request of the corporation, act as or acted as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust or other enterprise in which this corporation has an interest and all
references in this Article X shall be interpreted accordingly.
10.08 Nonexclusivity.
(a) Except as provided in (b), Sections 10.01, 10.02 and 10.06
do not preclude any additional right to indemnification or allowance of expenses
that a director or officer may have under any of the following:
(1) The Articles of Incorporation.
(2) A written agreement between the director or
officer and the corporation.
(3) A resolution of the Board of Directors.
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(4) A resolution, after notice, adopted by a majority
vote of all of the corporation's voting shares then issued and outstanding.
(b) Regardless of the existence of an additional right under
(a), the corporation shall not indemnify a director or officer, or permit a
director or officer to retain any allowance of expense unless it is determined
by or on behalf of the corporation that the director or officer did not breach
or fail to perform a duty he or she owes to the corporation which constitutes
conduct under Section 10.02(a) (1), (2), (3) or (4). A director or officer who
is a party to the same or related proceeding for which indemnification or an
allowance of expenses is sought may not participate in a determination under
this subsection.
(c) Sections 10.01 to 10.13 do not affect the corporation's
power to pay or reimburse expenses incurred by a director or officer in any of
the following circumstances.
(1) As a witness in a proceeding to which he or
she is not a party.
(2) As a plaintiff or petitioner in a proceeding
because he or she is or was an
employee, agent, director or officer of the corporation.
10.09 Court-Ordered Indemnification.
(a) Except as provided otherwise by written agreement
between the director or officer and the corporation, a director or officer who
is a party to a proceeding may apply for indemnification to the court conducting
the proceeding or to another court of competent jurisdiction. Application shall
be made for an initial determination by the court under Section 10.05(a)(5) or
for review by the court of an adverse determination under Section 10.05(a) (1),
(2), (3), (4) or (6). After receipt of an application, the court shall give any
notice it considers necessary.
(b) The court shall order indemnification if it
determines any of the following:
(1) That the director or officer is entitled to
indemnification under Sections 10.01 or 10.02.
(2) That the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances, regardless of whether indemnification is required under
Section 10.02.
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(c) If the court determines under (b) that the director or
officer is entitled to indemnification, the corporation shall pay the director's
or officer's expenses incurred to obtain the court ordered indemnification.
10.10 Indemnification and Allowance of Expenses of Employees and
Agents. The corporation shall indemnify an employee of the corporation who is
not a director or officer of the corporation, to the extent that he or she has
been successful on the merits or otherwise in defense of a proceeding, for all
reasonable expenses incurred in the proceeding if the employee was a party
because he or she was an employee of the corporation. In addition, the
corporation may indemnify and allow reasonable expenses of an employee or agent
who is not a director or officer of the corporation to the extent provided by
the Articles of Incorporation or these Bylaws, by general or specific action of
the Board of Directors or by contract.
10.11 Securities Law Claims.
(a) Pursuant to the public policy of the State of Wisconsin,
the corporation shall provide indemnification and allowance of expenses and may
insure for any liability incurred in connection with a proceeding involving
securities regulation described under (b) to the extent required or permitted
under Section 10.01 to 10.13.
(b) Sections 10.01 to 10.13 apply, to the extent applicable to
any other proceeding, to any proceeding involving a federal or state statute,
rule or regulation regulating the offer, sale or purchase of securities,
securities brokers or dealers, or investment companies or investment advisers.
10.12. Definitions. Terms used in this Article X, unless they are
specifically defined in the Wisconsin Business Corporations Law as amended
(including, without limitation, the terms defined under Section 180.0850 of the
Wisconsin Statutes) in which case the definition in the Wisconsin Business
Corporation Law shall control, shall be defined as follows:
(a) "Affiliate" shall include, without limitation, any
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise that directly or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, the corporation.
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(b) "Corporation" means this corporation and any domestic or
foreign predecessor of this corporation where the predecessor corporation's
existence ceased upon the consummation of a merger or other transaction.
(c) "Director or officer" means any of the following:
(1) An individual who is or was a director or officer
of this corporation.
(2) An individual who, while a director or officer of
this corporation, is or was serving at the corporation's request as a director,
officer, partner, trustee, member of any governing or decision-making committee,
employee or agent of another corporation or foreign corporation, partnership,
joint venture, trust or other enterprise.
(3) An individual who, while a director or officer of
this corporation, is or was serving an employee benefit plan because
his or her duties to the corporation also impose duties on, or otherwise involve
services by, the person to the plan or to participants in or beneficiaries of
the plan.
(4) Unless the context requires otherwise, the estate
or personal representative of a director or officer.
For purposes of this Article, it shall be conclusively presumed that
any director or officer serving as a director, officer, partner, trustee, member
of any governing or decision-making committee, employee or agent of an affiliate
shall be so serving at the request of the corporation.
(d) "Expense" include fees, costs, charges,
disbursements, attorney fees and other expenses incurred in connection with a
proceeding.
(e) "Liability" includes the obligation to pay a
judgment, settlement, penalty, assessment, forfeiture or fine, including an
excise tax assessed with respect to an employee benefit plan, and reasonable
expenses.
(f) "Party" includes an individual who was or is, or who
is threatened to be made, a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending or
completed civil, criminal, administrative or investigative action, suit,
arbitration or other proceeding, whether formal or informal, which involves
foreign, federal, state or local law and which is brought by or in the right of
the corporation or by any other person.
B -27-
<PAGE> 28
10.13 Liberal Construction. In order for the corporation to obtain and
retain qualified directors, officers and employees, the foregoing provisions
shall be liberally administered in order to afford maximum indemnification of
directors, officers and, where Section 10.10 of these Bylaws applies, employees.
The indemnification above provided for shall be granted in all applicable cases
unless to do so would clearly contravene law, controlling precedent or public
policy.
B -28-
<PAGE> 1
EXHIBIT 21.1
1998 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-Jefferson*
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*
BancSecurity Corporation
F&M Bank-Iowa Central
F&M Bank-Iowa South Central
F&M Bank-Story County
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 a bank or corporation organized
and existing under the laws of the State of Wisconsin, except that:
1. F&M Bank-Darlington, National Association is a national bank;
2. F&M Bank-Cannon Valley is a Minnesota state bank;
3. BancSecurity Corporation is an Iowa corporation; and
<PAGE> 2
4. F&M Bank-Iowa Central, F&M Bank-Iowa South Central and F&M
Bank-Story County are Iowa state banks.
- ------------------
*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
1998 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 February 4, 1999,
relating to the consolidated balance sheets of F&M Bancorporation, Inc. and
Subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report is
included in the December 31, 1998 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 22, 1999
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