S-4/A
Table of Contents

As filed with the Securities and Exchange Commission on November 2, 2018

Registration Statement No. 333-227757

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FARMERS & MERCHANTS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

OHIO   6712   34-1469491

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

307 N. Defiance Street

Archbold, Ohio 43502

(419) 446-2501

(Address, including Zip Code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Paul S. Siebenmorgen

President and Chief Executive Officer

Farmers & Merchants Bancorp, Inc.

307 N. Defiance Street

Archbold, Ohio 43502

(419) 446-2501

(Name, address, including Zip Code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Thomas C. Blank, Esq.

Shumaker, Loop & Kendrick, LLP

1000 Jackson Street

Toledo, Ohio 43604-5573

(419) 241-9000

 

John W. Tanselle, Esq.

SmithAmundsen LLC

201 North Illinois Street, Suite 1400

Capital Center, South Tower

Indianapolis, Indiana 46204-4212

(317) 464-4148

 

 

Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement and upon the effective time of the merger described in the accompanying proxy statement and prospectus.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third Party Tender Offer)  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.   ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share

 

Proposed

Maximum
Aggregate

Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, no par value

  Up to 1,830,000 shares   N/A   $22,291,000   $2,702

 

 

(1)

This represents the maximum number of shares of Farmers & Merchants Bancorp, Inc. common stock estimated to be issuable upon completion of the merger described herein. This number is based on the 1,000 shares of Limberlost Bancshares, Inc. common stock expected to be outstanding when the transaction is consummated, and the exchange of each such shares of Limberlost Bancshares, Inc. common stock for 1,830 shares of Farmers & Merchants Bancorp, Inc. common stock, pursuant to the terms of the Agreement and Plan of Reorganization and Merger, dated as of August 17, 2018 (the “Merger Agreement”), by and between Farmers & Merchants Bancorp, Inc. and Limberlost Bancshares, Inc., which is attached to the proxy statement and prospectus as Annex A.

(2)

Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and computed pursuant to Rules 457(f)(2) and (f)(3) thereunder, on the basis of the book value of the common stock of Limberlost Bancshares, Inc. to be exchanged in the transaction, computed, in accordance with Rule 457(f), as: (i) the product of (a) $30,756 (the book value of Limberlost Bancshares, Inc. common stock as of June 30, 2018, the latest practicable date prior to filing this registration statement); and (b) 1,000 (the aggregate number of shares of Limberlost Bancshares, Inc. common stock expected to be outstanding when the transaction is consummated), less (ii) $8,465,000 (the estimated amount of cash to be paid to Limberlost Bancshares, Inc. shareholders in connection with the transaction).

(3)

The registration fee of $2,702 for the securities registered hereby has been calculated, pursuant to Section 6(b) of the Securities Act of 1933, as amended, as $22,291,000 (the proposed maximum aggregate offering price) multiplied by 0.0001212.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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THE INFORMATION IN THIS PROXY STATEMENT AND PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS EFFECTIVE. THIS PROXY STATEMENT AND PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

PRELIMINARY PROXY STATEMENT AND PROSPECTUS

DATED NOVEMBER 2, 2018 SUBJECT TO COMPLETION

 

FARMERS & MERCHANTS BANCORP, INC.    LIMBERLOST BANCSHARES, INC.

YOUR VOTE IS VERY IMPORTANT

PROSPECTUS OF FARMERS & MERCHANTS BANCORP, INC. FOR UP TO

1,830,000 SHARES OF COMMON STOCK AND

PROXY STATEMENT OF LIMBERLOST BANCSHARES, INC.

 

 

The Board of Directors of Farmers & Merchants Bancorp, Inc. (“F&M”) and the Board of Directors of Limberlost Bancshares, Inc. (“LBI”) have approved an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”), pursuant to which LBI will merge with and into F&M (the “Merger”). This proposed strategic business combination will further expand F&M’s operations in the State of Indiana. Following the Merger, the combined company will have a total of 30 banking offices, 20 in Ohio and 10 in Indiana, and have approximately $1.5 billion in assets, $1.1 billion in loans, $1.1 billion in deposits, and total shareholders’ equity of $220 million.

If the Merger Agreement is approved by a majority of the shareholders of LBI and the Merger is subsequently completed, the shares of LBI common stock owned by each LBI shareholder (other than dissenting shares) will be converted into the right to receive: (i) 1,830 shares (the “Exchange Ratio”) of F&M common stock; plus (ii) $8,465 in cash. F&M will pay cash for any fractional shares resulting from application of the Exchange Ratio. The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions.

We cannot complete the Merger unless a majority of the outstanding shares of common stock of LBI vote to approve the Merger Agreement. LBI will hold a special meeting of its shareholders to vote on this merger proposal. Your vote is very important. Whether or not you plan to attend the shareholder meeting, please take the time to vote by completing the enclosed proxy card and mailing it in the enclosed envelope. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the Merger Agreement. Not returning your card will have the same effect as a vote against the Merger Agreement.

The date, time and place of the meeting are as follows:

December 12, 2018, 5:00 p.m., local time

The Clock Tower Inn

1335 US Highway 27 North

Berne, Indiana 46711

 

 

This proxy statement and prospectus provides you with detailed information about the special meeting and the proposed Merger. It also contains or references information about LBI and F&M. You can also get information about F&M from publicly available documents that have been filed with the Securities and Exchange Commission. F&M common stock is listed on the NASDAQ Capital Market under the symbol “FMAO.”

 

 

We strongly support the Merger of our companies. The Board of Directors of LBI recommends that you vote in favor of the Merger Agreement.

 

/s/ Paul S. Siebenmorgen    /s/ Andrew J. Briggs
President and Chief Executive Officer    Chairman
FARMERS & MERCHANTS BANCORP, INC.    LIMBERLOST BANCSHARES, INC.

For a discussion of certain risk factors which you should consider in evaluating the Merger, see “Risk Factors” beginning on page 22. We encourage you to read this entire document carefully.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued pursuant to this proxy statement and prospectus or determined if this proxy statement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

These securities are not savings or deposit accounts or other obligation of any bank or non-bank subsidiary of either of our companies, and they are not insured by the Federal Deposit Insurance Corporation, the Deposit Insurance Fund or any other federal or state governmental agency.

This proxy statement and prospectus is dated November 7, 2018,

and it is being first mailed to LBI shareholders on or about November 7, 2018.


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ADDITIONAL INFORMATION

This document incorporates important business and financial information about F&M from other documents filed by F&M with the Securities and Exchange Commission (“SEC”) that are not delivered with or included in this document. This information (including the documents incorporated herein by reference) is available to you without charge upon your written or oral request. You may request these documents in writing or by telephone at the following address and telephone number:

Farmers & Merchants Bancorp, Inc.

307 N. Defiance Street

Archbold, Ohio 43502

Attention: Lydia Huber,

Corporate Secretary

Telephone: (419) 446-2501

To ensure timely delivery, shareholders must request the documents containing the information described above no later than five (5) business days prior to the date of the special meeting of the LBI shareholders. Accordingly, if you would like to make such a request, please do so by December 5, 2018, in order to receive the requested information before the meeting.

You can also obtain copies of the documents incorporated by reference in this document through the SEC’s website at www.sec.gov. See “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107.


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LIMBERLOST BANCSHARES, INC.

215 East Line Street

Geneva, Indiana 46740

NOTICE OF SPECIAL MEETING OF

SHAREHOLDERS TO BE HELD ON

DECEMBER 12, 2018

To Our Shareholders:

We will hold a special meeting of the shareholders of Limberlost Bancshares, Inc. (“LBI”) on December 12, 2018, at 5:00 p.m. local time, at The Clock Tower Inn, 1335 US Highway 27 North, Berne, Indiana 46711.

The purposes of the special meeting are the following:

 

  1.

Merger Proposal. To consider and vote upon a proposal to approve the Agreement and Plan of Reorganization and Merger, dated August 17, 2018 (the “Merger Agreement”), between Farmers & Merchants Bancorp, Inc. (“F&M”) and LBI, and to approve the transactions contemplated thereby (the “Merger Proposal”). Pursuant to the Merger Agreement, LBI will merge with and into F&M (the “Merger”) and, immediately thereafter, Bank of Geneva, the wholly-owned banking subsidiary of LBI, will merge with and into Farmers & Merchants State Bank (“F&M Bank”), a wholly-owned banking subsidiary of F&M (the “Bank Merger”).

 

  2.

Adjournment Proposal. To approve one (1) or more adjournments of the LBI special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Merger Proposal (the “Adjournment Proposal”).

 

  3.

Other Matters. To vote upon such other matters which may properly be presented at the special meeting or any adjournment or postponement of the special meeting. LBI’s Board of Directors is not aware of any such other matters.

The accompanying proxy statement and prospectus describes the Merger Agreement and the proposed Merger in detail and includes, as Annex A, the complete text of the Merger Agreement. We urge you to read these materials for a description of the Merger Agreement and the proposed Merger. In particular, you should carefully read the section captioned “Risk Factors” beginning on page 22 of the accompanying proxy statement and prospectus for a discussion of certain risk factors relating to the Merger.

The Board of Directors of LBI has fixed the close of business on October 26, 2018, as the record date for determining those shareholders who are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. Approval of the Merger Proposal requires the affirmative vote of at least a majority of the outstanding shares of LBI common stock. Approval of the Adjournment Proposal only requires more votes to be cast in favor of the proposal than are cast against it, so long as a quorum is present.

As required by Indiana Code 23-1-44-10, LBI is notifying all of its shareholders entitled to vote on the Merger Proposal that you are or may be entitled to assert dissenters’ rights under Chapter 44 of the Indiana Business Corporation Law. A copy of Chapter 44 is attached as Annex B to the accompanying proxy statement and prospectus. See also “THE MERGER—Rights of Dissenting Shareholders” beginning on page 49 in the accompanying proxy statement and prospectus.

The LBI Board of Directors recommends that you vote “FOR” (1) approval of the Merger Proposal; and (2) approval of the Adjournment Proposal.

Whether or not you plan to attend the special meeting in person, please submit your proxy by completing, signing, and dating the enclosed proxy card and returning it as soon as possible using the enclosed postage-prepaid envelope. If you attend the special meeting, you may vote in person if you wish, even if you have previously submitted your proxy. Not submitting your proxy will have the same effect as a vote against the Merger Proposal.

By Order of the Board of Directors

 

Andrew J. Briggs    Phillip Lucas
Chairman    Executive Vice President

November 7, 2018

Geneva, Indiana


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FORWARD-LOOKING STATEMENTS

This document, and the information included or incorporated by reference into it, contain forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often, but not always, be identified by the use of words like “believe,” “continue,” “pattern,” “estimate,” “project,” “intend,” “anticipate,” “expect” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions. These forward-looking statements include, but are not limited to, statements relating to the benefits of the proposed Merger between F&M and LBI, including future financial and operating results, cost savings, enhanced revenues, and accretion/dilution to reported earnings that may be realized from the Merger, as well as other statements of expectations regarding the Merger, and other statements of F&M’s goals, intentions and expectations; statements regarding F&M’s business plan and growth strategies; statements regarding the asset quality of F&M’s loan and investment portfolios; and estimates of F&M’s risks and future costs and benefits, whether with respect to the Merger or otherwise.

These forward-looking statements are subject to significant risks, assumptions and uncertainties that may cause results to differ materially from those set forth in forward-looking statements, including, among other things: the risk that the businesses of the F&M and LBI will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings from the Merger may not be fully realized or realized within the expected time frame; revenues following the Merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the Merger; the ability to obtain required regulatory and shareholder approvals, and the ability to complete the Merger on the expected time frame; possible changes in economic and business conditions; the existence or exacerbation of general geopolitical instability and uncertainty; the ability of F&M to attract new customers; possible changes in monetary and fiscal policies, and laws and regulations; the effects of easing restrictions on participants in the financial services industry; the cost and other effects of legal and administrative cases; possible changes in the credit worthiness of customers and the possible impairment of collectability of loans; fluctuations in market rates of interest; competitive factors in the banking industry; changes in the banking legislation or regulatory requirements of federal and state agencies applicable to banks and bank holding companies; continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends; changes in market, economic, operational, liquidity, credit and interest rate risks associated with the F&M’s and LBI’s business; and other risks and factors identified in F&M’s filings with the SEC.

Neither F&M nor LBI undertakes any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed herein unless required to under the federal securities laws. In addition, F&M’s and LBI’s past results of operations do not necessarily indicate either of their anticipated future results, whether the Merger is effectuated or not.


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TABLE OF CONTENTS

 

     PAGE  

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SHAREHOLDER MEETING

     1  

SUMMARY

     6  

F&M AND LBI HISTORICAL AND PRO FORMA PER SHARE DATA

     15  

SELECTED CONSOLIDATED FINANCIAL DATA

     15  

F&M FIVE YEAR SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     16  

LBI FIVE YEAR SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     17  

F&M UNAUDITED PRO FORMA SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

     18  

NOTES TO UNAUDITED PRO FORMA SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

     21  

RISK FACTORS

     22  

THE LBI SPECIAL MEETING

     29  

General Information

     29  

Matters To Be Considered

     29  

Record Date, Voting Rights, Quorum and Vote Required

     29  

Voting Agreement

     29  

Voting

     30  

Proxies

     30  

Voting Shares Held in the Bank of Geneva Employee Stock Ownership Plan (“ESOP”)

     30  

Solicitation of Proxies

     31  

Recommendation of the LBI Board of Directors

     31  

Other Matters

     31  

Beneficial Ownership of LBI Common Stock by Certain Shareholders

     32  

MERGER PROPOSAL

     34  

ADJOURNMENT PROPOSAL

     34  

THE MERGER

     35  

Description of the Merger

     35  

Merger Consideration/Exchange of LBI Common Stock

     35  

Effect of the Merger on F&M Shareholders

     36  

Background of the Merger

     36  

F&M’s Reasons for the Merger

     38  

LBI’s Reasons for the Merger; Recommendation

     38  

Opinion of LBI’s Financial Advisor

     41  

Rights of Dissenting Shareholders

     49  

Registration of F&M Common Stock

     51  

Regulatory Approvals

     51  

Effective Date of the Merger

     52  

Accounting Treatment of the Merger

     52  

The NASDAQ Capital Market Listing

     52  

Registration Statement

     52  

Interests of Certain Persons in the Merger

     52  

THE MERGER AGREEMENT

     54  

Description of the Merger

     54  

Representations and Warranties

     54  

Conditions to Completion of the Merger

     55  

Termination; Waiver; Amendment

     57  

Restrictions Affecting the Parties Prior to Completion of the Merger

     58  

 

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Agreement Not to Solicit Other Offers

     59  

Fees and Expenses

     59  

Management After the Merger

     59  

Indemnification and Insurance of LBI Directors and Officers

     60  

Employee Benefit Plans

     60  

Voting Agreement

     61  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     62  

Tax Consequences of the Merger

     62  

U.S. Tax Consequences to F&M and LBI

     63  

U.S. Federal Income Tax Consequences to U.S. Holders of LBI Common Stock Based Upon Merger Consideration Received

     64  

Cash in Lieu of Fractional Shares

     64  

Possible Dividend Treatment

     65  

Backup Withholding and Reporting Requirements

     65  

DESCRIPTION OF F&M

     66  

Business

     66  

Incorporation of Certain Information Regarding F&M by Reference

     66  

DESCRIPTION OF LBI

     67  

Business

     67  

Market for Common Equity and Related Shareholder Matters

     68  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

     69  

COMPARISON OF COMMON STOCK

     97  

LEGAL MATTERS

     107  

EXPERTS

     107  

SHAREHOLDER PROPOSALS FOR NEXT YEAR

     107  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     107  

LBI FINANCIAL INFORMATION

     F-1  

ANNEX A: AGREEMENT AND PLAN OF REORGANIZATION AND MERGER

     A-1  

ANNEX B: CHAPTER 44 OF THE INDIANA BUSINESS CORPORATION LAW (DISSENTERS’ RIGHTS)

     B-1  

ANNEX C: OPINION OF RENNINGER & ASSOCIATES, LLC

     C-1  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

AND THE SHAREHOLDER MEETING

The following questions and answers are intended to briefly address some commonly asked questions regarding the Merger, the Merger Agreement, and the shareholder meeting. We urge you to read carefully the remainder of this proxy statement and prospectus because the information in this section may not provide all the information that might be important to you in determining how to vote. Additional important information is also contained in the annexes to, and the documents incorporated by reference in, this proxy statement and prospectus.

 

Q:

Why am I receiving this document?

 

A:

LBI has agreed to be acquired by F&M under the terms of the Merger Agreement. In order for us to complete the Merger, we need the approval of the Merger Agreement by LBI shareholders, among other things. This document is being delivered to you because it is serving as both a proxy statement of LBI and a prospectus of F&M. In order to approve the Merger Agreement, LBI has called a special shareholder meeting of its shareholders. This document serves as a proxy statement for such special meeting and describes the proposals to be voted on at the special meeting and is being used by the LBI Board of Directors to solicit votes from the LBI shareholders in connection with such proposals. This document is also a prospectus of F&M because F&M is offering shares of its common stock, as well as cash, in exchange for shares of LBI in the Merger.

This proxy statement and prospectus contains important information regarding the Merger, as well as information about F&M and LBI. It also contains important information about what the LBI Board of Directors considered when evaluating the Merger. We urge you to read this proxy statement and prospectus carefully, including the Merger Agreement, a copy of which is attached to this proxy statement and prospectus as Annex A and is incorporated herein by reference, and the other annexes.

 

Q:

When and where will the LBI special meeting be held?

 

A:

The LBI special meeting will be held at The Clock Tower Inn, 1335 US Highway 27 North, Berne, Indiana 46711, on December 12, 2018, at 5:00 p.m. (local time).

 

Q:

What am I voting on?

 

A:

You are being asked to vote to approve the Merger Agreement and the transactions contemplated thereby, pursuant to which LBI will merge with and into F&M. F&M would be the surviving entity in the Merger, and LBI would no longer be a separate company.

You are also being asked to vote on two additional proposals (completion of the Merger is not conditioned upon approval of any of these additional proposals):

 

   

a proposal to adjourn the LBI special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Merger Proposal (which we refer to as the “Adjournment Proposal”); and

 

   

to vote on such other matters that may be properly presented at the special meeting or any adjournment or postponement of the special meeting. LBI’s Board is not aware of any such other matters.

 

Q:

How does the LBI board recommend that I vote with respect to each proposal?

 

A:

The LBI Board of Directors recommends that LBI shareholders vote “FOR approval of the Merger Proposal; and “FOR approval of the Adjournment Proposal.

 

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Q:

Why are F&M and LBI proposing to merge?

 

A:

We believe the Merger is in the best interests of both companies and our respective shareholders. LBI and F&M believe that the Merger will bring together two complementary financial institutions to create a strong company that is positioned for further growth. The Merger will give the combined company greater scale and geographic diversity, allowing F&M to further expand its existing operations in the State of Indiana. We believe the Merger will enhance our capabilities to provide banking and financial services to our customers and strengthen the competitive position of the combined organization.

You should review the background of and reasons for the Merger described in greater detail beginning on page 36.

 

Q:

What will LBI shareholders receive in the Merger?

 

A:

If the Merger Agreement is approved by the shareholders of LBI and the Merger is subsequently completed, each share of LBI common stock (other than dissenting shares) will be converted into the right to receive (i) 1,830 shares (the “Exchange Ratio”) of F&M common stock, plus (ii) $8,465 in cash (the stock and cash consideration is at times referred to herein as the “Merger Consideration”). Each LBI shareholder that would otherwise be entitled to receive a fractional share of F&M common stock will receive cash in lieu of such fractional share. The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions.

Because the Exchange Ratio is fixed (except for customary anti-dilution adjustments), the value of the Merger Consideration that you will receive will depend on the market price of F&M common stock when you receive your shares of F&M common stock. The implied per share value of the Merger Consideration, based upon F&M’s closing stock price on October 29, 2018, the most recent practicable trading day before this proxy statement and prospectus was finalized, was $85,233.50 including the cash consideration. No assurance can be given that the current market price of F&M common stock will be equivalent to the market price of F&M common stock on the date that shares of F&M common stock are received by an LBI shareholder or at any other time. You should obtain current market prices for shares of F&M common stock which is listed on the NASDAQ Capital Market under the symbol “FMAO.”

 

Q:

What risks should I consider before I vote on the Merger Proposal?

 

A:

You should carefully review the section captioned “RISK FACTORS” beginning on page 22.

 

Q:

Will F&M shareholders receive any shares or cash as a result of the Merger?

 

A:

No. After the Merger, F&M shareholders will continue to own the same number of F&M shares they owned before the Merger.

 

Q:

When is the Merger expected to be completed?

 

A:

We are working to complete the Merger as quickly as possible. We must first obtain the necessary regulatory approvals and the approval of LBI shareholders at the special meeting. We currently expect to complete the Merger effective as of December 31, 2018 or early in the first quarter of 2019.

 

Q:

What happens if the Merger is not completed?

 

A:

If the Merger is not completed, LBI shareholders will not receive any consideration for their shares of LBI common stock in connection with the Merger. Instead, LBI will remain an independent company. In addition, if the Merger Agreement is terminated in certain circumstances, a termination fee may be required to be paid by LBI to F&M.

 

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Q:

What are the tax consequences of the Merger to me?

 

A:

The Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). A U.S. Holder (as defined in the section captioned “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” beginning on page 62) who exchanges all of his, her, or its shares of LBI common stock for the Merger Consideration (1,830 shares of F&M common stock and $8,465 in cash per share) pursuant to the Merger Agreement may recognize a gain, but not any loss, on the exchange. At the closing of the Merger, F&M will receive an opinion from their tax attorneys confirming these tax consequences which the shareholders of LBI will be permitted to rely upon. See “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” beginning on page 62. Your individual tax consequences will depend on your personal situation. You should consult your tax advisor for a full understanding of the tax consequences of the Merger to you.

 

Q:

Will I have dissenters’ rights?

 

A:

Dissenters’ rights are available to LBI’s shareholders under Indiana law, but you will only be able to dissent from the Merger by complying with the provisions of Chapter 44 of the Indiana Business Corporation Law, as amended (the “IBCL”), a copy of which is included as Annex B to this proxy statement and prospectus. If you wish to assert your dissenters’ rights, you must deliver to LBI written notice of your intent to assert such rights before the vote is taken at the special meeting. In addition, you must not vote in favor of the Merger either in person or by proxy. The procedure for dissenting is explained more fully under “THE MERGER – Rights of Dissenting Shareholders” beginning on page 49 and in Annex B to this proxy statement and prospectus.

 

Q:

Who can vote at the special meeting?

 

A:

All holders of record of LBI common stock as of the close of business on October 26, 2018, the record date for the special meeting (the “record date”), are entitled to receive notice of, and to vote at, the special meeting, or any postponement or adjournment of the special meeting scheduled in accordance with Indiana law. As of the record date, there were 1,000 shares of LBI common stock outstanding and entitled to vote at the special meeting.

 

Q:

What constitutes a quorum?

 

A:

The presence, in person or by proxy, of shareholders holding at least a majority of the outstanding shares of LBI common stock as of the record date will constitute a quorum for the special meeting. In determining whether a quorum is present, shareholders who abstain, cast broker non-votes, or are otherwise present at the special meeting will be deemed present at the special meeting. Once a share is represented for any purpose at the special meeting, it will be deemed present for quorum purposes for the remainder of the meeting.

 

Q:

What are the vote requirements to approve the matters that will be considered at the special meeting?

 

A:

At the special meeting, the affirmative vote of holders of a majority of the outstanding shares of LBI common stock is required to approve the Merger Proposal. Approval of the Adjournment Proposal requires more votes to be cast in favor of the proposal than are cast against it.

Each of the directors of LBI has entered into a voting agreement with F&M pursuant to which each of them has agreed, subject to their fiduciary duties to entertain a superior third-party acquisition proposal under the Merger Agreement, to vote, or cause to be voted, all of their shares of LBI common stock owned by each of them of record or beneficially, including shares owned by certain other persons over which they have voting control, in favor of the Merger Proposal. Collectively, as of the record date, our directors had the power to

 

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vote, or cause to be voted, 558.9037 shares, or approximately 55.9% of the outstanding shares of LBI common stock. Assuming that the members of the Board vote these shares in favor of the Merger as required under the voting agreement, the Merger will be approved by the LBI shareholders.

 

Q:

How many votes do I have?

 

A:

LBI shareholders are entitled to one vote on each proposal to be considered at the special meeting for each share of LBI common stock owned as of the record date for the special meeting.

 

Q:

How do I vote?

 

A:

You may have your shares of LBI common stock voted on the matters to be presented at the special meeting in the following ways: (i) by completing, signing, dating, and returning the enclosed proxy card in the accompanying prepaid reply envelope; or (ii) by attending the special meeting and casting your vote in person. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must obtain a legal proxy from your bank, broker, or other nominee.

 

Q:

If my shares are held in “street name,” will my bank, broker, or other nominee vote my shares for me?

 

A:

Your bank, broker, or other nominee will vote any shares you hold in “street name” only if you provide instructions to them on how to vote your shares. You should follow the directions provided by your bank, broker, or other nominee to vote your shares. If you do not provide your bank, broker, or other nominee with instructions on how to vote your shares held in “street name,” they will not be permitted to vote your shares, which will have the effect of a vote “AGAINST” the Merger.

Similarly, your bank, broker, or other nominee will vote your shares on the Adjournment Proposal, if necessary, but only if you provide instructions on how to vote. If you do not submit voting instructions to your bank, broker, or other nominee on how to vote your shares held in “street name,” your shares will not be counted in determining the outcome of this proposal.

 

Q:

How do I vote the shares of LBI common stock credited to my account in the Bank of Geneva Employee Stock Ownership Plan (“ESOP”)?

 

A:

If shares of LBI common stock are credited to your plan account under the ESOP, you will receive a voting instruction card that you may use to direct the trustee to vote these shares on your behalf under the ESOP. Under the terms of the ESOP, a participant is entitled to direct the trustee how to vote the shares of LBI common stock credited to his or her account under the ESOP. If the ESOP trustee does not receive timely voting instructions for the shares of LBI common stock held in the ESOP, the shares for which the trustee does not receive timely instructions will be voted in a manner calculated to most accurately reflect the instructions received from other ESOP participants.

 

Q:

What do I need to do now?

 

A:

You should carefully read and consider the information contained in this proxy statement and prospectus and any information incorporated herein by reference. Then, please submit your proxy by completing, signing, and dating the enclosed proxy card and returning it as soon as possible using the enclosed postage-prepaid envelope so that your shares can be voted at the special meeting. If a returned proxy card is signed, but does not specify how you wish to vote your shares, your proxy will be voted “FOR” the: (1) approval of the Merger Proposal; and (2) approval of the Adjournment Proposal.

 

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Q:

What if I don’t vote or I abstain from voting?

 

A:

If you do not vote or you abstain from voting, your abstention will be equivalent to a vote “AGAINST” the Merger Proposal, but such abstention will have no impact on the Adjournment Proposal. If you return a properly signed proxy card but do not indicate how you want to vote, your proxy will be voted “FOR” approval of the Merger Proposal; and “FOR approval of the Adjournment Proposal.

 

Q.

May I change my vote after I have submitted my proxy?

 

A:

Yes. You can change your vote at any time before your proxy is voted at the special meeting. You can do this in one (1) of three (3) ways. First, you can send a written notice stating that you revoke your proxy. Second, you can complete and submit a new proxy, dated at a date later than your most recent proxy. Please submit your notice of revocation and/or new proxy card to LBI, 215 East Line Street, Geneva, Indiana 46740-0278, Attention: Richard D. Briggs, Corporate Secretary. Third, you may attend the special meeting and vote in person. Simply attending the special meeting, however, will not revoke your proxy. You must request a ballot and vote the ballot at the meeting.

 

Q:

Should I send in my stock certificate(s) now?

 

A:

No. After the Merger is completed, LBI shareholders will receive written instructions from F&M for exchanging their stock certificates for shares of F&M common stock and cash constituting the Merger Consideration, and cash for fractional shares to be received by them in the Merger. Any shares of LBI common stock held in book-entry form will be automatically exchanged for shares of F&M common stock. If you are a current F&M shareholder, you should retain your certificates representing F&M common shares, as you will continue to hold the F&M shares you currently own.

 

Q:

Whom should I contact if I have other questions about the Merger Agreement or the Merger?

 

A:

You may contact:

Limberlost Bancshares, Inc.

215 East Line Street

Geneva, Indiana 46740-0278

Attention: Andrew J. Briggs, Chairman

Telephone: (260) 368-7288

 

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SUMMARY

This summary highlights selected information from this proxy statement and prospectus. Because this is a summary, it does not contain all of the information that is important to you. You should carefully read this entire document, including the documents incorporated herein by reference, and the other documents to which we have referred you before you decide how to vote. See “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107 for a description of documents that we incorporate by reference into this document. Each item in this summary includes a page reference that directs you to a more complete description in this document of the topic discussed.

Description of Farmers & Merchants Bancorp, Inc. (page 66)

Farmers & Merchants Bancorp, Inc.

307 N. Defiance Street

Archbold, Ohio 43502

(419) 446-2501

F&M is a financial holding company headquartered in Archbold, Ohio that was organized in 1985. F&M common stock is listed on the NASDAQ Capital Market under the symbol “FMAO.” F&M is the parent holding company of F&M Bank, an Ohio chartered commercial bank which opened for business in Archbold, Ohio, in 1897, and F&M Risk Management, Inc., a captive insurance company founded in December 2014. F&M Bank has a total of 24 banking locations with 20 in Northwest Ohio and 4 in Northeast Indiana. F&M Bank’s business activities are currently limited to one significant business segment, which is community banking. F&M Bank also operates FM Investment Services as a division of its operations. FM Investment Services offers non-deposit investment and insurance products.

As of June 30, 2018, F&M had approximately consolidated assets of $1.1 billion, deposits of $931 million and shareholders’ equity of $137.5 million. As of June 30, 2018, F&M and its subsidiaries had 276 full-time equivalent employees.

Description of Limberlost Bancshares, Inc. (page 67)

Limberlost Bancshares, Inc.

215 East Line Street

Geneva, Indiana 46740

(260) 368-7288

LBI is a bank holding company incorporated under Indiana law and headquartered in Geneva, Indiana. LBI is not listed on any stock market or quoted in any “over-the-counter” market. As such, there is not an active trading market for shares of LBI common stock. LBI is the parent holding company of Bank of Geneva, an Indiana chartered commercial bank, which opened for business in Geneva, Indiana, in 1892. Bank of Geneva has a total of 6 banking locations. LBI’s business activities are currently limited to one significant business segment, which is community banking.

As of June 30, 2018, LBI had approximately consolidated assets of $287 million, deposits of $212 million and shareholders’ equity of $30.8 million. As of June 30, 2018, LBI and its subsidiaries had 61 full-time equivalent employees.

The Merger Agreement (page A-1)

We have attached a copy of the Merger Agreement to this document as Annex A. Please read the Merger Agreement in its entirety. It is the legal document that governs the Merger.



 

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The Merger Agreement provides that, if all of the conditions are satisfied or waived, LBI will be merged with and into F&M and LBI will cease to exist. Immediately following the Merger, Bank of Geneva will be merged with and into F&M Bank and Bank of Geneva will cease to exist. We expect to complete the Merger on December 31, 2018 or early in the first quarter of 2019.

Reasons for the Merger (pages 38)

F&M. F&M’s Board of Directors considered a number of financial and nonfinancial factors in making its decision to merge with LBI, including LBI’s Board of Directors, management and staff. The Board believes that expanding F&M’s operations into the market areas where LBI operates offices provides financial and strategic benefits to F&M and LBI as a combined company.

LBI. In considering the Merger with F&M, LBI’s Board of Directors collected and evaluated a variety of financial and economic information regarding F&M and F&M Bank, and their reputation and future prospects. In the opinion of LBI’s Board of Directors, favorable factors included F&M’s strong earnings and stock performance, its management, the compatibility of its markets to those of LBI, the likelihood of regulatory approvals of the Merger, and the attractiveness of F&M’s offer from a financial perspective. In addition, the Board of Directors considered the fairness opinion of Renninger, described below.

Opinion of LBI’s Financial Advisor (page 41)

LBI’s Board of Directors jointly retained Renninger & Associates, LLC and Ausdal Financial Partners (“AFP”) (together referred to as “Renninger”) to advise it in regard to its strategic alternatives and to render a fairness opinion in connection with the proposed Merger. At the meeting of LBI’s Board of Directors on August 17, 2018, Renninger delivered to LBI’s Board of Directors an oral opinion, which was confirmed by delivery of a written opinion, dated August 17, 2018, to the effect that, as of the date of the opinion and based upon its analysis and subject to the conditions, limitations, qualifications and assumptions set forth in the opinion, the right of the holders of LBI common shares to receive: (i) 1,830 shares (the “Exchange Ratio”) of F&M common stock; and (ii) $8,465.00 in cash (collectively, the “Merger Consideration”), for each share of LBI common stock, was fair, from a financial point of view, to such holders of LBI common stock.

The full text of the written opinion of Renninger, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion of Renninger, is attached as Annex C to this proxy statement and prospectus and is incorporated herein by reference. LBI shareholders are urged to read Renninger’s written opinion carefully and in its entirety. Renninger’s opinion is limited solely to the fairness, from a financial point of view, of the Merger Consideration to be received in the Merger by the holders of LBI common stock and does not address LBI’s underlying business decision to effect the Merger or the relative merits of the Merger as compared to any alternative business strategies or transactions that might be available with respect to LBI. Renninger’s opinion does not constitute a recommendation to any shareholder of LBI as to how such shareholder should vote or act with respect to any matter relating to the Merger or otherwise.

What LBI Shareholders Will Receive (page 35)

If the Merger Agreement is approved and the Merger is subsequently completed, each outstanding share of LBI common stock (other than dissenting shares) will be converted into the right to receive the Merger Consideration of: (i) 1,830 shares (the “Exchange Ratio”) of F&M common stock; and (ii) $8,465.00 in cash. The number of shares of F&M common stock issuable to each LBI shareholder will be rounded to the nearest thousandth of a share. The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization or similar transactions. Each LBI shareholder that would otherwise be entitled to receive a fractional share of F&M common stock will receive cash in lieu of such fractional share.



 

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Because the Exchange Ratio is fixed (except for customary anti-dilution adjustments), the value of the Merger Consideration that you will receive will depend on the market price of F&M common stock when you receive your shares of F&M common stock. The implied per share value of the Merger Consideration, based upon F&M’s closing stock price on October 29, 2018, the most recent practicable trading day before this proxy statement and prospectus was finalized, was $85,233.50 per share. No assurance can be given that the current market price of F&M common stock will be equivalent to the market price of F&M common stock on the date that shares of F&M common stock are received by an LBI shareholder or at any other time.

Within three (3) business days following the effective date of the Merger, F&M will mail a letter of transmittal to each person who was, immediately prior to the effective time of the Merger, a holder of record of LBI common stock. The letter of transmittal will contain instructions for use in effecting the surrender of LBI stock certificates (or shares held in book-entry form) in exchange for the consideration to which such person may be entitled pursuant to the Merger Agreement.

What F&M Shareholders Will Receive (page 36)

F&M shareholders will not receive any consideration in the Merger. After the Merger, F&M shareholders will continue to own the same number of F&M shares owned before the Merger.

The LBI Special Shareholders Meeting (page 29)

The special meeting of LBI shareholders will be held on December 12, 2018, at 5:00 p.m. local time, at The Clock Tower Inn, 1335 US Highway 27 North, Berne, Indiana 47611.

At the special meeting, LBI shareholders will be asked:

 

  1.

Merger Proposal. To consider and vote upon a proposal to approve the Merger Agreement and to approve the transactions contemplated thereby. Pursuant to the Merger Agreement, LBI will merge with and into F&M and, immediately thereafter, Bank of Geneva will merge with and into F&M Bank.

 

  2.

Adjournment Proposal. To approve one (1) or more adjournments of the LBI special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Merger Proposal.

 

  3.

Other Matters. To vote upon such other matters which may properly be presented at the special meeting or any adjournment or postponement of the special meeting. LBI’s Board of Directors is not aware of any such other matters.

LBI Recommendation to Shareholders (page 31)

LBI’s Board of Directors approved and adopted the Merger Agreement and approved and authorized the proposed Merger. LBI’s Board of Directors concluded that entering into the Merger Agreement and completing the Merger and the other transactions contemplated by the Merger Agreement are in the best interest of LBI and the LBI shareholders. LBI’s Board of Directors recommends that LBI shareholders vote “FOR” (1) approval of the Merger Proposal, and (2) approval of the Adjournment Proposal. In reaching its determination, LBI’s Board of Directors considered a number of factors, some of which are described in the section captioned “THE MERGER—LBI’s Reasons for the Merger; Recommendation” beginning on page 38. Because of the wide variety of factors considered, LBI’s Board of Directors did not believe it practicable, nor did it attempt, to quantify or otherwise assign relative weight to the specific factors it considered in reaching its decision.

LBI Special Meeting Record Date; Vote Required (page 29)

Only LBI shareholders of record as of the close of business on October 26, 2018, are entitled to notice of, and to vote at, the LBI special meeting and any adjournments or postponements of the special meeting. As of the record



 

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date, there were 1,000 shares of LBI common stock outstanding held by 68 shareholders of record. This number does not reflect the number of persons or entities who may hold their stock in “street name” through a bank, broker, or nominee, or hold through the ESOP. Approval of the Merger Proposal requires the affirmative vote of holders of at least a majority of the outstanding shares of LBI common stock entitled to vote. The approval of the Adjournment Proposal requires more votes to be cast in favor of the proposal than are cast against it. You can vote your shares by attending the LBI special meeting and voting in person or you can vote by proxy by marking the enclosed proxy card with your vote, signing it and mailing it in the enclosed return envelope. You can revoke your proxy at any time before the special meeting by sending a written notice of revocation, submitting a new proxy or by attending the special meeting and voting in person.

No approval by F&M shareholders is required.

Voting Agreement (page 29)

Each member of the Board of Directors of LBI, as of August 17, 2018, the date the Merger Agreement was executed, entered into a voting agreement with F&M to cause all LBI common stock owned by each of them of record or beneficially to be voted in favor of the Merger Proposal. See “THE MERGER AGREEMENT—Voting Agreement” on page 61. As of the record date, the members of LBI’s Board of Directors and their affiliates had power to vote, or caused to be voted, an aggregate of 558.9037 shares of LBI common stock outstanding, representing approximately 55.9% of the outstanding shares on that date. Assuming that the members of the Board vote their shares in favor of the Merger as required under the voting agreement, the Merger will be approved by the LBI shareholders.

F&M ownership of LBI Shares

F&M does not currently own any shares of LBI.

What We Need to Do to Complete the Merger (page 55)

Completion of the Merger depends on a number of conditions being met or waived. In addition to our compliance with the Merger Agreement, these conditions include, among others:

 

   

the approval of the Merger Agreement at the special meeting by a majority of the outstanding shares of LBI common stock;

 

   

the approval of the Merger and the Bank Merger by certain regulatory agencies and the expiration of any regulatory waiting periods;

 

   

the representations and warranties made by the parties in the Merger Agreement must be true, accurate and correct in all material respects on and as of the effective date of the Merger, except that representations and warranties that are qualified by materiality or a Material Adverse Effect (as defined below in “THE MERGER AGREEMENT—Conditions to Completion of the Merger”) must be true and correct in all respects, and provided that for those representations and warranties which address matters only as of an earlier date, then they shall be tested as of such earlier date;

 

   

the covenants made by the parties must have been complied with in all material respects from the date of the Merger Agreement through and as of the effective date of the Merger;

 

   

F&M must have received an opinion of Shumaker, Loop & Kendrick, LLP that, for U.S. federal income tax purposes, the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code;



 

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LBI must have received a letter from Shumaker, Loop & Kendrick, LLP, addressed to the shareholders of LBI, dated as of the effective date of the Merger, to the effect that such shareholders may rely on the opinion referenced immediately above;

 

   

the Registration Statement on Form S-4, of which this proxy statement and prospectus is a part, relating to the F&M shares to be issued pursuant to the Merger Agreement, must have become effective under the Securities Act of 1933, as amended (the “Securities Act”), and no stop order suspending the effectiveness of the Registration Statement shall have been issued or threatened by the Securities and Exchange Commission (“SEC”);

 

   

the shares of F&M common stock to be issued in the Merger shall have been listed for trading on the NASDAQ Capital Market (subject to official notice of issuance);

 

   

there must be no order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger or the Bank Merger; and

 

   

other customary conditions and obligations of the parties as set forth in the Merger Agreement.

Regulatory Approvals (page 51)

The Merger cannot be completed until F&M Bank receives necessary regulatory approvals, which include the approval of the Ohio Division of Financial Institutions (the “ODFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). F&M Bank has filed an application with the ODFI and the FDIC, but cannot be certain when or if such approval will be obtained. F&M has also requested that the Board of Governors of the Federal Reserve System (the “Federal Reserve”) waive its right to receive an application in connection with the Merger as permitted under Regulation Y of the Bank Holding Company Act. If the waiver is not granted, an application and approval will also be required from the Federal Reserve before the Merger may be consummated.

Conduct of Business Pending Merger (page 58)

Under the terms of the Merger Agreement, LBI and F&M must carry on their business in the ordinary course and, subject to certain limited exceptions, may not take certain extraordinary actions without first obtaining the other party’s consent.

F&M has agreed that LBI will continue to pay quarterly dividend distributions at no more than the current rate of 65% net earnings until the Merger closes. F&M and LBI will each cooperate to insure that LBI shareholders will receive only one (1) quarterly dividend for the quarter in which the Merger closes, and not a separate dividend from both F&M and LBI, provided that LBI shareholders may receive a partial distribution during the quarter in which the Merger is to close to allow for the payment of tax liability resulting from quarterly earnings of LBI.

Agreements of F&M

In the Merger Agreement, F&M has agreed, among other matters, to:

 

   

Proceed and use its reasonable and diligent efforts to obtain any consents and approvals for the Merger. See “THE MERGER—Regulatory Approvals” on page 51.

 

   

Take action as may be necessary to allow LBI and its subsidiaries’ employees, as soon as reasonably practicable following the effective date of the Merger, to participate in benefit plans F&M maintains for its employees. Until such time as participation is implemented, F&M will assume, honor and continue the employee plans and benefit arrangements of LBI as in effect on the effective date of the Merger, subject to certain limitations set forth in the Merger Agreement, including termination of the Bank of Geneva ESOP and Bank of Geneva 401K Plan. See “THE MERGER AGREEMENT—Employee Benefit Plans” on page 60.



 

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Provide, or allow for, director and officer liability insurance and indemnification. See “THE MERGER AGREEMENT—Indemnification and Insurance of LBI Directors and Officers” on page 60.

Agreement Not to Solicit Other Offers (page 59)

LBI has agreed that it will not solicit, encourage, or facilitate any inquiries or proposals regarding other acquisition proposals by third parties. LBI may respond to an unsolicited proposal if the LBI Board of Directors determines in good faith, and after consultation with legal counsel, that such action is necessary in order to act in a manner consistent with the directors’ fiduciary duties. Also, prior to obtaining shareholder approval, LBI may, under certain specified circumstances, withdraw, modify, or change in a manner adverse to F&M, its recommendation to its shareholders with respect to the Merger Proposal and/or terminate the Merger Agreement if the LBI Board of Directors determines in good faith, and after consultation with legal counsel, that a third party proposal is more favorable to LBI shareholder than the Merger and that it is necessary in order to act in a manner consistent with the directors’ fiduciary duties. LBI must provide certain notices to and engage in negotiations with F&M in connection with third party proposals.

Dissenters’ Rights (page 49)

Dissenters’ rights are available to LBI’s shareholders under Indiana law, but you will only be able to dissent from the Merger by complying with the provisions of Chapter 44 of the IBCL. If you wish to assert dissenters’ rights, you must deliver to LBI written notice of your intent to assert such rights before the vote is taken at the special meeting. In addition, you must not vote in favor of the Merger Proposal either in person or by proxy. If the Merger Proposal is approved and the Merger is completed, and you have dissented and followed the required procedures, then you will not receive any shares of common stock of F&M or cash as the Merger Consideration. Instead, you will be entitled to receive the fair value of your LBI common stock in cash as determined through the dissenters’ rights procedures. The procedure for dissenting is explained more fully under “THE MERGER—Rights of Dissenting Shareholders” beginning on page 49 and in Annex B to this proxy statement and prospectus.

Management and Operations After the Merger (page 59)

LBI’s corporate existence will cease after the Merger. Accordingly, except as otherwise described herein, directors and officers of LBI will not serve in such capacities after the effective date of the Merger. Upon completion of the Merger, the current officers and directors of F&M will continue to serve in such capacities.

Interests of Directors and Officers in the Merger That Are Different From Your Interests (page 52)

You should be aware that some of directors and executive officers of LBI and Bank of Geneva may have interests in the Merger that are different from, or in addition to, their interests as shareholders. Both LBI’s Board of Directors and F&M’s Board of Directors were aware of these interests and took them into consideration in approving the Merger Agreement and the Merger. See “THE MERGER—Interests of Certain Persons in the Merger: Agreements with LBI and F&M” on page 52. These interests are as follows:

 

   

Phillip Lucas, the Executive Vice President of Bank of Geneva, has a change of control and severance agreement with Bank of Geneva that provides for a payment following a change in control of LBI, subject to certain limitations, and the funding of all premiums through maturity with respect to a certain life insurance policy in the name of Mr. Lucas. Under this agreement, Mr. Lucas would be entitled to receive a lump sum payment of $830,223.31. The cost to fully fund the Mr. Lucas’ insurance premiums is approximately $82,000. In addition, Mr. Lucas has entered into an employment agreement with F&M Bank, subject to consummation of the Merger.



 

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F&M has agreed that for a period of six (6) years after the effective time of the Merger, it will maintain directors’ and officers’ liability insurance in force covering directors and officers of LBI and Bank of Geneva, subject to certain conditions set forth in the Merger Agreement.

 

   

The Merger Agreement obligates F&M to appoint Andrew J. Briggs to the F&M and F&M Bank Boards of Directors. Mr. Briggs will be entitled to receive compensation, consistent with what F&M and F&M Bank non-employee directors receive, from F&M and/or F&M Bank for service to the Boards. In addition, Mr. Briggs will be appointed 1st Senior Vice President of Business Development of F&M Bank.

Termination of the Merger (page 57)

Both F&M and LBI can mutually agree to terminate the Merger Agreement before we complete the Merger. In addition, either LBI or F&M acting alone can terminate the Merger Agreement under the circumstances described on page 57.

LBI has agreed to pay F&M a termination fee of $3,500,000 if:

 

   

LBI’s Board of Directors terminates the Merger Agreement in the exercise of its fiduciary duties after receipt of an unsolicited superior acquisition proposal from a third party; or

 

   

F&M terminates the Merger Agreement because LBI’s Board of Directors withdraws or modifies its recommendation to LBI’s shareholders to vote for the Merger following receipt of a written proposal for an acquisition from a third party.

Material U.S. Federal Income Tax Consequences (page 62)

It is a condition to the closing of the Merger that Shumaker, Loop & Kendrick, LLP deliver an opinion, effective as of the date of the Merger, to F&M, and also deliver a letter addressed to LBI shareholders to the effect that the LBI shareholders are permitted to rely on such opinion, substantially to the effect that, for United States federal income tax purposes, the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. This opinion will not, however, bind the Internal Revenue Service (the “IRS”) which could take a different view. If the Merger is treated as a reorganization, for U.S. federal income tax purposes (i) no gain or loss will be recognized by F&M or LBI as a result of the Merger, (ii) LBI shareholders will recognize gain (but not loss) in an amount not to exceed the cash received in exchange for LBI common stock in the Merger (other than any cash received in lieu of a fractional share of F&M common stock); and (iii) LBI shareholders who exercise dissenters’ rights and receive solely cash in exchange for LBI common stock in the Merger will, generally, recognize gain or loss equal to the difference between the amount of cash received and their tax basis in their shares.

Determining the actual tax consequences of the Merger to you can be complicated. We suggest you consult with your own tax advisors with respect to the tax consequences of the Merger to you.

For a more detailed description of the material federal income tax consequences of the Merger to F&M and LBI shareholders, see “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” on page 62.

Comparative Rights of F&M and LBI Shareholders (page 97)

The rights of shareholders of F&M and LBI differ in some respects. The rights of holders of F&M common stock are governed by the laws of the State of Ohio, including the Ohio General Corporation Law, and F&M’s Articles of Incorporation and Code of Regulations. The rights of holders of LBI common stock are governed by the laws of the State of Indiana, including the IBCL, and LBI’s Articles of Incorporation and Bylaws. Upon completion of the Merger, LBI shareholders who receive F&M common stock will take such stock subject to F&M Articles of Incorporation and Code of Regulations and the Ohio General Corporation Law.



 

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Completion of the Merger (page 52)

The Merger will become effective when we file a Certificate of Merger with the Ohio Secretary of State and Articles of Merger with the Indiana Secretary of State, or at such later date and time as may be set forth in the Certificate of Merger and Articles of Merger. We expect the Merger to become effective on December 31, 2018 or early in the first quarter of 2019.

Comparative Market Price Information

Shares of F&M common stock are listed on the NASDAQ Capital Market under the symbol “FMAO.” LBI common stock is not listed on a stock market or quoted on any “over-the-counter” market and is subject to transfer restrictions under the LBI Articles of Incorporation. Accordingly, there is no established trading market for LBI common stock. As of the record date, LBI had 68 shareholders of record. This number does not reflect the number of persons or entities who may hold their stock in “street name” through a bank, broker, or nominee, or hold through the ESOP. The following table presents quotation information for F&M common stock on August 17, 2018, the business day before the Merger was publicly announced, and October 29, 2018, the last practicable day for which information was available prior to the date of this proxy statement and prospectus. Information regarding LBI common stock is presented as of January 2, 2017, the last practicable day for which information was available prior to August 17, 2018 when an arm’s length sales transaction occurred. There have been no sales transactions of LBI common stock since the execution of the Merger Agreement on August 17, 2018.

 

     F&M
Common Stock
     LBI Sales Price of
Common Stock as of 1/2/17(1)
 
     (Dollars Per Share)  
     High      Low      Close      High     Low     Close  

August 17, 2018

   $ 44.73      $ 43.50      $ 43.88        —   (2)       —   (2)       —   (2)  

October 29, 2018

   $ 42.00      $ 41.04      $ 41.95      $ 32,511.66     $ 32,511.66     $ 32,511.66  

 

(1)

There is no established public trading market for LBI’s common stock. The stock prices above were prices reported to LBI by buyers and/or sellers of LBI common stock at the time transfers of record ownership were requested. While LBI has no knowledge that pricing information reported to it and described above is inaccurate, LBI has no way of independently assuring the accuracy of the price information so reported to it and the buyers and sellers do not have a specific legal obligation to accurately report sale prices to LBI. LBI believes that there were a total of 5 sale transactions involving LBI common stock during the periods reported above, and the pricing information for all of those sale transactions were reported to LBI.

(2)

No pricing information reported.

The market value of the aggregate consideration that LBI shareholders will receive in the Merger is approximately $88.765 million (or $88,765 per share of LBI common stock) based on 1,000 shares of LBI common stock outstanding, F&M’s closing stock price of $43.88 on August 17, 2018, the business day before the Merger was publicly announced, and the cash portion of the Merger Consideration of $8,465.00 per share.



 

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Also set forth below for the closing price of F&M common stock on August 17, 2018, and October 29, 2018, is the equivalent pro forma price of LBI common stock, which we determined by multiplying the applicable price of F&M common stock by the number of shares of F&M common stock we are issuing for each share of LBI common stock in the Merger, which is the Exchange Ratio of 1,830. The equivalent pro forma price of LBI common stock shows the implied value to be received in the Merger by LBI shareholders who receive F&M common stock in exchange for a share of LBI common stock on these dates.

 

     F&M
Common
Stock
     LBI
Common
Stock
     LBI
Equivalent
Pro Forma
 

August 17, 2018

   $ 43.88        —        $ 80,300.40  

October 29, 2018

   $ 41.95        —        $ 76,768.50  

We suggest you obtain a current market quotation for F&M common stock. We expect that the market price of F&M common stock will fluctuate between the date of this document and the date on which the Merger is completed and thereafter. Because the Exchange Ratio is fixed (except for customary anti-dilution adjustments) and the market price of F&M common stock is subject to fluctuation, the value of the shares of F&M common stock that LBI shareholders will receive in the Merger may increase or decrease prior to and after the Merger. The cash portion of the Merger Consideration of $8,465.00 per share will not vary, but will remain constant until paid in connection with the consummation of the Merger.

Comparative Per Share Data

The following table sets forth the basic and diluted earnings per common share, book value per share and cash dividends per share for each of F&M and LBI on an historical basis, for F&M on a pro forma combined basis, and on a pro forma combined basis per LBI equivalent share.

The pro forma data gives effect to the proposed issuance of 1,830,000 shares of F&M common shares to LBI shareholders, which assumes 1,000 shares of LBI common stock are outstanding at the time of closing and assumes that there are no dissenters. For purposes of presenting pro forma basic and diluted earnings per share, cash dividends per share, and book value per share, the comparative pro forma data assumes that F&M and LBI had been combined throughout the period shown. The data in the column “Pro Forma Equivalent Per LBI Share” shows the effect of the Merger from the perspective of an owner of LBI common stock, and was obtained by multiplying the Combined Pro Forma Amounts for F&M by the “Exchange Ratio” of 1,830.

We expect that we will incur reorganization and restructuring expenses as a result of combining our two companies. We also anticipate that the Merger will provide the combined company with financial benefits that include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the combined company, does not take into account these expected expenses or these anticipated financial benefits, and does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the merged company would have been had our companies been merged during the periods presented.

LBI does not have a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and accordingly does not file documents and reports with the SEC to be incorporated by reference.

The information in the following table is based on historical financial information of LBI and F&M. The information with respect to F&M is included in its reports previously filed with the SEC. The historical financial information of F&M has been incorporated into this document by reference. See “WHERE YOU CAN FIND



 

14


Table of Contents

ADDITIONAL INFORMATION” on page 107 for a description of documents that we incorporate by reference into this document and how to obtain copies of them.

F&M AND LBI

HISTORICAL AND PRO FORMA PER SHARE DATA

 

     F&M
Historical
     Adjusted
F&M
Historical
     LBI
Historical
     Combined
Pro Forma
Amounts For
F&M(1)
 

Year ended December 31, 2017

 

        

Net Income per share

           

Basic

   $ 1.38      $ (0.22    $ 5,347.26      $ 1.41  

Diluted

   $ 1.38      $ (0.22    $ 5,347.26      $ 1.41  

Cash Dividends per share

   $ 0.50      $ 0.50      $ 4,400.00      $ 0.50  

 

(1)

See “Unaudited Pro Forma Summary of Selected Consolidated Financial Data” on page 18 for certain supporting information.

SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth certain summary historical consolidated financial data for each of our companies. F&M’s and LBI’s balance sheet and income statement data as of and for the five years in the period ended December 31, 2017 are taken from each of F&M’s and LBI’s respective audited financial statements (which data and financial statements are presented on a consolidated basis).

The following tables also set forth certain summary unaudited pro forma consolidated financial information for F&M and LBI reflecting the Merger. The pro forma disclosures are being presented to provide additional information in support of the pro forma data included under the “Comparative Per Share Data” section of this SUMMARY. As a result, this condensed pro forma presentation is not intended to comply with the disclosure requirements under Article 11 of Regulation S-X. The income statement information presented gives effect to the Merger as if it occurred on the first day of the period presented. The balance sheet information presented gives effect to the Merger as if it occurred on December 31, 2017. The pro forma data reflects the proposed acquisition of LBI and the proposed issuance of 1,830,000 shares of F&M common shares to LBI shareholders, which assumes 1,000 shares of LBI common stock are outstanding at the time of closing, assumes that there are no dissenters and assumes the payment of $8,465,000 in cash, in the aggregate, to the LBI shareholders as part of the Merger Consideration.

The pro forma information reflects the purchase method of accounting, with LBI’s assets and liabilities recorded at their estimated fair values as of December 31, 2017. The actual fair value adjustments to the assets and the liabilities of LBI will be made on the basis of appraisals and evaluations that will be made as of the date the Merger is completed. Thus, the actual fair value adjustments may differ significantly from those reflected in these pro forma financial statements. In the opinion of F&M’s management, the estimates used in the preparation of these pro forma financial statements are reasonable under the circumstances.

We expect that we will incur reorganization and restructuring expenses as a result of combining our companies. We also anticipate that the Merger will provide the combined company with financial benefits that include reduced operating expenses and the opportunity to earn more revenue. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under two sets of assumptions, does not take into account these expected expenses or anticipated financial benefits, and does not attempt to predict or suggest future results.



 

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Table of Contents

This selected financial data is only a summary and you should read it in conjunction with F&M’s consolidated financial statements and related notes incorporated into this document by reference. See “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107 for a description of documents that we incorporate by reference into this document and how to obtain copies of such documents.

F&M

FIVE YEAR SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

(Dollars in Thousands, Except Per Share Amounts)

 

    Six Months
Ending June 30
    Years Ending December 31,  
    2018     2017     2017     2016     2015     2014     2013  

Summary of Operations (in thousands)

             

Total Interest Income

  $ 22,673     $ 19,845     $ 41,248     $ 37,727     $ 33,650     $ 33,453     $ 31,428  

Total Interest Expense

    2,990       2,432       5,127       4,223       3,587       3,716       4,604  

Net Interest Income

    19,683       17,413       36,121       33,504       30,063       29,737       26,824  

Provision for Loan Losses

    172       98       222       1,121       625       1,191       858  

Net Interest Income After

Provision for Loan Losses

    19,511       17,315       35,899       32,383       29,438       28,546       25,966  

Noninterest Income

    5,416       5,357       10,735       11,368       10,788       10,184       10,838  

Noninterest Expense

    15,278       14,169       28,731       27,431       26,067       25,213       24,201  

Net Income Before Income Taxes

    9,649       8,503       17,903       16,320       14,159       13,517       12,603  

Income Taxes

    1,768       2,441       5,183       4,656       3,819       3,871       3,596  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 7,881     $ 6,062     $ 12,720     $ 11,664     $ 10,340     $ 9,646     $ 9,007  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information

             

Basic EPS(1)

  $ 0.85     $ 0.66     $ 1.38     $ 1.27     $ 1.12     $ 1.04     $ 0.97  

Diluted EPS(1)

  $ 0.85     $ 0.66     $ 1.38     $ 1.27     $ 1.12     $ 1.04     $ 0.97  

Dividends Declared(1)

  $ 0.27     $ 0.24     $ 0.50     $ 0.46     $ 0.44     $ 0.42     $ 0.41  

Average Basic Shares Outstanding

    9,173,530       9,155,450       9,250,825       9,224,230       9,234,116       9,256,356       9,353,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Diluted Shares Outstanding

    9,173,530       9,155,450       9,250,825       9,224,230       9,234,116       9,256,356       9,353,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period End Balance (in thousands)

             

Total Assets

  $ 1,105,332     $ 1,066,175     $ 1,107,009     $ 1,055,895     $ 989,068     $ 941,213     $ 965,938  

Total Loans

  $ 831,015     $ 790,838     $ 823,024     $ 758,094     $ 684,630     $ 622,345     $ 576,113  

Allowance for Loan Losses

  $ 6,789     $ 7,077     $ 6,868     $ 6,784     $ 6,057     $ 5,905     $ 5,194  

Total Deposits

  $ 930,766     $ 877,475     $ 919,340     $ 842,203     $ 77,1339     $ 762,560     $ 776,464  

Stockholders’ Equity

  $ 137,576     $ 131,235     $ 134,137     $ 125,577     $ 120,097     $ 114,493     $ 108,617  

Selected Ratios

             

Return on Average Assets

    1.41     1.14     1.18     1.14     1.08     1.02     0.96

Return on Average Equity

    11.64     9.47     9.75     9.38     8.80     8.72     8.28

 

(1)

Share data has been adjusted to reflect a 2 for 1 stock split on September 20, 2017.



 

16


Table of Contents

LBI

FIVE YEAR SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

(Dollars in Thousands, Except Per Share Amounts)

 

     Six Months Ending
June 30,
    Years Ending December 31  
     2018     2017     2017     2016     2015     2014     2013  

Summary of Operations (in thousands)

              

Total Interest Income

   $ 7,130     $ 6,115     $ 12,712     $ 11,334     $ 10,728     $ 9,911     $ 8,557  

Total Interest Expense

     931       699       1,522       1,078       914       970       823  

Net Interest Income

     6,199       5,416       11,190       10,256       9,814       8,941       7,734  

Provision for Loan Losses

     225       210       420       330       300       254       600  

Net Interest Income After Provision for Loan Losses

     5,974       5,206       10,770       9,926       9,514       8,687       7,134  

Noninterest Income

     472       737       1,126       746       1,100       903       937  

Noninterest Expense

     3,373       3,091       6,570       5,954       5,689       5,373       5,094  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 3,073     $ 2,852     $ 5,326     $ 4,718     $ 4,925     $ 4,217     $ 2,977  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information

              

Basic EPS

   $ 3,079.07     $ 2,864.86     $ 5,347.26     $ 4,765.94     $ 4,995.42     $ 4,323.18     $ 3,031.31  

Diluted EPS

   $ 3,079.07     $ 2,864.86     $ 5,347.26     $ 4,765.94     $ 4,995.42     $ 4,323.18     $ 3,031.31  

Dividends Declared

   $ 1,375.00     $ 2,325.00     $ 4,400.00     $ 1,950.00     $ 2,800.00     $ 2,335.00     $ 3,025.00  

Average Basic Shares Outstanding

     998       996       996       990       986       976       982  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Diluted Shares Outstanding

     998       996       996       990       986       976       982  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period End Balance (in thousands)

              

Total Assets

   $ 286,656     $ 258,121     $ 279,214     $ 243,678     $ 224,285     $ 214,270     $ 205,527  

Total Loans

   $ 258,498     $ 231,952     $ 242,631     $ 220,857     $ 205,072     $ 186,526     $ 176,610  

Allowance for Loan Losses

   $ 3,213     $ 2,792     $ 2,996     $ 2,586     $ 2,276     $ 1,965     $ 1,776  

Total Deposits

   $ 215,833     $ 188,421     $ 215,833     $ 177,067     $ 166,371     $ 166,917     $ 155,133  

Stockholders’ Equity

   $ 30,756     $ 29,136     $ 29,539     $ 28,369     $ 25,422     $ 23,380     $ 19,939  

Selected Ratios

              

Return on Average Assets

     2.20     2.28     2.06     2.06     2.27     2.01     1.63

Return on Average Equity

     20.45     19.84     17.96     17.50     20.15     19.47     15.13


 

17


Table of Contents

F&M

UNAUDITED PRO FORMA SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

(Dollars in Thousands, Except Per Share Amounts)

 

December 31, 2017

 

     F&M
Historical
     Adjusted
F&M
Historical
         LBI
Historical
     Combined
Pro Forma
Amounts For
F&M(1)
 

Summary of Operations

             

Interest income

   $ 41,248      $ (26   (J)    $ 12,712      $ 53,934  

Interest expense

     5,127        (40   (K) (L)      1,522        6,609  
  

 

 

    

 

 

      

 

 

    

 

 

 

Net interest income

     36,121        14          11,190        47,325  

Provision for loan losses

     222        —            420        642  

Net interest income after provision

     35,899        14          10,770        46,683  

Non-interest income

     10,735        (586   (M)      1,126        11,275  

Non-interest expenses

     28,731        —            6,570        35,301  
  

 

 

    

 

 

      

 

 

    

 

 

 

Income before income tax expense

     17,903        (572        5,326        22,657  

Income tax expense

     5,183        1,811     (N)      —          6,994  
  

 

 

    

 

 

      

 

 

    

 

 

 

Net Income

   $ 12,720      $ (2,383      $ 5,326      $ 15,663  
  

 

 

    

 

 

      

 

 

    

 

 

 

Per Share Data

             

Net Income

             

Basic

   $ 1.38      $ (0.22      $ 5,347.26      $ 1.41  

Diluted

   $ 1.38      $ (0.22      $ 5,347.26      $ 1.41  

Cash Dividends

   $ 0.50      $ 0.50        $ 4,400.00      $ 0.50  

Balance End of Period

             

Total assets

   $ 1,107,009      $ 50,763        $ 279,214      $ 1,436,986  

Total loans

   $ 823,024      $ (3,102      $ 242,631      $ 1,062,553  

Allowance for loan losses

   $ 6,868      $ (2,996      $ 2,996      $ 6,868  

Total deposits

   $ 919,340      $ 75        $ 215,833      $ 1,135,248  

Stockholders’ equity

   $ 134,137      $ 58,264        $ 29,539      $ 221,940  

 

June 30, 2018

 

     F&M
Historical
     Adjusted
F&M
Historical
         LBI
Historical
     Combined
Pro Forma
Amounts For
F&M(1)
 

Summary of Operations

             

Interest income

   $ 22,673      $ (13   (J)    $ 7,130      $ 29,790  

Interest expense

     2,990        (20   (K) (L)      931        3,901  
  

 

 

    

 

 

      

 

 

    

 

 

 

Net interest income

     19,683        7          6,199        25,889  

Provision for loan losses

     172        —            225        397  

Net interest income after provision

     19,511        7          5,974        25,492  

Non-interest income

     5,416        (293   (M)      472        5,595  

Non-interest expenses

     15,278        1,350          3,373        20,001  
  

 

 

    

 

 

      

 

 

    

 

 

 

Income before income tax expense

     9,649        (1,636        3,073        11,086  

Income tax expense

     1,768        645     (N)      —          2,413  
  

 

 

    

 

 

      

 

 

    

 

 

 

Net Income

   $ 7,881      $ (2,281      $ 3,073      $ 8,673  
  

 

 

    

 

 

      

 

 

    

 

 

 


 

18


Table of Contents
     F&M
Historical
     Adjusted
F&M
Historical
         LBI
Historical
     Combined
Pro Forma
Amounts For
F&M(1)
 

Per Share Data

             

Net Income

             

Basic

   $ 0.85      $ (0.21      $ 3,079.07      $ 0.78  

Diluted

   $ 0.85      $ (0.21      $ 3,079.07      $ 0.78  

Cash Dividends

   $ 0.27      $ 0.27        $ 1,375.00      $ 0.27  

Balance End of Period

             

 

June 30, 2018

 

     F&M
Historical
     Adjusted
F&M
Historical
         LBI
Historical
     Combined
Pro Forma
Amounts For
F&M(1)
 

Total assets

   $ 1,105,332      $ 50,763     Sum (A) to (F)
and (AA) to
(CC)
   $ 286,656      $ 1,442,751  

Total loans

   $ 831,015      $ (3,102   (A) (B)    $ 258,498      $ 1,086,411  

Allowance for loan losses

   $ 6,789      $ (3,213   (F)    $ 3,213      $ 6,789  

Total deposits

   $ 930,766      $ 75     (G)    $ 215,833      $ 1,146,674  

Stockholders’ equity

   $ 137,576      $ 58,366     (I)    $ 30,756      $ 195,942  

December 31, 2017 adjusted and combined information calculations involving LBI are based on a 34% tax rate and June 30, 2018 calculations are based on a 21% tax rate.

 

(1)

See Note 1 in “Notes to Unaudited Pro Forma Summary of Selected Consolidated Financial Data on page 21 for information relating to the determination of the purchase price and application of the purchase method of accounting in estimating the fair values of LBI’s assets and liabilities as of December 31, 2017. The actual fair value adjustments to the assets and the liabilities of LBI will be made on the basis of appraisals and evaluations that will be made as of the date the Merger is completed.

Balance Sheet

 

  (A)

Reduced for non-accretable credit mark of 1.25% of LBI loans as of balance sheet date. [$(3,231)]

 

  (B)

Fair value adjustment of loans to be amortized to interest income over five years. [$129]

 

  (C)

Fair value adjustment based upon PP&E appraisals. To be recognized over useful life of assets.

 

  (D)

Estimate of goodwill that will be recognized as part of the purchase accounting transaction. [$62,088]

 

  (E)

Core deposit intangible to be recorded at no more than $4.1MM and amortized straight-line over 7 years. [$4,100]

 

  (F)

Remove LBI ALL [$(3,213)]

 

  (G)

Fair value adjustment of certificates of deposits to be amortized to interest expense over life of CDs. [$75]

 

  (H)

Fair value adjustment for outstanding long-term borrowings to be amortized to interest expense over life of borrowings. [$50]

 

  (I)

Remove LBI stockholders’ equity; 90% of purchase price attributable to stock less Adjusted BV of LBI. [$80,305]



 

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Table of Contents
  (AA)

Fixed cash component of the purchase—$8,465 per share (LBI -1,000 shares) [$(8,465)]

 

  (BB)

F&M preclosing transaction costs [(1,350)]

 

  (CC)

Elimination of OCI from LBI [(705)]

Income Statement

 

  (J)

Amortization/(Accretion) estimate for the fair value adjustment on loans [26]

 

  (K)

(Amortization)/Accretion estimate for the fair value adjustment on CDs [23]

 

  (L)

(Amortization)/Accretion estimate for the fair value adjustment on borrowings [17]

 

  (M)

Amortization of CDI [586]

 

  (N)

Estimate of federal income tax on LBI earnings, 34% for the year-ended December 31, 2017, and 21% for the period ended June 30, 2018.



 

20


Table of Contents

NOTES TO UNAUDITED PRO FORMA SUMMARY OF SELECTED

CONSOLIDATED FINANCIAL DATA

(Dollars in Thousands, Except Per Share Amounts)

Note 1 – Determination and Allocation of Purchase Price

Each share of LBI common stock that is outstanding immediately prior to the Merger, other than shares held by persons who have perfected dissenters’ rights and any shares owned by F&M or LBI, will be converted into the right to receive 1,830 shares of F&M common stock and cash of $8,465.00. The table below assumes the issuance of 1,830,000 shares of F&M common stock, which represents an assumed 1,000 shares of LBI common stock outstanding multiplied by the Exchange Ratio, plus the payment of $8,465,000 in cash.

 

To record goodwill generated from the acquisition Purchase Price:

  

LBI shares outstanding

     1,000  

Exchange Ratio

     1,830  
  

 

 

 

F&M shares issued

     1,830,000  

F&M common stock price at 8/17/2018

   $ 43.88  
     80,300,400  
  

 

 

 

Cash portion of Merger Consideration

   $ 8,465,000  
  

 

 

 

Total Purchase Price

   $ 88,765,400  
  

 

 

 
     (Dollars in
thousands)
 

Total Purchase Price

   $ 88,765  

Allocated to:

  

Historical book value of LBI assets and liabilities

     30,756  

LBI estimated transaction costs

     (1,928
  

 

 

 

Adjusted book value of LBI

   $ 28,828  
  

 

 

 

Adjustments to record assets and liabilities at fair value:

  

Loans, fair value mark

     (3,102

LBI allowance for loan losses write-off

     (3,213

Other real estate owned

     (18

Core deposits intangible

     4,100  

Borrowings

     50  

CDs fair value mark

     75  

Deferred taxes

     (43
  

 

 

 

Total allocation

     (2,151
  

 

 

 

Goodwill

     62,088  
  

 

 

 


 

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RISK FACTORS

In addition to general investment risks and the other information contained in or incorporated by reference into this proxy statement and prospectus, including the matters addressed under the section “FORWARD-LOOKING STATEMENTS,” you should carefully consider the following risk factors in deciding how to vote for the Merger Proposal presented in this proxy statement and prospectus. You should also consider the other information in this proxy statement and prospectus and the other documents incorporated by reference into this proxy statement and prospectus. See “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107.

Risk Factors Relating to the Merged Company and Its Industry

Combining the two (2) companies may be more difficult, costly or time consuming than expected and the anticipated benefits and costs savings of the Merger may not be realized.

The success of the Merger will depend on a number of factors, including, but not limited to, the merged company’s ability to:

 

   

integrate LBI’s operations with the operations of F&M;

 

   

maintain existing relationships with F&M’s depositors and LBI’s depositors to minimize withdrawals of deposits subsequent to the acquisition;

 

   

maintain and enhance existing relationships with borrowers of F&M and LBI;

 

   

achieve projected net income of F&M Bank and expected cost savings and revenue enhancements from the merged company;

 

   

control the incremental non-interest expense to maintain overall operating efficiencies;

 

   

retain and attract key and qualified management, lending and other banking personnel; and

 

   

compete effectively in the communities served by F&M and LBI, and in nearby communities.

F&M’s failure to successfully integrate LBI into its business may adversely affect its financial condition and results of operations.

The value of the stock consideration to be received by LBI shareholders in the Merger will fluctuate.

If the Merger is completed, LBI shareholders (other than dissenting shareholders) will receive a number of shares of F&M common stock based on a fixed Exchange Ratio of 1,830 shares of F&M common stock for each share of LBI common stock, plus $8,465.00 in cash. Because the market value of F&M common stock may (and likely will) fluctuate, the value of the stock portion of the Merger Consideration you receive for your shares may also fluctuate. The market value of F&M common stock could fluctuate for any number of reasons, including those specific to F&M and those that influence trading prices of equity securities generally. As a result, you will not know the exact value of the shares of F&M common stock you will receive at the time you must vote your shares. The value of F&M common stock on the closing date of the Merger may be greater or less than the market price of F&M common stock on the record date, on the date of this proxy statement and prospectus or on the date of the special meeting. Moreover, the fairness opinion of Renninger is dated August 17, 2018. Changes in the operations and prospects of F&M and LBI, general market and economic conditions and other factors which are both within and outside of the control of F&M and LBI, on which the fairness opinion is based, may alter the relative value of the companies. The Merger Agreement does not require that Renninger’s fairness opinion be updated as a condition to the completion of the Merger. Therefore, the fairness opinion does not address the fairness of the Exchange Ratio at the time the Merger will be completed. The cash portion of the Merger Consideration, $8,465.00 per share, will remain constant. The cash portion represented approximately 9.5% of the total Merger Consideration as of the date the Merger Agreement was signed.

We encourage you to obtain a current market quotation for F&M common stock because the value of any F&M shares you receive may be more or less than the value of such shares as of the date of this document.

 

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The merged company’s allowance for loan losses may not be adequate to cover actual loan losses.

The merged company’s loan customers may not repay their loans according to their terms, and the customers’ collateral securing the payment of their loans may be insufficient to assure repayment. As of December 31, 2017, approximately 68% of the merged company’s loans are comprised of commercial real estate, commercial lines of credit, term and development loans, and agricultural loans, which can result in higher loan loss experience than residential loans in economic downturns. The underwriting, review and monitoring that will be performed by the merged company’s officers and directors cannot eliminate all of the risks related to these loans.

Each of F&M and LBI make various assumptions and judgments about the collectability of their respective loan portfolios and provide an allowance for loan losses based on a number of factors. If the assumptions are wrong or the facts and circumstances subsequently and materially change, the allowance for loan losses and Merger-related credit marks may not be sufficient to cover the merged company’s loan losses. The merged company may have to increase its allowance for loan losses in the future, which could decrease its net income.

Deterioration in loan quality will adversely affect the merged company’s results of operations and financial condition.

Each of F&M and LBI seek to mitigate the risks inherent in their respective loan portfolios by adhering to sound underwriting practices. Their lending strategies also include emphasizing diversification on a geographic, industry and customer level, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality. There is continuous review of their respective loan portfolios, including internally administered loan “watch” lists and independent loan reviews. These evaluations take into consideration identified credit problems, as well as the possibility of losses inherent in the loan portfolio that are not specifically identified. Although F&M and LBI believe their underwriting and loan review procedures are appropriate for the various kinds of loans they make, the merged company’s results of operation and financial condition will be adversely affected in the event the quality of their respective loan portfolios deteriorates. As of December 31, 2017, F&M had approximately $1.0 million and LBI had approximately $2.3 million (comprised of classified, non-accrual, and impaired loans) in non-performing loans.

Changes in interest rates may reduce the merged company’s net interest income.

Like other financial institutions, the merged company’s net interest income is its primary revenue source. Net interest income is the difference between interest earned on loans and investments and interest expense incurred on deposits and other borrowings. The merged company’s net interest income will be affected by changes in market rates of interest, the interest rate sensitivity of its assets and liabilities, prepayments on its loans and investments and limits on increases in the rates of interest charged on certain of its loans.

The merged company will not be able to predict or control changes in market rates of interest. Market rates of interest are affected by regional and local economic conditions, as well as monetary policies of the Federal Reserve. The following factors also may affect market interest rates:

 

   

inflation;

 

   

slow or stagnant economic growth or recession;

 

   

unemployment;

 

   

money supply;

 

   

international disorders;

 

   

instability in domestic and foreign financial markets; and

 

   

other factors beyond the merged company’s control.

 

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Each of F&M and LBI has policies and procedures designed to manage the risks from changes in market interest rates; however, despite risk management, changes in interest rates could adversely affect the merged company’s results of operations and financial condition.

Changes in economic conditions and the geographic concentration of the merged company’s markets could adversely affect the merged company’s financial condition.

The merged company’s success will depend to a great extent upon the general economic conditions of the Northwest Ohio and Northcentral and Northeast Indiana areas. Unlike larger banks that are more geographically diversified, the merged company will provide banking and financial services to customers primarily located in these areas. Favorable economic conditions may not exist in the merged company’s markets.

A continued economic slowdown could have the following consequences:

 

   

loan delinquencies may increase;

 

   

problem assets and foreclosures may increase;

 

   

demand for the products and services of LBI and F&M may decline; and

 

   

collateral for loans made by LBI and F&M may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans.

The pro forma financial data included in this document is preliminary and the actual financial condition and results of operations of F&M after the Merger may differ materially.

The pro forma financial data in this document is presented for illustrative purposes only and is not necessarily indicative of what F&M’s actual financial condition or results of operations would have been had the Merger been completed on the dates indicated. The unaudited pro forma summary of selected consolidated financial data reflect adjustments, which are based upon preliminary estimates and the purchase price allocation reflected in this document is preliminary, and final allocation of the purchase price will be based upon the actual purchase price and the fair value of the assets and liabilities of LBI as of the date of the completion of the Merger. For more information, please see “F&M and LBI Historical and Pro Forma Per Share Data” beginning on page 15 and “Unaudited Pro Forma Summary of Selected Consolidated Financial Data” beginning on page 18.

Anti-takeover defenses may delay or prevent future mergers.

Provisions contained in F&M’s Articles of Incorporation and Code of Regulations and certain provisions of Ohio law could make it more difficult for a third party to acquire F&M, even if doing so might be beneficial to F&M shareholders. See “COMPARISON OF COMMON STOCK—Anti-Takeover Provisions” on page 97. These provisions could limit the price that some investors might be willing to pay in the future for shares of F&M common stock and may have the effect of delaying or preventing a change in control.

If the Merger is not completed, the parties will have incurred substantial expenses without realizing the expected benefits.

F&M and LBI have incurred substantial expenses in connection with the transactions described in this proxy statement and prospectus. The completion of the Merger depends on the satisfaction of several conditions. We cannot guarantee that these conditions will be met. LBI expects to incur approximately $2.2 million in pre-tax Merger-related expenses and F&M expects to incur approximately $1.3 million in pre-tax Merger-related expenses, which include legal, accounting and financial advisory expenses, among others, and which excludes any termination fees, if applicable. Although some of these expenses will not be incurred if the Merger is not completed, others will and such expenses could have a material adverse impact on the financial condition of

 

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F&M and LBI because they would not have realized the expected benefits of the Merger. There can be no assurance that the Merger will be completed.

The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed, which could have a negative impact on LBI.

The Merger Agreement with F&M is subject to a number of conditions which must be fulfilled in order to close. Those conditions include: LBI shareholder approval, regulatory approvals, the continued accuracy of certain representations and warranties by both parties and the performance by both parties of certain covenants and agreements. Because approximately 55.9% of the common stock of LBI is owned or controlled by members of the Board of Directors of LBI, each of whom has committed to vote such shares in favor of the Merger, the risk of not obtaining shareholder approval is lower than in most transactions. However, there can be no assurance that the regulatory approval and other conditions to consummation of the transaction will be obtained and that the Merger will be completed.

In addition, certain circumstances exist where either F&M or LBI, individually, or F&M and LBI, mutually, may choose to terminate the Merger Agreement, including the acceptance of a superior acquisition proposal by LBI and if greater than 10% of the outstanding shares of LBI common stock exercise their dissenters’ rights in accordance with Chapter 44 of the IBCL. See “THE MERGER AGREEEMENT—Termination; Waiver; Amendment” for a more complete discussion of the circumstances under which the Merger Agreement could be terminated. There can be no assurance that the conditions to closing the Merger will be fulfilled or that the Merger will be completed.

If the Merger Agreement is terminated, there may be various consequences to LBI, including:

 

   

LBI’s businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger;

 

   

LBI may experience negative reactions from its customers, venders, and/or employees; and

 

   

LBI will have incurred substantial expenses in connection with the Merger, without realizing any of the anticipated benefits of completing the Merger.

If the Merger Agreement is terminated by LBI due to its acceptance of a superior acquisition proposal or by F&M due to the failure of LBI’s Board of Directors to recommend approval of the Merger Agreement to its shareholders by reason of a superior acquisition proposal or for certain related reasons, then LBI has agreed pay to F&M a $3,500,000 termination fee. The payment of the termination fee could have a material adverse effect on LBI’s financial condition, and there can be no assurance that LBI would be able to complete a transaction with a party willing to pay an equivalent or more attractive price than the price F&M has agreed to pay in the Merger.

The termination fee and the restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire LBI.

Until the completion of the Merger, with some exceptions, LBI is prohibited from soliciting, initiating, encouraging or participating in any discussion of, providing information with respect to, or otherwise considering any inquiries or proposals that may lead to an acquisition proposal, such as a merger or other business combination transaction, with any person other than F&M. In addition, LBI has agreed to pay a termination fee of $3,500,000 to F&M if the LBI Board of Directors withdraws or modifies its recommendation to its shareholders with respect to the Merger Proposal by reason of a superior acquisition proposal. These provisions likely will discourage other companies from trying to acquire LBI even though such other companies might be willing to offer greater value to LBI’s shareholders than F&M has offered in the Merger Agreement. The payment of the termination fee also could have a material adverse effect on LBI’s financial condition.

 

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The market price of F&M common stock after the Merger may be affected by factors different from those affecting the shares of LBI or F&M currently.

Upon completion of the Merger, holders of LBI common stock will become holders of F&M common stock. F&M’s business differs in important respects from that of LBI, and, accordingly, the results of operations of the combined company and the market price of F&M common stock after the completion of the Merger may be affected by factors different from those currently affecting the independent results of operations of each of F&M and LBI. F&M is, and will continue to be, subject to the risks described in F&M’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, all of which are filed with the SEC and incorporated by reference into this proxy statement and prospectus. See the documents incorporated by reference in this proxy statement and prospectus and referred to under “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107.

LBI shareholders will have a reduced ownership and voting interest after the Merger and will exercise less influence over management.

LBI’s shareholders currently have the right to vote in the election of the LBI Board of Directors and on other matters affecting LBI. When the Merger occurs, each LBI shareholder will become a shareholder of F&M with a percentage ownership of the combined organization that is smaller than the shareholder’s percentage ownership of LBI. Because of this, LBI’s shareholders will have less influence over the management and policies of F&M than they now have over the management and policies of LBI.

Risk Factors Relating to the Merger

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

The transactions contemplated in the Merger Agreement cannot be completed until F&M receives necessary regulatory approvals, which include the approval of the Federal Deposit Insurance Corporation and Ohio Division of Financial Institutions and may also include the Board of Governors of the Federal Reserve System if the requirement to file an application for approval of the transaction is not waived. In determining whether to grant these approvals, the regulators consider a variety of factors, including the regulatory standing of each party and the factors described under “THE MERGER—Regulatory Approvals.” An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval or delay its receipt. These regulators may impose conditions on the completion of the Merger or the Bank Merger or require changes to the terms of the Merger or the Bank Merger. Such conditions or changes could have the effect of delaying or preventing completion of the Merger or the Bank Merger or imposing additional costs on or limiting the revenues of the combined company following the Merger and the Bank Merger, any of which might have an adverse effect on the combined company following the Merger.

Certain of LBI’s directors and executive officers have interests in the Merger that may differ from the interests of LBI’s shareholders.

LBI shareholders should be aware that some of LBI’s executive officers and directors have interests in the Merger and have arrangements that are different from, or in addition to, those of LBI shareholders generally. LBI’s Board of Directors was aware of and considered these interests, among other matters, when making its decision to approve and adopt the Merger Agreement, and in recommending that LBI shareholders vote in favor of approving the Merger Agreement.

For a description of these interests, see “THE MERGER—Interests of Certain Persons in the Merger” on page 52.

 

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LBI and F&M will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on LBI or F&M. These uncertainties may impair LBI’s or F&M’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with LBI or F&M to seek to change existing business relationships with LBI or F&M. Retention of certain employees by LBI or F&M may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with LBI or F&M. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with LBI or F&M, LBI’s and/or F&M’s business could be harmed. In addition, subject to certain exceptions, each of LBI and F&M has agreed to operate its business in the ordinary course prior to closing. See “THE MERGER AGREEMENT—Restrictions Affecting the Parties Prior to Completion of the Merger” on page 58 for a description of the restrictive covenants applicable to LBI and F&M while the Merger is pending.

The shares of F&M common stock to be received by LBI shareholders as a result of the Merger will have different rights from the shares of LBI common stock.

Upon completion of the Merger, LBI shareholders will become F&M shareholders and their rights as shareholders will be governed by the F&M Articles of Incorporation and Code of Regulations and Ohio law. The rights associated with LBI common stock may be different from the rights associated with F&M common stock. Please see “COMPARISON OF COMMON STOCK” beginning on page 97 for a discussion of the different rights associated with F&M common stock.

F&M and LBI may waive one or more of the conditions to the Merger and, except in certain instances, amend the Merger Agreement without re-soliciting LBI shareholder approval for the Merger.

Each of the conditions to the obligations of F&M and LBI to complete the Merger may, to the extent permitted by applicable law, be waived in writing by agreement by F&M and LBI, if the condition is a condition to both parties’ obligation to complete the Merger, or by the party for which such condition is a condition of its obligation to complete the Merger. Further, except in certain instances and to the extent permitted by applicable law, F&M and LBI may amend, modify, or supplement the Merger Agreement. The boards of directors of F&M and LBI may evaluate the materiality of any such waiver, amendment, modification, or supplement to determine whether amendment of this proxy statement and prospectus and re-solicitation of proxies is necessary. F&M and LBI, however, generally do not expect any such waiver, amendment, modification, or supplement to be significant enough to require re-solicitation of LBI’s shareholders. In the event that any such waiver, amendment, modification, or supplement is not determined to be significant enough to require re-solicitation of LBI’s shareholders, except as otherwise provided in the Merger Agreement, the companies will have the discretion to complete the Merger without seeking further shareholder approval.

The Merger may fail to qualify as a tax-free reorganization for federal tax purposes, resulting in your recognition of taxable gain or loss in respect of your shares of LBI common stock.

F&M and LBI intend the Merger to qualify as a tax-free “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. Although the IRS will not provide a ruling on the matter, F&M and LBI will, as a condition to closing, obtain an opinion from legal counsel that the Merger will constitute a “reorganization” for federal tax purposes. This opinion does not bind the IRS or prevent the IRS from adopting a contrary position. If the Merger fails to qualify as a reorganization, you generally would recognize gain or loss on each share of LBI common share surrendered in an amount equal to the difference between your adjusted tax basis in that share and the fair market value of the Merger consideration received in exchange for that share upon completion of the Merger. Furthermore, if the Merger fails to qualify as a reorganization, there may be additional tax consequences to LBI and its shareholders associated with the deemed sale by LBI of its assets to F&M, which could result in corporate level gains and associated taxes.

 

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LBI shareholders will have dissenters’ rights in the Merger.

Dissenters’ rights are statutory rights that, if applicable under law, enable shareholders to dissent from an extraordinary transaction, such as a Merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction. The shareholders of LBI will have the rights accorded to dissenting shareholders under Chapter 44 of the IBCL. The fair value determined through a judicial proceeding may be more or less than the consideration offered under the Merger Agreement. As a result, F&M bears the risk that payments owed to dissenting shareholders may exceed the consideration outlined in this proxy statement and prospectus.

 

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THE LBI SPECIAL MEETING

Special Meeting of Shareholders of

LBI

General Information

We are furnishing this document to the shareholders of LBI in connection with the solicitation by the Board of Directors of LBI of proxies for use at the LBI special meeting of shareholders to be held on December 12, 2018, at 5:00 p.m. local time, at The Clock Tower Inn, 1335 US Highway 27 North, Berne, Indiana 46711. This document is first being mailed to LBI shareholders on November 7, 2018, and includes the notice of LBI special meeting, and is accompanied by a form of proxy.

Matters To Be Considered

The purposes of the special meeting are as follows:

 

  1.

Merger Proposal. To consider and vote upon a proposal to approve the Merger Agreement and the transactions contemplated thereby, pursuant to which LBI will merge with and into F&M and, immediately thereafter, Bank of Geneva will merge with and into F&M Bank.

 

  2.

Adjournment Proposal. To approve one (1) or more adjournments of the LBI special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Merger Proposal.

 

  3.

Other Matters. To vote upon such other matters which may properly be presented at the special meeting or any adjournment or postponement of the special meeting. LBI’s Board of Directors is not aware of any such other matters.

Pursuant to the Merger Agreement, LBI will merge into F&M. The Merger Agreement is attached to this document as Annex A and is incorporated in this document by reference. For a description of the Merger Agreement, see “THE MERGER AGREEMENT,” beginning on page 54.

Record Date, Voting Rights, Quorum, and Vote Required

LBI has fixed October 26, 2018, as the record date for determining those LBI shareholders entitled to notice of, and to vote at, the special meeting. Accordingly, if you were an LBI shareholder of record at the close of business on October 26, 2018, you will be entitled to notice of and to vote at the special meeting. Each share of LBI common stock you own on the record date entitles you to one (1) vote on each matter presented at the special meeting. At the close of business on the record date of October 26, 2018, there were 1,000 shares of LBI common stock outstanding held by approximately 68 shareholders of record. This number does not reflect the number of persons or entities who may hold their stock in “street name” through a bank, broker, or nominee, or hold through the ESOP.

The presence, in person or by proxy, of shareholders holding at least a majority of the outstanding shares of LBI common stock as of the record date will constitute a quorum for the special meeting. In determining whether a quorum is present, shareholders who abstain, cast broker non-votes, or are otherwise present at the special meeting will be deemed present at the special meeting. Once a share is represented for any purpose at the special meeting, it will be deemed present for quorum purposes for the remainder of the meeting. Approval of the Merger Proposal requires the affirmative vote of at least a majority of the outstanding shares of LBI common stock. Approval of the Adjournment Proposal only requires more votes to be cast in favor of the proposal than are cast against it.

Voting Agreement

Each of the directors of LBI has entered into a voting agreement with F&M pursuant to which each of them has agreed, subject to their fiduciary duties to entertain a superior third-party acquisition proposal under the Merger Agreement, to vote, or cause to be voted, all of their shares of LBI common stock owned by each of them

 

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of record or beneficially, including shares owned by certain other persons over which they have voting control, in favor of the Merger Proposal. Collectively, as of the record date, our directors had the power to vote, or cause to be voted, 558.9037 shares, or approximately 55.9% of the outstanding shares of LBI common stock. Assuming that the members of the Board vote these shares in favor of the Merger as required under the voting agreement, the Merger will be approved by the LBI shareholders. See “THE MERGER AGREEMENT—Voting Agreement” on page  61.

Voting

You may vote your shares in person by attending the special meeting, or by mailing us your completed proxy if you are unable or do not wish to attend. We encourage you to vote by mailing the proxy card even if you plan to attend the meeting. If your shares are held in “street name” by a bank, broker, or other nominee, you are considered the beneficial owner of shares held in “street name.” As the beneficial owner, you have the right to direct your bank, broker, or other nominee on how to vote your shares of LBI common stock. To vote your shares in person at the special meeting, you must obtain a signed proxy from your bank, broker, or other nominee giving you the right to vote your shares. To obtain such a proxy, you should follow the instructions provided by your bank, broker, or other nominee.

Proxies

If you are an LBI shareholder, you should have received a proxy card for use at the LBI special meeting with this proxy statement and prospectus. The accompanying proxy card is for your use in voting at the special meeting if you are unable or do not wish to attend the special meeting in person. The shares represented by proxies properly signed and returned will be voted at the special meeting as instructed by the LBI shareholder giving the proxies. Proxy cards that are properly signed and returned but do not have voting instructions will be voted “FOR” approval of the Merger Proposal and “FOR” approval of the Adjournment Proposal.

If you deliver a properly signed proxy card, you may revoke your proxy at any time before it is exercised by:

 

   

delivering to the Corporate Secretary of LBI at or prior to the special meeting a written notice of revocation addressed to LBI, 215 East Line Street, Geneva, Indiana 46740, Attention: Richard D. Briggs, Corporate Secretary;

 

   

delivering to LBI at or prior to the special meeting a properly completed proxy card having a later date; or

 

   

voting in person by ballot at the special shareholders meeting.

Because approval of the Merger Proposal requires the affirmative vote of at least a majority of the outstanding shares of LBI common stock, abstentions and broker non-votes will have the same effect as voting “AGAINST” approval of the Merger Proposal. Accordingly, your Board of Directors urges all LBI shareholders to vote by proxy by completing, dating and signing the accompanying proxy and returning it promptly in the enclosed postage-paid envelope. Abstentions and broker non-votes will have no effect on the Adjournment Proposal since it only requires more votes to be cast in favor of the proposal than are cast against it at the meeting. You should not send stock certificates with your proxy card.

Voting Shares Held in the Bank of Geneva Employee Stock Ownership Plan (“ESOP”)

If shares of LBI common stock are credited to your plan account under the ESOP, you will receive a voting instruction card that you may use to direct the trustee to vote these shares on your behalf under the ESOP. Under the terms of the ESOP, a participant is entitled to direct the trustee how to vote the shares of LBI common stock credited to his or her account under the ESOP. If the ESOP trustee does not receive timely voting instructions for

 

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the shares of LBI common stock held in the ESOP, the shares for which the trustee does not receive timely instructions will be voted in a manner calculated to most accurately reflect the instructions received from other ESOP participants.

Solicitation of Proxies

LBI will bear the entire cost of soliciting proxies from and mailing proxies to its shareholders in connection with the LBI special meeting. In addition to solicitation of proxies by mail, proxies may be solicited personally or by telephone by directors, officers and certain employees of LBI, who will not be specially compensated for such soliciting.

In soliciting proxies, no one has any authority to make any representations and warranties about the Merger or the Merger Proposal in addition to or contrary to the provisions stated in this document. No statement regarding the Merger, the Merger Agreement or the Merger Proposal should be relied upon except as expressly stated in this document.

Recommendation of the LBI Board of Directors

LBI’s Board of Directors has approved the Merger Agreement. LBI’s Board of Directors believes that the Merger is fair to and in the best interests of LBI and its shareholders. The Board recommends that the LBI shareholders vote “FOR” approval of the Merger Proposal and “FOR” approval of the Adjournment Proposal. See “THE MERGER—LBI’s Reasons for the Merger” on page 38.

Other Matters

The special meeting of LBI shareholders has been called for the purposes set forth in the Notice to LBI shareholders included in this document. Your Board of Directors is unaware of any matter for action by shareholders at the special meeting other than as stated in the Notice or in this proxy statement and prospectus. However, the enclosed proxy will give discretionary authority to the persons named in the proxy with respect to matters which are not known to your Board of Directors as of the date hereof and which may properly come before the special meeting. It is the intention of the persons named in the proxy to vote with respect to such matters in accordance with the recommendations of the Board of Directors of LBI or, if no recommendations are given, in their best judgment. The approval of the transaction of any other business that may properly come before the special meeting generally requires more votes to be cast in favor of the proposal than are cast against it.

 

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Beneficial Ownership of LBI Common Stock by Certain Shareholders

The following table shows, as of June 30, 2018, which is the most recent practicable date prior to the date of the proxy statement and prospectus, the beneficial ownership of LBI common stock of each person who beneficially owns more than five percent (5%) of LBI’s outstanding common stock, each LBI director, each of the executive officers of LBI and/or Bank of Geneva and all of the directors and executive officers as a group. Unless otherwise indicated, each person has sole voting and investment power with respect to the shares set forth in the following table. This table should be read with the understanding that more than one (1) person may be the beneficial owner or possess certain attributes of beneficial ownership with respect to the same LBI common stock. The address for the directors and executive officers is c/o 215 East Line Street, Geneva, Indiana 46740.

 

Name of Beneficial Owner

   Amount and Nature of
Beneficial Ownership
    Percent of Class(1)  

Directors

    

Frederick L. Bixler

     3       *  

Andrew J. Briggs

     387.2973 (2)       38.7297

Christopher W. Briggs

     93.0808 (3)       9.3081

James P. Buckingham

     41.5256 (4)       4.1526

Russell W. Flueckiger

     11 (5)       1.1

Mark P. Merkel

     1       *  

Leslie Briggs Snider

     19       1.9

Eugene R. Subler

     3 (6)       *  

Susan Zurcher

     —         —    

Non-Director Executive Officers

    

Phillip P. Lucas

     2.5401 (7)       *  

Julie Steiner

     3.9915 (8)       *  

Timothy Dubach

     1.1796 (9)       *  

Robert Rhoades

     1.6827 (10)       *  

Directors and Non-Director Executive Officers as a Group (13 persons)

     568.2976       56.8298

Other Greater Than 5% Shareholders

    

John P. Briggs(11)

     61 (12)       6.1

Richard D. Briggs(13)

     64 (14)       6.4

Sara L. Briggs Income Trust(15)

     95 (16)       9.5

Sara L. Briggs Income Trust II(17)

     155 (18)       15.5

 

*

Less than 1% of the total outstanding.

(1) 

Based upon 1,000 shares of LBI common stock outstanding as of October 26, 2018.

(2) 

Includes 2 shares held jointly with Mr. Briggs’ spouse; 23.1213 shares allocated to Mr. Briggs under the ESOP; 0.1271 shares allocated to Mr. Briggs’ spouse under the ESOP; 95 shares held by the Sara L. Briggs Income Trust, for which Mr. Briggs serves as trustee; 155 shares held by the Sara L. Briggs Income Trust II, for which Mr. Briggs serves as trustee; and 0.0489 shares allocated to Sara L. Briggs under the ESOP, for which Mr. Briggs serves as attorney in fact pursuant to a duly executed power of attorney.

(3)

Includes 0.0808 shares allocated to Mr. Briggs under the ESOP.

(4)

Includes 40.5256 shares allocated to Mr. Buckingham under the ESOP.

(5)

Consists of 3 shares held jointly with Mr. Flueckiger’s spouse and 8 shares held individually by Mr. Flueckiger’s spouse.

(6)

Consists of 3 shares held jointly with Mr. Subler’s spouse.

(7) 

Consists of 2.5401 shares allocated to Mr. Lucas under the ESOP.

(8) 

Consists of 3.3839 shares allocated to Ms. Steiner under the ESOP and 0.6076 shares allocated to Ms. Steiner’s spouse under the ESOP.

(9) 

Consists of 1.1796 shares allocated to Mr. Dubach under the ESOP.

(10) 

Consists of 1.6827 shares allocated to Mr. Rhoades under the ESOP.

 

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(11) 

Mr. Briggs’ address is 115 W. Butcher Street, P O Box 616, Geneva, IN 46740.

(12) 

Includes 1 share held individually by Mr. Briggs’ spouse.

(13) 

Mr. Briggs’ address is 3696 N. Shady Lane, Decatur, IN 46733.

(14) 

Includes 1 share held individually by Mr. Briggs’ spouse.

(15) 

The Sara L. Briggs Income Trust’s address is 920 N. Main Street, Geneva, IN 46740.

(16)

These shares are the same shares which are beneficially owned by Mr. Andrew J. Briggs as a result of his service as trustee of the Sara L. Briggs Income Trust (see note 2 above).

(17) 

The Sara L. Briggs Income Trust II’s address is PO Box 278, Geneva, IN 46740.

(18)

These shares are the same shares which are beneficially owned by Mr. Andrew J. Briggs as a result of his service as trustee of the Sara L. Briggs Income Trust II (see note 2 above).

 

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MERGER PROPOSAL

LBI is asking its shareholders to approve the Merger Proposal. Holders of LBI common stock should read this proxy statement and prospectus carefully and in its entirety, including the annexes, for more detailed information concerning the Merger Agreement and the Merger. A copy of the Merger Agreement is attached to this proxy statement and prospectus as Annex A.

After careful consideration, the Board of Directors of LBI approved and adopted the Merger Agreement and determined it to be advisable and in the best interest of LBI and its shareholders. See “THE MERGER—LBI’s Reasons for the Merger; Recommendation of LBI’s Board of Directors” included elsewhere in this proxy statement and prospectus for a more detailed discussion of the LBI Board of Directors’ recommendation.

For the reasons discussed in this proxy statement and prospectus, the Board of Directors of LBI determined that the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of LBI and its shareholders, and adopted and approved the Merger Agreement. The Board of Directors of LBI recommends that LBI shareholders vote “FOR” approval of the Merger Proposal.

ADJOURNMENT PROPOSAL

The LBI special meeting may be adjourned to another time or place, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the LBI special meeting to approve the Merger Proposal.

If, at the LBI special meeting, the number of shares of LBI common stock present or represented and voting in favor of the Merger Proposal is insufficient to approve the Merger Proposal, LBI intends to move to adjourn the LBI special meeting in order to enable the Board of Directors of LBI to solicit additional proxies for approval of the Merger Proposal. In that event, LBI will ask its shareholders to vote upon the Adjournment Proposal, but not the Merger Proposal.

In this Adjournment Proposal, LBI is asking its shareholders to authorize the holder of any proxy solicited by the Board of Directors of LBI, on a discretionary basis, to vote in favor of adjourning the LBI special meeting to another time and place for the purpose of soliciting additional proxies, including the solicitation of proxies from LBI shareholders who have previously voted.

The Board of Directors of LBI recommends a vote “FOR” the Adjournment Proposal.

 

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THE MERGER

At the special meeting, the shareholders of LBI will consider and vote upon approval of the Merger Agreement. The following summary highlights certain information about the Merger. To understand the Merger, you should read carefully this entire proxy statement and prospectus, including the Merger Agreement, which is attached to this document as Annex A.

Description of the Merger

Under the terms and subject to the conditions of the Merger Agreement approved by each of LBI’s and F&M’s Boards of Directors, LBI will merge with and into F&M and the separate corporate existence of LBI will cease. Immediately following the Merger, Bank of Geneva will merge with and into F&M Bank and Bank of Geneva will cease to exist as a separate entity. The Articles of Incorporation and Code of Regulations of F&M, as in effect prior to the Merger, will be the Articles of Incorporation and Code of Regulations of F&M after the Merger.

Merger Consideration/Exchange of LBI Common Stock

The Merger Agreement provides that LBI shareholders (other than dissenting shareholders) will have the right, with respect to each of their shares of LBI common stock, to receive, without interest, (i) 1,830 shares (the “Exchange Ratio”) of F&M common stock, and $8,465.00 in cash (collectively the “Merger Consideration”), subject to the payment of cash instead of fractional shares.

If F&M changes the number of outstanding shares of F&M common stock before the Merger through any stock split, stock dividend, recapitalization or similar transaction, then the Exchange Ratio will be proportionately adjusted so that LBI shareholders will receive such number of shares of F&M common stock as represents the same percentage of outstanding shares of F&M common stock at the effective date of the Merger as would have been represented by the number of shares of F&M common stock such shareholder would have received if the recapitalization had not occurred.

F&M will not issue fractional shares to LBI shareholders. Instead, LBI common shareholders will receive for each fractional share an amount in cash determined by multiplying (i) the fractional interest by (ii) the average of the closing price of the common stock of F&M for the ten (10) days that F&M common stock trades on the NASDAQ Capital Market preceding the fourth calendar day prior to the effective date of the Merger.

If you are an LBI shareholder, you will receive F&M common stock as a portion of the Merger Consideration for your shares of LBI common stock. As such, the value of the consideration that you will receive in the Merger will depend on the market price of F&M common stock when you receive your shares of F&M common stock. The implied per share value of the stock consideration, based upon F&M’s closing stock price on October 29, 2018, the most recent practicable trading day before this proxy statement and prospectus was finalized, was $76,768.50 per share. No assurance can be given (and it is not likely) that the current market price of F&M common stock will be equivalent to the market price of F&M common stock on the date that shares of F&M common stock are received by an LBI shareholder or at any other time.

On or prior to the effective date of the Merger, F&M will deposit with Computershare Trust Company, or another exchange agent selected by F&M (the “Exchange Agent”), as exchange agent, shares in book entry form of F&M common stock, each to be given to the holders of LBI common stock in exchange for old certificates (or shares in book entry form) representing shares of LBI common stock. Within three (3) business days following the effective date of the Merger, F&M will mail a letter of transmittal to each person who was, immediately prior to the effective time of the Merger, a holder of record of LBI common stock. The letter of transmittal will contain instructions for use in effecting the surrender of LBI stock certificates (or shares in book entry form) in exchange for the Merger Consideration to which such person is entitled pursuant to the Merger Agreement. Within ten

 

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(10) business days following the later of the effective date of the Merger or the surrender to the Exchange Agent of the old certificate(s) (or shares in book entry form) representing shares of LBI common stock for cancellation, together with such letter of transmittal duly executed and completed, the holder of such old certificate(s) (or shares in book entry form) will be provided evidence of shares in book entry form representing shares of F&M common stock and a check for the cash portion of the Merger Consideration ($8,465 per share) and any cash to be paid in lieu of fractional shares, pursuant to the Merger Agreement, and the old certificate (or shares in book entry form) will be canceled.

Until you surrender your LBI stock certificates (or shares in book entry form) for exchange, you will accrue, but will not be paid, any dividends or other distributions declared after the effective time of the Merger with respect to F&M common stock into which any of your shares may have been converted. In addition, until you surrender your LBI stock certificates (or shares in book entry form) for exchange, you will not be paid the cash portion of the Merger Consideration ($8,465 per share) and any cash to be paid in lieu of fractional shares. When you surrender your LBI stock certificates (or shares in book entry form), F&M will pay any unpaid dividends or other distributions, without interest. After the completion of the Merger, there will be no transfers on the stock transfer books of LBI of any shares of LBI common stock.

If a certificate for LBI common stock has been lost, stolen or destroyed, F&M will issue the consideration properly payable under the Merger Agreement to the registered owner of such certificate upon receipt of an affidavit of lost stock certificate, in form and substance satisfactory to F&M, and upon compliance by the LBI shareholder with all procedures historically required by LBI in connection with lost, stolen or destroyed certificates.

Effect of the Merger on F&M Shareholders

The approval of the F&M shareholders of the Merger Agreement is not required in order to complete the Merger. F&M shareholders will also not be entitled to exchange their shares of F&M common stock for any consideration as a result of the Merger. After the Merger, F&M shareholders will continue to own the same number of F&M shares they owned before the Merger.

Background of the Merger

The following chronology summarizes certain key events and contacts that led to the signing of the Merger Agreement. It does not purport to catalogue every conversation among LBI’s Board of Directors, members of its management, or its representatives and other parties.

Andrew J. Briggs, LBI’s Chairman, informed Michael A. Renninger, Principal of Renninger & Associates, LLC, on January 30, 2018, of his interest in exploring the potential sale of LBI for reasons more fully discussed below under the heading “LBI’s Reasons for the Merger; Recommendation.”

On February 6, 2018, LBI entered into an engagement agreement with Renninger to assist it in assessing strategic alternatives and to pursue affiliation with another financial institution. LBI selected Renninger based on its qualifications, expertise, reputation, and experience in mergers and acquisitions involving Indiana financial institutions similar to LBI.

Renninger provided a list of ten financial institutions that would have a potential interest in acquiring LBI at prices ranging from 169% to 254% of book value, a range which was very favorable compared to recent transactions. LBI decided to proceed with testing the market upon Renninger’s completion of its due diligence procedures and preparation of a Confidential Information Memorandum. Based on LBI’s interest in maintaining confidentiality and a strong preference for an acquiror with reasonable stock liquidity, Renninger was authorized to contact six financial institutions regarding their potential interest in acquiring LBI. These financial institutions were selected based on an anticipation of their ability to offer sufficient value, a satisfactory level of stock

 

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liquidity, and a strong interest in LBI’s staff, customers, and communities. Three parties, including F&M, signed confidentiality agreements during the week of May 14, 2018 and were allowed access to a virtual data room containing extensive financial and operating information on LBI. Two parties ultimately provided Indications of Interest during the week of June 18, 2018.

LBI promptly considered the merits of the Indications of Interest and Renninger’s summary and recommendation. Based on the superiority of its proposal and the expectation that it would provide a good fit for LBI’s customers, communities, and employees, F&M was invited to conduct off-site due diligence. F&M completed off-site due diligence procedures by June 28, 2018 and submitted a non-binding Letter of Intent on July 5, 2018, which was revised on July 9, 2018 to address the impact of a change in the proposed transaction’s structure. The second party was not invited to conduct due diligence procedures since F&M reiterated its superior proposal and LBI was focused on retaining confidentiality.

LBI’s Board of Directors met with Mr. Renninger on July 13, 2018 to consider F&M’s non-binding Letter of Intent. The LBI Board of Directors voted unanimously to accept the terms of the non-binding Letter of Intent based, in part, on its superior financial and non-financial terms relative to the other proposal and recent comparable transactions, and agreed to proceed with negotiations of a definitive agreement.

Over the ensuing weeks, Shumaker, Loop & Kendrick, LLP (“SLK”), legal counsel to F&M, and SmithAmundsen LLC (“SmithAmundsen”), legal counsel to LBI, exchanged drafts and negotiated provisions of the Merger Agreement, with the input of Renninger, ProBank Austin, LLC, financial advisor to F&M, and the management teams of LBI and F&M on certain business and financial terms. During this time, management of the parties and their respective financial and legal advisors continued discussions and additional due diligence was performed. The parties also provided drafts of their respective disclosure letters to the Merger Agreement and discussed other aspects of the proposed transaction.

On Friday, August 17, 2018, LBI’s Board of Directors met to consider a nearly final draft of the Merger Agreement. John Tanselle and Andrew Podgorny of SmithAmundsen were present and led a discussion, answering questions from the LBI Board of Directors throughout, regarding the structure of the proposed transaction with F&M, the terms and conditions of the Merger Agreement and ancillary documents, and the directors’ fiduciary duties under Indiana law in connection with a potential merger. Mr. Renninger was also present and discussed at length the process used by Renninger to develop all proposals, including the one received from F&M, and the financial terms of the Merger Agreement which approximated 288% of book value based on F&M’s stock price at that time, and rendered his verbal opinion, subject to the conditions, limitations, qualifications, and assumptions set forth in the Renninger written opinion, that the Merger Consideration was fair to LBI shareholders from a financial point of view. Renninger subsequently confirmed this verbal opinion pursuant to a written opinion dated August 17, 2018 (which is attached as Annex C to this proxy statement and prospectus). Following additional discussion amongst the LBI Board of Directors, management, counsel, and its financial adviser, the LBI Board of Directors approved the Merger Agreement and the Merger and the other transactions contemplated thereby (subject to the finalization of minor changes to the Merger Agreement and ancillary agreements). In connection therewith, each member of the LBI Board of Directors entered into a voting agreement with F&M agreeing to vote, or cause to be voted, all of their shares of LBI common stock, and shares owned by certain affiliates over which they have voting control, in favor of the Merger Proposal. Later that day, F&M and LBI executed the Merger Agreement.

Prior to the opening of business on Monday, August 20, 2018, management of both parties met with LBI’s employees and issued a joint press release announcing the Merger.

 

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F&M’s Reasons for the Merger

In reaching its decision to adopt and approve the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, the F&M Board of Directors consulted with F&M management and considered a number of factors, including the following material factors:

 

   

each of F&M’s and LBI’s business, operations, financial condition, asset quality, earnings and prospects. In reviewing these factors, the F&M Board of Directors considered that the Merger (1) will expand F&M’s business within attractive markets in Northeastern and Northcentral Indiana; (2) will increase total loans, the key revenue source for F&M; (3) will provide F&M with an experienced management team and quality bank branches in and around Northeastern and Northcentral Indiana; and (4) will provide F&M with the opportunity to sell F&M’s broad array of products to LBI’s client base;

 

   

its understanding of the current and prospective environment in which F&M and LBI operate, including national and local economic conditions, the competitive environment for financial institutions generally, and the likely effect of these factors on F&M both with and without the proposed transaction;

 

   

its review and discussions with F&M’s management concerning the due diligence examination of LBI;

 

   

the complementary nature of the cultures of the two companies, which management believes should facilitate integration and implementation of the transaction;

 

   

the financial and other terms of the Merger Agreement, including the fixed Exchange Ratio, tax treatment and deal protection and termination fee provisions, which it reviewed with its outside financial and legal advisors;

 

   

the potential risk of diverting management attention and resources from the operation of F&M’s business towards the completion of the Merger; and

 

   

the regulatory and other approvals required in connection with the Merger and the expectation that such regulatory approvals will be received in a timely manner and without the imposition of unacceptable conditions.

The foregoing discussion of the information and factors considered by the F&M Board of Directors is not intended to be exhaustive, but includes the material factors considered by the F&M Board of Directors. In reaching its decision to approve and adopt the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, the F&M Board of Directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The F&M Board of Directors considered all these factors as a whole, including discussions with, and questioning of, F&M’s management and F&M’s financial and legal advisors, and overall considered the factors to be favorable to, and to support, its determination.

For the reasons set forth above, the F&M Board of Directors determined that the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of F&M and its shareholders, and approved and adopted the Merger Agreement.

LBI’s Reasons for the Merger; Recommendation

After careful consideration, LBI’s Board of Directors, at a meeting held on August 17, 2018, determined that the Merger Agreement is advisable, fair to, and in the best interests of LBI and its shareholders. Accordingly, LBI’s Board of Directors adopted and approved the Merger Agreement and the Merger and the other transactions contemplated by the Merger Agreement and recommends that LBI shareholders vote “FOR” the approval of the Merger Proposal. In reaching its decision to adopt and approve the Merger Agreement and the Merger and the other transactions contemplated by the Merger Agreement, and to recommend that its shareholders approve the Merger Proposal, the LBI Board of Directors evaluated the Merger and the Merger Agreement in consultation

 

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with LBI’s management, as well as its financial and legal advisors, and considered a number of factors, including the following material factors:

 

   

The review undertaken by the LBI Board of Directors and management, with the assistance of financial and legal advisors, with respect to the strategic alternatives available to LBI, including the possibility of remaining independent.

 

   

The fact that Andrew J. Briggs, current Chairman of LBI and President of Bank of Geneva, had indicated to the LBI Board of Directors his intention to retire and the lack of a suitable successor.

 

   

Each of LBI’s, F&M’s, and the combined company’s business, operations, financial condition, asset quality, earnings, and prospects. In reviewing these factors, the LBI Board of Directors considered its view that based on historical information with respect to F&M’s business, operations, financial condition, asset quality, earnings, and prospects, that the combined company has the ability to grow as an independent community financial institution that will be positioned to take advantage of multiple strategic options in the future and increase shareholder value, and that the Merger would result in a combined company with diversified revenue sources, a balanced loan portfolio, and an attractive funding base.

 

   

The Board of Directors’ understanding of the current and prospective environment in which LBI and F&M operate, including national and local economic conditions, the interest rate environment, the regulatory environment, the competitive environment for financial institutions generally, and the likely effect of these factors on LBI and F&M.

 

   

The expected results to LBI shareholders from continuing to operate as an independent community banking institution compared with the value of the Merger Consideration offered by F&M.

 

   

The expectation that the Merger should result in economies of scale, cost savings, and efficiencies to the combined company.

 

   

The belief that F&M shares LBI’s community banking philosophy and the complementary nature of the cultures of LBI and F&M, which management believes should facilitate integration and implementation of the Merger.

 

   

The anticipated continued participation in the combined company by Andrew J. Briggs, current Chairman of LBI and President of Bank of Geneva, as a member of the Board of Directors of F&M and F&M Bank, Phillip Lucas, current Executive Vice President of Bank of Geneva, as a Senior Vice President of F&M Bank, and certain other employees.

 

   

The anticipated effect of the Merger on LBI’s shareholders, employees, customers, communities served, and other constituents.

 

   

F&M’s perceived superior access to capital and managerial resources relative to that of LBI, and a favorable impression of the experience and capability of F&M’s management team.

 

   

The financial presentations of management and Renninger, LBI’s financial advisor, to the Board of Directors and the oral opinion of Renninger delivered to the Board of Directors on August 17, 2018, which was confirmed by delivery of a written opinion dated August 17, 2018, to the effect that, as of the date of such opinion, and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by Renninger as set forth in its opinion, the Merger Consideration was fair, from a financial point of view, to holders of LBI common stock, as more fully described in the section titled “THE MERGER—Opinion of LBI’s Financial Advisor” beginning on page 41.

 

   

The Merger Consideration of 1,830 shares of F&M common stock plus $8,465.00 in cash for each share of LBI common stock, which equated to $90,320.90 per LBI share (subject to potential reduction as provided for in the Merger Agreement) based on the $44.73 closing price of F&M common stock on August 16, 2018, the last full trading day before the LBI Board of Directors approved the Merger

 

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Agreement. The indicated value represented 293% of the LBI’s tangible book value per share as of June 30, 2018, and 20.7 times LBI’s earnings per share for the twelve months ending June 30, 2018, after adjusting LBI’s S-Corporation earnings for a blended state and federal tax rate of 25%.The LBI Board of Directors understood that these multiples are favorable relative to multiples received in recent transactions involving comparable financial institutions.

 

   

The fact that over 90% of the Merger Consideration will consist of F&M common stock, which would allow LBI shareholders to participate in any possible future growth, earnings, appreciation, and opportunities of the combined LBI and F&M business and synergies resulting from the Merger, and the value to LBI shareholders represented by that consideration.

 

   

The fact that the exchange ratio is fixed so that if the market price of F&M common stock is higher at the time of the closing of the Merger, the economic value of the Merger Consideration to be received by LBI shareholders in exchange for their shares of LBI common stock will also be higher.

 

   

The significant increase in liquidity to LBI shareholders as shares of LBI common stock are not presently listed or quoted on any public market and are further subject to transfer restrictions imposed by LBI’s Articles of Incorporation. On the other hand, F&M common stock is listed and actively traded on the NASDAQ Capital Market.

 

   

The strength and recent performance of F&M’s common stock.

 

   

The financial and other terms of the Merger Agreement, including the parties’ respective representations, warranties, covenants, and conditions to closing, each of which it reviewed with its financial and legal advisors.

 

   

The Merger Consideration will generally be tax-free to LBI shareholders based on the expected tax treatment of the Merger as a “reorganization” for U.S. federal income tax purposes, considering the fact that it is expected that the cash portion of the Merger Consideration will be taxable to the shareholders of LBI, as further described under the section titled “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” beginning on page 62.

 

   

The satisfactory results of LBI’s management’s, with the assistance of financial and legal advisors, reverse due diligence review of F&M.

 

   

The expectation that the Merger would likely be approved by the regulatory authorities and by the shareholders of LBI in a timely manner.

The LBI Board of Directors also considered a number of potential risks and uncertainties associated with the Merger, including, without limitation, the following:

 

   

The risk that the Merger may not be consummated or that the closing may be unduly delayed, including as a result of factors outside either F&M’s or LBI’s control.

 

   

The fact that completion of the Merger requires the regulatory approval and approval of LBI’s shareholders.

 

   

The fact that certain LBI directors and executive officers have financial interests in the Merger in addition to their interests as LBI shareholders and the manner in which such interests would be affected by the Merger.

 

   

The potential risk of diverting management attention and resources from the operation of LBI’s business towards the completion of the Merger.

 

   

The restrictions on the conduct of LBI’s business prior to the completion of the Merger, which are customary for merger agreements involving financial institutions, but which, subject to specific exceptions, could delay or prevent LBI from undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of LBI absent the pending completion of the Merger.

 

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Certain provisions of the Merger Agreement prohibit LBI from soliciting, and limit its ability to respond to, acquisition proposals from third parties.

 

   

The possibility that the cash portion of the Merger Consideration would be reduced in accordance with the terms of the Merger Agreement and the impact of any such reduction on the LBI shareholders.

 

   

The possibility that LBI will have to pay a $3.5 million termination fee to F&M if the Merger Agreement is terminated under certain circumstances.

 

   

The potential risks associated with achieving anticipated cost synergies and savings and successfully integrating LBI’s and Bank of Geneva’s business, operations, and workforce with those of F&M and F&M Bank.

 

   

The fact that the exchange ratio is fixed so that if the market price of F&M common stock is lower at the time of the closing of the Merger, the economic value of the Merger Consideration to be received by LBI shareholders in exchange for their shares of common stock will also be lower.

 

   

The other risks described under the heading “Risk Factors,” beginning on page 22.

In considering the recommendation of the LBI Board of Directors, you should be aware that certain directors and officers of LBI may have interests in the Merger that are different from, or in addition to, interests of LBI shareholders generally and may create potential conflicts of interest. The LBI Board of Directors was aware of these interests and considered them when evaluating and negotiating the Merger Agreement, the Merger, and the other transactions contemplated by the Merger Agreement, and in recommending to LBI’s shareholders that they vote in favor of the Merger Proposal. See “THE MERGER—Interests of Certain Persons in the Merger,” beginning on page 52.

The foregoing discussion of the factors considered by the LBI Board of Directors is not intended to be exhaustive, but, rather, includes the material factors considered by the LBI Board of Directors. In reaching its decision to adopt and approve the Merger Agreement and the Merger and the other transactions contemplated by the Merger Agreement, the LBI Board of Directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The LBI Board of Directors considered all these factors as a whole, including discussions with, and questioning of, LBI’s management and LBI’s financial and legal advisors, and overall considered the factors to be favorable to, and to support, its determination.

For the reasons set forth above, the LBI Board of Directors has adopted and approved the Merger Agreement and the Merger and the transactions contemplated thereby, and recommends that you vote “FOR” the Merger Proposal and “FOR” the Adjournment Proposal.

Opinion of LBI’s Financial Advisor

By letter executed February 6, 2018, LBI jointly retained Renninger & Associates, LLC and Ausdal Financial Partners (“AFP”) (together referred to as “Renninger”) to render financial advisory and investment banking services in connection with general financial strategy and planning and to act as the exclusive financial advisor to LBI in connection with a potential strategic combination. Renninger & Associates, LLC is an investment banking and consulting firm specializing in community bank mergers and acquisitions. AFP is a registered broker dealer affiliated with Renninger & Associates, LLC. Renninger, as a customary part of its business, is continually engaged in the valuation of commercial banks, bank holding companies, savings and loan associations, savings banks, and savings and loan holding companies in connection with mergers, acquisitions, and other securities-related transactions. Renninger has knowledge of, and experience with, the banking markets in which both LBI and F&M operate. LBI selected Renninger as its financial advisor on the basis of its experience and expertise in representing community banks in similar transactions and their familiarity with LBI.

In its capacity as financial advisor, Renninger provided a fairness opinion to the LBI Board of Directors in connection with the proposed Merger. At the meeting of the LBI Board on August 17, 2018, Renninger rendered

 

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its oral opinion to the LBI Board (which was subsequently confirmed in writing by delivery of Renninger’s written opinion dated August 17, 2018) that, based upon and subject to the various factors, assumptions, and limitations set forth in its opinion, Renninger’s experience as an investment banker, Renninger’s work as described in the opinion, and other factors Renninger deemed relevant, as of the opinion date, the Merger Consideration set forth in the Merger Agreement was fair, from a financial point of view, to the holders of LBI common stock. Renninger’s written opinion, dated August 17, 2018, is also referred to herein as the “Renninger Opinion.”

The full text of the Renninger Opinion, which sets forth, among other things, the assumptions made, procedures followed, matters considered, and limitations on the review undertaken in rendering its opinion, is attached as Annex C to this proxy statement and prospectus and is incorporated herein by reference. The summary of the Renninger Opinion set forth herein is qualified in its entirety by reference to the full text of the opinion. LBI common shareholders should read the full text of the opinion carefully and in its entirety. The Renninger Opinion is addressed to the LBI Board of Directors, is directed only to the fairness, from a financial point of view, of the Merger Consideration to the holders of LBI common stock, and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act on any matters relating to the Merger. Renninger provided its oral opinion to the LBI Board of Directors on August 17, 2018 in connection with and for the purposes of the LBI Board’s evaluation of the Merger. The Renninger Opinion addressed only the fairness, from a financial point of view, of the Merger Consideration to the holders of LBI common stock. Renninger expressed no view or opinion as to any of the legal, accounting, and tax matters relating to the Merger and any other transactions contemplated by the Merger Agreement or any terms or other aspects of the Merger Agreement, the Merger, or any such other transactions. Renninger expressed no opinion as to the fairness of any consideration paid in connection with the Merger to the holders of any other class of securities, creditors, or other constituencies of LBI, or as to the underlying decision by LBI to engage in the Merger or enter into the Merger Agreement. Renninger did not express any opinion as to the fairness of the amount or nature of the compensation to be received in the Merger by LBI officers, directors, or employees, or any other class of such persons, relative to the compensation to be received in the Merger by the holders of LBI common stock.

The description of the opinion set forth below is qualified in its entirety by reference to the text of the opinion. You also should consider the following when reading the discussion of the Renninger Opinion in this document:

 

   

The opinion letter details the procedures followed, assumptions made, matters considered, and qualifications and limitations of the review undertaken by Renninger in connection with its opinion, and should be read in its entirety;

 

   

Renninger expressed no opinion as to the price at which LBI’s or F&M’s common stock would actually be sold or trading at any given time;

 

   

The Renninger Opinion does not address the relative merits of the Merger and the other business strategies considered by the LBI Board of Directors, nor does it address the decision of the LBI Board of Directors to proceed with the Merger; and

 

   

The Renninger Opinion does not constitute a recommendation to any LBI shareholder as to how he or she should vote at the special meeting.

The preparation of a fairness opinion involves various determinations as to the most appropriate methods of financial analysis and the application of those methods to the particular circumstances. It is, therefore, not readily susceptible to partial analysis or summary description. In performing its analyses, Renninger made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of LBI and F&M and may not be realized. Any estimates contained in Renninger’s analyses are not necessarily predictive of future results or values, and may be significantly more or less favorable than the estimates. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which the companies or their securities may actually be sold. Unless specifically noted, none of the

 

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analyses performed by Renninger was assigned a greater significance by Renninger than any other. The relative importance or weight given to these analyses is not affected by the order of the analyses or the corresponding results. The summaries of financial analyses include information presented in tabular format. The tables should be read together with the text of those summaries.

With respect to the internal projections and estimates for LBI and F&M, and the expected transaction costs, purchase accounting adjustments, and cost savings, LBI’s and F&M’s management and advisors confirmed to us that they reflected the best currently available estimates and judgments of management of the future financial performance of LBI and F&M, respectively, and Renninger assumed that such performance would be achieved. Renninger expresses no opinion as to such financial projections and estimates or the assumptions on which they are based. Renninger also assumed that there has been no material change in LBI’s or F&M’s assets, financial condition, results of operations, business, or prospects since the date of the most recent financial statements made available to Renninger. Renninger assumed in all respects material to its analysis that LBI and F&M will remain as going concerns for all periods relevant to the analyses, that all of the representations and warranties contained in the Merger Agreement are true and correct, that each party to the Merger Agreement will perform all of the covenants required to be performed by such party under the Merger Agreement, and that the closing conditions in the Merger Agreement are not waived. Finally, Renninger has relied upon the advice LBI has received from its legal, accounting, and tax advisors as to all legal, accounting, and tax matters relating to the Merger and the other transactions contemplated by the Merger Agreement.

Renninger has relied, without independent verification, upon the accuracy and completeness of the information it reviewed for the purpose of rendering its opinion. Renninger did not undertake any independent evaluation or appraisal of the assets and liabilities of LBI or F&M, nor was it furnished with any appraisals. Renninger has not reviewed any individual credit files of LBI or F&M, and has assumed that LBI’s and F&M’s allowances are, in the aggregate, adequate to cover inherent credit losses. The Renninger Opinion is based on economic, market, and other conditions existing on the date of its opinion. No instructions were given to Renninger and no limitations were imposed upon Renninger by LBI’s Board of Directors or its management with respect to the investigations made or the procedures followed by Renninger in rendering its opinion. Renninger was not asked to, and did not, make any recommendation to the LBI Board of Directors as to the form or amount of the consideration to be paid to the LBI shareholders, which was determined through arm’s length negotiations between LBI and F&M.

In rendering its opinion, Renninger made the following assumptions:

 

   

all material governmental, regulatory, and other consents and approvals necessary for the consummation of the Merger would be obtained without any adverse effect on LBI, F&M, or on the anticipated benefits of the Merger;

 

   

LBI and F&M have provided all of the information that might be material to Renninger in its review; and

 

   

the financial projections it reviewed were reasonably prepared on a basis reflecting the best currently available estimates and judgment of the management of LBI and F&M as to the future operating and financial performance of LBI and F&M, respectively.

In connection with its opinion, Renninger reviewed:

 

  (i)

the Merger Agreement, dated as of August 17, 2018;

 

  (ii)

certain publicly available financial statements and other historical financial information of LBI and F&M that we deemed relevant;

 

  (iii)

certain non-public internal financial and operating data of LBI and F&M that were prepared and provided to us by the respective management of LBI and F&M;

 

  (iv)

internal financial projections for LBI for the year ending December 31, 2018, as prepared by and reviewed with management of LBI;

 

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  (v)

internal financial projections for F&M for the year ending December 31, 2018, as prepared by and reviewed with management of F&M;

 

  (vi)

the pro forma financial impact of the Merger on F&M, based on assumptions relating to transaction expenses, purchase accounting adjustments and cost savings as discussed with representatives of F&M;

 

  (vii)

publicly reported historical stock price and trading activity for F&M’s common stock, including an analysis of certain financial and stock information of certain other publicly traded companies deemed comparable to LBI and F&M;

 

  (viii)

the financial terms of certain recent business combinations in the commercial banking industry, to the extent publicly available, deemed comparable to the Merger;

 

  (ix)

the current market environment generally and the banking environment in particular; and

 

  (x)

such other information, financial studies, analyses, and investigations and financial, economic, and market criteria as we considered relevant.

Renninger also discussed with certain members of senior management of LBI the business, financial condition, results of operations, and prospects of LBI, including certain operating, regulatory, and other financial matters. Renninger was provided similar information from certain members of senior management of F&M regarding the business, financial condition, results of operations, and prospects of F&M.

The following is a summary of the material factors considered and analyses performed by Renninger in connection with its opinion dated August 17, 2018. The summary does not purport to be a complete description of the analyses performed by Renninger.

Summary of Financial Terms of Agreement. The financial terms of the Merger Agreement provide that LBI shareholders shall be entitled to receive, in exchange for each share LBI common stock, the Merger Consideration consisting of 1,830 shares of F&M’s common stock and $8,465.00 in cash. Based on 1,000 common shares of LBI outstanding and F&M’s common stock closing price of $44.73 on August 16, 2018, the last full trading day before the LBI Board of Directors approved the Merger Agreement, the implied deal value per share equaled $90,320.90 and the aggregate transaction value approximated $90.3 million (calculated by multiplying the per share deal value of $90,320.90 by the total number of LBI common shares of 1,000). Renninger calculated that the value of $90,320.90 per share represented:

 

   

293 percent of LBI’s June 30, 2018 tangible book value per share; and

 

   

20.7 times LBI’s earnings per share for the last twelve months ending June 30, 2018, after adjusting LBI’s S-Corporation earnings for a blended state and federal tax rate of 25%.

The Merger Agreement provided for a potential downward adjustment to the aggregate cash consideration for certain contingencies. It was determined that an aggregate price reduction of $1.5 million was extremely unlikely and, if it did come to pass, Renninger concluded that its opinion as to the fairness of the consideration to LBI shareholders would be unchanged. Based upon information received after August 17, 2018, no downward adjustment is currently anticipated.

 

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LBI Financial Performance and Peer Analysis. Renninger compared selected results of LBI’s operating performance to that of eighteen selected publicly traded financial institutions in Indiana, Illinois, Michigan and Ohio with total assets between $200 million and $400 million. Renninger considered this group of financial institutions comparable to LBI on the basis of asset size and geographic location. This peer group consisted of the following financial institutions:

 

Institution Name

  

City/State

  

Institution Name

  

City/State

AMB Financial Corp    Saint John, IN    Central Bank Corp    Sault S.M., MI
Century Financial Corp    Coldwater, MI    Clarkston Financial Corp    Waterford, MI
CNB Corporation    Cheboyga, MI    Communibanc Corporation    Napoleon, OH
CSB Bancorp, Inc.    Chelsea, MI    Eastern Michigan Financial Corp    Croswell, MI
FFD Financial Corporation    Dover, OH    FFW Corporation    Wabash, IN
First Citizens National Bank    Upper Sandusky, OH    First Ottawa Bancshares, Inc.    Ottawa, IL
FNBH Bancorp    Howell, MI    Grand River Commerce, Inc.    Grandville, MI
HCB Financial Corporation    Hastings, MI    Northeast Indiana Bancorp    Huntington, IN
SVB&T Corporation    Jasper, IN    University Bancorp    Ann Arbor, MI

Renninger noted the following selected financial measures for the peer group as compared to LBI:

Peer Financial Performance(1)

 

     25th Pct.     Median     75th Pct.     LBI(1)  

Total Assets ($millions)

   $ 241     $ 298     $ 382     $ 287  

Tangible Equity/Assets Ratio

     8.31     9.92     12.47     10.75

LTM Return on Average Assets (“ROAA”)

     0.08     0.75     1.39     1.69

LTM Return on Average Equity (“ROAE”)

     0.85     7.00     15.27     15.47

LTM Efficiency Ratio

     80.4     69.1     60.3     50.6

NPAs/Total Assets(2)

     2.24     0.90     0.45     0.20

 

(1) 

Peer financial performance as of the most recent last twelve months (“LTM”) period available. LBI financial performance as of June 30, 2018. LBI ROAA and ROAE have been adjusted to C-Corporation equivalency.

(2) 

Nonperforming Assets (“NPAs”) include nonaccrual loans and leases, renegotiated loans and leases, and real estate owned.

This comparison indicated that LBI was below the median of the peer group in terms of asset size, between the median and the 75th percentile in terms of tangible equity/asset ratio, but outperformed the 75th percentile in terms of ROAA, ROAE, efficiency ratio and NPAs/Total Assets. The following presents a summary of the market trading data of LBI compared to this same peer group as of August 16, 2018:

Peer Market Trading Data

 

     25th Pct.     Median     75th Pct.     LBI  

Price/Tangible Book Value per Share

     63     108     136     N/M  

Price/LTM Core EPS

     9.7       14.7       17.7       N/M  

Dividend Yield

     0.00     1.93     2.78     N/M  

Average Weekly Volume (000)

     35       307       1,447       0  

Average Weekly Volume to Shares

     0.00     0.01     0.05     0.00

LBI is not listed on any stock market or quoted in any “over-the-counter” market. As such, there is not an active trading market for shares of LBI common stock. As an S-Corporation, LBI has generally paid between 60% and 65% of net earnings to shareholders in the form of a tax dividend and/or a return on equity.

 

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Comparable Transaction Analysis. Renninger compared the financial performance of certain selling institutions and the prices paid in selected transactions to LBI’s financial performance and the transaction multiples being paid by F&M for LBI. Specifically, Renninger reviewed certain information relating to select financial institution transactions in the nation between November 8, 2016 (the date of the 2016 U.S. presidential election) and August 16, 2018, the last full trading day before the LBI Board of Directors approved the Merger Agreement, with seller’s assets between $200 million and $400 million, a tangible equity/tangible assets percentage of at least 8% and less than 14%, and a return on average assets of at least 0.75%. Thirty-nine transactions were included in this group based on the selected criterion. The following lists the transactions reviewed by Renninger:

Guideline M&A Transactions

 

Buyer Name

  

State

  

Seller Name

  

State

  

Announced
Date

Bank of Southern California    CA    Americas United Bank    CA    2/22/18
Heritage Commerce Bank    CA    ATBancorp    IA    1/11/18
Investor Group    KY    Bancorp of Lexington    KY    11/14/17
Investor Group    NE    Bank Management, Inc.    NE    1/11/17
Bank of Marin Bancorp    CA    Bank of Napa, N.A.    CA    3/31/17
Farmers & Merchants Bancorp    CA    Bank of Rio Vista    CA    3/26/18
Equity Bancshares, Inc.    KS    Cache Holdings, Inc.    OK    7/17/17
Seacoast Commerce Banc Hldgs    CA    Capital Bank    CA    5/2/17
Suncrest Bank    CA    CBBC Bancorp    CA    11/7/17
RBC Holding Company, Inc.    OK    Central Financial Corporation    KS    3/6/18
LCNB Corp.    OH    Columbus First Bancorp, Inc.    OH    12/21/17
Spirit of Texas Bancshares, Inc.    TX    Camanche National Corporation    TX    7/9/18
First Financial Bankshares, Inc.    TX    Commercial Bancshares, Inc.    TX    10/12/17
Equity Bancshares, Inc.    KS    Eastman National Bancshares, Inc.    OK    7/17/17
SB One Bancorp    NJ    Enterprise Bank N.J.    NJ    6/20/18
Progress Financial Corporation    AL    First Partners Financial, Inc.    AL    2/14/17
FSB LLC    AL    First Southern Bancshares, Inc.    AL    6/27/17
Smart Financial, Inc.    TN    Foothills Bancorp, Inc.    TN    6/27/18
Southern Missouri Bancorp, Inc.    MO    Gideon Bancshares Company    MO    6/12/18
Old Second Bancorp, Inc.    IL    Greater Chicago Financial Corp.    IL    12/26/17
QCR Holding, Inc.    IL    Guaranty Bankshares, Ltd.    IA    6/8/17
United Community Banks, Inc.    GA    HCSB Financial Corporation    SC    4/20/17
Equity Bancshares, Inc.    KS    Kansas Bank Corporation.    KS    12/18/17
Piedmont Bancorp, Inc.    GA    Mountain Valley Bancshares, Inc.    GA    3/17/17
Seacoast Banking Corporation    FL    Palm Beach Community Bank    FL    5/4/17
FFP Group    NM    Raton Capital Corporation    NM    12/13/17
Business First Bancshares, Inc.    LA    Richland State Bancorp, Inc.    LA    6/4/18
Heartland Financial USA, Inc.    IA    Signature Bancshares, Inc.    MN    11/13/17
First American Bank Corporation    IL    Southport Financial Corporation    WI    9/18/17
Fist Bancshares, Inc.    MS    Southwest Banc Shares, Inc.    AL    10/24/17
T Acquisition, Inc.    TX    T Bancshares, Inc.    TX    11/10/16
Independent Bank Corporation    MI    TCSB Bancorp    MI    12/4/17
SmartFinancial, Inc.    TN    Tennessee Bancshares, Inc.    TN    12/12/17
Glacier Bancorp, Inc.    MT    TFB Bancorp, Inc.    AZ    11/15/17
Citizens Community Bancorp, Inc.    WI    United Bancorporation    WI    6/21/18
MutualFirst Financial, Inc.    IN    Universal Bancorp    IN    10/4/17
Triumph Bancorp, Inc.    TX    Valley Bancorp, Inc.    CO    7/26/17
Citizens Community Bancorp, Inc.    WI    Wells Financial Corp.    MN    3/17/17
Guaranty Bancshares, Inc.    TX    Westbound Bank    TX    1/29/18

 

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The following table highlights the median results of the guideline M&A transactions:

M&A Guideline

 

Seller Financial Data

   Median     LBI(1)  

Total Assets ($millions)

   $ 305     $ 287  

Tangible Equity/Tangible Assets

     10.67     10.75

LTM ROAA

     1.01     1.69

LTM ROAE

     9.25     15.47

Efficiency Ratio

     64.32     50.62

NPAs/Total Assets

     0.49     0.20

Deal Transaction Multiples

    

Price/Tangible Book Value Ratio

     169.2     293.1

Price/LTM Earnings

     17.7X       20.7X  

 

(1) 

LBI’s financial performance and deal transaction multiples based on LTM June 30, 2018 data. LBI’s S-Corporation earnings have been adjusted to C-Corporation equivalency.

The median LTM ROAA of the guideline transactions was 1.01 percent which was considerably below LBI’s 2.13 percent on an S-Corporation basis and 1.69% on a C-Corporation equivalent basis. Similarly, the median LTM ROAE was 9.25% for the guideline transactions which was considerably below LBI’s 19.53% on an S-Corporation basis and 15.47% on a C-Corporation equivalent basis. LBI also had a significantly better efficiency ratio and nonperforming assets ratio compared to guideline medians. The indicated price to tangible book value ratio being paid by F&M for LBI of 293.1 percent was higher than the guideline median price to tangible book ratio of 169.2 percent. The price-to-earnings multiple of 20.7 for LBI (on a C-Corporation equivalent basis) was higher than the guideline median of 17.7.

F&M Financial Performance and Market Trading Data versus Peer. Renninger compared selected results of F&M’s operating performance to that of twenty-four Midwest United States publicly traded financial institutions with assets between $800 million and $1.4 billion. Renninger considered this group of financial institutions comparable to F&M on the basis of asset size and geographic location. This peer group consisted of the following companies:

 

Institution Name

 

City/State

  

Institution Name

 

City/State

Ames National Corporation   Ames, IA    BNCCORP, INC.   Bismarck, ND
Citizens Community Bancorp   Eau Claire, WI    Croghan Bancshares, Inc.   Fremont, OH
Fentura Financial, Inc.   Fenton, MI    First Bankers Trustshares, Inc.   Quincy, IL
First Savings Financial Group, Inc.   Clarksville, IN    Foresight Financial Group, Inc.   Winnebago, IL
Guaranty Federal Bancshares, Inc.   Springfield, MO    Heartland Bancorp   Whitehall, OH
HopFed Bancorp, Inc.   Hopkinsville, KY    Kentucky Bancshares, Inc.   Paris, KY
Landmark Bancorp, Inc.   Manhattan, KS    Level One Bancorp, Inc.   Farmington, MI
Limestone Bancorp, Inc.   Louisville, KY    Mackinac Financial Corporation   Manistique, MI
MBT Financial Corp.   Monroe, MI    Middlefield Banc Corp.   Middlefield, OH
Oconomowoc Bancshares, Inc.   Oconomowoc, WI    Ohio Valley Banc Corp.   Gallipolis, OH
PSB Holdings, Inc.   Wausau, WI    SB Financial Group, Inc.   Defiance, OH
Two Rivers Financial Group, Inc.   Burlington, IA    United Bancshares, Inc.   Columbus Gr, OH

 

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Renninger noted the following selected financial measures:

Peer Financial Performance(1)

 

     25th Pct.     Median     75th Pct.     F&M(1)  

Total Assets ($billions)

   $ 0.84     $ 0.99     $ 1.30     $ 1.11  

Tangible Equity/Tangible Assets

     7.05     8.67     11.23     12.09

LTM Core ROAA

     0.42     0.89     1.34     1.32

LTM Core ROAE

     4.60     9.28     12.64     8.29

LTM Efficiency Ratio

     82.0     68.4     59.8     59.8

NPAs/Total Assets

     1.72     0.91     0.33     0.15

LTM Core EPS Growth

     (23.0 %)      18.4     38.0     18.1

 

(1)

Peer and F&M financial performance as of June 30, 2018.

F&M’s tangible equity ratio was above the 75th percentile of the peer group, just below the 75th percentile for core ROAA and was below the median for core ROAE. F&M’s efficiency ratio equaled the 75th percentile, its NPAs/Total Assets was better than the 75th percentile, and its earnings growth was just below the median.

The following presents a summary of the market trading data of F&M compared to this same peer group as of August 16, 2018:

Peer Market Trading Data

 

     25th Pct.     Median     75th Pct.     F&M  

Price/Tangible Book Value per Share

     120     152     186     311

Price/LTM Core EPS

     10.5       15.0       26.3       28.5  

Dividend Yield

     0.65     1.69     2.92     1.32

Average Weekly Volume (000)

     86       2,021       12,501       17,663  

Average Weekly Volume to Shares o/s

     0.01     0.33     1.18     0.95

F&M common stock traded above the 75th percentile of the peer group as measured by price to tangible book value per share and LTM Core EPS. F&M’s dividend yield was between the 25th percentile and median of the peer group. F&M was above the median of the peer group in average weekly trading volume and was below the 75th percentile based on volume to shares outstanding.

Renninger also considered the stock price change of F&M and LBI, if any, compared to selected indices between November 8, 2016 (the date of the 2016 U.S. presidential election) and August 16, 2018, the last full trading day before the LBI Board of Directors approved the Merger Agreement. The U.S. presidential election on November 8, 2016 ushered in a period of optimism for equities in general and in bank stocks in particular due to increased optimism for a reduction to the corporate income tax rate, an increase in interest rates, a reduction in regulatory burden, and an improvement in the general economy. The following table provides additional data:

 

Stock Price Change

   SNL Bank(1)     S&P 500     F&M     LBI  

Between 11/8/2016 – 8/16/18

     46     33     170     N/A  

Source: S&P Global Market Intelligence, a division of S&P Global (f/k/a SNL Financial).

 

(1) 

SNL U.S. Bank: Includes all Major Exchange (NYSE, NYSE American and NASDAQ) Banks in SNL’s coverage universe.

 

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Over this time period, F&M’s stock price increased 170% percent. As previously discussed, LBI’s common stock is not listed on any stock market or quoted in any “over-the-counter” market and there is not an active trading market for shares of LBI common stock. The SNL Bank Index was up approximately 46 percent over the same time period, while the S&P 500 Index was up 33 percent.

Pro Forma Merger Analysis. Renninger analyzed the potential pro forma effect of the Merger. Assumptions were made regarding the fair value accounting adjustments, cost savings and other acquisition adjustments based on discussions with management of LBI and F&M. The analysis indicated that the Merger is expected to be accretive to F&M’s estimated stand-alone EPS in Year 1 (excluding nonrecurring transaction expenses). Renninger calculated that F&M’s tangible book value per share would be diluted at closing, but recovered in approximately three years.

Pro Forma Dividends Per Share to LBI. Based on the 1,830 share exchange ratio and F&M’s current annual cash dividend rate of $0.56 per share, LBI’s common stockholders would have received $1,024.80 in equivalent cash dividends per share. As an S-Corporation, LBI has a practice of distributing 60% to 65% of net earnings to shareholders in the form of a tax dividend and/or a return on equity.

Renninger’s Compensation and Other Relationships with LBI and F&M. LBI agreed to pay Renninger certain fees for its services as financial advisor in connection with the Merger. LBI agreed to pay a cash fee of $10,000 upon execution of the engagement letter and an additional $40,000 upon execution of the Merger Agreement. LBI has also agreed to pay a cash transaction fee of one percent of the transaction value due at closing of the transaction, with a credit for the $50,000 previously paid as described above.

LBI has agreed to reimburse Renninger for its reasonable out-of-pocket expenses up to $7,500, unless otherwise approved by LBI, and to indemnify Renninger against certain liabilities, including liabilities under securities laws. Except as disclosed above, there are no material relationships that existed during the two years prior to the date of the Renninger Opinion or that are mutually understood to be contemplated, in which any compensation was received or is intended to be received as a result of the relationship between Renninger and any party to the Merger.

Summary. Based on the preceding summary discussion and analysis, and subject to the qualifications described herein, Renninger determined the Merger Consideration to be fair, from a financial point of view, to the holders of LBI common stock. The opinion expressed by Renninger was based on market, economic, and other relevant considerations as they existed and could be evaluated as of the date of the opinion. Events occurring after the date of issuance of the opinion, including, but not limited to, changes affecting the securities markets, the results of operations or material changes in the financial condition of either F&M or LBI could materially affect the assumptions used in preparing this opinion.

Rights of Dissenting Shareholders

Under Indiana law, LBI shareholders have dissenters’ rights with respect to the Merger. The dissenters’ rights of LBI shareholders are set forth in Chapter 44 of the IBCL, a copy of which is attached to this document as Annex B. LBI shareholders must strictly comply with the procedures set forth in Chapter 44 of the IBCL to be entitled to receive a fair value cash payment for their shares of LBI common stock rather than having such shares converted into the right to receive the consideration in the Merger as described above.

As an LBI shareholder, Chapter 44 of the IBCL provides that you have the right to demand payment in cash for the “fair value” of the shares of LBI common stock you own immediately before the Merger is completed. In this regard, “fair value” is defined to mean the value of your shares immediately before the effectuation of the Merger, excluding any appreciation or depreciation on the value of your shares in anticipation of the Merger, unless a court determines that such exclusion would be inequitable. For purposes of Chapter 44 of the IBCL, the term “fair value” does not imply, and should not be construed as meaning, that the Merger Consideration is

 

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anything other than fair and in the best interests of LBI shareholders. If a shareholder asserts his, her, or its dissenters’ rights, there is no guarantee that the “fair value” of his, her, or its shares will be determined to be equal to or greater than the Merger Consideration. The opinion of Renninger discussed in this proxy statement and prospectus as to the fairness, from a financial point of view, of the Merger Consideration is not an opinion as to, and it does not address, “fair value” for purposes of Chapter 44 of the IBCL.

To assert your dissenters’ rights, you must first:

 

  1.

deliver to LBI before the vote on the Merger is taken, written notice of your intent to demand payment in cash for your shares if the Merger is completed; and

 

  2.

you must not vote in favor of the Merger. To not vote in favor of the Merger, you must either vote against the Merger Proposal or abstain from voting on the Merger Proposal in person or by proxy or simply take no action at all with respect to voting your shares.

Dissenting shareholders may not dissent as to only some but not all of the LBI common stock registered in their names, except in limited circumstances. Dissenting shareholders may send their written notice to:

Limberlost Bancshares, Inc.

215 East Line Street

Geneva, Indiana 46740

Attention: Richard D. Briggs, Corporate Secretary

If the Merger Proposal is approved by the LBI shareholders, LBI must deliver a written notice of dissenters’ rights to each dissenting shareholder satisfying the above conditions within ten (10) days after shareholder approval has occurred. The notice to dissenting shareholders must:

 

  1.

state where the payment demand must be sent and where and when certificates for certificated shares must be deposited;

 

  2.

inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received;

 

  3.

supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed Merger, which was August 20, 2018, and require that the dissenting shareholder certify whether or not that shareholder acquired beneficial ownership of the shares before that date;

 

  4.

set a date by which LBI must receive the payment demand, which date may not be fewer than 30 nor more than 60 days after the date the notice to dissenters is delivered; and

 

  5.

be accompanied by a copy of Chapter 44 of the IBCL.

If you receive such a notice, to exercise your dissenters’ rights, you must then:

 

  1.

demand payment for the shares of LBI common stock you own;

 

  2.

certify that you owned the LBI shares before August 20, 2018; and

 

  3.

deposit your LBI stock certificates in accordance with the instructions in such notice.

If an LBI shareholder does not strictly comply with each of the conditions described above, the shareholder will not be entitled to dissenters’ rights under Chapter 44 of the IBCL. If you execute and return the enclosed proxy but do not specify a choice on the Merger Proposal, you will be deemed to have voted in favor of the Merger and, accordingly, to have waived your dissenters’ rights, unless you revoke the proxy prior to it being voted. Accordingly, if you return the enclosed proxy and wish to dissent from the Merger, you must vote your LBI shares against the Merger Proposal or abstain from voting.

 

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Upon completion of the Merger, F&M will pay each dissenting LBI shareholder who has complied with all of the requirements of Chapter 44 of the IBCL and of the notice, F&M’s estimate of the fair value of their shares immediately prior to the consummation of the Merger, excluding any appreciation in value in anticipation of the Merger.

Dissenting shareholders can object to the fair value established by F&M by stating their estimate of the fair value and demanding payment of the additional amount within 30 days after F&M makes or offers payment to the dissenting shareholder. F&M can elect to agree to the dissenting shareholder’s fair value demand or commence an action within 60 days of receipt of the dissenting shareholder’s demand in the Circuit or Superior Court of Adams County, Indiana for a judicial determination of the fair value. The court may appoint one or more appraisers to determine the fair value. The court will assess the costs of the proceeding, including compensation and expenses of the appraisers, counsel for the parties and experts, against all parties to the action in such amounts as the court finds equitable. Each dissenting shareholder made a party to the action will be entitled to receive the amount, if any, by which the court finds the fair value of the dissenter’s shares, plus interest, exceeds the amount paid by F&M.

This summary of the rights of dissenting shareholders addresses all material features of the applicable Indiana dissenters’ rights statute, but does not contain a description of all requirements of the dissenters’ rights statute and is qualified in its entirety by reference to the full text of the statutory provisions attached to this document as Annex B.

If you wish to exercise dissenters’ rights with respect to the Merger and you fail to comply with the statutory requirements for exercising dissenters’ rights, you will lose such rights. Accordingly, LBI shareholders who may wish to exercise dissenters’ rights should consider seeking legal counsel.

Registration of F&M Common Stock

Shares of F&M common stock to be issued to LBI shareholders in the Merger will be registered under the Securities Act. These shares may be traded freely without restriction by those LBI shareholders not considered to be “affiliates” of F&M under the Securities Act after the Merger is complete. At the present time, there are no persons involved in the management of LBI who are anticipated to be an “affiliate” of F&M after the Merger, other than Andrew J. Briggs, who will be appointed to the Board of Directors of F&M and F&M Bank.

Regulatory Approvals

The Merger cannot be completed until F&M Bank receives necessary regulatory approvals, which include the approval of the Ohio Division of Financial Institutions (the “ODFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). On October 12, 2018, F&M Bank filed applications with both the ODFI and the FDIC, but cannot be certain when or if such approval will be obtained. F&M has also requested that the Board of Governors of the Federal Reserve System (the “Federal Reserve”) waive its right to receive an application in connection with the Merger as permitted under Regulation Y of the Bank Holding Company Act. If the waiver is not granted, an application and approval will also be required from the Federal Reserve before the Merger may be consummated. F&M also has provided notice of the transaction to the Indiana Department of Financial Institutions, the approval of which is not required to consummate the Merger.

After the FDIC’s approval is received, the Bank Merger cannot be completed for 30 days. During this 30-day waiting period, the United States Department of Justice has the authority to challenge the Bank Merger on antitrust grounds. With the approval of the FDIC and the Department of Justice, the waiting period can be reduced to 15 days.

The approval of the ODFI and the FDIC is not the opinion of the regulatory authorities that the Merger is favorable to the LBI and F&M shareholders from a financial point of view or that the ODFI or the FDIC has

 

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considered the adequacy of the terms of the Merger. The approvals in no way constitute an endorsement or a recommendation of the Merger by the FDIC.

Effective Date of the Merger

The Merger will be consummated if the Merger Proposal is approved by the LBI shareholders, all required consents and approvals are obtained and all other conditions to the Merger are either satisfied or waived. The Merger will become effective when a Certificate of Merger is filed with the Ohio Secretary of State and when Articles of Merger are filed with the Indiana Secretary of State or at such later date and time as may be specified in the Certificate of Merger and Articles of Merger. The closing of the Merger will likely occur in the month in which any applicable waiting period following the last approval of the Merger expires or on such other date as agreed to by the parties. We currently anticipate that the Merger will be completed on December 31, 2018 or early in the first quarter of 2019. However, completion of the Merger could be delayed if there is a delay in obtaining the required shareholder or regulatory approvals or in satisfying the other conditions to completion of the Merger. LBI and F&M have the right, subject to certain conditions, to terminate the Merger Agreement if the Merger is not completed by March 31, 2019.

Accounting Treatment of the Merger

F&M will account for the Merger under the “acquisition” method of accounting in accordance with United States generally accepted accounting principles. Using the acquisition method of accounting, the assets (including identified intangible assets) and liabilities of LBI will be recorded by F&M at their respective fair values at the time of the completion of the Merger. The excess of F&M’s purchase price over the net fair value of the tangible and identified intangible assets acquired over liabilities assumed will be recorded as goodwill.

The NASDAQ Capital Market Listing

F&M will file a notification with the NASDAQ Capital Market regarding the issuance of F&M common stock in the Merger. Following the Merger, the F&M shares issued to LBI shareholders will be listed on the NASDAQ Capital Market.

Registration Statement

F&M has filed a Registration Statement on Form S-4 with the SEC in order to register the shares of F&M common stock to be issued pursuant to the Merger under the Securities Act. Because F&M common stock is listed on the NASDAQ Capital Market, it is exempt from the statutory registration requirements of each state in the United States. Therefore, F&M has not taken any steps to register its stock under state laws.

Interests of Certain Persons in the Merger

When considering the recommendation of the Board of Directors of LBI, you should be aware that certain of the directors and officers of LBI have interests in the Merger other than, or in addition to, their interests as LBI shareholders, pursuant to certain agreements and understandings that are set forth in the Merger Agreement. These interests are different from, or in conflict with, your interests as LBI shareholders. The members of LBI’s Board of Directors and the F&M’s Board of Directors were aware of these additional interests, and considered them, when they approved the Merger Agreement. Except as follows, to the knowledge of LBI, the officers and directors of LBI do not have any material interest in the Merger apart from their interests as shareholders.

Agreements with LBI and F&M. Phillip Lucas, the Executive Vice President of Bank of Geneva, has a change of control and severance agreement with Bank of Geneva that provides for a payment following a change in control of LBI, subject to certain limitations, and the funding of all premiums through maturity with respect to a certain life insurance policy in the name of Mr. Lucas. Under this agreement, Mr. Lucas will be entitled to

 

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receive a lump sum payment of $830,223.31 in the event that the Merger is consummated. The cost to fully fund the Mr. Lucas’ insurance premiums is approximately $82,000. In addition, Mr. Lucas has entered into an employment agreement with F&M Bank as of August 17, 2018, the date the Merger Agreement was executed, which will become effective upon consummation of the Merger. Under the terms of the employment agreement, Mr. Lucas will be employed by F&M Bank for a period of 2 years at a salary of $165,000, which may be increased, but not decreased, and will be entitled to benefits provided to other similarly situated employees of F&M Bank. He will receive a signing bonus of $14,000 in cash and receive 400 shares of common stock of F&M. The employment agreement contains restrictions upon Mr. Lucas’ ability to solicit customers or employees of F&M Bank during the term of the employment agreement and for one year thereafter. In the event the Merger does not close and the Merger Agreement is terminated, Mr. Lucas will not receive his change in control payment and the employment agreement with F&M would not become effective.

Indemnification and Continued Director and Officer Liability Coverage. From and after the effective time of the Merger, F&M has agreed to indemnify and advance expenses to each person who is now, or who has been at any time before the effective time of the Merger, an officer or director of LBI and Bank of Geneva for all actions taken by any such officer of director prior to the effective time of the Merger in their respective capacities as officers and/or directors of LBI or Bank of Geneva to the same extent as LBI and Bank of Geneva currently provides for indemnification of its officers and directors.

In addition, F&M has agreed to use its reasonable best efforts to include LBI’s and Bank of Geneva’s present and former directors and officers on its existing insurance, or to obtain directors’ and officers’ liability insurance “tail” policy coverage for LBI’s and Bank of Geneva’s present and former directors and executive officers, for a period of six (6) years, which will provide the directors and officers with coverage containing terms no less advantageous than the coverage currently provided by LBI to such directors and officers for claims based on activity prior to the effective time of the Merger. However, F&M has no obligation during the 6-year period to pay an aggregate amount in premiums which is more than 1.5 times the current annual amount spent by LBI to maintain its current directors’ and officers’ insurance coverage. If F&M is unable to obtain the coverage described above, F&M has agreed to use its reasonable best efforts to obtain as much comparable insurance as is available.

After the Merger, LBI’s and Bank of Geneva’s officers and employees who become officers, directors or employees of F&M or its subsidiaries shall have the same directors and officers insurance coverage and indemnification protection that F&M provides to other officers, directors and employees of F&M or its subsidiaries.

Board Appointment and Employment. The Merger Agreement obligates F&M to appoint Andrew J. Briggs, currently the Chairman of LBI and President of Bank of Geneva, and one of LBI’s largest shareholders, to the F&M and F&M Bank Boards of Directors. Following the merger, Mr. Briggs will receive standard annual retainer and meeting attendance fees for service on the boards of directors of F&M and F&M Bank. No determination has been made with respect to Mr. Briggs’ committee appointments at this time. The following director fee structure became effective January 1, 2018:

 

   

Director Retainer Fee of $21,000 per year;

 

   

Chairman of the Board Retainer Fee of $24,000 per year;

 

   

Directors Fee of $750 per board meeting attended;

 

   

Board Committee Chairman Fee of $700 paid to All Board Committee Chairpersons per board committee meeting attended; and

 

   

Meeting Fees for Other Board Committees of $600 per board committee meeting attended.

In addition, Mr. Briggs will be appointed 1st Senior Vice President of Business Development of F&M Bank and have an annual salary of $2,600.

 

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THE MERGER AGREEMENT

The following summary highlights certain material provisions of the Merger Agreement. Because this is a summary of the Merger Agreement, it does not contain a description of all of the terms of the Merger Agreement and is qualified in its entirety by reference to the Merger Agreement. You should read carefully the entire Merger Agreement, which is attached to this document as Annex A and is incorporated herein by reference.

Description of the Merger

Under the terms and subject to the conditions of the Merger Agreement approved by each of LBI’s and F&M’s Boards of Directors, LBI will merge with and into F&M and the separate corporate existence of LBI will cease. Immediately following the Merger, Bank of Geneva will merge with and into F&M Bank and Bank of Geneva will cease to exist as a separate entity. The Articles of Incorporation and Code of Regulations of F&M and F&M Bank, as in effect prior to the Merger, will be the Articles of Incorporation and Code of Regulations of F&M and F&M Bank, respectively, after the Merger.

Representations and Warranties

The Merger Agreement contains some customary representations and warranties made both by LBI and F&M, including representations and warranties relating to:

 

   

due organization and existence;

 

   

corporate power and authorization to enter into the transactions contemplated by the Merger Agreement;

 

   

the fact that neither the Merger Agreement nor the Merger create a conflict or violation of certain documents, agreements, and laws or results in the creation of certain rights for a third party;

 

   

capitalization;

 

   

governmental filings, notices, authorizations, consents and approvals required in connection with the transactions contemplated by the Merger Agreement;

 

   

third-party filings, notices, authorizations, consents and approvals required in connection with the transactions contemplated by the Merger Agreement;

 

   

corporate books and records;

 

   

compliance with law;

 

   

the accuracy of statements made and materials provided by each party;

 

   

litigation and pending proceedings;

 

   

financial statements;

 

   

absence of certain material changes or events;

 

   

absence of undisclosed liabilities (by LBI only);

 

   

absence of default under material contracts and agreements;

 

   

actions affecting the tax consequences and regulatory approval of the Merger;

 

   

loans and investments (by LBI only);

 

   

employee benefits plans and plan compliance (by LBI only);

 

   

taxes, returns and reports;

 

   

title to assets (by LBI only);

 

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certain obligations to employees (by LBI only);

 

   

properties owned and leased (by LBI only);

 

   

shareholder rights plans (by LBI only);

 

   

indemnification agreements (by LBI only);

 

   

deposit insurance with the Federal Deposit Insurance Corporation;

 

   

reports to regulatory agencies;

 

   

absence of agreements with regulatory agencies;

 

   

environmental matters (by LBI only);

 

   

compliance with the securities laws;

 

   

compliance with the Securities and Exchange Commission filing requirements (by F&M only);

 

   

sufficiency of funds to pay the cash portion of the Merger Consideration (by F&M only);

 

   

no approval needed from F&M shareholders (by F&M only); and

 

   

brokerage fees.

The representations and warranties in the Merger Agreement will not survive the effective date of the Merger or the termination of the Merger Agreement. After the effective date of the Merger or termination of the Merger Agreement, none of the parties to the Merger Agreement, their respective subsidiaries, or the respective officers and directors of any of them will have any liability for any of their representations and warranties made in the Merger Agreement unless the Merger Agreement is terminated as a result of a willful breach, in which case the non-breaching party may recover appropriate damages from the breaching party.

Conditions to Completion of the Merger

F&M’s and LBI’s obligations to complete the Merger are subject to the satisfaction of the following conditions, among other things, at or prior to the effective time of the Merger:

 

  1.

the approval of the Merger Agreement at the special meeting by a majority of the issued and outstanding shares of LBI common stock;

 

  2.

the receipt of all regulatory approvals required for the Merger and the Bank Merger and the expiration of any regulatory waiting periods prior to consummation of the Merger;

 

  3.

the representations and warranties made by the parties in the Merger Agreement must be true, accurate and correct in all material respects on and as of the effective date of the Merger, except that representations and warranties that are qualified by materiality or a Material Adverse Effect (as defined below) must be true and correct in all respects, and provided that for those representations and warranties which address matters only as of an earlier date, then they shall be tested as of such earlier date. For the purpose of the Merger Agreement, a “Material Adverse Effect” means any effect, circumstance, occurrence or change that (i) is material and adverse to the financial position, results of operations or business of LBI and Bank of Geneva taken as a whole, or F&M and F&M Bank taken as a whole, as applicable or (ii) would materially impair the ability of LBI or F&M, as applicable, to perform its obligations under the Merger Agreement; provided, however, that a Material Adverse Effect shall not be deemed to include the impact of (a) changes in banking and similar laws of general applicability to banks or their holding companies or interpretations thereof by courts or governmental authorities, (b) changes in generally accepted accounting principles (“GAAP”) or regulatory accounting requirements applicable to banks or their holding companies generally, (c) any modifications or changes to valuation policies and practices in connection with the Merger or

 

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  restructuring charges taken in connection with the Merger, in each case in accordance with GAAP, (d) effects of any action taken with the prior written consent of the other party hereto, (e) changes in the general level of interest rates (including the impact on the securities portfolios of LBI and Bank of Geneva, or F&M and F&M Bank, as applicable) or conditions or circumstances relating to or that affect either the United States economy, financial or securities markets or the banking industry, generally, (f) changes resulting from expenses (such as legal, accounting and investment bankers’ fees) incurred in connection with the Merger Agreement or the transactions contemplated therein, including without limitation payment of any amounts due to, or the provision of any benefits to, any officers or employees under agreements, plans or other arrangements in existence of or contemplated by the Merger Agreement and disclosed to F&M, (g) the impact of the announcement of the Merger Agreement and the transactions contemplated thereby, and compliance with the Merger Agreement on the business, financial condition or results of operations of LBI and Bank of Geneva, or F&M and F&M Bank, as applicable and (h) the occurrence of any military or terrorist attack within the United States or any of its possessions or offices; provided that in no event shall a change in the trading price of the F&M common stock, by itself, be considered to constitute a Material Adverse Effect on F&M (it being understood that the foregoing proviso shall not prevent or otherwise affect a determination that any effect underlying such decline has resulted in a Material Adverse Effect);

 

  4.

the covenants made by the parties must have been complied with in all material respects from the date of the Merger Agreement through and as of the effective date of the Merger;

 

  5.

F&M must have received an opinion of Shumaker, Loop & Kendrick, LLP that, for U.S. federal income tax purposes, the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code;

 

  6.

LBI must have received a letter from Shumaker, Loop & Kendrick, LLP addressed to the shareholders of LBI, dated as of the effective date of the Merger, to the effect that such shareholders may rely on the opinion referenced in clause 5 above;

 

  7.

the Registration Statement on Form S-4, of which this proxy statement and prospectus is a part, relating to the F&M shares to be issued pursuant to the Merger Agreement, must have become effective under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement shall have been issued or threatened by the SEC;

 

  8.

the shares of F&M common stock to be issued in the Merger shall have been listed for trading on The NASDAQ Capital Market (subject to official notice of issuance);

 

  9.

there must be no order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger or the Bank Merger;

 

  10.

receipt by each party of certain certificates, certain legal opinions and various closing documents;

 

  11.

F&M and F&M Bank shall have taken the necessary action to cause Andrew J. Briggs to be appointed to their respective Boards of Directors as of the Effective Date;

 

  12.

F&M shall have authorized the issuance of the stock portion of the Merger Consideration and deposited the cash portion of the Merger Consideration, in each case, with the Exchange Agent; and

 

  13.

F&M shall have provided evidence to LBI of endorsement to the LBI director and officer liability insurance policy or purchased comparable insurance to for the protection of such persons.

The conditions to completion of the Merger are subject to waiver by the party benefiting from such condition. The conditions may also be altered by the written agreement of both parties. If these and other conditions are not satisfied or waived, F&M and/or LBI may terminate the Merger Agreement. See “THE MERGER AGREEMENT—Termination; Waiver; Amendment,” “THE MERGER—Regulatory Approvals,” “THE MERGER—Interests of Certain Persons in the Merger,” “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES,” and Annex A.

 

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Termination; Waiver; Amendment

F&M and LBI may terminate the Merger Agreement at any time before the Merger is completed, including after the LBI shareholders have approved the Merger, if one of the events which gives the party the right to terminate occurs. The Merger Agreement may be terminated:

 

  1.

by mutual consent of F&M and LBI;

 

  2.

by either F&M or LBI if there has been a material breach by the other of any of the covenants or any of the representations or warranties set forth in the Merger Agreement, which is not cured within thirty (30) days following written notice given by the non-breaching party to the party committing the breach;

 

  3.

by either F&M or LBI if any event, fact or circumstance has occurred with respect to the other party that has had or could be reasonably expected to have a Material Adverse Effect on such party;

 

  4.

by either F&M or LBI if any governmental or regulatory approval required to permit the consummation of the transactions contemplated in the Merger Agreement shall have been denied and such denial is final and non-appealable;

 

  5.

by either F&M or LBI if any court or governmental or regulatory authority shall have issued a final non-appealable order enjoining or otherwise prohibiting consummation of the transactions contemplated in the Merger Agreement;

 

  6.

by either F&M or LBI in the event of the failure of LBI’s shareholders to approve the Merger Agreement at the special meeting; provided, however, that LBI may only terminate the Merger Agreement pursuant to this clause if it has complied in all material respects with its obligations to convene a meeting of its shareholders and use its reasonable best efforts to obtain the requisite vote to consummate the Merger;

 

  7.

by either F&M or LBI if the Merger has not been completed by March 31, 2019, provided the terminating party is not then in material breach of any representation, warranty, covenant, or other agreement set forth in the Merger Agreement;

 

  8.

by LBI if its Board of Directors determines in the exercise of its fiduciary duties that it must terminate the Merger Agreement after receipt of an unsolicited superior acquisition proposal from a third party;

 

  9.

by F&M if LBI’s Board of Directors withdraws or modifies its recommendation to LBI shareholders to vote for the Merger following receipt of a proposal of an acquisition from a third party;

 

  10.

by F&M if LBI fails to give F&M timely notice of any inquiry by a third party with respect to an acquisition of LBI or Bank of Geneva;

 

  11.

by F&M if LBI gives F&M notice that it intends to furnish information to or enter into discussions or negotiations with a third party relating to a proposed acquisition of LBI or Bank of Geneva and those negotiations are not terminated within sixty (60) days;

 

  12.

by F&M if greater than ten percent (10%) of the outstanding LBI common stock have become and remain subject to a demand for payment under the dissenters’ rights provisions of the IBCL. See “THE MERGER—Rights of Dissenting Shareholders” beginning on page 49.

Upon termination for any of these reasons, the Merger Agreement will be void and of no further force or effect. However, if either F&M or LBI willfully breaches any of the representations and warranties or agreements set forth in the Merger Agreement, then the other party will be entitled to recover appropriate damages for the breach. Notwithstanding the foregoing, if F&M terminates the Merger Agreement under item 9 above or if LBI terminates the Merger Agreement in accordance with item 8 above, LBI must pay F&M $3,500,000 as a termination fee to reimburse F&M for the considerable time and expense invested by F&M in furtherance of the Merger.

F&M and LBI can agree to amend the Merger Agreement and can waive their right to require the other party to adhere to the terms and conditions of the Merger Agreement, where the law allows. However, F&M and LBI

 

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cannot amend the Merger Agreement after the LBI shareholders approve the Merger without their further approval if the amendment would decrease the Merger Consideration, except as otherwise provided in the Merger Agreement, or materially adversely affect the rights of LBI shareholders or the tax consequences of the Merger to the shareholders of LBI.

Restrictions Affecting the Parties Prior to Completion of the Merger

The Merger Agreement contains a number of restrictions regarding the conduct of the business of F&M, F&M Bank, LBI and Bank of Geneva until the Merger is completed. Among other items and subject to certain limited exceptions, LBI and Bank of Geneva may not take any of the following actions, without the prior written consent of F&M:

 

   

make any change to their capital structure, including redemption of shares of common stock;

 

   

authorize an additional class of stock or issue, or authorize the issuance of, any capital stock or any options or other instruments convertible into shares of capital stock, except pursuant to the exercise of stock options outstanding as of the date of the Merger Agreement;

 

   

declare, distribute or pay any dividends, authorize a stock split or make any other distribution to their shareholders, except for LBI’s quarterly cash dividend distributions in an amount not to exceed 65% of net earnings of LBI; provided, however, LBI and F&M will coordinate LBI’s dividend schedule for the quarter in which the Merger is completed so that LBI shareholders do not receive dividends on both F&M and LBI common stock during the same calendar quarter, other than a distribution to pay for the tax liability of the LBI shareholders;

 

   

except for the fiduciary obligations of LBI to entertain a superior third-party acquisition proposal, merge, combine or consolidate with or, other than in the ordinary course of business consistent with past practice (including the sale, transfer or disposal of other real estate owned), sell their assets or securities to any other person or entity or effect a share exchange or enter into any transaction not in the ordinary course of business;

 

   

incur any liability or obligation, make any commitment, payment or disbursement, enter into any contract or agreement, or acquire or dispose of any property, other than other real estate owned, or asset having a fair market value in excess of $50,000 except for payments and disbursements made in the ordinary course of business consistent with past practice, property acquired or disposed of in connection with foreclosures of mortgages or enforcement of security interests, loans in the ordinary course of business and deposit liabilities and advances from the Federal Home Loan Bank in each case in the ordinary course of business;

 

   

subject any of their assets or properties to any mortgage, lien, or encumbrance, except in the ordinary course of business consistent with past practice;

 

   

promote or increase or decrease the rate of compensation or enter into any agreement to promote or increase or decrease the rate of compensation of any director, officer, or employee of LBI or Bank of Geneva, except for promotions and non-material increases in the ordinary course of business and in accordance with their past practices;

 

   

subject to certain exceptions, execute, create, institute, modify or amend any employee benefit plan or agreement for current or former directors, officers or employees of LBI or Bank of Geneva, change the level of benefits or payments under any such employee benefit plan or agreement or increase or decrease any severance or termination pay benefits or any other fringe or employee benefits other than as required by law or regulatory authorities or as specifically provided in the Merger Agreement;

 

   

amend their Articles of Incorporation or Bylaws from those in effect on August 17, 2018;

 

   

subject to certain exceptions, modify, amend or institute new employment practices or enter into, renew, modify, amend or extend any employment or severance agreement with any present or former directors, officers or employees of LBI or Bank of Geneva;

 

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give, dispose, sell, convey, assign, hypothecate, pledge, encumber or otherwise transfer or grant a security interest in any capital stock of Bank of Geneva;

 

   

fail to make additions to Bank of Geneva’s reserve for loan losses or any other reserve account in the ordinary course of business and in accordance with sound banking practices;

 

   

make any loans or establish or expand any deposit or trust relationship not consistent with past practice;

 

   

other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or entity; or

 

   

agree to take any of the foregoing actions.

This discussion of the restrictions imposed by the Merger Agreement is not intended to be exhaustive, but includes material restrictions imposed on the parties. Please refer to the Merger Agreement, attached as Annex A, for a complete listing of the restrictions.

Agreement Not to Solicit Other Offers

LBI has agreed that it will not, and will not cause Bank of Geneva to, whether directly or indirectly, solicit, encourage, or facilitate inquiries or proposals, or enter into an agreement with respect thereto, or initiate or participate in any negotiations or discussions with any third party regarding other acquisition proposals, or furnish any information to a third party proposing or seeking an acquisition proposal. LBI may, however, provide such information (subject to a customary confidentiality agreement) or participate in such negotiations or discussion in response to an unsolicited acquisition proposal, which does not otherwise violate the non-solicitation terms of the Merger Agreement, if the LBI Board of Directors determines in good faith, after consultation with outside legal counsel, that such action is necessary in order to act in a manner consistent with the directors’ fiduciary duties. Additionally, LBI must notify F&M as soon as reasonably practicable if it receives any request for information or any inquiry, proposal, discussion, or indication of interest with respect to any acquisition proposal from a third party, and also advise F&M of the material terms and conditions and identity of the third party with respect to such request or acquisition proposal.

Moreover, prior to obtaining shareholder approval, LBI may, under certain specified circumstances, withdraw, modify, or change in a manner adverse to F&M, its recommendation to its shareholders with respect to the Merger Proposal and/or terminate the Merger Agreement in order to enter into an acquisition agreement with respect to an acquisition proposal from a third party, if the LBI Board of Directors determines in good faith, after consultation with outside legal counsel, that such acquisition proposal is more favorable to LBI shareholder than the Merger and that it is necessary in order to act in a manner consistent with the directors’ fiduciary duties. However, LBI cannot take any of those actions in response to a superior acquisition proposal unless (i) it provides F&M with notice and a ten-business-day period to engage in good faith negotiations so that the Merger and the other transactions contemplated by the Merger Agreement may still be effected and (ii) at the end of such ten-business-day period, LBI’s Board of Directors continues to reasonably believe that the acquisition proposal at issue constitutes a superior acquisition proposal.

Fees and Expenses

F&M and LBI will pay their own fees, costs, and expenses incurred in connection with the Merger, including the fees of any investment bankers engaged by such party.

Management After the Merger

F&M will be the surviving corporation in the Merger and LBI’s separate corporate existence will cease. Accordingly, the directors and officers of LBI will no longer serve in such capacities after the completion of the

 

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Merger. Similarly, F&M Bank will be the surviving banking institution in the Bank Merger with Bank of Geneva’s separate corporate existence will cease.

The directors of F&M and F&M Bank immediately prior to the Mergers will continue to be the directors of F&M and F&M Bank following the Merger until they resign or until their respective successors are duly elected and qualified. However, the Merger Agreement obligates F&M to appoint Andrew J. Briggs, the current Chairman of the Board of LBI and President of Bank of Geneva, to the F&M and F&M Bank Boards of Directors.

The officers of F&M and F&M Bank immediately prior to the Merger will continue to be the officers of F&M and F&M Bank following the Mergers until they resign or until their successors are duly elected and qualified. Andrew J. Briggs will be appointed 1st Senior Vice President of Business Development of F&M Bank. Also, Phillip Lucas, currently the Executive Vice President of Bank of Geneva, will become a Senior Vice President of F&M Bank upon consummation of the Merger and has entered into an employment agreement with F&M Bank, consistent with the terms of the Merger Agreement.

Indemnification and Insurance of LBI Directors and Officers

From and after the effective time of the Merger, F&M has agreed to indemnify and advance expenses to each person who is now, or who has been at any time before the effective time of the Merger, an officer or director of LBI and Bank of Geneva for all actions taken by any such officer of director prior to the effective time of the Merger in their respective capacities as officers and/or directors of LBI or Bank of Geneva to the same extent as LBI and Bank of Geneva currently provides for indemnification of its officers and directors.

In addition, F&M has agreed to use its reasonable best efforts to include LBI’s and Bank of Geneva’s present and former directors and officers on its existing insurance, or to obtain directors’ and officers’ liability insurance “tail” policy coverage for LBI’s and Bank of Geneva’s present and former directors and executive officers, for a period of six (6) years, which will provide the directors and officers with coverage containing terms no less advantageous than the coverage currently provided by LBI to such directors and officers for claims based on activity prior to the effective time of the Merger. However, F&M has no obligation during the 6-year period to pay an aggregate amount in premiums which is more than 1.5 times the current annual amount spent by LBI to maintain its current directors’ and officers’ insurance coverage. If F&M is unable to obtain the coverage described above, F&M has agreed to use its reasonable best efforts to obtain as much comparable insurance as is available.

After the Merger, LBI’s and Bank of Geneva’s officers and employees who become officers, directors or employees of F&M or its subsidiaries shall have the same directors and officers insurance coverage and indemnification protection that F&M provides to other officers, directors and employees of F&M or its subsidiaries.

Employee Benefit Plans

The Merger Agreement provides, subject to discretionary decisions of F&M, that the current employees of LBI and Bank of Geneva who continue as employees of F&M or its subsidiaries following the Merger will be entitled to participate in the employee benefit plans of F&M and F&M Bank. With respect to each employee benefit plan or benefit arrangement maintained by F&M in which employees of LBI or Bank of Geneva subsequently participate, for purposes of determining eligibility, vesting, vacation and severance entitlement, F&M will ensure that service with LBI or Bank of Geneva will be treated as service with F&M; provided, however, that service with LBI or Bank of Geneva shall not be treated as service with F&M for purposes of benefit accrual, except with respect to vacation and severance benefits.

With respect to F&M and F&M Bank group health plans which current LBI or Bank of Geneva employees or their eligible dependents become participants in, F&M has agree to waive restrictions and limitations for

 

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pre-existing conditions and waive waiting period limitations and evidence of insurability requirements, in each case to the extent such participant had satisfied similar limits or requirements under a similar plan prior to the effective time of the Merger. To the extent current LBI or Bank of Geneva employees enroll in a F&M or F&M Bank group health plan prior to the end of the current LBI group health plan year, F&M has agreed to use reasonable efforts to ensure that its or F&M Bank’s group health plan(s) will, in the same plan year incurred, honor any deductibles, co-payments, and out-of-pocket maximums incurred by continuing employees or their eligible dependents prior to the effective time of the Merger in satisfying any deductibles, co-payments, and out-of-pocket maximums for the plans they participated in immediately prior to the effective time of the Merger.

Effective prior to the effective time of the Merger, LBI will cause the Bank of Geneva Employee Stock Ownership Plan and the Bank of Geneva 401K Plan to be terminated. LBI and Bank of Geneva employees will be permitted, subject to certain conditions, to make direct rollover contributions to the 401(k) plan maintained by F&M from the terminated Bank of Geneva plans.

Except for Philip Lucas and other employees receiving other Merger related payments, subject to delivery of a termination and release agreement to F&M by the entitled employee, LBI and Bank of Geneva employees who continue to be employed at the effective time of the Merger, but are not retained by F&M after the effective time of the Merger or are terminated other than for cause within six (6) months of the effective time of the Merger, will be entitled to severance pay equal to two (2) weeks of pay, at the employee’s then-current base rate, for each full year of continuous service with LBI and Bank of Geneva, with a minimum of four (4) weeks and maximum of twenty-six (26) weeks.

After the Merger, F&M has agreed to provide COBRA continuation coverage for each qualified beneficiary entitled to such coverage under applicable federal law.

Voting Agreement

Each of the directors of LBI has entered into a voting agreement with F&M pursuant to which each of them has agreed, subject to their fiduciary duties to entertain a superior third-party acquisition proposal under the Merger Agreement, to vote, or cause to be voted, all of their shares of LBI common stock owned by each of them of record or beneficially, including shares owned by certain other persons over which they have voting control, in favor of the Merger Proposal. Collectively, as of the record date, our directors had the power to vote, or cause to be voted, 558.9037 shares, or approximately 55.9% of the outstanding shares of LBI common stock. Additionally, pursuant to the voting agreement, each of the directors of LBI has agreed not to sell, assign, transfer, dispose, or otherwise convey, or cause, permit, authorize, or approve of the sale, assignment, transfer, disposition, or other conveyance of, any of their shares of LBI common stock, or interest therein, to any other person without F&M prior written consent. Assuming that the members of the Board vote these shares in favor of the Merger as required under the voting agreement, the Merger will be approved by the LBI shareholders.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

Tax Consequences of the Merger

This section describes the intended, material U.S. federal income tax consequences of the Merger to F&M, LBI, and U.S. holders of LBI common stock who exchange their common stock for F&M common stock and cash pursuant to the Merger. F&M and LBI intend for the Merger to be treated as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and F&M and LBI intend that each will be a “party to a reorganization” within the meaning of Section 368(b) of the Code. The closing of the Merger is conditioned upon the receipt by F&M and LBI of an opinion of Shumaker, Loop & Kendrick, LLP, dated as of the closing date of the Merger, substantially to the effect that, on the basis of facts, representations and assumptions set forth in that opinion (including factual representations contained in certificates of officers of F&M and LBI), the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. This section summarizes the matters addressed in the tax opinion of Shumaker, Loop & Kendrick, LLP filed as an exhibit to the registration statement of which this proxy statement and prospectus is a part.

F&M and LBI have not requested and do not intend to request any ruling from the Internal Revenue Service as to the U.S. federal income tax consequences of the Merger, and the tax opinion to be delivered in connection with the Merger is not binding on the Internal Revenue Service. Consequently, there is no assurance of the accuracy of the anticipated U.S. federal income tax consequences to F&M, LBI, and the U.S. holders of LBI common stock described in this proxy statement/prospectus.

The following discussion is based on the Code, its legislative history, existing and proposed Treasury Department regulations promulgated thereunder, published Internal Revenue Service rulings, and court decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Any such change could affect the continuing validity of this discussion.

For purposes of this discussion, the term “U.S. holder” means:

 

   

a citizen or resident of the U.S.;

 

   

a corporation, or an entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S. or any state or political subdivision thereof;

 

   

a trust that (1) is subject to (A) the primary supervision of a court within the U.S. and (B) the authority of one or more U.S. persons to control all substantial decisions of the trust or (2) has a valid election in effect under applicable Treasury Department regulations to be treated as a U.S. person; or

 

   

an estate that is subject to U.S. federal income tax on its income regardless of its source.

If a partnership (including for this purpose any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds LBI common stock, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. If you are a partnership, or a partner in such partnership, holding LBI common stock, you should consult your tax advisor.

Holders of LBI common stock that are not U.S. holders may have different tax consequences than those described above and are urged to consult their own tax advisors regarding the tax treatment to them under U.S. and non-U.S. laws.

This discussion is addressed only to those LBI shareholders who hold their LBI common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment), and does not address all of the U.S. federal income tax consequences that may be relevant to particular LBI shareholders in light of their individual circumstances or to LBI shareholders who are subject to special rules, such as:

 

   

mutual funds, banks, thrifts or other financial institutions;

 

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S corporations or other pass-through entities (or investors in S corporations or other pass-through entities);

 

   

retirement plans or pension funds;

 

   

insurance companies;

 

   

tax-exempt organizations;

 

   

dealers or brokers in stocks and securities, or currencies;

 

   

traders in securities that elect to use the mark-to-market method of accounting;

 

   

regulated investment companies;

 

   

real estate investment trusts;

 

   

persons who exercise dissenters’ rights;

 

   

persons who hold LBI common stock as part of a straddle, hedge, constructive sale, conversion transaction or other risk management transaction;

 

   

persons who purchase or sell their LBI common stock as part of a wash sale;

 

   

expatriates or persons who have a functional currency other than the U.S. dollar;

 

   

persons who are not U.S. holders; and

 

   

persons who acquired their LBI common stock through the exercise of an employee stock option or otherwise as compensation or through a tax qualified retirement plan.

In addition, this discussion does not address any alternative minimum tax, U.S. federal estate or gift tax or any state, local or foreign tax consequences of the Merger, nor does it address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010. Determining the actual tax consequences of the Merger to a holder of LBI common stock may be complex. All holders of LBI common stock should consult their tax advisors as to the specific tax consequences of the Merger to them.

Reorganization Treatment

The Merger is intended to be a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code, and F&M and LBI are each intended to be a “party to the reorganization” within the meaning of Section 368(b) of the Internal Revenue Code. If the intended reorganization treatment is respected by the IRS and the courts, then the material federal income tax consequences described below are anticipated.

U.S. Tax Consequences to F&M and LBI

Reorganization Treatment. The Merger is intended to be a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and F&M and LBI are each intended to be a “party to a reorganization” within the meaning of Section 368(b) of the Code. The obligation of LBI and F&M to complete the Merger is conditioned upon the receipt of opinions from Shumaker, Loop & Kendrick, LLP, counsel to F&M to the effect that the Merger will for federal income tax purposes qualify as a “reorganization” based upon customary representations made by LBI and F&M. If the intended reorganization treatment is respected by the Internal Revenue Service and the courts, then the material U.S. federal income tax consequences described below are anticipated.

No Gain or Loss. No gain or loss will be recognized by F&M or LBI as a result of the Merger.

 

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Tax Basis. The tax basis of the assets of LBI in the hands of F&M will be the same as the tax basis of such assets in the hands of LBI immediately prior to the merger.

Holding Period. The holding period of the assets of LBI to be received by F&M will include the period during which such assets were held by LBI.

U.S. Federal Income Tax Consequences to U.S. Holders of LBI Common Stock Based Upon Merger Consideration Received

If the Merger is treated as a reorganization within the meaning of Section 368(a) of the Code, the tax consequences are generally as follows:

A U.S. holder of LBI common stock will recognize gain (but not loss) with respect to the F&M common stock and cash such U.S. holder receives pursuant to the Merger, in an amount equal to the lesser of (i) the amount by which the sum of the fair market value of the F&M common stock and the amount of cash received by such U.S. holder (other than cash received in lieu of a fractional F&M common share), exceeds such U.S. holder’s basis in its LBI common stock, and (ii) the amount of cash received by such U.S. holder (other than any cash received in lieu of a fractional F&M common share, as discussed under “—Cash In Lieu of Fractional Shares” below). Subject to possible dividend treatment (as discussed below under “—Possible Dividend Treatment,” below), gain that U.S. holders of LBI common stock recognize in connection with the Merger generally will constitute capital gain and will constitute long-term capital gain if such U.S. holders have held their LBI common stock for more than one year at the effective time of the Merger. Long-term capital gain of certain non-corporate holders of LBI common stock, including individuals, is generally taxed at preferential rates.

The tax basis of the F&M common stock received by a U.S. holder of LBI common stock in the Merger (including a fractional F&M common share, if any, deemed issued and redeemed by F&M) will be the same as the basis of the LBI common stock surrendered in exchange for the F&M common stock and cash, reduced by the amount of cash received by such U.S. holder in the Merger (other than any cash received in lieu of a fractional F&M common share), and increased by any gain recognized by such U.S. holder in the Merger (including any portion of the gain that is treated as a dividend (as described below), but excluding any gain or loss resulting from the deemed issuance and redemption of a fractional F&M common share). The holding period for F&M common stock received by such U.S. holder (including a fractional F&M common share, if any, deemed to be issued and redeemed by F&M) will include such U.S. holder’s holding period for LBI common stock surrendered in exchange for the F&M common stock. If a U.S. holder of LBI common stock acquired different blocks of LBI common stock at different times or at different prices, any gain or loss will be determined separately with respect to each block of LBI common stock. In computing the amount of gain recognized, if any, a U.S. holder of LBI common stock may not offset a loss realized on one block of stock against the gain realized on another block of stock. U.S. holders of LBI common stock should consult their tax advisors regarding the manner in which F&M common stock and cash received in the Merger should be allocated among different blocks of LBI common stock and regarding their bases and holding periods in the particular shares of F&M common stock received in the Merger.

Cash in Lieu of Fractional Shares

A U.S. holder of LBI common shares who receives cash in lieu of a fractional share of F&M common stock generally will be treated as having received such fractional share and then having received such cash in redemption of such fractional share. Gain or loss generally will be recognized based on the difference between the amount of cash received in lieu of the fractional share and the portion of the U.S. holder’s aggregate adjusted basis in the LBI common stock surrendered which is allocable to the fractional share. Subject to possible dividend treatment (as discussed below under Possible Dividend Treatment”), such gain or loss generally will be long-term capital gain or loss if the U.S. holder’s holding period for its LBI common stock exceeds one

 

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year at the effective time of the Merger. The Code contains limitations on the extent to which a taxpayer may deduct capital losses from ordinary income.

Possible Dividend Treatment

In some cases described above, the gain recognized by a U.S. holder could be treated as having the effect of the distribution of a dividend under the tests set forth in Section 302 of the Code, in which case such gain would be treated as dividend income. Because the possibility of dividend treatment depends primarily upon each holder’s particular circumstances, including the application of certain constructive ownership rules, U.S. holders of LBI common stock should consult their tax advisors regarding the application of the foregoing rules to their particular circumstances.

Backup Withholding and Reporting Requirements

Under certain circumstances, cash payments made to a U.S. holder of LBI common stock pursuant to the Merger may be subject to backup withholding at a rate of 28% of the cash payable to the U.S. holder, unless the U.S. holder furnishes its taxpayer identification number in the manner prescribed in applicable Treasury Department regulations, and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to a U.S. holder under the backup withholding rules are not an additional tax and will be allowed as a refund or credit against the U.S. holder’s U.S. federal income tax liability. A U.S. holder of LBI common stock who receives F&M common stock as a result of the Merger should retain records pertaining to the Merger, including records relating to the number of shares and the basis of such U.S. holder’s LBI common stock. Each U.S. holder of LBI common stock who is required to file a U.S. federal income tax return and who is a “significant holder” that receives F&M common stock in the Merger will be required to file a statement with such U.S. federal income tax return in accordance with Treasury Department regulations section 1.368-3 setting forth such U.S. holder’s basis in the LBI common stock surrendered, the fair market value of the F&M common stock and cash received in the Merger, and certain other information.

The preceding discussion of material U.S. federal income tax consequences of the Merger is included in this proxy statement and prospectus for general information only, and is intended only as a summary of material U.S. federal income tax consequences of the Merger. It is not a complete analysis or discussion of all potential tax effects that may be important to you. Each LBI shareholder should consult with his, her or its own tax advisor regarding the specific tax consequences to the shareholder of the Merger, including the application and effect of state, local and foreign income and other tax laws.

 

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DESCRIPTION OF F&M

The following information should be read with the financial statements incorporated by reference into this proxy statement and prospectus.

Business

F&M is a financial holding company headquartered in Archbold, Ohio that was organized in 1985. F&M’s common stock is listed on the NASDAQ Capital Market under the symbol “FMAO.” For federal income tax purposes, F&M is taxed as a C corporation under the Internal Revenue Code. F&M is the parent holding company of F&M Bank, an Ohio chartered commercial bank, which opened for business in Archbold, Ohio, in 1897, and F&M Risk Management, Inc., a captive insurance company founded in December 2014. F&M Bank has a total of 25 banking locations with 20 in Northwest Ohio and 4 in Northeast Indiana. F&M Bank’s business activities are currently limited to one significant business segment, which is community banking. F&M Bank also operates FM Investment Services as a division of its operations. FM Investment Services offers non-deposit investment and insurance products.

As of June 30, 2018, F&M had approximately consolidated assets of $1.1 billion, deposits of $931 million and shareholders’ equity of $137.5 million. As of June 30, 2018, F&M and its subsidiaries had 276 full-time equivalent employees.

F&M’s principal office is located at 307 North Defiance Street, Archbold, Ohio 43502. Its telephone number is (419) 446-2501.

Incorporation of Certain Information Regarding F&M by Reference

The foregoing information concerning F&M does not purport to be complete. Additional information relating to F&M’s business, management, executive officer and director compensation, voting securities and certain relationships is incorporated by reference in this document from other documents filed by F&M with the SEC and listed under “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107. If you desire copies of any of these documents, you may contact F&M at its address or telephone number indicated under “WHERE YOU CAN FIND ADDITIONAL INFORMATION” on page 107.

 

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DESCRIPTION OF LBI

The following information should be read with the financial statements included within this proxy statement and prospectus.

Business

LBI is a bank holding company incorporated under Indiana law and headquartered in Geneva, Indiana. LBI is not listed on any stock market or quoted in any “over-the-counter” market. As such, there is not an active trading market for shares of LBI common stock. For federal income tax purposes, LBI has elected to be taxed as an S corporation under the Internal Revenue Code. LBI is the parent holding company of Bank of Geneva, an Indiana chartered commercial bank, which opened for business in Geneva, Indiana, in 1892. LBI’s business activities are currently limited to one significant business segment, which is community banking.

Bank of Geneva operates six full service branches, including its main office, in Northeastern Indiana. Branches are located in the cities of Geneva, Berne, Monroe, Monroeville, Portland, and Decatur. Bank of Geneva offers a full range of traditional banking and financial services and products. Bank of Geneva’s primary business activity is the origination of one-to-four family residential real estate loans and farm real estate loans and, to a lesser extent, non-farm non-residential real estate loans, agricultural loans, commercial loans, and consumer loans.

LBI’s primary regulator is the Federal Reserve. Bank of Geneva’s primary federal regulator is the Federal Reserve and its primary state regulator is the Indiana Department of Financial Institutions.

As of June 30, 2018, LBI had approximately consolidated assets of $287 million, deposits of $212 million and shareholders’ equity of $30.8 million. As of June 30, 2018, LBI and Bank of Geneva had 61 full-time equivalent employees.

The principal executive offices of LBI and Bank of Geneva are located at 215 East Line St., Geneva, Indiana 46740. The telephone number for LBI and Bank of Geneva is (260) 368-7288.

 

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Market for Common Equity and Related Shareholder Matters

Shares of LBI common stock are not listed on any exchange or quoted on any “over-the-counter” market and are not regularly traded. Further, under the LBI Articles of Incorporation, shares of LBI common stock may not be sold, transferred, disposed of, or encumbered without the prior written consent of a majority of the LBI Board of Directors. Accordingly, there is no established public trading market for shares of LBI common stock. The following table presents, for the periods indicated, the high and low sale prices as well as per share cash dividends declared by LBI.

 

     High (1)      Low (1)      Dividends
Declared
 

Quarter End

        

December 31, 2018 (through
October 29, 2018)

     —   (2)        —   (2)      $ 0.00  

September 30, 2018

     —   (2)        —   (2)      $ 1,335.00  

June 30, 2018

     —   (2)        —   (2)      $ 700.00  

March 31, 2018

   $ 0.00 (3)      $ 0.00 (3)      $ 675.00  

December 31, 2017

     —   (2)        —   (2)      $ 1,400.00  

September 30, 2017

     —   (2)        —   (2)      $ 675.00  

June 30, 2017

     —   (2)        —   (2)      $ 675.00  

March 31, 2017

   $ 32,511.66      $ 32,511.66      $ 1,650.00  

December 31, 2016

     —   (2)        —   (2)      $ 0.00  

September 30, 2016

     —   (2)        —   (2)      $ 675.00  

June 30, 2016

     —   (2)        —   (2)      $ 675.00  

March 31, 2016

     —   (2)        —   (2)      $ 600.00  

 

(1)

There is no established public trading market for LBI’s common stock. The stock prices above were prices reported to LBI by buyers and/or sellers of LBI common stock at the time transfers of record ownership were requested. While LBI has no knowledge that pricing information reported to it and described above is inaccurate, LBI has no way of independently assuring the accuracy of the price information so reported to it and the buyers and sellers do not have a specific legal obligation to accurately report sale prices to LBI. LBI believes that there were a total of 5 sale transactions involving LBI common stock during the periods reported above, and the pricing information for all of those sale transactions were reported to LBI.

(2)

No pricing information reported.

(3)

During this time period, the only reported pricing information was from two sales of LBI common stock in non-arm’s length sales transactions.

Subject to certain limitations set forth in the Merger Agreement, LBI intends to continue its policy of paying quarterly dividends; however, future cash dividend payments will depend upon a number of factors, including, but not limited to, capital requirements, regulatory limitations, LBI’s financial condition, results of operations, and Bank of Geneva’s ability to pay dividends to LBI. LBI relies upon dividends originating from Bank of Geneva to accumulate earnings for payment of cash dividends to its shareholders.

The following table presents high and low pricing information for LBI common stock on August 17, 2018, the business day before the Merger was publicly announced, and January 2, 2017, the last practicable day for which information was available prior to the date of this proxy statement and prospectus from an arm’s length sales transaction, based upon the information provided above.

 

     High(1)      Low (1)      Close(1)  

August 17, 2018

     —   (2)        —   (2)        —   (2)  

January 2, 2017

   $ 32,511.66      $ 32,511.66      $ 32,511.66  

 

(1)

There is no established public trading market for LBI’s common stock. The stock prices above were prices reported to LBI by buyers and/or sellers of LBI common stock at the time transfers of record ownership

 

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  were requested. While LBI has no knowledge that pricing information reported to it and described above is inaccurate, LBI has no way of independently assuring the accuracy of the price information so reported to it and the buyers and sellers do not have a specific legal obligation to accurately report sale prices to LBI. LBI believes that there were a total of 5 sale transactions involving LBI common stock during the periods reported above, and the pricing information for all of those sale transactions were reported to LBI.
(2)

No pricing information reported.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is presented by management of LBI to focus on the financial condition of Limberlost Bancshares, Inc. and its subsidiary, Bank of Geneva, as of and for the six-month period ended June 30, 2018 and as of and for the years ended December 31, 2017 and December 31, 2016, and its results of operations for the three- and six-month periods ended June 30, 2018 and June 30, 2017 and as of and for the years ended December 31, 2017 and December 31, 2016. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this proxy statement and prospectus, particularly the audited and unaudited consolidated financial statements and related notes appearing herein. This discussion and analysis LBI believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this proxy statement and prospectus may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. LBI assumes no obligation to update any of these forward-looking statements.

Overview

We are a bank holding company headquartered in Geneva, Indiana. Through our wholly-owned subsidiary, Bank of Geneva, an Indiana state chartered bank, we provide a broad range of financial services tailored to meet the needs of small businesses, farmers and consumers. Since our inception in 1892, our priority has been and continues to be serving the financial needs of the people of Northeast Indiana, while creating shareholder value through the effective and ongoing development of an attractive consumer and commercial bank in our markets. We currently operate out of six full-service branches. As of June 30, 2018, we had total consolidated assets of $286.66 million, net loans of $255.29 million, total deposits of $211.96 million, total federal home loan bank (“FHLB”) advances of $40.99 million, and total shareholders’ equity of $30.76 million. We operate in an area of Indiana that has a population base that is primarily Amish. Our six branches are located in the following counties of Indiana: one in Allen, four in Adams and one in Jay. Bank of Geneva was established in 1892, with the holding company, LBI, being established in 1998.

As a bank holding company operating through one market segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expenses, such as salaries, employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.

Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, local competition, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our

 

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loan portfolio are affected by, among other factors, economic and competitive conditions in our markets and across our region, as well as developments affecting the real estate, agriculture, financial services, insurance, transportation, manufacturing and energy sectors within our markets.

Financial Highlights

The financial highlights as of and for the six months ended June 30, 2018 include:

 

   

Total Assets: $286.66 million, a $7.44 million, or 2.66%, increase from December 31, 2017.

 

   

Total Net Loans: $255.29 million, a $15.65 million, or 6.53%, increase from December 31, 2017.

 

   

Total Deposits: $211.96 million, a $3.87million, or 3.87%, decrease from December 31, 2017.

 

   

Net Income: $3.07 million, a $0.22 million, or 7.75%, increase from the six months ended June 30, 2017.

 

   

Net Interest Income: $6.20 million, a $0.78 million, or 14.47%, increase from the six months ended June 30, 2017.

 

   

Allowance for Loan and Lease Losses: 1.24% of total loans as of June 30, 2018.

 

   

Return on Average Assets: 2.20% (annualized).

 

   

Regulatory Capital Ratios:

 

   

Tier 1 Leverage: 11.15%

 

   

Common Equity Tier 1 Risk-Based: 13.67%

 

   

Tier 1 Risk-Based: 13.67%

 

   

Total Risk-Based Capital : 14.92%

 

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Table of Contents

Results of Operations for the Six Months Ended June 30, 2018 & 2017 and the Twelve Months Ended December 31, 2017 & 2016

Performance Summary—Six Months Ended June 30, 2018 & 2017

For the six months ended June 30, 2018, net income was $3.073 million compared to $2.852 million as of June 30, 2017. Return on average assets for the six months ended June 30, 2018 was 2.20% compared to 2.28% for the six months ended June 30, 2017. Bank of Geneva has been able to maintain a strong ratio of net interest income to average earning assets for each period ending June 30, 2018 and June 30, 2017. This ratio as of June 30, 2018 was 4.58% compared to 4.52% as of June 30, 2017. See Income Statement below:

 

     June 30
2018
     June 30
2017
     $ Change      % Change  

Interest Income

           

Loans receivable

   $ 6,798,030      $ 5,952,823      $ 845,207        14.20

Investment securities

           

Taxable

     272,281        144,029        128,252        89.05

Tax-exempt

     21,550        3,426        18,124        529.01

Other

     38,198        14,873        23,325        156.83
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     7,130,059        6,115,151        1,014,908        16.60
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     603,794        418,790        185,004        44.18

Borrowings

     327,066        280,576        46,490        16.57
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     930,860        699,366        231,494        33.10
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     6,199,199        5,415,785        783,414        14.47

Provision for Loan Losses

     225,000        210,000        15,000        7.14
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Loan Losses

     5,974,199        5,205,785        768,414        14.76
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Income

           

Service charges on deposit accounts

     245,405        224,117        21,288        9.50

Net realized gain (loss) on sales of available-for-sale securities

     0        0        0        0.00

Gain on sale of loans

     550        283,118        (282,568      -99.81

Other income

     226,266        229,465        (3,199      -1.39
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     472,221        736,700        (264,479      -35.90
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Expense

           

Salaries and employee benefits

     2,062,385        1,944,479        117,906        6.06

Net occupancy expenses

     185,961        168,560        17,401        10.32

Equipment expenses

     196,395        202,782        (6,387      -3.15

Deposit insurance expense

     40,946        40,127        819        2.04

Technology expense

     199,066        160,060        39,006        24.37

Legal and professional fees

     157,518        125,239        32,279        25.77

Other expenses

     531,238        449,266        81,972        18.25
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     3,373,509        3,090,513        282,996        9.16
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     3,072,911        2,851,972        220,939        7.75
  

 

 

    

 

 

    

 

 

    

 

 

 

Performance Summary—Twelve Months Ended December 31, 2017 & 2016

For the twelve months ended December 31, 2017, net income was $5.326 million compared to $4.718 million as of December 31, 2016. Return on average assets for the twelve months ended December 31,

 

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2017 was 2.06% compared to 2.06% for the twelve months ended December 31, 2016. Like the periods ending in June of 2018 and 2017, Bank of Geneva has been able to maintain a strong ratio of net interest income to average earning assets for each period ending December 31, 2017 and December 31, 2016. This ratio as of December 31, 2017 was 4.45% compared to 4.60% as of December 31, 2016. See Income Statement below:

 

     December 31
2017
     December 31
2016
     $ Change      % Change  

Interest Income

           

Loans receivable

   $ 12,322,405      $ 11,051,841      $ 1,270,564        11.50

Investment securities

           

Taxable

     338,467        254,090        84,377        33.21

Tax-exempt

     14,414        10,729        3,685        34.35

Other

     36,413        17,387        19,026        109.43
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     12,711,699        11,334,047        1,377,652        12.15
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     916,658        659,082        257,576        39.08

Borrowings

     605,509        418,451        187,058        44.70
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,522,167        1,077,533        444,634        41.26
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     11,189,532        10,256,514        933,018        9.10

Provision for Loan Losses

     420,000        330,000        90,000        27.27
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income After Provision for Loan Losses

     10,769,532        9,926,514        843,018        8.49
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Income

           

Service charges on deposit accounts

     470,118        453,452        16,666        3.68

Net realized gain (loss) on sales of available-for-sale securities

     (184,048      69,141        (253,189      -366.19

Gain on sale of loans

     327,062        0        327,062        0.00

Other income

     513,363        223,363        290,000        129.83
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,126,495        745,956        380,539        51.01
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Expense

           

Salaries and employee benefits

     4,146,310        3,643,115        503,195        13.81

Net occupancy expenses

     346,726        331,232        15,494        4.68

Equipment expenses

     401,430        396,312        5,118        1.29

Deposit insurance expense

     84,093        91,953        (7,860      -8.55

Technology expense

     325,870        322,243        3,627        1.13

Legal and professional fees

     335,431        335,431        0        0.00

Other expenses

     930,298        833,904        96,394        11.56
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     6,570,158        5,954,190        615,968        10.35
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     5,325,869        4,718,280        607,589        12.88
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and FHLB borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and

 

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mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”

To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. We calculate average assets, liabilities and capital using a monthly average.

For the six months ended June 30, 2018, net interest income totaled $6.20 million and net interest margin and net interest spread were 4.58% and 4.39%, respectively. For the six months ended June 30, 2017, net interest income totaled $5.42 million and net interest margin and net interest spread were 4.52% and 4.34%, respectively.

 

     June 30
2018
     June 30
2017
     $ Change      % Change  

Interest Income

           

Loans receivable

   $ 6,798,030      $ 5,952,823      $ 845,207        14.20

Investment securities

           

Taxable

     272,281        144,029        128,252        89.05

Tax-exempt

     21,550        3,426        18,124        529.01

Other

     38,198        14,873        23,325        156.83
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     7,130,059        6,115,151        1,014,908        16.60
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     603,794        418,790        185,004        44.18

Borrowings

     327,066        280,576        46,490        16.57
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     930,860        699,366        231,494        33.10
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     6,199,199        5,415,785        783,414        14.47
  

 

 

    

 

 

    

 

 

    

 

 

 

For the twelve months ended December 31, 2017, net interest income totaled $11.19 million and net interest margin and net interest spread were 4.45% and 4.26%, respectively. For the twelve months ended December 31, 2016, net interest income totaled $10.26 million and net interest margin and net interest spread were 4.60% and 4.45%, respectively.

 

     December 31
2017
     December 31
2016
     $ Change      % Change  

Interest Income

           

Loans receivable

   $ 12,322,405      $ 11,051,841      $ 1,270,564        11.50

Investment securities

           

Taxable

     338,467        254,090        84,377        33.21

Tax-exempt

     14,414        10,729        3,685        34.35

Other

     36,413        17,387        19,026        109.43
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     12,711,699        11,334,047        1,377,652        12.15
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     916,658        659,082        257,576        39.08

Borrowings

     605,509        418,451        187,058        44.70
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,522,167        1,077,533        444,634        41.26
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     11,189,532        10,256,514        933,018        9.10
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the six months ended June 30, 2018 and 2017, interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield. The average total loans reflected below are net of deferred loan fees and discounts.

 

     Six Months
June 30, 2018
(Dollars in Thousands)
    Six Months
June 30, 2017
(Dollars in Thousands)
 
     Average
Balance
    Int.      Yield/
Rate
    Average
Balance
    Int.      Yield/
Rate
 

Assets

              

Loans

   $ 249,976     $ 6,798        5.48   $ 227,109     $ 5,953        5.29

Investment securities

   $ 19,050     $ 294        3.11   $ 11,603     $ 147        2.55

Other interest-earning assets

   $ 3,764     $ 38        2.04   $ 2,895     $ 15        1.04

Total interest-earning assets

   $ 272,790     $ 7,130        5.27   $ 241,607     $ 6,115        5.10
  

 

 

   

 

 

      

 

 

   

 

 

    

Allowance for loan losses

   $ (3,103        $ (2,680     

Noninterest-earning assets

   $ 9,905          $ 10,951       
  

 

 

        

 

 

      

Total assets

   $ 279,592          $ 249,878       
  

 

 

        

 

 

      

Liabilities/Equity

              

Deposits

   $ 177,288     $ 604        0.69   $ 145,763     $ 418        0.58

HLB Advances and borrowings

   $ 37,188     $ 327        1.77   $ 40,780     $ 281        1.39

Total interest-bearing liabilities

   $ 214,476     $ 931        0.88   $ 186,543     $ 699        0.76
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-bearing deposits

   $ 34,044          $ 34,428       

Other noninterest-bearing liabilities

   $ 1,021          $ 464       
  

 

 

        

 

 

      

Total liabilities

   $ 249,541          $ 221,435       
  

 

 

        

 

 

      

Total equity

   $ 30,051          $ 28,443       
  

 

 

        

 

 

      

Total liabilities and equity

   $ 279,592          $ 249,878       
  

 

 

        

 

 

      

Net Interest Income

     $ 6,199          $ 5,416     
    

 

 

        

 

 

    

Interest Rate Spread

          4.39          4.34

Net Interest-Earning Assets

   $ 58,314          $ 55,064       
  

 

 

        

 

 

      

Interest Rate Margin

          4.58          4.52

Average Interest-Earning Assets to Interest-Bearing Liabilities

          127.19          129.52

The interest rate spread increased from 4.34% for the six months ended June 30, 2017 to 4.39% for the six months ended June 30, 2018. Net interest income increased from $5.42 million to $ 6.20 million for the same period. During this period, June 30, 2017 to June 30, 2018, average total assets increase from $249.88 million to $279.59 million. This is an increase of $29.71 million or 11.89%. Average total asset growth is primarily from loan growth.

 

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Table of Contents
     December 31, 2017
(Dollars in Thousands)
    December 31, 2016
(Dollars in Thousands)
 
     Average
Balance
    Int.      Yield/
Rate
    Average
Balance
    Int.      Yield/
Rate
 

Assets

              

Loans

   $ 235,033     $ 12,322        5.24   $ 210,666     $ 11,052        5.25

Investment securities

   $ 13,737     $ 353        2.57   $ 10,172     $ 265        2.61

Other interest-earning assets

   $ 2,877     $ 36        1.25   $ 2,008     $ 17        0.85

Total interest-earning assets

   $ 251,647     $ 12,711        5.05   $ 222,846     $ 11,334        5.09
  

 

 

   

 

 

      

 

 

   

 

 

    

Allowance for loan losses

   $ (2,790        $ (2,426     

Noninterest-earning assets

   $ 9,037          $ 9,335       
  

 

 

        

 

 

      

Total assets

   $ 257,894          $ 229,755       
  

 

 

        

 

 

      

Liabilities/Equity

              

Deposits

   $ 152,457     $ 916        0.60   $ 132,970     $ 659        0.50

FHLB Advances and borrowings

   $ 40,529     $ 606        1.50   $ 34,697     $ 418        1.20

Total IBL

   $ 192,986     $ 1,522        0.79   $ 167,667     $ 1,077        0.64
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-bearing deposits

   $ 35,220          $ 33,846       

Other noninterest-bearing liabilities

   $ 625          $ 1,281       
  

 

 

        

 

 

      

Total liabilities

   $ 228,831          $ 202,794       
  

 

 

        

 

 

      

Total equity

   $ 29,063          $ 26,961       
  

 

 

        

 

 

      

Total liabilities and equity

   $ 257,894          $ 229,755       
  

 

 

        

 

 

      

Net Interest Income

     $ 11,189          $ 10,257     
    

 

 

        

 

 

    

Interest Rate Spread

          4.26          4.45

Net Interest-Earning Assets

   $ 58,661          $ 55,179       
  

 

 

        

 

 

      

Interest Rate Margin

          4.45          4.60

Average Interest-Earning Assets to Interest-Bearing Liabilities

          130.40          132.91

The interest rate spread decreased from 4.45% for the twelve months ended December 31, 2016 to 4.26% for the twelve months ended December 31, 2017. Net interest income increased from $10.26 million to $11.19 million for the same period. During this period, December 31, 2016 to December 31, 2017, average total assets increase from $229.76 million to $257.89 million. This is an increase of $28.13 million or 12.24%. Average total asset growth is primarily from loan growth for this period also.

Provision for Loan Losses

Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. The provision for loan losses funding was $225,000.00 for the six months ended June 30, 2018 and $210,000.00 for the six months ended June 30, 2017. The provision for loan losses funding was $420,000 for the twelve months ended December 31, 2017 and $330,000.00 for the twelve months ended December 31, 2016. The primary reason for continued funding of the allowance for loan losses is loan growth. Total loans increased $26.55 million from June 30, 2017 to June 30, 2018 and $21.78 million from December 31, 2016 to December 31, 2017.

Allowance for loan losses as a percentage of total loans, for the periods indicated, are as follows:

 

   

June 30, 2018 1.24%

 

   

June 30, 2017 1.20%

 

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Table of Contents
   

December 31, 2017 1.23%

 

   

December 31, 2016 1.17%

Noninterest Income

Our primary sources of noninterest income are service charges on deposit accounts. The following charts present, for the periods indicated, the major categories of noninterest income:

 

     June 30
2018
     June 30
2017
     $ Change      % Change  

Noninterest Income

           

Service charges on deposit accounts

   $ 245,405      $ 224,117      $ 21,288        9.50

Net realized gain (loss) on sales of available-for-sale securities

     0        0        0        0.00

Gain on sale of loans

     550        283,118        (282,568      -99.81

Other income

     226,266        229,465        (3,199      -1.39

Total noninterest income

     472,221        736,700        (264,479      -35.90
  

 

 

    

 

 

    

 

 

    

 

     December 31
2017
     December 31
2016
     $ Change      % Change  

Noninterest Income

           

Service charges on deposit accounts

   $ 470,118      $ 453,452      $ 16,666        3.68

Net realized gain (loss) on sales of available-for-sale securities

     (184,048      69,141        (253,189      366.19

Gain on sale of loans

     327,062        0        327,062        0.00

Other income

     513,363