<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998
REGISTRATION NO. 333-53091
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
F & M BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
WISCONSIN 6022 39-1365327
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
ONE BANK AVENUE
KAUKAUNA, WISCONSIN 54130
(920) 766-1717
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
RANDALL A. HAAK, ESQ.
MCCARTY, CURRY, WYDEVEN, PEETERS & HAAK, LLP
120 E. 4TH STREET
KAUKAUNA, WISCONSIN 54130
(920) 766-4693
(Name, address, including Zip Code, and telephone
number, including area code, of agent for service)
----------------
COPIES TO:
KENNETH V. HALLETT, ESQ. HOWARD O. HAGEN, ESQ.
QUARLES & BRADY DICKINSON, MACKAMAN, TYLER & HAGEN, P.C.
411 EAST WISCONSIN AVENUE 699 WALNUT, SUITE 1600
MILWAUKEE, WISCONSIN 53202 DES MOINES, IOWA 50309-3986
(414) 277-5000 (515) 244-2600
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
----------------
<PAGE> 2
May 21, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
BancSecurity Corporation ("BancSecurity") to be held on Monday, June 29, 1998
at Security Bank, 11 N. 1st Avenue, Marshalltown, Iowa (the "BancSecurity
Special Meeting"). The BancSecurity Special Meeting will begin at 4:30 p.m.,
Central Time. At the BancSecurity Special Meeting, you will be asked to approve
an Agreement and Plan of Merger dated as of December 1, 1997 (the "Agreement"),
which provides for the merger (the "Merger") of a wholly-owned subsidiary of F&M
Bancorporation, Inc. ("F&M") with and into BancSecurity. The Agreement provides
that, upon consummation of the Merger, each holder of BancSecurity Common Stock
who has not perfected dissenters' rights will be entitled to receive, in
exchange for each share of BancSecurity Common Stock held at the time of the
Merger, the number of shares of F&M Common Stock determined by an exchange ratio
provided in the Agreement (the "Exchange Ratio").
Under the Agreement, and subject to certain conditions and adjustments, the
Exchange Ratio for each of the 38,726 issued and outstanding shares of
BancSecurity Common Stock is the number of shares of F&M Common Stock
determined as a result of (i) $145 million divided by (ii) the average closing
price (the "Average Price") of F&M Common Stock on the NASDAQ Stock Market over
the last thirty trading days in which trading occurs ending at the end of the
third trading day immediately preceding the closing of the Merger, then (iii)
dividing the result by the 38,726 outstanding shares of BancSecurity Common
Stock. However, if the Average Price is equal to or less than $35.80 or equal
to or greater than $40.00, then the number of F&M Common Stock to be issued in
the Merger will not need to be increased or decreased, as the case may be; and
provided further that in the event the Average Price is less than $32.00, then
BancSecurity can choose to terminate the Agreement unless the number of shares
of F&M Common Stock issued in the Merger is increased to an aggregate value of
at least $129.6 million.
At today's date, the Average Price would have exceeded $40.00. Thus, the
Exchange Ratio for each share of BancSecurity Common Stock would have
been 93.6064 (i.e., $145 million divided by 40.00, divided by 38,726). If the
Average Price had been $35.80 or below (but at least $32.00), the Exchange
Ratio would have been 104.5881; if the Average Price had been between $35.80
and $40.00, the Exchange Ratio would have varied between those numbers as
described herein. F&M does not have the right to terminate the transaction if
the Average Price exceeds any particular level. BancSecurity shareholders
should note that the Exchange Ratio is fixed outside of a collared price range,
and shareholders will not know at the time of the vote the precise Exchange
Ratio which shareholders will receive. It is BancSecurity's expectation that
the Merger will close shortly after The BancSecurity shareholder vote, so that
the approximate Exchange Ratio will be known at the time of the Special
Meeting; however, there can be no assurance. Prior to the Special Meeting,
BancSecurity shareholders desiring a current estimate of the Exchange Ratio may
call (collect) Marsha Gaskill at (515) 754-5545.
The Board of Directors of BancSecurity has received an opinion from Hovde
Financial, Inc. as of the date hereof to the effect that the Exchange Ratio is
fair, from a financial point of view, to BancSecurity shareholders (the
"Fairness Opinion").
<PAGE> 3
The Merger will require the affirmative vote of holders of 75% of the
outstanding shares of BancSecurity Common Stock. At the record date, the
directors and executive officers of BancSecurity as a group own approximately
20.2% of outstanding shares of BancSecurity Common Stock, and these persons have
indicated their intention to vote FOR the Merger.
THE BOARD OF DIRECTORS OF BANCSECURITY BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF BANCSECURITY AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE AGREEMENT.
The attached Joint Proxy Statement/Prospectus will provide you with a
detailed description of the Agreement and the transactions contemplated thereby.
The Fairness Opinion is attached as Appendix A and the Agreement is attached as
Appendix C to the Joint Proxy Statement/Prospectus. Information concerning F&M
and BancSecurity is also provided in the Joint Proxy Statement/Prospectus.
Extensive information concerning F&M is also provided in F&M's 1997 Annual
Report to shareholders, accompanying this Joint Proxy Statement/Prospectus.
Please give this information your attention.
The affirmative vote of the holders of not less than three-quarters of the
shares of BancSecurity Common Stock entitled to vote at the BancSecurity Special
Meeting is required to approve the Agreement and the Merger. The failure to
either (i) execute and return the accompanying proxy card or (ii) vote in person
at the BancSecurity Special Meeting will have the effect of a vote cast against
the Agreement. Furthermore, abstentions will have the same effect as votes cast
against approval of the Agreement. To assure that your shares are represented in
voting on this very important matter, please complete and return the
accompanying proxy card promptly in the enclosed envelope, whether or not you
plan to attend the BancSecurity Special Meeting. If you do attend, you may, if
you wish, revoke your proxy and vote your shares in person at the BancSecurity
Special Meeting.
If you require assistance, please contact me at BancSecurity at (515)
754-5500.
Very truly yours,
Ronald E. Fenton,
President
<PAGE> 4
May 21, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"F&M Special Meeting") of F&M Bancorporation, Inc. ("F&M") to be held on Monday,
June 29, 1998 at the Paper Valley Hotel and Conference Center, 333 West College
Avenue, Appleton, Wisconsin. The F&M Special Meeting will begin at 10:00 a.m.
Central Time.
At the F&M Special Meeting, you will be asked to approve the issuance of
shares of F&M Common Stock pursuant to an Agreement and Plan of Merger dated as
of December 1, 1997 (the "Agreement"), which provides for the merger (the
"Merger") of a wholly-owned subsidiary of F&M with and into BancSecurity
Corporation ("BancSecurity"). The Agreement provides that, upon consummation of
the Merger, each holder of BancSecurity Common Stock will be entitled to
receive, in exchange for each share of BancSecurity Common Stock held at the
time of the Merger, shares of F&M Common Stock, in an exchange ratio provided in
the Agreement (the "Exchange Ratio").
Under the Agreement, and subject to certain conditions and adjustments, the
Exchange Ratio for each of the 38,726 issued and outstanding shares of
BancSecurity Common Stock is the number of shares of F&M Common Stock
determined as a result of (i) $145 million divided by (ii) the average closing
price (the "Average Price") of F&M Common Stock on the NASDAQ Stock Market over
the last thirty trading days in which trading occurs ending at the end of the
third trading day immediately preceding the closing of the Merger, then (iii)
dividing the result by the 38,726 outstanding shares of BancSecurity Common
Stock. However, if the Average Price is equal to or less than $35.80 or equal
to or greater than $40.00, then the number of shares of F&M Common Stock to be
issued in the Merger will not need to be increased or decreased, as the case
may be; and provided further that in the event the Average Price is less than
$32.00, then BancSecurity can choose to terminate the Agreement unless the
number of shares of F&M Common Stock issued in the Merger is increased to an
aggregate value of at least $129.6 million.
At today's date, the Average Price would have exceeded $40.00. Thus, the
Exchange Ratio for each share of BancSecurity Common Stock would have been
93.6064 (i.e., $145 million divided by $40.00, divided by 38,726). If the
Average Price had been $35.80 or below (but at least $32.00); the Exchange
Ratio would have been 104.5881, if the Average Price had been between $35.80
and $40.00, the Exchange Ratio would have varied between those numbers as
described herein.
THE BOARD OF DIRECTORS OF F&M BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF F&M AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE AGREEMENT.
The attached Joint Proxy Statement/Prospectus will provide you with a
detailed description of the Agreement and the transactions contemplated thereby.
The Agreement itself is attached as Appendix C to the Joint Proxy
Statement/Prospectus. Extensive information concerning F&M and BancSecurity is
also provided in the Joint Proxy Statement/Prospectus. Please give this
information your attention.
<PAGE> 5
Under NASDAQ Stock Market listing requirements, the affirmative vote of the
holders of a majority of the shares of F&M Common Stock present, in person or by
proxy, and entitled to vote at the F&M Special Meeting, is required to approve
the Merger. To assure that your shares are represented in voting on this very
important matter, please complete and return the accompanying proxy card
promptly in the enclosed envelope, whether or not you plan to attend the F&M
Special Meeting. If you do attend, you may, if you wish, revoke your proxy and
vote your shares in person at the F&M Special Meeting.
In addition to the Merger, the Board of Directors of F&M has also proposed
an amendment (the "Amendment") to the Articles of Incorporation of F&M (the
"Articles") to increase the number of authorized shares of F&M Common Stock
$1.00 par value that F&M is authorized to issue from twenty million (20,000,000)
shares to fifty million (50,000,000) shares. The Articles provide that the
affirmative vote of the holders of a majority of the outstanding shares of F&M
Common Stock is required to approve the Amendment.
THE BOARD OF DIRECTORS OF F&M HAS UNANIMOUSLY APPROVED THE PROPOSED
AMENDMENT TO THE ARTICLES AND RECOMMENDS A VOTE FOR THE AMENDMENT.
If you require assistance, please contact Janet M. Lakso at F&M at
920/766-1717.
Very truly yours,
Gail E. Janssen, John W. Johnson
Chairman of the Board President and CEO
<PAGE> 6
BANCSECURITY CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 29, 1998
To the Shareholders of BancSecurity Corporation:
NOTICE is hereby given that a special meeting of the shareholders of
BancSecurity Corporation, an Iowa corporation ("BancSecurity"), will be held at
Security Bank, 11 N. 1st Avenue, Marshalltown, Iowa on Monday, June 29, 1998,
at 4:30 p.m. local time, for the purpose of considering and voting upon the
following matters:
1. Approval and adoption of an Agreement and Plan of Merger (the
"Agreement") providing for the merger (the "Merger") of a
wholly-owned subsidiary of F&M Bancorporation, Inc. ("F&M"), a
Wisconsin corporation, into BancSecurity, in which outstanding
shares of BancSecurity Common Stock will be converted into the
right to receive shares of F&M Common Stock; and
2. Such other matters relating to the foregoing as may properly be
brought before the meeting or any adjournment thereof;
all as set forth in the accompanying Joint Proxy Statement/Prospectus.
The Board of Directors has fixed the close of business on May 8, 1998 as
the record date for the determination of shareholders entitled to receive notice
of and to vote at the special meeting or any adjournment thereof.
The affirmative vote of the holders of not less than 75% of the outstanding
shares of BancSecurity Common Stock entitled to be cast is required for approval
of the Agreement and the transactions contemplated thereby.
Dissenting BancSecurity shareholders have certain rights of appraisal. See
"Rights of Dissenting Shareholders of BancSecurity" in the Joint Proxy
Statement/Prospectus and the statutory provisions of Iowa law set forth in
Appendix B thereto.
WHETHER OR NOT YOU EXPECT TO ATTEND THE BANCSECURITY SPECIAL MEETING,
PLEASE MARK, SIGN, DATE, AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE
ACCOMPANYING POST-PAID ENVELOPE. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED
AT THE SPECIAL MEETING, WHETHER YOUR HOLDINGS ARE LARGE OR SMALL. IF FOR ANY
REASON YOU SHOULD DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE
IT IS VOTED.
By order of the Board of Directors,
Gordon G. Leth, Secretary
May 21, 1998
Marshalltown, Iowa
<PAGE> 7
F&M BANCORPORATION, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 29, 1998
To the Shareholders of F&M Bancorporation, Inc.:
NOTICE is hereby given that a Special Meeting (the "F&M Special Meeting")
of the shareholders of F&M Bancorporation, Inc., a Wisconsin corporation
("F&M"), will be held at the Paper Valley Hotel and Conference Center, 333 West
College Avenue, Appleton, Wisconsin on Monday, June 29, 1998, at 10:00 a.m.
local time, for the purpose of considering and voting upon the following
matters:
1. To approve the transactions contemplated by an Agreement and Plan
of Merger (the "Agreement") providing for the merger (the
"Merger") of a wholly-owned subsidiary of F&M into BancSecurity
Corporation, an Iowa corporation ("BancSecurity"), in which
outstanding shares of BancSecurity Common Stock will be converted
into the right to receive shares of F&M Common Stock;
2. To amend the Articles of Incorporation of F&M (the "Articles") to
increase the number of authorized shares of F&M Common Stock $1.00
par value that F&M is authorized to issue from twenty million
(20,000,000) shares to fifty million (50,000,000) shares; and
3. To transact such other business as may properly be brought before
the F&M Special Meeting or any adjournment thereof;
all as set forth in the accompanying Joint Proxy Statement/Prospectus.
The Board of Directors has fixed the close of business on May 8, 1998 as
the record date for the determination of shareholders entitled to receive notice
of and to vote at the F&M Special Meeting or any adjournment thereof.
The affirmative vote of the holders of not less than a majority of the
outstanding shares of F&M Common Stock present, in person or by proxy, at the
F&M Special Meeting and entitled to vote, is required for approval of the
Agreement and the transactions contemplated thereby. The affirmative vote of the
holders of a majority of F&M Common Stock outstanding is required to adopt the
Amendment of the Articles. F&M Shareholders do not have dissenters' rights of
appraisal.
WHETHER OR NOT YOU EXPECT TO ATTEND THE F&M SPECIAL MEETING, PLEASE MARK,
SIGN, DATE, AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ACCOMPANYING POST-PAID
ENVELOPE. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE F&M SPECIAL
MEETING, WHETHER YOUR HOLDINGS ARE LARGE OR SMALL. IF FOR ANY REASON YOU SHOULD
DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
By order of the Board of Directors,
Janet M. Lakso,
Secretary
May 21, 1998
Kaukauna, Wisconsin
<PAGE> 8
JOINT PROXY STATEMENT F&M BANCORPORATION, INC.
FOR UP TO
SPECIAL MEETINGS OF SHAREHOLDERS 4,050,279 SHARES
OF COMMON STOCK
F&M BANCORPORATION, INC.
AND OF PROSPECTUS
BANCSECURITY CORPORATION
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of BancSecurity Acquisition Corporation ("Acquisition Corp."), a
wholly-owned subsidiary of F&M Bancorporation, Inc., a Wisconsin corporation
("F&M"), with and into BancSecurity Corporation, an Iowa corporation
("BancSecurity").
In the Merger, all the outstanding shares of Common Stock, $25.00 par
value, of BancSecurity (the "BancSecurity Common") will be converted into shares
of Common Stock, $1.00 par value, of F&M ("F&M Common") according to an exchange
ratio (the "Exchange Ratio") determined pursuant to the provisions of the
Agreement and Plan of Merger (the "Agreement") among F&M, BancSecurity and
Acquisition Corp.
Under the Agreement, and subject to certain conditions and adjustments, the
Exchange Ratio for each of the 38,726 issued and outstanding shares of
BancSecurity Common Stock is the number of shares of F&M Common Stock determined
by dividing (i) $145 million by (ii) the average closing price (the "Average
Price") of F&M Common on the NASDAQ Stock Market over the last thirty trading
days in which trading occurs ending at the end of the third trading day
immediately preceding the closing of the Merger, then (iii) dividing the result
by the 38,726 outstanding shares of BancSecurity Common; provided that if the
Average Price is equal to or less than $35.80 or equal to or greater than
$40.00, then the number of shares of F&M Common to be issued in the Merger will
not need to be increased or decreased, as the case may be; and provided further
that in the event the Average Price is less than $32.00, then BancSecurity can
choose to terminate the Agreement unless the number of shares of F&M Common
issued in the Merger is increased to an aggregate value of at least $129.6
million (or $3,346.59 per share).
At the date hereof, the Average Price would have exceeded $40.00. Thus, the
Exchange Ratio for each share of BancSecurity Common would have been 93.6064
(i.e., $145 million divided by $40.00, divided by 38,726). If the Average Price
had been $35.80 or below (but at least $32.00), the Exchange Ratio would have
been 104.5881; if the Average Price had been between $35.80 and $40.00, the
Exchange Ratio would have varied between those numbers as described herein.
FOR CERTAIN RISKS FACTORS RELATING TO THIS OFFERING, SEE "RISK FACTORS"
BEGINNING AT PAGE 15 HEREIN.
No person has been authorized in connection with this offering to give any
information or to make any representations other than contained, or incorporated
by reference, in this Joint Proxy Statement/Prospectus.
The Joint Proxy Statement/Prospectus also relates to the proposed amendment
to the F&M Articles of Incorporation to increase the number of authorized shares
of F&M Common that F&M is authorized to issue from twenty million shares to
fifty million shares, which matter is being voted upon solely by F&M
shareholders.
The date of this Joint Proxy Statement/Prospectus is May 21, 1998, and this
Joint Proxy Statement/Prospectus is first being mailed to BancSecurity and F&M
shareholders on or about May 27, 1998.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 9
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY F&M,
BANCSECURITY, OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF F&M OR BANCSECURITY SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
F&M is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The reports, proxy statements and other
information filed by F&M with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at 7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 at prescribed rates. Also, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants (such as F&M) that file electronically
with the Commission. In addition, because F&M Common is traded on the NASDAQ
Stock Market, material filed by F&M can be inspected at the offices of National
Association of Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C.
20006.
F&M has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities to be issued pursuant to or as contemplated by the Agreement. This
Joint Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement. Such additional information may be obtained at
the addresses set forth above. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated in this Joint Proxy
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by F&M pursuant to the
Exchange Act are incorporated by reference in this Prospectus:
(i) F&M's Annual Report on Form 10-K for the year ended December 31,
1997, as amended (the "F&M 1997 10-K");
(ii) F&M's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 (the "F&M 3/31/98 10-Q"); and
2
<PAGE> 10
(iii) The description of F&M Common included in Item 11 to F&M's
Registration Statement on Form 10, as amended by Post-Effective
Amendment No. 2 thereto filed September 16, 1993.
All reports and definitive proxy or information statements filed by F&M pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Joint Proxy Statement/Prospectus shall be deemed to be incorporated by
reference into this Joint Proxy Statement/Prospectus from the date of the
filings of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Joint Proxy Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS
IS DELIVERED, ON WRITTEN OR ORAL REQUEST, OF SUCH PERSON. REQUESTS SHOULD BE
DIRECTED TO F&M BANCORPORATION, INC., ONE BANK AVENUE, KAUKAUNA, WISCONSIN
54130 (TELEPHONE 920/766-1717), ATTN: CORPORATE SECRETARY. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY JUNE 22, 1998.
3
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
AVAILABLE INFORMATION.........................................................................2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................................2
GENERAL INFORMATION...........................................................................6
BancSecurity Special Meeting.............................................................7
F&M Special Meeting......................................................................8
SUMMARY.......................................................................................9
Purposes of the BancSecurity Special Meeting and F&M Special Meeting.....................9
Parties ................................................................................9
The Merger...............................................................................9
Conversion of BancSecurity Common.......................................................10
Federal Income Tax Consequences.........................................................10
Comparison of F&M Common with BancSecurity Common.......................................10
Required Vote for Merger................................................................11
Dissenters' Appraisal Rights............................................................11
Interests of BancSecurity Management; Management after the Merger.......................12
Fairness Opinion........................................................................12
Accounting Treatment....................................................................12
Recommendations of BancSecurity and F&M Directors.......................................12
Comparative Unaudited Per Share Data....................................................13
RISK FACTORS.................................................................................15
THE MERGER...................................................................................18
Reasons for the Merger and Board Recommendations........................................18
Negotiation of Terms....................................................................21
Terms of Merger.........................................................................22
Conversion of BancSecurity Common into F&M Common.......................................22
Effective Time of the Merger............................................................24
Distribution of F&M Common..............................................................24
Opinion of BancSecurity's Financial Advisor.............................................24
Conditions to the Merger................................................................30
Waiver, Amendment or Termination........................................................31
Interests of BancSecurity Management; Management after the Transaction..................31
Federal Income Tax Consequences.........................................................31
Resale of F&M Common....................................................................32
Accounting Treatment....................................................................32
RIGHTS OF DISSENTING SHAREHOLDERS OF BANCSECURITY............................................33
MARKET INFORMATION AND DIVIDENDS.............................................................35
F&M ...............................................................................35
BancSecurity............................................................................36
F&M SELECTED FINANCIAL INFORMATION...........................................................37
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C>
F&M BANCORPORATION, INC......................................................................38
Other Pending Acquisition...............................................................38
BANCSECURITY SELECTED CONSOLIDATED FINANCIAL DATA............................................39
BANCSECURITY MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION........................................40
FIRST QUARTER -- 1998 COMPARED WITH 1997................................................40
1997 COMPARED WITH 1996 AND 1995........................................................44
YEAR 2000...............................................................................61
RECENT ACCOUNTING DEVELOPMENTS..........................................................61
BANCSECURITY CORPORATION.....................................................................63
General ...............................................................................63
Management..............................................................................64
Share Ownership.........................................................................65
INFORMATION AS TO SECURITIES.................................................................66
F&M Common..............................................................................66
BancSecurity Common.....................................................................67
Comparison of F&M Common with BancSecurity Common.......................................68
PROPOSED AMENDMENT TO F&M'S ARTICLES OF INCORPORATION
REGARDING AUTHORIZED SHARES.............................................................68
OTHER MATTERS................................................................................69
SHAREHOLDER PROPOSALS........................................................................69
LEGAL OPINIONS...............................................................................69
EXPERTS/AUDITORS.............................................................................70
INDEX TO FINANCIAL STATEMENTS................................................................71
FAIRNESS OPINION OF HOVDE FINANCIAL, INC.............................................Appendix A
TEXT OF DIVISION XIII OF THE IOWA BUSINESS CORPORATION ACT...........................Appendix B
TEXT OF AGREEMENT AND PLAN OF MERGER.................................................Appendix C
</TABLE>
5
<PAGE> 13
GENERAL INFORMATION
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of BancSecurity in connection with the solicitation of proxies on
behalf of the BancSecurity Board of Directors to be voted at the Special Meeting
of Shareholders of BancSecurity to be held on June 29, 1998 and at any
adjournment thereof (the "BancSecurity Special Meeting"). This Joint Proxy
Statement/Prospectus is also being furnished to the shareholders of F&M in
connection with the solicitation of proxies on behalf of F&M's Board of
Directors to be voted at the Special Meeting of Shareholders of F&M to be held
on June 29, 1998 and at any adjournment thereof (the "F&M Special Meeting").
(The BancSecurity Special Meeting and the F&M Special Meeting are sometimes
referred to herein together as the "Meetings.") The purpose of the BancSecurity
Special Meeting and of this solicitation is to obtain BancSecurity Shareholder
action with regard to the approval of an Agreement and Plan of Merger, dated as
of December 1, 1997, by and among BancSecurity, F&M and Acquisition Corp. (the
"Agreement"). The purpose of the F&M Special Meeting and of this solicitation is
to obtain F&M Shareholder action with regard to (i) approval of the Agreement,
and (ii) approval of the amendment (the "Amendment") to the F&M Articles of
Incorporation (the "Articles") to increase the number of authorized shares of
F&M Common that F&M is authorized to issue from twenty million (20,000,000)
shares to fifty million (50,000,000) shares.
The Agreement provides for the acquisition of BancSecurity by F&M,
effected through the merger (the "Merger") of Acquisition Corp., a wholly-owned
subsidiary of F&M, into BancSecurity. Each outstanding share of BancSecurity
Common, $25.00 par value ("BancSecurity Common"), except shares for which
dissenters' rights are validly exercised, will be converted into shares of F&M
Common Stock, $1.00 par value ("F&M Common"), according to an exchange ratio
(the "Exchange Ratio") set forth in the Agreement. See "The Merger."
Under the Agreement, and subject to certain conditions and adjustments,
the Exchange Ratio for each of the 38,726 issued and outstanding shares of
BancSecurity Common, is the number of shares of F&M Common determined by
dividing (i) $145 million by (ii) the average closing price (the "Average
Price") of F&M Common on the NASDAQ Stock Market over the last thirty trading
days in which trading occurs ending at the end of the third trading day
immediately preceding the closing of the Merger, then (iii) dividing the result
by the 38,726 outstanding shares of BancSecurity Common. However, if the Average
Price is equal to or less than $35.80 or equal to or greater than $40.00, then
the number of shares of F&M Common to be issued in the Merger will not need to
be increased or decreased, as the case may be; and provided further that in the
event the Average Price is less than $32.00, then BancSecurity can choose to
terminate the Agreement unless the number of shares of F&M Common issued in the
Merger is increased to an aggregate value of at least $129.6 million (or
$3,346.59 per share).
At the date hereof, the Average Price would have exceeded $40.00.
Thus, the Exchange Ratio for each share of BancSecurity Common would
have been 93.6064 (i.e., $145 million divided by $40.00, divided by 38,726). If
the Average Price had been $35.80 or below (but not less than $32.00), the
Exchange Ratio would have been 104.5881; if the Average Price had been between
$35.80 and $40.00, the Exchange Ratio would have varied between those numbers
as described herein.
See "The Merger-Conversion of BancSecurity Common into F&M Common".
Consummation of the Merger is subject to the satisfaction of several
conditions, including approval by the shareholders of BancSecurity at the
BancSecurity Special Meeting, approval by F&M shareholders at the F&M Special
Meeting, and approval by the Board of Governors of the Federal Reserve System
(the "FRB") and the Iowa Division of Banking (the "Division"). See "The
Merger--Conditions to the Merger." The FRB approved the Merger on February 19,
1998, and the Division approved it on February 20, 1998. It is expected that the
Merger will be consummated in June 1998, shortly after the Meetings.
6
<PAGE> 14
The cost of solicitation of proxies will be borne by each party with
respect to the BancSecurity Special Meeting and the F&M Special Meeting.
However, because this Joint Proxy Statement/Prospectus also constitutes a
disclosure document with respect to F&M Common, F&M paid the costs and expenses
of the preparation hereof. In addition to solicitation by mail, directors,
officers and employees of BancSecurity or F&M may solicit proxies by telephone
or personal contact, but will receive no additional compensation for such
services.
The information contained in this Joint Proxy Statement/Prospectus
concerning BancSecurity and F&M has been supplied by each of them, respectively.
This Joint Proxy Statement/Prospectus is being mailed to F&M and BancSecurity
shareholders on or about May 27, 1998.
BancSecurity Special Meeting
In order to approve the Merger transaction described herein, the
affirmative vote of holders of not less than three-quarters of the outstanding
shares of BancSecurity Common entitled to be cast must be received at the
BancSecurity Special Meeting. The Iowa Business Corporation Act (the "IBCA")
affords those shareholders of BancSecurity who properly exercise their right to
dissent from the Merger, in accordance with the statutory proce dures, the right
to receive payment of the "fair value" of their shares in cash. See "Rights of
Dissenting Shareholders of BancSecurity" herein and Appendix B hereto.
Each shareholder of record of BancSecurity Common at the close of
business on May 8, 1998, will be entitled to one vote for each share of
BancSecurity Common registered in such shareholder's name. At that date, there
were 38,726 shares of BancSecurity Common issued and outstanding, all of which
are entitled to vote; a majority of outstanding shares constitutes a quorum.
Shares represented at the BancSecurity Special Meeting by a properly
executed proxy will be voted in accordance with the specification made on the
proxy; if no specification is made, such shares will be voted FOR approval of
the Agreement and the Merger. Abstentions will be treated as shares present for
purposes of determining the presence of a quorum; however, because of the
requirement that the Merger be approved by holders of 75% of the outstanding
shares of BancSecurity Common, abstentions and non-voting shares will have the
effect of votes AGAINST the Merger. Any shareholder submitting a proxy has the
right to revoke the proxy at any time before it is voted by giving written
notice to the Secretary of BancSecurity, by giving oral notice to the presiding
officer during the BancSecurity Special Meeting that the shareholder intends to
vote in person, or by submitting a subsequently dated proxy. Attendance by a
shareholder at the BancSecurity Special Meeting will not in and of itself
constitute revocation of a proxy.
The Board of Directors of BancSecurity has received an opinion (the
"Fairness Opinion") of Hovde Financial, Inc. ("Hovde") as of the date of this
Joint Proxy Statement/Prospectus that the Exchange Ratio is fair, from a
financial point of view, to BancSecurity shareholders. The Fairness Opinion is
attached hereto as Appendix A. See "The Merger--Opinion of BancSecurity's
Financial Advisor".
THE BOARD OF DIRECTORS OF BANCSECURITY UNANIMOUSLY RECOMMENDS APPROVAL
OF THE MERGER, THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AS IT
BELIEVES THEM TO BE IN THE BEST INTERESTS OF BANCSECURITY AND ITS SHAREHOLDERS.
The BancSecurity Board of Directors does not intend to present any
other matter before the BancSecurity Special Meeting. By law, the only business
that may be conducted at a special meeting of shareholders is the business
described in the notice of meeting.
7
<PAGE> 15
F&M Special Meeting
F&M Shareholders of record at the close of business on May 8, 1998,
will be entitled to one vote on each matter presented for each outstanding share
held (the "F&M Record Date"). The list of shareholders of record entitled to
notice of and to vote at the meeting will be available for inspection by any
shareholder at the Corporation's principal office at One Bank Avenue, Kaukauna,
Wisconsin, prior to the meeting and will also be available at the meeting. As of
May 8, 1998, there were 9,910,591 shares of F&M Common outstanding. This is
F&M's only class of stock outstanding. Any shareholder entitled to vote may vote
either in person or by a duly-authorized proxy. A majority of the votes entitled
to be cast on a matter, represented in person or by proxy, constitutes a quorum
for action on that matter.
Under NASDAQ Stock Market listing requirements, an affirmative vote of
holders of majority of the shares of F&M Common present, in person or by proxy,
and entitled to vote at the F&M Special Meeting, is required to approve the
issuance of shares of F&M Common pursuant to the Merger. Presence, in person or
by proxy, of the holders of a majority of the outstanding shares of F&M Common
constitutes a quorum at the F&M Special Meeting. Shareholders of F&M do not have
dissenter's rights under the Wisconsin Business Corporation Law ("WBCL") in this
matter.
Under the F&M Articles, an affirmative vote of holders of a majority of
the outstanding shares of F&M Common outstanding at the F&M Record Date is
required to adopt the Amendment to the Articles to increase the number of the
authorized shares of F&M Common that F&M is authorized to issue to fifty million
shares from twenty million shares.
Shares represented at the F&M Special Meeting by properly executed
proxy will be voted in accordance with the specification made on the proxy; if
no specification is made, such shares will be voted FOR approval of each of the
Merger and the Amendment. Abstentions will be treated as present for purposes of
determining the presence of a quorum, but will have the effect of votes AGAINST
the Merger and AGAINST the Amendment. Broker non-votes (proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners entitled to vote shares as to the matter) will not be treated
as present for determining a quorum or for determining the vote on those
matters. Any shareholder submitting a proxy has the right to revoke the proxy at
any time before it is voted by giving written notice to the secretary of F&M, by
giving oral notice to the presiding officer during the F&M Special Meeting that
the shareholder intends to vote in person, or by submitting a subsequently dated
proxy. Attendance by a shareholder at the F&M Special Meeting will not in and of
itself constitute revocation of a proxy.
THE BOARD OF DIRECTORS OF F&M UNANIMOUSLY RECOMMENDS APPROVAL OF THE
MERGER, AS IT BELIEVES THE MERGER TO BE IN THE BEST INTERESTS OF F&M AND ITS
SHAREHOLDERS AND APPROVAL OF THE AMENDMENT.
The F&M Board of Directors does not intend to present any other matters
before the Special Meeting.
8
<PAGE> 16
SUMMARY
The following is a brief summary of certain information contained in
this Joint Proxy Statement/ Prospectus. This summary is intended merely to
supply pertinent facts and highlights of the material contained or incorporated
in reference in this Joint Proxy Statement/Prospectus. The information contained
in this summary is qualified by reference to more detailed information contained
elsewhere, or incorporated by reference, in this Joint Proxy
Statement/Prospectus. Unless otherwise indicated, all F&M financial and other
stock-related data in this Joint Proxy Statement/Prospectus have been restated
to give retroactive effect to F&M's 10% stock dividends in June 1996 and 1997.
Purposes of the BancSecurity Special Meeting and F&M Special Meeting
Shareholders of BancSecurity and F&M are being asked to approve the
acquisition of BancSecurity by F&M through the Merger of Acquisition Corp. into
BancSecurity pursuant to the Agreement. In addition, shareholders of F&M are
being asked to approve the Amendment to the F&M Articles.
Parties
BancSecurity, an Iowa corporation, and F&M, a Wisconsin corporation,
are registered bank holding companies subject to supervision and regulation by
the FRB under the Federal Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act"). Security Bank Jasper - Poweshiek, Security Bank,
Marshalltown, and Story County Bank & Trust (together the "BancSecurity Banks"),
wholly-owned subsidiaries of BancSecurity, are Iowa state banks subject to the
supervision of the Division and the FDIC.
BancSecurity, which has its principal executive offices at 11 N. First
Avenue, P.O. Box 370, Marshalltown, Iowa 50158-0370 (telephone: 515/754-5500),
had total consolidated assets of $545 million at March 31, 1998. BancSecurity is
a three bank holding company which owns 100% of the BancSecurity Banks' stock.
The BancSecurity Banks have 14 full service offices in Iowa.
F&M, which has its principal executive offices at One Bank Avenue,
Kaukauna WI 54130 (telephone: 920/766-1717), had total consolidated assets of
almost $1.7 billion at March 31, 1998. F&M subsidiaries have 65 bank offices in
Wisconsin and one bank office in Minnesota; F&M also has a trust company
subsidiary. In addition to its proposed acquisition of BancSecurity, F&M has
agreed to acquire Financial Management Services of Jefferson, Inc.
("Jefferson"), a one-bank holding company in south-central Wisconsin owning The
Farmers and Merchants Bank of Jefferson ("FMBJ"), with total assets of $99.7
million at December 31, 1997.
Acquisition Corp., which shares its principal executive offices with
F&M, is a wholly-owned subsidiary of F&M organized to effect the transaction.
See "F&M Bancorporation, Inc." and "BancSecurity Corporation."
The Merger
The Agreement provides for the acquisition of BancSecurity by F&M
through the Merger of Acquisition Corp. into BancSecurity, the surviving
corporation. F&M will provide newly-issued shares of F&M Common to holders of
BancSecurity Common, upon conversion of their shares in the Merger. See "The
Merger" and the text of the Agreement at Appendix C hereto.
9
<PAGE> 17
Conversion of BancSecurity Common
In the Merger, shares of BancSecurity Common will be converted into
shares of F&M Common, in accordance with the Exchange Ratio set forth in the
Agreement. No fractional shares of F&M Common will be issued in the Merger. In
lieu of the issuance of fractional shares of F&M Common in the Merger, cash
adjustments will be paid to holders thereof in accordance with the Exchange
Ratio set forth in the Agreement.
Under the Agreement, and subject to certain conditions and adjustments,
the Exchange Ratio for each of the 38,726 issued and outstanding shares of
BancSecurity Common is the number of shares of F&M Common determined by dividing
(i) $145 million by (ii) the average closing price (the "Average Price") of F&M
Common on the NASDAQ Stock Market over the last thirty trading days in which
trading occurs ending at the end of the third trading day immediately preceding
the closing of the Merger, then (iii) dividing the result by the number of
shares of BancSecurity Common then outstanding. However, if the Average Price is
equal to or less than $35.80 or equal to or greater than $40.00, then the number
of shares of F&M Common to be issued in the Merger will not need to be increased
or decreased, as the case may be; and provided further that in the event the
Average Price is less than $32.00, then BancSecurity can choose to terminate the
Agreement unless the number of shares of F&M Common issued in the Merger is
increased to an aggregate value of at least $129.6 million (or $3,346.59 per
share).
At the date hereof, the Average Price would have exceeded $40.00. Thus,
the Exchange Ratio for each share of BancSecurity Common would have been
93.6064 (i.e., $145 million divided by $40.00, divided by 38,726). If the
Average Price had been $35.80 or below (but not less than $32.00), the Exchange
Ratio would have been 104.5881; if the Average Price had been between $35.80
and $40.00, the Exchange Ratio would have varied between those numbers as
described herein.
See "Comparative Unaudited per Share Data" below, "The
Merger--Conversion of BancSecurity Common into F&M Common" and "Market Prices
and Dividends--F&M."
Federal Income Tax Consequences
The transaction contemplated by the Agreement is intended to constitute
a reorganization resulting in no recognizable gain or loss for federal income
tax purposes by those BancSecurity Common shareholders who receive solely shares
of F&M Common (other than cash in lieu of fractional share interests) in
exchange for their shares of BancSecurity Common (a "Reorganization"). Assuming
that the Merger is consummated as contemplated in this Joint Proxy
Statement/Prospectus, F&M believes, and has obtained an opinion of counsel, that
the Merger will constitute such a Reorganization. The receipt of cash by
BancSecurity shareholders upon exercise of their dissenters' rights will be a
taxable transaction.
The parties have not sought any rulings from the Internal Revenue
Service that the transaction constitutes a Reorganization. It is a condition to
BancSecurity's obligations under the Agreement, however, that it receive an
opinion of counsel that the transaction will be treated as a Reorganization, and
it is expected that McCarty, Curry, Wydeven, Peeters & Haak, LLP, counsel to
F&M, will issue that opinion. See "The Merger--Federal Income Tax Consequences."
Comparison of F&M Common with BancSecurity Common
BancSecurity is organized under the IBCA and F&M is organized under the
WBCL, the provisions of which determine, respectively, the rights of holders of
common stock of each corporation, except as otherwise permissibly provided in
their respective Articles of Incorporation or Bylaws, or by their respective
Boards of
10
<PAGE> 18
Directors. While the rights of both corporations' shareholders are substantially
similar, there are also important differences. Under Section 180.0622(b) of the
WBCL, as judicially interpreted, shareholders have statutory liability for
certain unpaid indebtedness to employees for services rendered; no similar
statutory liability exists under the IBCA. There are also differences in the
shareholder vote required for certain important transactions. See "Information
as to Securities--Comparison of F&M Common with BancSecurity Common."
In addition to the differences between F&M Common and BancSecurity
Common themselves, differences exist in their trading markets. F&M Common is
traded on the NASDAQ Stock Market, while the trading market for shares of
BancSecurity Common has been limited.
Required Vote for Merger
The affirmative vote of holders of not less than three-quarters of the
outstanding shares of BancSecurity Common entitled to be cast is required to
approve and adopt the Agreement. In addition, the affirmative vote of holders of
not less than a majority of the outstanding shares of F&M Common present, in
person or by proxy, and entitled to vote at the F&M Special Meeting is required
to approve the issuance of shares of F&M Common pursuant to the Merger.
As of May 8, 1998, directors and executive officers of BancSecurity
beneficially owned an aggregate of 7,826 shares of BancSecurity Common, or 20.2%
of the outstanding shares of BancSecurity Common entitled to vote at the
BancSecurity Special Meeting. As of May 8, 1998, directors and executive
officers of F&M beneficially owned an aggregate of 550,808 shares of F&M Common
or 5.5% of the outstanding shares of F&M Common entitled to vote at the F&M
Special Meeting. Such persons have indicated that they intend to vote FOR the
Merger and the issuance of the shares of F&M Common in the Merger, respectively.
The directors and executive officers of F&M, and their affiliates, do not own
any shares of BancSecurity Common. The directors and executive officers of
BancSecurity do not own any shares of F&M Common. See "General Information" and
"BancSecurity Corporation, Inc.--Share Ownership."
Dissenters' Appraisal Rights
Any shareholder or beneficial shareholder of BancSecurity who complies
with the procedural requirements of the IBCA in exercising his or her
dissenters' rights will be entitled to receive cash in the amount of the "fair
value" of his or her shares as determined pursuant to the exercise of such
rights, instead of shares of F&M Common as contemplated by the terms of the
Agreement. Failure to comply with each of the detailed statutory procedural
requirements may result in a loss of such appraisal rights. A condition, which
can be waived by F&M and Acquisition Corp., to their obligation to conclude the
transaction is that holders of less than 10% of the issued and outstanding
BancSecurity Common will have elected to exercise such rights. See "The
Merger--Conditions to the Merger," "Rights of Dissenting Shareholders of
BancSecurity" and the statutory provisions set forth in Appendix B to this Joint
Proxy Statement/Prospectus.
If a BancSecurity shareholder fails to perfect his or her dissenters'
rights by failing strictly to comply with the applicable statutory requirements,
he or she will be bound by the terms of the Agreement. An executed proxy on
which no voting direction is made will be voted FOR approval of the Merger, so a
dissenting shareholder who wishes to have his or her shares represented by a
proxy at the BancSecurity Special Meeting but preserve his dissenters' rights
must mark his or her proxy card either to vote against the Merger or to abstain
from voting thereon, in addition to complying with the other requirements as
described herein.
Holders of F&M Common do not have dissenters' rights under the WBCL
with respect to the matter being voted upon at the F&M Special Meeting.
11
<PAGE> 19
Fairness Opinion
Hovde has delivered to the Board of Directors of BancSecurity its
written opinion dated the date hereof, to the effect that, as of such date, the
Exchange Ratio is fair, from a financial point of view, to the holders of
BancSecurity Common. The full text of the Fairness Opinion, which sets forth
material assumptions made, procedures followed, matters considered and
limitations on the review undertaken, is attached as Appendix A hereto.
BANCSECURITY SHAREHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY AND IN ITS
ENTIRETY. See "The Merger-Opinion of BancSecurity's Financial Advisor."
Interests of BancSecurity Management; Management after the Merger
Executive officers and directors of BancSecurity, as a group, own
approximately 20.2% of the outstanding shares of BancSecurity Common. Those
shares are entitled to participate in the Merger consideration to the same
extent as other outstanding shares of BancSecurity Common. The parties do not
contemplate the execution, revision or extension of any employment or other
compensatory agreements with members of BancSecurity management in connection
with the proposed Merger, although BancSecurity employees will become eligible
for participation in F&M employee plans on the same terms as other F&M employees
and existing employment agreements will remain in place.
Upon consummation of the Merger, F&M initially expects to continue to
operate the BancSecurity Banks as subsidiaries of BancSecurity under the
direction and general policies of F&M, BancSecurity and the Banks' boards of
directors. It is further anticipated that F&M's President and CEO, John W.
Johnson, or an F&M designee, will be elected to and serve as a member of the
board of directors of BancSecurity. As with all of F&M's subsidiary banks, F&M
will perform certain functions and provide certain services for the BancSecurity
Banks, and the BancSecurity Banks will pay F&M a management fee therefor.
The Agreement provides that immediately following the Merger, and
subject to certain conditions, Ronald E. Fenton, President of BancSecurity, will
be added to the Board of Directors of F&M for a three year term ending in 2001.
See "The Merger -- Interests of BancSecurity Management; Management
after the Merger."
Accounting Treatment
F&M intends to account for the acquisition of BancSecurity by using the
pooling of interests method of accounting.
Recommendations of BancSecurity and F&M Directors
THE BOARDS OF DIRECTORS OF BOTH BANCSECURITY AND F&M UNANIMOUSLY
RECOMMEND APPROVAL OF THE MERGER, THE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. See "The Merger--Reasons for the Merger."
12
<PAGE> 20
Comparative Unaudited Per Share Data
The following table sets forth for F&M Common and BancSecurity Common
certain unaudited historical, pro forma and pro forma equivalent per share
financial information for the quarters ended March 31, 1998 and 1997 and each of
the three years ended December 31, 1997, 1996 and 1995. The information
presented herein should be read in conjunction with the financial statements and
other information, appearing elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
As of and for the quarters As of and for the years
ended March 31, ended December 31,
---------------------------- ------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
F&M
Net Income per Share (basic) (1):
Historical............................... $ 0.56 $ 0.48 $ 2.09 $ 1.73 $ 1.59
Pro forma (2):
Assuming $40.00 Average Price............ 0.54 0.49 1.75 1.77 1.61
Assuming $35.80 Average Price............ 0.53 0.47 1.70 1.71 1.56
Dividends per Share:
Historical............................... $ 0.22 $ 0.182 $ 0.764 $ 0.607 $ 0.496
Pro forma (3)............................ 0.22 0.182 0.764 0.607 0.496
Shareholders' Equity per Share:
Historical............................... $ 15.83 * $ 15.26 * *
Pro forma (2):
Assuming $40.00 Average Price............ 15.64 15.02
Assuming $35.80 Average Price............ 15.16 14.55
BANCSECURITY
Net Income per Share (basic) (1):
Historical............................... $ 47.35 $ 47.91 $ 78.92 $ 174.43 $ 155.65
Pro forma equivalent (4):
Assuming $40.00 Average Price............ 50.55 45.87 163.81 165.68 150.71
Assuming $35.80 Average Price............ 55.43 49.16 177.80 178.85 163.16
Dividends per Share:
Historical............................... $ 10.75 -0- $ 43.00 $ 38.50 $ 34.25
Pro forma equivalent (4):
Assuming $40.00 Average Price............ $ 20.59 $ 17.04 $ 71.52 $ 56.82 $ 46.43
Assuming $35.80 Average Price............ 23.01 19.04 79.91 63.48 51.88
Shareholders' Equity per Share:
Historical............................... $1,414.58 * $1,345.08 * *
Pro forma equivalent (4):
Assuming $40.00 Average Price............ 1,464.00 1,405.97
Assuming $35.80 Average Price............ 1,585.56 1,521.76
</TABLE>
- ----------------
(1) Before extraordinary items and cumulative effect of change in accounting
principles.
(2) Giving effect to F&M's proposed merger with BancSecurity; does not give
effect to F&M's other pending acquisition.
(3) The F&M pro forma dividends per share amounts represent historical
dividends per share, restated for prior stock dividends.
(4) The BancSecurity pro forma equivalent per share amounts are calculated by
multiplying the F&M pro forma per share amounts by assumed Exchange Ratios
of 93.6064 and 104.5881 shares of F&M Common for each share of BancSecurity
Common, which are the minimum Exchange Ratio, the approximate Exchange
Ratio at March 31, 1998 and the maximum Exchange Ratio (without further
adjustments); see "The Merger--Conversion of BancSecurity Common into F&M
Common." The actual Exchange Ratio may be higher or lower, and will depend
upon the average trading price of F&M Common prior to the Merger and
BancSecurity's equity preceding closing (which have not yet been finally
determined).
* Presented only at March 31, 1998 and December 31, 1997.
13
<PAGE> 21
The following table presents historical data on a per common share
basis for F&M and BancSecurity, and equivalent per common share basis for
BancSecurity, as of the last trading date preceding the first public
announcement of the proposed Merger and as of a recent date.
<TABLE>
<CAPTION>
BancSecurity
----------------------------------
Per Share
F&M Equivalent
Historical Historical (1) Basis (2)
---------- -------------- ---------
<S> <C> <C> <C>
Market Value Per Share as of:
December 1, 1997 ................ $37.125 $1,450 $3,744.25
May 20, 1998..................... $ 40.75 $1,450 $3,814.46
</TABLE>
- ------------------
(1) Trading in shares of BancSecurity Common is infrequent, and there is no
independent market with respect to such shares. There has been only a
limited number of transactions in shares of BancSecurity Common. The
indicated price represents the last sales price of BancSecurity Common
of which BancSecurity is aware; the transaction constituted a
repurchase of 24 shares by BancSecurity on September 4, 1997. See
"Market Information and Dividends - BancSecurity."
(2) The BancSecurity pro forma equivalent per share amount is calculated by
multiplying the F&M historical market value by assumed Exchange Ratios
of 100.8553 shares and 93.6064 shares, respectively, of F&M Common for
each share of BancSecurity Common, which are the approximate Exchange
Ratio at the dates shown in the table; see "The Merger--Conversion of
BancSecurity Common into F&M Common." The actual Exchange Ratio may be
higher or lower, and will depend upon the average trading price of F&M
Common prior to the Merger and BancSecurity's equity preceding closing
(which have not yet been finally determined).
The following table presents equivalent market values for one share of
BancSecurity Common in shares of F&M Common which holders of BancSecurity
Common would receive assuming various average F&M Common market prices at
Closing:
<TABLE>
<CAPTION>
Assumed F&M Equivalent per
Common Average Price BancSecurity Share
-------------------- ------------------
<S> <C>
$30.00 $3,346.59
$32.00 $3,346.59
$34.00 $3,555.75
$36.00 $3,744.25
$38.00 $3,744.25
$40.00 $3,744.25
$42.00 $3,931.47
</TABLE>
At the date hereof, the Average Price of F&M Common was over $40.00 per share,
although there can be no assurance it will be so as of the date the Exchange
Ratio is determined. Prior to the BancSecurity Special Meeting, BancSecurity
shareholders desiring a current estimate of the Exchange Ratio may call
(collect) Marsha Gaskill at (515) 754-5545.
14
<PAGE> 22
RISK FACTORS
In evaluating the Merger, BancSecurity shareholders should consider
carefully the following factors, along with the other information contained or
incorporated by reference in this Joint Proxy Statement/Prospectus, in
connection with approval of the Merger and the potential acquisition of shares
of F&M Common.
Acquisitions
Since its inception, F&M has experienced substantial growth through
acquisitions of other financial institutions. F&M's strategy to continue to make
acquisitions is dependent upon its ability to identify potential targets for
acquisition and consummate transactions on terms acceptable to F&M.
Also, F&M's future success is dependent in part upon its ability to
integrate the operations of, and manage over time, acquired financial
institutions. F&M has acquired 13 financial institutions or offices within the
past four years, including one acquisition in 1995, four in 1996, six in 1997
and two to date in 1998. F&M has one acquisition pending in addition to the
acquisition of BancSecurity.
The acquisition of BancSecurity would be the largest acquisition for
F&M both in consideration paid and assets acquired. In addition, it would be
F&M's first large acquisition outside of Wisconsin. Factors such as the size of
BancSecurity's operations, the more remote location of the BancSecurity Banks
from F&M's principal executive offices, and the need to manage substantial
banking operations in another state could combine to make the BancSecurity
acquisition transition more challenging for F&M than was the case in past
acquisitions.
Competition
Banks, including the F&M subsidiary banks (the "F&M Banks") and the
BancSecurity Banks proposed to be acquired, actively compete with other
financial institutions and businesses in both attracting and retaining deposits
and making loans. Financial institution competitors include banks, savings
banks, savings and loan associations and credit unions. Other business
competitors include insurance companies, securities brokerage firms, trust
companies and investment management firms. While F&M believes it has a
competitive advantage because many of its bank office locations represent the
only commercial bank office in their community, competition with other financial
institutions and businesses, as well as the pricing levels of their products and
services, can affect the F&M Banks' ability to obtain and retain customers.
F&M also faces competition in seeking institutions to acquire.
Wisconsin has recently experienced a significant consolidation of its banking
industry, and many large holding companies with greater resources than F&M
(including several out-of-state holding companies) are actively pursuing
acquisitions in Wisconsin. Similar conditions affect acquisition opportunities
in other nearby states such as Minnesota and Iowa. This competition affects the
available acquisition opportunities for F&M and can affect the costs of such
acquisitions.
Need for Technological Change
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. While F&M's
community banking strategy stresses "traditional" personal service, F&M's future
success will depend in part on its ability to address the needs of its customers
by using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in F&M's
Banks' operations. Many of F&M's competitors have substantially greater
resources to invest in technological improvements.
15
<PAGE> 23
Like other financial institutions, F&M must assure that its computer
and other systems are "year 2000 compliant" (meaning capable of operating, and
accurately recognizing dates and processing information, in and after the year
2000). To help assure that F&M's systems are year 2000 compliant on a timely
basis, F&M began a focused compliance program, and has designated an F&M
employee to coordinate F&M's year 2000 compliance efforts. As part of that
effort, F&M is monitoring year 2000 compliance efforts by its suppliers, because
many of F&M's affected systems (such as data processing) are contracted from
third parties and a significant part of F&M being year 2000 compliant requires
such compliance by the third parties. Based in part upon information from these
third parties, F&M currently believes that it will be year 2000 compliant on a
timely basis to avoid material operational disruptions and to comply with the
requirements of its regulators. To date, F&M has not identified material
expenditures which will be required to become year 2000 compliant. However,
there can be no assurance that such operational difficulties or expenditures
will not be identified or experienced in the future.
Banking Industry
The banking industry is highly regulated by both federal and state
regulatory authorities. Regulation includes, among other things, capital reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community investment
requirements and restrictions on transactions with affiliated parties. Financial
institution regulation has been the subject of significant legislation in recent
years, may be the subject of further significant legislation in the future, and
is not within the control of F&M. This regulation substantially affects the
business and financial results of all financial institutions and holding
companies, including F&M and the F&M Banks.
F&M and BancSecurity, as members of the banking industry, are affected
by general economic conditions, particularly as those conditions affect the
Wisconsin and Iowa communities served by their respective Banks. A financial
institution's earnings also depend to a large extent upon the relationship
between the cost of funds (primarily deposits) and the yield on earning assets
(loans and investments). This relationship, known as the interest rate margin,
is subject to fluctuation and is affected by regulatory, economic and
competitive factors which influence interest rates, the volume and rate of
interest on interest-earning assets and interest-bearing liabilities, and the
level of non-performing assets.
Geographic Concentration
The operations of F&M and the F&M Banks are concentrated in Wisconsin
and neighboring states. Because of this geographic concentration, F&M may be
more susceptible to economic factors specifically affecting this region than if
its operations were diversified over a larger geographic area.
F&M believes that the geographic area of its operations provides a
mixed base of cities, smaller communities and rural areas, that the businesses
within this area provide a diverse mix of manufacturing, service, retailing,
agricultural and other businesses, which are not concentrated in any particular
product or service line, and that individual customers also have a wide
diversity of occupations. In recent years, the economic and business environment
in the State of Wisconsin and nearby states has been relatively strong and
stable, and the unemployment rate in the area has been low. The communities in
which the F&M Banks are located range in population from almost 100,000 to less
than 500. Although many of the communities in which F&M Banks are located are
relatively small, they generally have diverse economies with representation from
many industry groups. F&M does not believe that its market area is sensitive to
developments in any particular industry or related groups of industries.
However, there can be no assurance that the region's economic health will
continue, that developments in any particular industry might not affect F&M,
that diversity of market areas will continue or that a greater diversity could
not be achieved over a wider geographical area or by investment in institutions
with a more extensive geographical market area.
16
<PAGE> 24
Dependence on Officers
F&M has historically been highly dependent on the services of its
Chairman, Gail E. Janssen. F&M does not have an employment agreement with Mr.
Janssen or maintain "key person" life insurance on Mr. Janssen. F&M has recently
taken actions to reorganize operations on a regional basis and to augment its
corporate staff to help support F&M's substantial growth, to place less
dependence on any one individual, and to anticipate management succession. As
part of these actions, F&M designated John W. Johnson, an F&M officer since
1994, as its President in July 1997 and Chief Executive Officer in November
1997.
Cautionary Statement Regarding Forward-Looking Statements
The discussions in this Joint Proxy Statement/Prospectus, and in the
documents incorporated herein by reference, which are not historical statements
(including those in the future tense or using terms such as "believe," "expect"
and "anticipate") contain forward-looking statements that involve risks and
uncertainties. F&M's actual future results could materially differ from those
discussed. Factors that could cause or contribute to such differences include,
but are not limited to, F&M future lending and collection experience, the
effects of acquisitions, competition from other institutions, changes in the
banking industry and its regulation, needs for technological change, and other
factors including those discussed above in "Risk Factors" and in F&M's
Management's Discussion and Analysis (which is incorporated herein by reference
from the F&M 1997 10-K and the F&M 3/31/98 10-Q) as well as those discussed
elsewhere in this Joint Proxy Statement/Prospectus, the F&M 1997 10-K and the
F&M 3/31/98 10-Q.
17
<PAGE> 25
THE MERGER
The Agreement contains the representations, warranties and covenants of
BancSecurity, F&M and Acquisition Corp., the conditions to the consummation of
the Merger and other terms and provisions with respect to the Merger. The
following is a brief description of matters relating to the Merger and
provisions of the Agreement believed by F&M and BancSecurity to be material. The
summaries herein of certain provisions of the Agreement do not purport to be
complete statements thereof and are qualified in their entirety by reference to
the text of the Agreement (excluding exhibits and schedules), a copy of which is
appended hereto as Appendix C.
Reasons for the Merger and Board Recommendations
The following discussions summarize all material factors considered by
the respective Boards of Directors of BancSecurity and F&M in making their
decisions to approve the Agreement and recommend the Merger.
BancSecurity
The Board of Directors of BancSecurity has concluded that the proposed
Merger is in the best interest of BancSecurity and its shareholders. The
principal factors considered by the BancSecurity Board of Directors in
recommending the Merger are, in no particular order:
- - Hovde's preliminary fairness opinion dated December 1, 1997 was, and
Hovde's definitive Fairness Opinion attached hereto as Appendix A was
expected to be, to the effect that, as of the dates thereof, the
Exchange Ratio was fair, from a financial point of view, to the holders
of BancSecurity Common. See "The Merger-Opinion of BancSecurity's
Financial Advisor" and the Fairness Opinion attached hereto as Appendix
A.
- - F&M offered an acquisition price which was approximately 253% of
BancSecurity's September 30, 1997 book value to holders of BancSecurity
Common in a tax-free reorganization.
- - Holders of BancSecurity Common will receive F&M Common which, unlike
BancSecurity Common, has an active trading market.
- - The Board of Directors of BancSecurity believes that F&M is a dynamic
organization which has shown consistent growth in earnings, assets and
stock appreciation in recent years.
- - Affiliation with a larger holding company provides an opportunity to
realize economies of scale and increased efficiencies of operations, to
the benefit of shareholders and customers.
- - The Board of Directors believes that an affiliation with a holding
company such as F&M which emphasizes local autonomy is in the best
interest of shareholders, as it enhances bank customer relationships
and opportunities.
- - The current and prospective economic and competitive environments
facing BancSecurity and other financial institutions are characterized
by consolidation and intensifying competition from both banks and
nonbank financial services organizations.
- - BancSecurity's business, its current financial condition and results of
operations, its future prospects and the current and anticipated
developments in the banking industry provided the basis for the Board's
belief, based on familiarity with these matters, that the consideration
to be received by BancSecurity's shareholders in the transaction fairly
reflects BancSecurity's intrinsic value.
In the Merger, BancSecurity Common shareholders will be given the
opportunity to obtain stock in a larger and more diversified banking
organization. Shares of F&M Common trade on the NASDAQ Stock Market, and have
greater marketability than currently is the case for shares of BancSecurity
Common. In general, past trading of BancSecurity Common has been isolated.
18
<PAGE> 26
FOR THESE REASONS, THE BOARD OF DIRECTORS OF BANCSECURITY
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE TRANSACTIONS CONTEMPLATED BY THE
AGREEMENT.
The BancSecurity Board of Directors considered the possibility of
significant changes in stock valuation during the time from the December 1, 1997
date of the Agreement to the date of the closing of the Merger. When
negotiations were being concluded, the price of F&M Common was approximately $38
per share. In approving the Agreement, the Board of Directors of BancSecurity
placed primary emphasis on preserving, to the extent feasible, the opportunity
for the holders of BancSecurity Common to receive shares of F&M Common having an
aggregate value of at least $129.6 million. The BancSecurity Board of Directors
concluded that its right to terminate the transaction in the event that the
holders of BancSecurity Common would receive shares of F&M Common having an
aggregate value of less than $129.6 million would provide important protection
to holders of BancSecurity Common. As part of the negotiation of the Agreement,
it was agreed that the number of shares of F&M Common to be issued in the Merger
would be fixed if the Average Price of F&M Common is equal to or less than
$35.80 or equal to or more than $40.00. The Board of Directors determined that
these price levels were reasonable based on advice from Hovde that such a price
range was consistent with its experience in other such transactions and that the
$129.6 million minimum aggregate value would be fair, from a financial point of
view, to the holders of BancSecurity Common. The Board of Directors of
BancSecurity recognized that a decline in the Average Price below $35.80 would
be disadvantageous, but determined that the risk was limited because of its
right to terminate the transaction unless the value of the shares of F&M Common
to be issued in the Merger equaled at least $129.6 million. The Board of
Directors of BancSecurity was also willing to accept this limitation because the
Agreement preserved the opportunity for holders of BancSecurity Common to share
on an unlimited basis in any appreciation beyond $40 per share in the value of
the F&M Common to be issued in the Merger.
F&M
From F&M's standpoint, the combination of its business with that of
BancSecurity will expand F&M's service area to additional markets in a new
state in which F&M currently has no presence, on a significant scale due to
BancSecurity's relatively large size for an independent financial institution
and its number of office locations (14) in central Iowa. Based upon F&M's past
experience, the acquisition of BancSecurity is also anticipated by F&M to help
F&M achieve economies of scale by combining certain operations and creating
additional efficiencies due to F&M's existing capacity to provide various
services to additional subsidiary banks such as the BancSecurity Banks.
However, F&M did not quantify particular expected cost savings. The acquisition
is also expected to give F&M a "platform" for possible future growth in Iowa,
which may provide opportunities in addition to those in F&M's traditional
Wisconsin markets and a further diversification of markets.
The F&M Board believes that the consideration to be paid to
BancSecurity shareholders is fair, particularly in view of market conditions,
BancSecurity's substantial presence in a new market area and other financial
factors considered by the Board of Directors. In that regard, F&M's Board of
Directors believes that, as a result of recent consolidations in the financial
institutions industry, there are few remaining independent banks and holding
companies in the Midwest of similar asset size to BancSecurity. The Board of
Directors noted that the approximately $500 million asset size and 14 offices of
BancSecurity would allow F&M to establish a new presence in the State of Iowa in
a meaningful way, which would not be available in acquisitions of smaller
entities. Therefore, the Board of Directors recognized that the BancSecurity
acquisition had greater value compared to other acquisitions because of the
advantages provided by its size.
In considering the price, the Board wanted to recognize, but not
overpay for, the value of the BancSecurity franchise. In reviewing financial
aspects of the transaction, the Board was assisted by F&M executive officers and
staff whose regular responsibilities and duties require them to analyze
financial information as to potential acquisition candidates. Because of the
significant number of F&M acquisitions in recent years, the
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<PAGE> 27
Board believed it was appropriate to proceed on the basis of
an internal analysis rather than incurring the cost and expense of third party
investment advice from an investment banker.
In making its financial review, the Board focused on certain key
indicators to assess whether the terms of the acquisition were acceptable,
although the Board did not set any particular quantitative limits on ratios or
make statistical studies as to these numbers; rather, it relied upon its overall
impression of recent activity in Midwestern banking markets, and its impression
(based on F&M's experience in acquiring other companies) of the level of
consideration which would be necessary to obtain the deal. The Board also
reviewed with F&M staff the results of the staff's due diligence reviews of
BancSecurity.
In that regard, the Board considered that the offer, at the $145
million level, represented 253% of BancSecurity's equity at September 30, 1997,
which the Board believed was within an acceptable range of premiums and
consistent with the 256% premium to the value at which F&M stock was then
trading. In addition, the Board considered the multiple of consideration paid to
earnings. In that regard, F&M's offer represented approximately 18.1x
BancSecurity's estimated earnings for 1998, as compared to F&M's multiple of
earnings of 17.4x annualized earnings for the third quarter of 1997. The Board
believed that this multiple of earnings was appropriate in view of the overall
strength of the BancSecurity operation which it was acquiring.
The Board also considered the dilution of F&M earnings per share, which
was expected to be approximately 2.2% assuming the acquisition was valued at
$145 million. The Board believed that to be appropriate because of the future
earnings opportunities which the acquisition of BancSecurity would present. In
addition to potential future cost savings (which were not specifically
identified or quantified, but which F&M in its experience believed generally
result in most acquisition situations), the Board noted that F&M had experienced
a net interest margin which was greater than BancSecurity (4.7% compared to
3.9%), and that F&M had in past acquisitions been able to increase net interest
margins, which it believed could help it offset any dilutive effect of this
acquisition.
F&M's Board also considered the costs of the transaction. The Board of
Directors did not believe that F&M's costs of the transaction would be a
material consideration in view of the size of the transaction. While costs and
expenses expected to be incurred by BancSecurity were expected to be higher
than F&M's, the Board of Directors considered that its costs and expenses would
have been incurred prior to the time of the acquisition, and did not believe
that these costs and expenses would have a material effect on F&M's results of
operations or financial condition on a going forward basis. The Board also
reviewed the terms and conditions of the transaction with legal counsel, and
determined that the provisions of the Agreement reflected negotiations between
F&M and BancSecurity which resulted in an appropriate balance of F&M's interest
in achieving an attractive deal for its shareholders and the interest of
BancSecurity in obtaining an offer sufficiently attractive to it that it would
be accepted. In particular, the Board recognized that the $40.00 per F&M share
collar level provided a point above which the total deal consideration might
increase above $145 million. The Board believed that the collar provisions were
acceptable because that amount represented a premium over F&M's then current
market price (approximately $38.00) and considering F&M's recent trading
history. The Board also considered that this collar level, if exceeded at the
time of closing, would provide a further incentive to the BancSecurity
shareholders to approve the transaction. The Board did not identify any
material disadvantages to the Merger.
In addition, the F&M Board of Directors believes that the BancSecurity
Banks are well-managed banks, and that the addition of the BancSecurity Banks
and their management to the F&M Banks will provide F&M with additional
management resources which will be beneficial to F&M.
FOR THESE REASONS, F&M'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" THE MERGER.
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<PAGE> 28
Negotiation of Terms
Over the last several years, the financial services industry has become
increasingly competitive and has undergone industry-wide consolidation. In
response to these developments, the BancSecurity Board, on an ongoing basis, has
considered strategic options for increasing shareholder value, including
potential business combinations with other institutions. In September 1997, a
decision was made to analyze possible merger transactions. BancSecurity
management was authorized by the BancSecurity Board to retain a financial
advisor to review and analyze the various strategic alternatives available to
BancSecurity, including a possible sale of BancSecurity. Hovde was retained by
BancSecurity to assist BancSecurity in such capacity. Hovde, assisted by
BancSecurity, prepared a confidential information package to be sent to a
selected group of potential acquirers.
Beginning in September 1997, BancSecurity sought to identify potential
merger partners based on a presentation by Hovde. Various financial institutions
were analyzed and compared by Hovde based on factors such as a potential
acquirer's ability to offer common stock as consideration, recent trading
information, the market characteristics of the potential acquirer's stock, the
potential acquirer's history and perceived ability to consummate a merger
transaction, and community and employee considerations. The BancSecurity Board
then selected a group of financial institutions, including F&M, to receive the
confidential information package. Those selected were told to submit non-binding
indications of interest in October.
Hovde presented its conclusions regarding the indications of interest
received from potential acquirers to the BancSecurity Board at a meeting on
October 22, 1997. The BancSecurity Board concluded that two potential acquirers
(including F&M) presented superior proposals. It was decided that talks would
continue exclusively with representatives of those two institutions and that
BancSecurity's legal counsel, Dickinson, Mackaman, Tyler & Hagen, P.C.
("Dickinson"), would prepare a proposed form of merger agreement.
BancSecurity provided additional due diligence materials to the senior
officers of each potential acquirer. Hovde held numerous discussions with
representatives of both potential acquirers regarding several issues relating to
the major terms of a business combination. Based on these discussions, each
potential acquirer submitted enhanced indications of interest to BancSecurity.
On November 13, 1997, the BancSecurity Board, with the assistance of
Hovde, considered and compared the two competing institutions by examining and
analyzing, among other things, (i) operating characteristics and market data;
(ii) historical stock performance; (iii) historical daily trading volume, growth
rates and dividend yields; (iv) consensus analyst ratings of the competing
entities; (v) the ownership structure of each institution; and (vi) a direct
comparison on key issues between the two competing proposals. Based on the
results of this analysis, the BancSecurity Board determined that the F&M offer
was superior to the other offer. The BancSecurity Board also considered the
terms of a draft merger agreement. A representative of Dickinson, outlined in
detail the terms and conditions of the draft merger agreement and other
transaction documents and the fiduciary duties of the BancSecurity Board in
considering the Merger. BancSecurity management and BancSecurity's accountants,
McGladrey & Pullen, LLP ("McGladrey") also made presentations regarding the
Merger. Hovde also made a presentation of the results of various financial
analyses. After discussing the presentations made at this and other meetings,
the members of the BancSecurity Board unanimously approved proceeding with a
merger agreement with F&M (subject to satisfactory resolution of certain
remaining details).
Over the next two weeks, representatives and advisors of both parties
met to finalize the remaining details of the Agreement and related documents and
exhibits. Upon completion of the final Agreement, the Board of BancSecurity met
on December 1, 1997. Representatives of each of Hovde, McGladrey and Dickinson
made a presentation. Hovde advised the BancSecurity Board that, as of such date,
the proposed exchange ratio of shares of F&M Common Stock per share for
BancSecurity Common was fair, from a financial point of view, to the
21
<PAGE> 29
holders of BancSecurity Common. McGladrey reviewed the nature and results of the
due diligence procedures employed with regard to F&M. Dickinson reviewed key
terms of the Agreement. A full and detailed discussion then ensued. The reasons
for proceeding with the Merger were identified and summarized. See "Reasons for
the Merger and Board Recommendations" above. The BancSecurity Board unanimously
adopted a resolution approving the Merger and recommending that the BancSecurity
shareholders approve the Merger. The Merger Agreement was executed on December
1, 1997, and the parties thereafter issued a press release announcing the
transaction.
Terms of Merger
The Agreement provides that Acquisition Corp., a wholly-owned
subsidiary of F&M will merge into BancSecurity. Upon completion of the
transaction, BancSecurity will be the surviving corporation. Pursuant to the
terms of the Agreement, as of the Effective Time of the Merger, each of the then
outstanding shares of BancSecurity Common will be converted into shares of F&M
Common. The BancSecurity Banks will then be wholly-owned indirect subsidiaries
of F&M.
Outstanding shares of BancSecurity Common with respect to which the
record or beneficial holder has perfected dissenters' rights in strict
accordance with the requirements of Division XIII of the IBCA ("Dissenters
Shares") will not be converted under the terms of the Agreement into shares of
F&M Common in the Merger. The holders thereof shall be entitled only to payment
of the "fair value" of their shares in accordance with the IBCA. See "Rights of
Dissenting Shareholders of BancSecurity" and Appendix B hereto. Holders of F&M
Common have no dissenters' rights under the WBCL.
Conversion of BancSecurity Common into F&M Common
In the Merger, each of the shares of BancSecurity Common (except
Dissenters Shares) automatically will be converted into shares of F&M Common.
Subject to the adjustment described below in the event that
BancSecurity's equity is less than the amount specified by the Agreement, at the
effective time of the Merger (the "Effective Time"), the 38,726 issued and
outstanding shares of BancSecurity Common (other than Dissenters Shares) will be
converted into shares of F&M Common. The total number of shares of F&M Common to
be so issued will be determined by dividing $145 million (the "Total Price") by
the average closing price of F&M Common on the NASDAQ Stock Market for the last
30 trading days in which trades occurred ending at the end of the third trading
day immediately preceding the closing date of the Merger (as adjusted for
reclassifications, recapitalizations, split-ups, combinations, exchanges of
shares or readjustments or stock dividends) (the "Average Price"). The result
will then be divided by the 38,726 shares of BancSecurity Common outstanding to
determine the Exchange Ratio for share of BancSecurity Common. However, if the
Average Price is equal to or less than $35.80 the number of shares of F&M Common
to be issued upon such conversion will not be further increased and if the
Average Price is equal to or more than $40.00 the number of shares of F&M Common
issued will not be further decreased; and provided further that if the Average
Price is less than $32.00, then F&M must either increase the number of shares of
F&M Common to be exchanged for BancSecurity Common so that the Total Price of
the F&M Common to be issued equals at least $129.6 million (or $3,346.59 per
share) or BancSecurity may choose to terminate the transaction.
No fractional shares of F&M Common will be issued in the Merger. In
lieu of the issuance of fractional shares of F&M Common in the Merger, cash
representing the value of any such fractional shares will be paid to holders
thereof, determined in accordance with the Exchange Ratio set forth in the
Agreement.
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<PAGE> 30
The Total Price is subject to adjustment as follows: If BancSecurity's
actual equity at the Effective Time after making the Accounting Adjustments (as
defined in the following sentence) is less than the Minimum Equity (as defined
in the following sentence), then the Total Price paid to holders of BancSecurity
Common will be reduced by an amount equal to the difference between
BancSecurity's actual equity at the Effective Time, after making the Accounting
Adjustments, and the Minimum Equity multiplied by one hundred and fifty percent
(150%) of the difference between (i) BancSecurity's actual equity at the
Effective Time, after making the Accounting Adjustments, and (ii) the Minimum
Equity. The obligation of F&M to effect the Merger is subject to the condition
that BancSecurity's equity as of March 31, 1998, determined in accordance with
generally accepted accounting principles excluding (i) year-end accounting
adjustments requested by F&M, (ii) the costs relating to this transaction, and
(iii) any adjustment (positive or negative) to such equity made pursuant to FASB
115 (the"Accounting Adjustment"), must, as of the last day of the month prior to
the Effective Time, be equal to or greater than the sum of $53 million plus
$590,000 per month for each month from April 1, 1998 to the Effective Time, less
any permitted quarterly dividends declared for and payable after the first
quarter of 1998 (the "Minimum Equity").
Therefore, on the basis of the foregoing assumptions, if the
transaction had been consummated as of the date hereof, and assuming
BancSecurity met its Minimum Equity, the approximate Exchange Ratio would have
been 93.6064 shares of F&M Common for each share of BancSecurity Common (i.e.,
$145 million divided by $40.00, divided by 38,726). If the Average Price had
been $35.80 or below (but not less than $32.00), the Exchange Ratio would have
been 104.5881; if the Average Price had been between $35.80 and $40.00, the
Exchange Ratio would have varied between those numbers as described herein.
The following table presents equivalent market values for one share of
BancSecurity Common in shares of F&M Common which holders of BancSecurity
Common would receive assuming various average F&M Common average market prices
at Closing:
<TABLE>
<CAPTION>
Assumed F&M Equivalent per
Common Average Price BancSecurity Share
-------------------- ------------------
<S> <C>
$30.00 $3,346.59
$32.00 $3,346.59
$34.00 $3,555.75
$36.00 $3,744.25
$38.00 $3,744.25
$40.00 $3,744.25
$42.00 $3,931.47
</TABLE>
At the date hereof, the Average Price of F&M Common was over $40.00 per
share, although there can be no assurance it will be so as of the dates the
Exchange Ratio is determined. Prior to the BancSecurity Special Meeting,
BancSecurity shareholders desiring a current estimate of the Exchange Ratio may
call (collect) Marsha Gaskill at (515) 754-5545.
Assuming the 93.6064 Exchange Ratio, on a pro forma basis at March 31,
1998, holders of BancSecurity Common as a group would own approximately 26.8% of
the then-outstanding shares of F&M Common (not giving effect to the pending
Jefferson acquisition). However, the actual Exchange Ratio will depend upon the
actual trading price of F&M Common prior to the Effective Date and whether the
BancSecurity equity test is satisfied, and may be higher or lower than the
foregoing.
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<PAGE> 31
On a pro forma basis at March 31, 1998, not giving effect to the
pending Jefferson transaction, BancSecurity shareholders would contribute 24.4%
of the total assets, 24.6% of the deposits and 25.9% of the capital of the
combined entity; BancSecurity would contribute 25.0%, 13.1% and 30.9% of the pro
forma net income of the combined entity for the quarter ended March 31, 1998 and
the respective years ended December 31, 1997 and 1996.
Effective Time of the Merger
The Agreement provides that the Effective Time of the Merger shall be
the date specified in the Articles of Merger as filed with the Iowa Secretary of
State. The Articles of Merger shall be filed as soon as practicable after all
conditions precedent to F&M's, Acquisition Corp.'s, and BancSecurity's
obligations have been satisfied or waived. Unless further extended for up to
three months by written agreement of the parties, if the closing for the Merger
has not taken place by August 31, 1998, F&M, Acquisition Corp. and BancSecurity
each may terminate the Agreement and abandon the Merger. See "Conditions to the
Merger" and "Waiver, Amendment or Termination" below.
Distribution of F&M Common
Within five business days of the closing of the Merger, Firstar Trust
Company, F&M's transfer agent (the "Exchange Agent") will send a notice and
transmittal form to each holder of BancSecurity shares for which certificates
have not been surrendered for exchange, advising such holder of the procedure
for surrendering to the Exchange Agent such certificates for exchange into one
or more certificates evidencing F&M Common, as provided in this Agreement. Such
exchange will be made as of the Effective Time of the Merger.
Until so surrendered, each outstanding certificate which prior to the
Effective Time represented shares of BancSecurity Common (other than Dissenters
Shares) thereafter will be deemed for all purposes to evidence only the right to
receive the shares of F&M Common into which such shares of BancSecurity Common
have been converted; provided, however, unless and until such certificates
representing BancSecurity Common are so surrendered, no stock certificates
representing the shares of F&M Common, nor any dividends or other distributions
of any kind payable in respect of shares of F&M Common into which such
BancSecurity Common has been converted, shall be paid or delivered to the holder
of an unsurrendered certificate and no interest shall be earned on such cash
dividend amounts. After the Effective Time, upon surrender of certificates for
BancSecurity Common, there shall be delivered to the record holder of the
certificates representing F&M Common issued in exchange therefor the amount of
any such dividends, or other distributions which as of any date subsequent to
the Effective Time, but prior to the surrender of BancSecurity certificates,
became payable or deliverable and were not paid or delivered to such holder with
respect to such shares; there will also be delivered the certificates
representing the F&M Common.
Opinion of BancSecurity's Financial Advisor
In addition to the December 1, 1997 preliminary fairness opinion, Hovde
Financial, Inc. ("Hovde") has delivered to BancSecurity its updated Fairness
Opinion, dated as of the date of this Joint Proxy Statement/Prospectus that,
based upon and subject to the various considerations set forth in such opinion,
the consideration to be received in the Merger by holders of the BancSecurity
Common (the "Merger Consideration") is fair from a financial point of view to
the holders of BancSecurity Common as of such date. In requesting Hovde's advice
and opinion, no limitations were imposed by BancSecurity upon Hovde with respect
to the investigations made or procedures followed by it in rendering its
opinion. The full text of the updated Fairness Opinion of Hovde, which describes
certain material procedures followed, assumptions made, matters considered and
limitations on the review undertaken, and which does not materially differ from
the December 1, 1997
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preliminary fairness opinion, is attached hereto as Appendix A. Holders of
BancSecurity Common should read this opinion in its entirety.
Hovde is a nationally recognized investment banking firm and, as part
of its investment banking business, is continually engaged in the valuation of
financial institutions in connection with mergers and acquisitions, private
placements and valuations for other purposes. As a specialist in securities of
financial institutions, Hovde has experience in, and knowledge of, banks,
thrifts and bank and thrift holding companies. BancSecurity's Board of Directors
selected Hovde to act as its financial advisor in connection with the Merger on
the basis of the firm's reputation and expertise in transactions such as the
Merger.
Hovde will receive a fee contingent upon the completion of the Merger
for services rendered in connection with advising BancSecurity regarding the
Agreement, including the issuance of the Fairness Opinion and financial advisory
services provided to BancSecurity, plus reimbursement of out-of-pocket expenses.
As of the date of the Fairness Opinion, such fee would be approximately
$1,875,000, and Hovde has received $385,000 of such fee.
HOVDE'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, OF THE MERGER CONSIDERATION, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF BANCSECURITY COMMON AS TO HOW SUCH HOLDER SHOULD
VOTE AT THE BANCSECURITY SPECIAL MEETING. THE SUMMARY OF THE OPINION OF HOVDE
SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION IN APPENDIX A.
The following is a brief summary of the analyses performed by Hovde in
connection with its preliminary fairness opinion and its updated Fairness
Opinion:
During the course of its engagement, and as a basis for arriving at its
opinion, Hovde reviewed and analyzed material bearing upon the financial and
operating condition of F&M and BancSecurity and material prepared in connection
with the Merger, including, among other things, the following: (i) the
Agreement; (ii) certain historical publicly available information concerning
BancSecurity and F&M; (iii) the nature and terms of recent acquisition and
merger transactions involving bank institutions and bank holding companies that
Hovde considered reasonably similar to BancSecurity in size, financial
character, operating character, historical performance and geographic market;
and (iv) financial and other information provided to Hovde by the management of
F&M and BancSecurity. Hovde conducted meetings with members of senior management
of BancSecurity and F&M for purposes of reviewing the future prospects of
BancSecurity and F&M. Hovde also took into account its experience in other
transactions, as well as its knowledge of the commercial banking and thrift
industries and its general experience in securities valuations.
Hovde has not made any independent evaluation or appraisal of any
properties, assets or liabilities of BancSecurity. Hovde assumed and relied upon
the accuracy and completeness of the publicly available and other financial and
other information provided to it, relied upon the representations and warranties
of F&M and BancSecurity made pursuant to the Merger Agreement, and did not
independently attempt to verify any of such information.
In connection with its opinion, Hovde performed various analyses with
respect to BancSecurity. The following is a brief summary of such analyses,
certain of which were presented to the BancSecurity Board by Hovde on December
1, 1997.
Analysis of the Merger Consideration. Hovde reviewed the value of the
Merger Consideration to be received by each holder of BancSecurity Common.
Assuming F&M's fixed offer price of $145 million, Hovde calculated that the
Merger Consideration equated to approximately 252.77% of BancSecurity's fully
diluted book
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value at September 30, 1997, approximately 254.09% of BancSecurity's fully
diluted tangible book value at September 30, 1997, a multiple of approximately
20.5 times BancSecurity's earnings for the 12 months ended September 30, 1997,
and a tangible book premium to core deposits of approximately 21.57%.
Summary of Proposals. Hovde summarized the sales process, the parties
contacted and the level of interest expressed by each party, including the value
of the aggregate consideration offered to the holders of BancSecurity Common.
Hovde also compared the significant terms of the F&M proposal to those of the
other bidders submitting proposals, including but not limited to the value of
the consideration offered, the market characteristics of the acquirer's stock
and the community/employee considerations. Furthermore, Hovde examined the
trading price and volume of F&M Common and the relationship between the trading
characteristics of F&M Common and the common stock of the other bidders, as well
as those of a peer group of comparable companies.
Analysis of Selected Mergers. As part of its analysis, Hovde reviewed
three sets of mergers: (i) selected mergers involving banks headquartered
anywhere in the United States announced between January 1, 1996 and November 18,
1997 in which the total assets of the seller were between $200 million and $4
billion and the tangible equity to assets ratio of the seller was between 8.0%
and 12.0% (the "Nationwide Mergers"); (ii) selected mergers involving banks
headquartered anywhere in the Midwest announced between January 1, 1996 and
November 18, 1997 in which the total assets of the seller were between $200
million and $4 billion and the tangible equity to assets ratio of the seller was
between 8.0% and 12.0% (the "Midwest Mergers"); and (iii) all mergers involving
banks headquartered in the state of Iowa announced between January 1, 1993 and
November 18, 1997 in which the total assets of the seller were greater than $100
million (the "Iowa Mergers"). The Nationwide Mergers consisted of 47 mergers;
the Midwest Mergers consisted of 12 mergers; and the Iowa Mergers consisted of 6
mergers. For each transaction, Hovde determined the value of the offer made by
the acquirer as of the announcement date of the transaction (the "Offer Value").
For each transaction, Hovde calculated the multiple of the Offer Value to the
acquired company's earnings per share ("EPS") for the twelve months preceding
("LTM") the announcement date of the transaction and the multiple of the Offer
Value to the acquired company's (i) book value per share, (ii) tangible book
value per share, and (iii) the tangible book premium to core deposits, each as
of the announcement date of the transaction. The Nationwide Mergers, the Midwest
Mergers and the Iowa Mergers are listed in the table below:
ACQUIRER TARGET
Nationwide Mergers
Union Planters Corp. Peoples First Corp.
Cullen/Frost Bankers Harrisburg Bancshares
Western Bancorp Santa Monica Bank
Alabama National First American Bancorp
Hibernia Corp. ArgentBank
First Midwest Bancorp SparBank, Inc.
First United Bancshares Citizens National Bancshares
Wachovia Corp. Jefferson Bancshares
Western Bancorp SC Bancorp
Century South Banks Bank Corp. of GA
Pacific Century Financial CU Bancorp
Regions Financial New Iberia Bancorp
First Commercial Corp. First Central Corp.
Citizens Baking Corp. CB Financial Corp.
Commerce Bancshares Shawnee State Bank
Compass Bancshares Central Texas Bancorp
Republic Security Family Bank
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Banc One Corp. Liberty Bancorp, Inc.
US Bancorp Business & Professional Bank
Dartmouth Capital Eldorado Bancorp
Keystone Financial Financial Trust Corp.
Westamerica Bancorp ValliCorp Holdings
Huntington Bancshares Citi-Bancshares, Inc.
First Virginia Banks Premier Bancshares
Park National Corp. First-Knox Banc Corp.
Mercantile Bancorp Mark Twain Bancshares
City National Corp. Riverside National Bank
Whitney Holding Corp. First National Bancshares
Bank SinoPac Far East National Bank
Popular, Inc. CBC Bancorp
City National Corp. Ventura City National
Valley National Corp. Midland Bancorp
Colonial BancGroup Jefferson Bancorp
Magna Group Homeland Bancshares
Summit Bancorp BMJ Financial Corp.
United Community Bancshares Park Financial Corp.
ABN AMRO Holdings CNBC Bancorp, Inc.
Hibernia Corp. Texarcana National Bancshares
Community First Bancshares Mountain Parks Financial
Regions Financial Allied Bankshares
Old Kent Financial Seaway Financial Corp.
Hibernia Corp. St. Bernard Bank & Trust Co.
Western Bancorp Western Bank
US Bancorp California Bancshares
Horizon Bancorp Twentieth Bancorp
HUBCO, Inc. Lafayette American
Firstar Corp. American Bancorp
Midwest Mergers
Union Planters Corp. Peoples First Corp.
First Midwest Bancorp SparBank, Inc.
Citizens Banking Corp. CB Financial Corp.
Commerce Bancshares Shawnee Bank Shares
Park National Corp. First-Knox Banc Group
Mercantile Bancorp Mark Twain Bancshares
Popular, Inc. CBC Bancorp
Magna Group Homeland Bankshares
United Community Bancshares Park Financial Corp.
ABN AMRO Holdings CNBC Bancorp, Inc.
Old Kent Financial Seaway Financial Corp.
Firstar Corp. American Bancorp
Iowa Mergers
Commercial Federal Liberty Financial
Magna Group Homeland Bankshares
Mercantile Bancorp Hawkeye Bancorp
Community First Bankshares Minowa Bancshares
FirsTier Financial Cornerstone Bank Group
Mercantile Bancorp Metro Bancorp
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The calculations for the Nationwide Mergers yielded a range of
multiples of Offer Value to LTM EPS of 7.2 times to 29.5 times, with an average
of 18.0 times and a median of 17.4 times; a range of multiples of Offer Value to
book value of 1.63 times to 2.84 times, with an average of 2.16 times and a
median of 2.16 times; a range of multiples of Offer Value to tangible book value
of 1.63 times to 3.00 times, with an average of 2.25 times and a median of 2.27
times; and a range of tangible book premium to core deposits of 8.90% to 29.03%,
with an average of 16.27% and a median of 16.15%.
The calculations for the Midwest Mergers yielded a range of multiples
of Offer Value to LTM EPS of 12.7 times to 24.4 times, with an average of 16.6
times and a median of 15.9 times; a range of multiples of Offer Value to book
value of 1.69 times to 2.81 times, with an average of 1.99 times and a median of
1.90 times; a range of multiples of Offer Value to tangible book value of 1.69
times to 2.87 times, with an average of 2.06 times and a median of 1.94 times;
and a range of multiples of tangible book premium to core deposits of 9.16% to
25.90%, with an average of 14.20% and a median of 12.31%.
The calculations of the Iowa Mergers yielded a range of multiples of
Offer Value to LTM EPS of 14.1 times to 33.1 times, with an average of 18.6
times and a median of 15.1 times; a range of multiples of Offer Value to book
value of 1.70 times to 2.81 times, with an average of 1.99 times and a median of
1.82 times; a range of multiples of Offer Value to tangible book value of 1.78
times to 2.84 times, with an average of 2.21 times and a median of 2.01 times;
and a range of tangible book premium to core deposits of 7.81% to 14.95%, with
an average of 10.80% and a median of 11.03%.
Hovde compared these multiples with the corresponding multiples for the
Merger, valuing the shares of F&M Common that would be received pursuant to the
Merger Agreement at $3,744.25 per share of BancSecurity Common. In calculating
the multiples for the Merger, Hovde used BancSecurity's EPS for the 12 months
ended September 30, 1997, and BancSecurity's book value per share, tangible book
value per share, and total deposits as of September 30, 1997, and Hovde
calculated that BancSecurity's LTM EPS for such 12 month period, book value per
share, tangible book value per share and tangible book premium to core deposits
as of September 30, 1997 were 20.5 times, 2.53 times, 2.54 times, and 21.57%,
respectively.
No company or transaction used in the above analysis as a comparison is
identical to BancSecurity, F&M or the Merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of BancSecurity, F&M and the companies comprising the Nationwide
Mergers, Midwest Mergers and Iowa Mergers.
Contribution Analysis. Hovde prepared a contribution analysis showing
percentages of assets, deposits and common equity at September 30, 1997, and
estimated 1997 and estimated 1998 net income that would be contributed to the
combined company on a pro forma basis by BancSecurity and F&M. It was assumed
for this analysis that F&M's 30 day average stock price would be $38.00 per
share. The analysis showed that BancSecurity, as of September 30, 1997, would
contribute 25.19% of pro forma consolidated total assets, 24.72% of core
deposits, 28.30% of common equity, 26.32% of estimated 1997 net income and
24.89% of estimated 1998 net income. This analysis showed that holders of
BancSecurity Stock would own approximately 28.14% of the pro forma common shares
outstanding of F&M, but would own no less than 27.11% of the pro forma common
shares outstanding of F&M and no more than 29.36% of the pro forma common shares
outstanding of F&M. This analysis excluded the financial impact on F&M for its
then-pending acquisitions of Sentry Bancorp, Bank of South Wayne and Financial
Management Services of Jefferson, Inc. Total assets for F&M's three then-pending
acquisitions aggregated approximately $142 million.
Financial Implications to Holders of BancSecurity Common. Hovde
prepared an analysis of the financial implications of the F&M offer to a holder
of BancSecurity Common. This analysis indicated that on a pro forma equivalent
basis, at a $3,744.25 price per share of BancSecurity Common, a holder of
BancSecurity Common would achieve approximately 6.9% accretion in fully diluted
earnings per share, an increase in fully diluted dividends per share of
approximately 64.3% and a decrease in fully diluted book value per share of
approximately
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13.6% in 1997 as a result of the consummation of the Merger. Assuming that the
projected earnings per share and dividends per share do not materially change
from historical growth rate levels, the holders of BancSecurity Common will
experience an increase of approximately 21.1% in earnings per share, an increase
of approximately 86.1% in dividends per share, and a decrease of approximately
9.5% in book value per share in 2001 as a result of the consummation of the
Merger.
Comparative Shareholder Returns. Hovde presented an analysis of
comparative theoretical stockholder returns in several scenarios, including
BancSecurity remaining independent, BancSecurity being acquired in 2001 and
BancSecurity being acquired by F&M through the Merger. This analysis, which was
based on the net present value of projected dividend streams and projected
common stock valuations from 1997 to 2001, indicated total shareholder returns
of 9.83% if BancSecurity remained independent, 14.96% for a merger in 2001 on
the terms specified in the following paragraph, and 21.16% based on the
acceptance of the offer from F&M.
Discounted Cash Flow Analysis. Hovde performed a discounted cash flow
analysis to determine a present value per share of BancSecurity Common assuming
BancSecurity continued to operate as a stand-alone entity and was acquired at a
later date. This present value was determined by projecting BancSecurity's
after-tax net income for the five years ended December 31, 1997 through 2001.
The "terminal value" per share (i.e., the projected 2001 value per share) range
of BancSecurity Common was determined by applying a range of price to earnings
multiples from 15.0 to 23.0 times against BancSecurity's projected earnings at
December 31, 2001. The present value of the terminal value range was then
determined using a range of risk-adjusted annual discount rates from 11.25% to
13.00%. The above calculations resulted in a net present value range of
BancSecurity Common of approximately $93,702,660 to $151,332,832 and net present
value range per fully diluted share of BancSecurity Common of approximately
$2,419.63 to $3,907.78 per share. However, based on experience, Hovde felt that
a more relevant range of price to earnings multiples and annual discount rates
to be utilized would be from 17.0 to 19.0 and from 11.75% to 12.50%,
respectively. These calculations resulted in a net present value range of
BancSecurity Common of approximately $107,620,704 to $123,464,619 and net
present value range per fully diluted share of BancSecurity Common of
approximately $2,779.03 to $3,118.16 per share. The foregoing net present value
analysis was developed by Hovde in support of its fairness opinion. The
valuation methodology was not derived from projections prepared by
BancSecurity's management; rather, the figures and assumptions set forth in
terms of asset, loan, equity and net income were based primarily on recent
historical performance and anticipated performance in 1998. These figures were
then extrapolated over a five-year period by Hovde. In addition to such
financial performance of BancSecurity over the next five years, Hovde also
analyzed a range of discount rates (11.25% to 13%) and terminal value multiples
(15.0x to 23.0x) when conducting its net present value analysis.
Although the summary set forth above does not purport to be a complete
description of the analyses performed by Hovde, the most material aspects of the
analyses performed by Hovde in rendering its opinion have been summarized above.
However, the preparation of a fairness opinion is not necessarily susceptible to
partial analysis or summary description. Hovde believes that its analysis and
the summary set forth above must be considered as a whole and that selecting
portions of its analysis, without considering all factors and analysis, would
create an incomplete view of the process underlying the analysis by which Hovde
reached its opinion. In addition, Hovde may have given various analyses more or
less weight than other analyses, but no analysis was given materially more
weight than any other analysis. Also, Hovde may have deemed various assumptions
more or less probable than other assumptions so that the ranges of valuations
resulting from any particular analysis described above should not be taken to be
Hovde's view of the actual value of BancSecurity or the combined company.
In performing its analysis, Hovde made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of BancSecurity and F&M. The
analysis performed by Hovde is not necessarily indicative of actual value or
actual future results, which may be significantly more or less favorable than
suggested by such analysis. Such analysis was prepared solely as part of Hovde's
analysis of the fairness of the Merger Consideration, from a financial point of
view, to the holders of BancSecurity Common. The analysis does not purport to be
an appraisal or to reflect
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the prices at which BancSecurity might actually be sold or the prices at which
any securities may trade at the present time or at any time in the future. Hovde
used in its analysis various projections of future performance prepared by the
management of BancSecurity. The projections are based on numerous variables and
assumptions which are difficult to predict with great accuracy and must be
considered not certain of occurrence as projected. Accordingly, actual results
could vary significantly from those assumed in the projections and any related
analysis. Hovde's opinion does not address the relative merits of the Merger as
compared to any other business combination in which BancSecurity might engage.
In addition, as described above, Hovde's opinion to the BancSecurity Board was
one of many factors taken into consideration by the BancSecurity Board in making
its determination to approve the Agreement.
Based upon the foregoing analyses and other investigations and
assumptions set forth in its opinion, without giving specific weightings to any
one factor or comparison, Hovde determined that the Merger Consideration was
fair from a financial point of view to the holders of BancSecurity Common.
Hovde's fairness opinion does not take into account any adjustment to the Merger
Consideration that may be provided for in the Agreement.
THE SUMMARY OF THE PRESENTATION BY HOVDE TO THE BANCSECURITY BOARD AS
SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
PRESENTATION. THE PREPARATION OF A FAIRNESS OPINION INVOLVES VARIOUS
DETERMINATIONS AS TO THE MOST APPROPRIATE AND RELEVANT METHODS OF FINANCIAL
ANALYSES AND THE APPLICATION OF THOSE METHODS TO THE PARTICULAR CIRCUMSTANCES,
AND, THEREFORE, SUCH AN OPINION IS NOT READILY SUSCEPTIBLE TO SUMMARY
DESCRIPTION. FURTHERMORE, IN ARRIVING AT ITS OPINION, HOVDE DID NOT ATTRIBUTE
ANY PARTICULAR WEIGHT TO ANY ANALYSIS OR FACTOR CONSIDERED BY IT, BUT RATHER
MADE QUALITATIVE JUDGMENTS AS TO THE SIGNIFICANCE AND RELEVANCE OF EACH ANALYSIS
AND FACTOR. ACCORDINGLY, HOVDE BELIEVES THAT ITS ANALYSES AND THE SUMMARY SET
FORTH ABOVE MUST BE CONSIDERED AS A WHOLE AND THAT SELECTING PORTIONS OF ITS
ANALYSES, WITHOUT CONSIDERING ALL FACTORS AND ANALYSES, COULD CREATE AN
INCOMPLETE VIEW OF THE PROCESS UNDERLYING THE ANALYSES SET FORTH IN ITS REPORT
TO THE BANCSECURITY BOARD AND ITS FAIRNESS OPINION. IN PERFORMING ITS ANALYSES,
HOVDE MADE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL
BUSINESS AND ECONOMIC CONDITIONS AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE
CONTROL OF F&M OR BANCSECURITY. THE ANALYSES PERFORMED BY HOVDE ARE NOT
NECESSARILY INDICATIVE OF ACTUAL VALUES OR ACTUAL FUTURE PERFORMANCE.
Conditions to the Merger
The obligations of F&M, BancSecurity and Acquisition Corp. to
consummate the Merger are conditioned upon obtaining the requisite approval of
the Division, and the FRB under the Bank Holding Company Act and expiration of
the statutory 15-day waiting period after such approval. The Division approved
BancSecurity's and F&M's application on February 20, 1998. The FRB approved
F&M's application on February 19, 1998 and the 15- day waiting period has
expired. F&M and Acquisition Corp.'s obligations to consummate the Merger are
also condition upon the closing of the transaction taking place by August 31,
1998 (unless extended by F&M and BancSecurity). The obligations of both F&M and
Acquisition Corp. are further conditioned upon: (i) approval of the transaction
by the requisite vote of shareholders of BancSecurity at the BancSecurity
Special Meeting; (ii) approval by F&M shareholders at the F&M Special Meeting;
(iii) qualification of the Merger for pooling of interests accounting; (iv)
registration of the shares of F&M Common to be issued in the Merger pursuant to
the Securities Act; (v) Dissenters Shares are less than ten percent (10%) of the
outstanding shares of BancSecurity Common; (vi) the net equity of BancSecurity
for the quarter ending March 31, 1998, equaling or exceeding $53 million (on a
regulatory accounting basis) plus $590,000 per month after April 1, 1998, unless
F&M exercises its option to reduce the Total Price as provided in the Agreement;
and (vii) other conditions set forth in the Agreement.
BancSecurity's obligation to consummate the Merger is conditioned upon,
among other things: the closing taking place by August 31, 1998 (unless extended
by F&M and BancSecurity); the Average Price of F&M Common under the Agreement
not being less than $32.00 per share unless F&M increases the number of shares
to be issued in the Exchange Ratio so that the Total Price is not less than
$129.6 million; and receipt of a favorable opinion of counsel as to the federal
income tax consequences of the transaction.
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The obligations of F&M, Acquisition Corp. and BancSecurity to
consummate the Merger are further conditioned upon the truth and correctness of
the representations and warranties made by the parties to the Agreement on and
as of the Closing Date; compliance with all obligations under the Agreement
which are to be performed or complied with prior to or on the Closing Date; the
absence of litigation or investigation in connection with the Merger; and the
occurrence of all proceedings to be taken in connection with the Merger
transaction and the delivery of all documents incident thereto.
Waiver, Amendment or Termination
In addition to the right of F&M, Acquisition Corp. or BancSecurity to
waive certain of the conditions to their obligations to proceed with the Merger,
the Agreement is subject to amendment, modification and supplementation by a
written agreement signed by the duly authorized representatives of F&M,
Acquisition Corp.
and BancSecurity.
The Agreement may be terminated and the Merger transaction abandoned
without liability on the part of any party at any time prior to the Closing Date
by mutual consent of F&M, Acquisition Corp. and BancSecurity, or by either F&M
and Acquisition Corp. or BancSecurity if the conditions to their obligations to
proceed under the Agreement have not been met or waived in writing. In the event
of termination and abandonment, not as a result of a breach of the Agreement,
each party would be responsible to pay its own expenses incident to the Merger.
Interests of BancSecurity Management; Management after the Transaction
Executive officers and directors of BancSecurity, as a group, own
approximately 20.2% of the outstanding shares of BancSecurity Common. See
"BancSecurity Corporation--Share Ownership." Those shares are entitled to
participate in the Merger consideration to the same extent as other outstanding
shares of BancSecurity Common. The parties do not contemplate the execution,
revision or any employment or other compensatory agreements with members of
BancSecurity management in connection with the proposed Merger, although
BancSecurity employees will become eligible for participation in F&M employee
plans on the same terms as other F&M employees, and existing employment
agreements will remain in place.
Upon consummation of the Merger, F&M expects to continue to operate the
BancSecurity Banks as subsidiaries of BancSecurity under the direction and
general policies of F&M, BancSecurity and the BancSecurity Banks' board of
directors. F&M intends to retain the BancSecurity Banks' current employees,
officers and board of directors. John W. Johnson, F&M's President and CEO, or
another F&M designee will become a member of the Board of Directors of
BancSecurity.
The Agreement provides that immediately following the Merger, and
subject to certain conditions, Ronald E. Fenton, President of BancSecurity will
be added to the F&M Board of Directors for a three year term expiring 2001.
Federal Income Tax Consequences
It is a condition to closing under the Agreement that BancSecurity
receive an opinion of counsel that the Merger will constitute a "reorganization"
as defined in Section 368 of the Internal Revenue Code of 1986, as amended, with
the consequences to holders of BancSecurity Common who receive F&M Common
generally described below. McCarty, Curry, Wydeven, Peeters & Haak, LLP, counsel
to F&M, expects to issue such an opinion. However, the parties have not sought
any rulings from the Internal Revenue Service that the transaction constitutes
such a reorganization. The parties also have not sought any rulings or opinions
with respect to the state or local tax consequences of the Merger. In the
Agreement, F&M and Acquisition Corp. have specifically disclaimed any
representations or warranties as to tax consequences, although such disclaimers
do not affect BancSecurity shareholders' rights to rely upon F&M's counsel's tax
opinion or F&M's obligations under federal
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<PAGE> 39
securities laws to accurately describe material tax consequences. BancSecurity
shareholders are therefore urged to consult their own tax advisors as to the tax
effects of the Merger on their own particular situations.
It is the opinion of McCarty, Curry, Wydeven, Peeters & Haak, LLP, that
the material income tax consequences of the Merger to holders of BancSecurity
Common, assuming that the Merger is consummated as contemplated by the
Agreement and as described herein, are: (a) The transaction will not result
in recognition of gain or loss by F&M, Acquisition Corp. or BancSecurity;
(b) Except for cash received in lieu of fractional shares, no gain or loss
will be recognized by holders of BancSecurity Common who receive solely shares
of F&M Common in exchange for their shares of BancSecurity Common; (c) The
aggregate basis of the shares of F&M Common received by holders of
BancSecurity Common in the transaction will be the same as the basis of their
shares of BancSecurity Common surrendered in exchange therefor; and (d) The
holding period of the shares of F&M Common received by holders of BancSecurity
Common in the exchange will include the holding period for their shares of
BancSecurity Common exchanged therefor, provided their shares of BancSecurity
Common were held as capital assets on the date of the exchange. The receipt of
cash by BancSecurity shareholders upon exercise of their dissenters' rights
will be a taxable transaction. The McCarty, Curry, Wydeven, Peeters &
Haak, LLP closing opinion as to the federal income tax effects of the
transaction also will include the foregoing matters.
Resale of F&M Common
The shares of F&M Common to be issued to shareholders of BancSecurity
in the BancSecurity Merger have been registered under the Securities Act and may
be freely traded by shareholders who, at the time of the BancSecurity Special
Meeting, are not "affiliates" of BancSecurity and are not "affiliates" of F&M at
the time of the proposed resale.
Shares of F&M Common received by "affiliates" of BancSecurity may be
resold by them only (i) in conformity with the resale provisions of Rule 145
under the Securities Act, (ii) pursuant to a further registration under the
Securities Act, or (iii) in accordance with another available exemption from the
registration requirements of the Securities Act. F&M's obligation to consummate
the Merger is conditioned upon the receipt of an executed Undertaking (an
"Affiliate's Undertaking") to comply with such resale restrictions from each
person who may be deemed an "affiliate" of BancSecurity within the meaning of
the Securities Act and Rule 145.
An "affiliate" is defined under the rules promulgated pursuant to the
Securities Act as a person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, an
entity. For this purpose, BancSecurity will treat each executive officer,
director and greater-than-10% shareholder of BancSecurity, and each other person
identified by counsel for BancSecurity as a person who may be deemed to be an
affiliate, as an affiliate. Shares of F&M Common issued to such persons in the
Merger will be transferable only in compliance with the Affiliate's Undertaking.
F&M is not obligated to register F&M Common owned by affiliates of BancSecurity
under the Securities Act for resale.
Each of the persons executing an Affiliate's Undertaking also will
represent that he or she will not dispose of or otherwise reduce his or her risk
relative to any beneficially owned shares of F&M Common prior to the publication
by F&M of an earnings statement covering at least 30 days of operations
subsequent to the Effective Time of Merger, and has not sold or otherwise
reduced his or her risk relative to any shares of F&M Common or shares of
BancSecurity Common beneficially owned by such person within a 30 day period
preceding the Effective Time. The purpose of these requirements is to
demonstrate the continuity of risk-sharing necessary for pooling of interests
accounting treatment.
Accounting Treatment
F&M intends to account for the acquisition of BancSecurity using the
pooling of interests method of accounting. F&M's ability to use pooling of
interests accounting is a condition to the Merger.
32
<PAGE> 40
RIGHTS OF DISSENTING SHAREHOLDERS OF BANCSECURITY
Under Division XIII of the IBCA (Sections 490.1301-490.1303 and
490.1320-490.1331, Iowa Code) a shareholder of a corporation has the right to
dissent from and to obtain cash payment for his or her shares in the event of
certain corporate actions, including the merger of the corporation with another
corporation. Therefore, a shareholder of BancSecurity may dissent from the
Merger and require the determination and payment of the "fair value" (as
determined under Division XIII of the IBCA) of each of his or her shares of
BancSecurity Common instead of receiving shares of F&M Common as contemplated by
the Agreement. The definition of "fair value", which is set forth in Subsection
490.1301(4), is "the value of the shares immediately before the effectuation of
the corporate action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action unless exclusion would
be inequitable." A copy of Division XIII of the IBCA is attached hereto as
Appendix B to this Joint Proxy Statement/Prospectus. The following information
is qualified in its entirety by reference to Appendix B.
For a shareholder of BancSecurity to be eligible for "dissenters'
rights," each of the following conditions must be satisfied:
1. The shareholder must file, before the vote on the Merger at the
BancSecurity Special Meeting, a written notice of intent to demand the fair
value of his or her shares of BancSecurity Common (voting against the Merger
does not satisfy this requirement).
2. The shareholder must not vote in favor of the Merger.
3. The Merger must be approved.
Shareholders who wish to dissent should send their written notice of
intent to demand fair value to BancSecurity Corporation, 11 North 1st Avenue,
P.O. Box 370, Marshalltown, Iowa 50158-0370, Attention: Ronald E. Fenton,
President. It is suggested that such notices, if mailed, be sent by registered
or certified mail, return receipt requested.
If the Merger is approved, BancSecurity will send to each BancSecurity
Common shareholder who filed such a notice and did not vote in favor of the
Merger, a notice that will contain, among other things, the address to which a
demand for payment and the certificate(s) representing each such shareholder's
shares of BancSecurity must be sent in order to obtain payment and the date by
which they must be received. After the later to occur of the Effective Time of
the Merger and BancSecurity's receipt of a valid demand for payment and the
certificates representing a shareholder's BancSecurity Common, BancSecurity will
forward to such dissenting shareholder payment of the amount BancSecurity
estimates to be the fair value of such dissenting shareholder's shares of
BancSecurity Common with interest, if required. Such payment shall be
accompanied by information required by the IBCA. If a dissenting shareholder
believes that the amount he or she has received is less than the fair value of
his or her shares of BancSecurity Common with interest, if required, the
dissenting shareholder may give written notice to BancSecurity of such
dissenting shareholder's estimate of the fair value of such shares of
BancSecurity Common with interest, if required, within 30 days after
BancSecurity makes payment of its estimated fair value, and may demand payment
of the difference. If such an estimate and payment demand is not received by
BancSecurity within such 30-day period, the dissenting shareholder is entitled
only to the amount remitted by BancSecurity.
If BancSecurity receives such an estimate and payment demand, it will,
within 60 days of receipt thereof, either pay to the dissenting shareholder the
amount demanded or agreed to by the dissenting shareholder or file in the
district court in Marshall County, Iowa, a petition requesting that the court
determine the fair value of the shares of BancSecurity Common. The petition
shall name as parties all dissenting shareholders who have complied with the
requirements of Division XIII of the IBCA and who have not reached agreement
with BancSecurity. The court shall determine the fair value of shares of
BancSecurity Common, which may be lower or higher than the value placed on the
shares by the terms of the Merger. A dissenting shareholder will be
33
<PAGE> 41
entitled to judgment for the amount by which the fair value of his or her shares
of BancSecurity Common as determined by the court exceeds the amount, if any,
remitted by BancSecurity, with interest. The court shall determine all costs and
expenses of such a proceeding to determine the fair value of the shares of
BancSecurity Common, including the reasonable expenses and compensation of the
appraisers who may be appointed by the court, and shall assess those costs and
expenses against BancSecurity, except that the court may assess part or all of
those costs and expenses against one or more dissenting shareholders whose
action in demanding supplemental payment is found to be arbitrary, vexatious or
not in good faith. The court may also assess fees and expenses of counsel and
experts for the respective parties in amounts that the court finds equitable (a)
against BancSecurity and in favor of one or more dissenting shareholders if the
court finds that BancSecurity did not substantially comply with the requirements
of Sections 490.1320- 490.1328, Iowa Code, or (b) against either BancSecurity or
one or more dissenting shareholders and in favor of the other party(ies) if the
court finds that the party(ies) against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith with respect to the rights
provided by the IBCA.
Holders of F&M Common do not have dissenters' rights under the WBCL
with respect to the Merger.
<PAGE> 42
MARKET INFORMATION AND DIVIDENDS
F&M
F&M Common trades on The NASDAQ Stock Market ("NASDAQ") under the
symbol "FMBK". F&M had approximately 3,150 shareholders of record at May 8,
1998. The following table summarizes high and low prices and cash dividends paid
for F&M Common for the periods indicated. The high and low prices represent
actual trade prices as reported on NASDAQ.
<TABLE>
<CAPTION>
CASH DIVIDENDS
CALENDAR PERIOD HIGH LOW PAID PER SHARE
- ------------------------------- ---- --- --------------
<S> <C> <C> <C> <C>
1996 1st quarter 23.55 20.05 .149
2nd quarter 28.64 22.32 .149
3rd quarter 28.64 25.68 .155
4th quarter 29.09 27.05 .155
1997 1st quarter 29.09 25.91 .182
2nd quarter 40.25 26.36 .182
3rd quarter 39.50 34.00 .20
4th quarter 41.50 36.50 .20
1998 1st quarter 43.00 36.25 .22
2nd quarter 42.50 40.31 .22
(through May 20)
</TABLE>
The closing price of F&M Common as reported on NASDAQ on December 1,
1997, the trading day immediately preceding the announcement of the proposed
transaction with BancSecurity, was $37.125. The closing sale price of F&M Common
as reported on NASDAQ on May 20, 1998 was $40.75.
F&M has paid quarterly or annual cash dividends since its inception.
The holders of F&M Common are entitled to receive such dividends as are declared
by the board of directors of F&M, which considers payment of dividends
quarterly. The ability of F&M to pay dividends is dependent upon the receipt of
dividends from the Banks, payment of which is subject to regulatory
restrictions. See "F&M Bancorporation, Inc.--Regulation and Supervision" in the
F&M 1997 10-K. In determining cash dividends, the board of directors of F&M
considers the earnings, capital requirements, debt servicing requirements,
financial ratio guidelines issued by the FRB and other banking regulators,
financial condition of F&M and the Banks, and other relevant factors. See Note
15 of Notes to F&M's Consolidated Financial Statements and the discussion under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Financial Condition--Capital Adequacy" in the F&M 1997 10-K for
restrictions on the ability of the F&M Banks to pay dividends.
35
<PAGE> 43
BancSecurity
BancSecurity is aware that BancSecurity shareholders have engaged in
private transactions involving BancSecurity Common which have been limited in
number and in volume. BancSecurity is not necessarily aware of the financial
terms of all of these transactions. The following table sets forth stock
transactions since January 1, 1996 in which BancSecurity repurchased stock for
its treasury:
<TABLE>
<CAPTION>
DATE SHARES PRICE PER SHARE
-------------------------------------------------------------
<S> <C> <C> <C>
1996 January 19, 1996 20 shares $1,070
July 18, 1996 5 shares 1,180
September 9, 1996 54 shares 1,195
1997 January 16, 1997 21 shares $1,300
August 29, 1997 20 shares 1,450
September 4, 1997 24 shares 1,450
</TABLE>
BancSecurity has paid dividends on an annual basis. Cash dividends paid
for 1997 were $1,665,218 ($43 per share); for 1996 were $1,493,454 ($38.50 per
share); and for 1995 were $1,331,297 ($34.25 per share). A dividend of $10.75
per share was paid for the first quarter of 1998. The ability of BancSecurity to
pay dividends is dependent upon the receipt of dividends from the BancSecurity
Banks, which is subject to normal regulatory restrictions. In determining cash
dividends, the Board of Directors of BancSecurity considers the earnings,
capital requirements, financial ratio guidelines issued by the FRB and other
banking regulators and other relevant factors. See Note 12 of Notes to
BancSecurity's Consolidated Financial Statements and the discussion under
"BancSecurity Management's Discussion and Analysis of Results of Operations and
Financial Condition - Capital Adequacy" for restrictions on the ability of
BancSecurity to pay dividends.
The Agreement provides that after December 1, 1997, BancSecurity shall
not pay any dividends with respect to BancSecurity Common in excess of (a)
$43.00 per share of BancSecurity Common on or about January 1998 for the year
1997, (b) a quarterly dividend in the first quarter of 1998 equal to $10.75 per
share, and (c) in each quarter thereafter a quarterly dividend in an amount
equal to the dividend the BancSecurity shareholders would have received had they
been shareholders of F&M in the event either the closing of the Merger does not
occur in the pertinent quarter or the closing of the Merger is after the record
date for the holders of F&M Common to receive a quarterly dividend in the
pertinent quarter, provided, that in the case of each dividend payment the
availability of the pooling of interests accounting treatment will not be
adversely effected.
36
<PAGE> 44
F&M SELECTED FINANCIAL INFORMATION
The summary financial data presented below for F&M Bancorporation, Inc.
for the quarters ended March 31, 1998 and 1997 and for each of the years in the
five year period ended December 31, 1997, are derived from the Consolidated
Financial Statements of F&M and should be read in conjunction with other
financial information incorporated by reference in this Prospectus, such as the
separate Consolidated Financial Statements and notes thereto of F&M, and
Management's Discussion and Analysis of Results of Operations and Financial
Condition, which are incorporated herein by reference. See Note (1) below
regarding accounting for business combinations.
<TABLE>
<CAPTION>
Quarters ended March 31, Years ended December 31,
------------------------ -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(unaudited; dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (1)
Interest income ............................ $ 33.1 $ 28.3 $ 122.5 $ 98.9 $ 87.6 $ 74.1 $ 70.9
Interest expense ........................... 15.6 13.3 57.8 45.4 39.4 29.5 29.3
Net interest income ........................ 17.5 15.0 64.7 53.5 48.2 44.6 41.5
Provision for loan losses .................. .7 .4 2.8 2.9 1.7 1.4 1.4
Non-interest income ........................ 2.5 1.9 8.8 6.6 5.4 4.8 5.9
Net income before extraordinary item and
cumulative effect of change in accounting
principle (2) ............................ 5.5 4.7 20.3 15.4 13.8 10.1 10.2
Net income ................................. 5.5 4.7 20.3 15.4 13.8 10.1 10.3
Net income applicable to common stock ...... 5.5 4.7 20.3 15.4 13.8 10.1 10.1
PERIOD END BALANCE SHEET DATA (1)
Total assets ............................... $ 1,684.7 $ 1,470.8 $ 1,646.0 $ 1,335.9 $ 1,148.9 $ 1,062.8 $ 1,011.3
Net loans .................................. 1,239.6 1,079.2 1,182.8 958.2 783.1 727.3 629.1
Total deposits ............................. 1,379.4 1,228.1 1,373.4 1,140.4 993.7 925.9 882.2
Short-term borrowings ...................... 62.0 64.4 47.7 42.3 12.6 21.0 6.8
Other borrowings ........................... 69.9 23.8 60.9 18.2 18.1 10.5 16.8
Preferred stock ............................ 0 0 0 0 0 0 2.1
Total shareholders' equity ................. 156.7 138.0 148.8 122.2 111.0 97.8 97.4
PER COMMON SHARE DATA
Net income per share:
Before extraordinary item and cumulative
effect of change in accounting
principle (2) ........................ $ 0.56 $ 0.48 $ 2.09 $ 1.73 $ 1.59 $ 1.16 $ 1.20
Basic .................................. 0.56 0.48 2.09 1.73 1.59 1.16 1.21
Diluted ................................ 0.55 0.48 2.08 1.73 1.59 1.16 1.21
Cash dividends (3) ......................... 0.22 0.18 0.76 0.61 0.50 0.40 0.30
PRO FORMA DATA (4)
Interest income ............................ $ 43.3 $ 38.2 $ 162.8 $ 138.4 $ 125.4 $ 106.3 $ 101.2
Non-interest income ........................ 3.4 2.8 12.8 10.2 8.8 7.8 8.9
Net income ................................. 7.3 6.5 23.4 22.2 19.9 15.8 15.6
Net income applicable to common stock ...... 7.3 6.5 23.4 22.2 19.9 15.8 15.4
Period end:
Total assets ........................... $ 2,229.8 $ 2,010.5 $ 2,192.7 $ 1,867.5 $ 1,660.4 $ 1,533.0 $ 1,463.9
Short-term borrowings .................. 85.2 88.1 74.8 68.0 33.6 39.0 25.3
Other borrowings ....................... 77.2 28.3 71.0 27.9 27.5 27.1 18.6
Per common share:
Net income:
Basic ................................ $ 0.54 $ 0.49 $ 1.75 $ 1.77 $ 1.61 $ 1.28 $ 1.29
Diluted .............................. 0.54 0.49 1.74 1.77 1.61 1.28 1.29
Cash dividends (3) ......................... 0.22 0.18 0.76 0.61 0.50 0.40 0.30
</TABLE>
- ------------------
(1) Except as indicated, the data have been restated to reflect F&M's
acquisitions using the pooling of interests method of accounting,
except in the case of certain acquisitions for which prior results were
not restated because they were not material to F&M. See Note 3 of Notes
to F&M's Consolidated Financial Statements incorporated herein by
reference. The 1997 and prior data also have not been restated to
reflect F&M's 1998 acquisitions; although one of those acquisitions is
being accounted for using the pooling of interests method of
accounting, prior periods will not be restated due to its relatively
small size as compared to F&M.
37
<PAGE> 45
(2) Cumulative effect of change in accounting principle in 1993 represents
the adoption of SFAS No. 109 (Accounting for Income Taxes) by one of
the Company's acquired subsidiaries.
(3) Cash dividends per share are not restated to reflect the acquisitions
accounted for using the pooling of interests method of accounting on a
pro forma basis.
(4) Giving effect to F&M's proposed Merger with BancSecurity, assuming an
Exchange Ratio of 93.6064 shares of F&M Common for each share of
BancSecurity Common; the actual Exchange Ratio may be higher, and has
not yet been finally determined. Does not give effect to F&M's other
pending acquisition.
F&M BANCORPORATION, INC.
F&M Bancorporation, Inc. was formed in 1980 to acquire the shares of
Farmers and Merchants Bank of Kaukauna, Wisconsin (now known as F&M
Bank-Kaukauna). F&M has grown internally and through acquisitions from a
one-bank holding company with total assets of $37 million at its inception to a
multi-bank holding company with 66 banking offices, and total assets of almost
$1.7 billion, at March 31, 1998.
At December 31, 1997, F&M's subsidiary banks (the "F&M Banks") ranged
in size from $19.3 million to $312.1 million in total assets. F&M acquired two
banks in separate transactions since December 31, 1997. Together, these banks
have two offices and approximately $44 million in total assets. The F&M Banks
are community banks which provide a full range of services to consumers and
businesses in small and medium-sized communities throughout Wisconsin, and in
one location in Minnesota. F&M provides the benefits of holding company
affiliation while allowing the F&M Banks to operate with considerable autonomy.
More detailed information about F&M, including historical audited and
interim (unaudited) financial statements and management's discussion and
analysis, is contained in the F&M 1997 10-K and the F&M 3/31/98 10-Q which are
incorporated in this Joint Proxy Statement/Prospectus by reference. See
"Incorporation of Documents by Reference."
Other Pending Acquisition
Jefferson. On December 31, 1997, F&M entered into an agreement to
acquire Financial Management Services of Jefferson, Inc. ("Jefferson"), the
holding company for The Farmers & Merchants Bank of Jefferson ("FMBJ"). FMBJ,
with its main office and a branch in the city of Jefferson, is located in
south-east Wisconsin. The agreement provides for the exchange of Jefferson stock
for approximately 641,975 shares of F&M Common (subject to adjustments provided
in the agreement). The transaction is expected to be completed in late May 1998.
At December 31, 1997, Jefferson had total assets of $99.7 million, net
loans of $62.0 million, total deposits of $80.7 million and shareholders' equity
of $13.2 million. For the year ended December 31, 1997, Jefferson had net income
of $1.0 million.
38
<PAGE> 46
BANCSECURITY SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of
BancSecurity Corporation ("BancSecurity") and its subsidiaries for the quarters
ended March 31, 1998 and 1997, and each of the five years ended December 31,
1997. This information and the following discussion and analysis should be read
in conjunction with other BancSecurity financial information presented elsewhere
herein.
<TABLE>
<CAPTION>
(UNAUDITED)
QUARTERS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 10,159 $ 9,841 $ 40,298 $ 39,452 $ 37,825 $ 32,221 $ 30,282
Interest expense 5,528 5,294 21,991 21,319 20,803 15,721 14,949
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 4,631 4,547 18,307 18,133 17,022 16,500 15,333
Provision for loan losses 1 78 2,353 695 1,093 870 688
Non-interest income 965 976 3,966 3,612 3,404 3,045 3,031
Non-interest expense 3,059 2,844 15,217 11,584 11,016 10,653 10,214
Net income 1,834 1,858 3,058 6,773 6,052 5,720 5,259
PERIOD END BALANCE SHEET DATA
Total assets 545,052 539,742 546,673 531,640 511,473 470,234 452,623
Net loans 325,674 313,366 329,680 313,801 295,976 276,445 246,065
Total deposits 450,371 449,282 446,595 436,911 428,250 390,985 391,160
Other borrowings 30,530 28,232 37,183 35,437 30,351 34,649 20,258
PER SHARE DATA
Net income 47.35 47.91 78.92 174.43 155.65 146.33 133.96
Cash dividends 10.75 0 43.00 38.50 34.25 30.75 27.50
</TABLE>
39
<PAGE> 47
BANCSECURITY MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provides information regarding
BancSecurity's results of operations and financial condition for the quarters
ended March 31, 1998 and 1997, and for the years ended December 31, 1997, 1996
and 1995.
Management's Discussion and Analysis includes discussions that are not
statements of historical fact (including statements in the future tense or which
include terms such as "believe," "expect," "anticipate" or "may") but instead
are forward-looking statements that involve risks and uncertainties, and
BancSecurity's actual future results could materially differ from those
discussed. Factors that could cause or contribute to such differences include,
but are not limited to, BancSecurity's future lending and collections
experiences, the effects of acquisitions, competition from other institutions,
changes in the banking industry and its regulation, technological change, and
other factors, including those described in this Management's Discussion and
Analysis.
FIRST QUARTER -- 1998 COMPARED WITH 1997
Results of Operations
For the three months ended March 31, 1998, net income decreased
$24,000, or 1.3%, to $1.8 million from $1.9 million in the first quarter of
1997. The annualized return on average assets was 1.37% for the first quarter of
1998 compared with 1.42% for the first quarter of 1997. Returns on average
stockholders' equity on an annualized basis for the first quarters of 1998 and
1997 were 13.87% and 14.41%, respectively.
Net Interest Income.
Net interest income for the three months ended March 31, 1998 increased
$84,000, or 1.8%, to $4.6 million from $4.5 million in the first quarter of
1997. Total interest income for the first quarter of 1998 increased $318,000, or
3.2%, to $10.2 million from $9.8 million in the first quarter of 1997. Interest
expense increased $234,000, or 4.4%, to $5.5 million in the first quarter of
1998 from $5.3 million in the first quarter of 1997.
Increased net interest income for the three month period is
attributable to the increase in asset volume due to BancSecurity's internal
growth and relative stability of BancSecurity's net interest margin. Total
interest income increased for the three month period in 1998 compared to the
same period in 1997 as a result of an increase in interest and fees on loans due
to increased loan activity and generally stable interest rates, while total
interest expense increased for the three month period in 1998 compared to 1997
as a result of increased levels of deposits.
Provision for Loan Losses.
The provision for loan losses for the three months ended March 31, 1998
had a decrease of $77,000 to $1,000 from $78,000 in the first quarter of 1997.
Despite this decrease in the provision for loan losses BancSecurity was able to
maintain the loan loss reserve as a percentage of loans at 1.82%. See "Allowance
for Loan Losses" for further discussion.
Non-Interest Income.
Non-interest income for the three months ended March 31, 1998 decreased
$11,000, or 1.13%, to $965,000 from $976,000 in the first quarter of 1997. The
net decrease was due primarily to a decrease in other fees and income as a
result of a one time gain on the sale of other real estate owned which was
recognized in the first quarter of 1997. This decrease was partially offset by
increased trust revenues, service fees and commission income.
40
<PAGE> 48
Non-Interest Expense.
Non-interest expense for the three months ended March 31, 1998
increased $215,000, or 7.6%, to $3.1 million from $2.8 million in the first
quarter of 1997. Personnel expenses increased in 1998 due to expanded operations
of two new bank locations as well as normal salary increases. Occupancy expenses
increased also due to servicing of the new locations and operations.
The overhead ratio, which is computed by subtracting non-interest
income from non-interest expense (excluding net securities transactions) and
dividing by average total assets, was 1.55% in the first quarter of 1998
compared with 1.42% in the first quarter of 1997. The increase in this ratio in
the first quarter of 1998 was the result of the factors set forth above.
Provision for Income Taxes.
BancSecurity's provision for income taxes for the three months ended
March 31, 1998 decreased $42,000, or 5.6%, to $702,000 from $744,000 in the
first quarter of 1997. The decrease in income tax provision was principally due
to decreased taxable income.
Net Income.
Net income for the first quarter of 1998 decreased by $24,000, or 1.3%,
to $1.8 million from $1.9 million in the same period for 1997.
Net income per common share was $47.35 for the first quarter of 1998
compared with $47.91 in the first quarter of 1997, a decrease of 1.2%.
Financial Condition
Loan Portfolio.
At March 31, 1998, total loans decreased $4.0 million, or 1.2%, to
$331.7 million from $335.7 million at December 31, 1997. The loan mix in
BancSecurity's portfolio at March 31, 1998 did not change in any material
respect compared with December 31, 1997.
<TABLE>
<CAPTION>
At March 31, 1998, loans are as follows:
(in thousands)
<S> <C>
Commercial and industrial $ 57,206
Agricultural 22,215
Real estate construction 776
Real estate mortgage 217,256
Installment and other consumer 34,262
---------
331,715
Less allowance for loan losses (6,041)
---------
Net loans $ 325,674
=========
</TABLE>
Non-Performing Assets.
Maintaining excellent credit quality continues to be a priority for
BancSecurity. At March 31, 1998 non-performing assets amounted to $7.9 million,
compared to $7.4 million at December 31, 1997. Non-performing loans at March 31,
1998 were $6.4 million, or 1.93% of total loans, compared to $6.8 million at
December 31, 1997.
41
<PAGE> 49
Other real estate owned ("OREO") at March 31, 1998 was $1.4 million as
compared to $0.6 million at December 31, 1997. The ratio of non-performing
assets to total loans at March 31, 1998 was 2.37%. Management continues to work
at reducing the level of non-performing assets. Management does not believe
that there is any common reason or general trend which accounts for the
increase (or that it is necessarily an indication of expected future
developments). Management continues to take an aggressive collection effort on
these assets, carefully monitoring these (and other) loans and regularly
reviews and evaluates the non-performing credits to determine appropriate
handling and action.
The following table sets forth the amount of non-performing loans,
other real estate owned and non-performing assets, and each of their percentages
to total loans at March 31, 1998:
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Non-accrual loans $4,519 1.36%
Loans past due 90 days or more 1,896 0.57%
Restructured loans 0 0.00%
------ ----
Total non-performing loans 6,415 1.93%
Other real estate owned 1,445 0.44%
------ ----
Total non-performing assets $7,860 2.37%
====== ====
</TABLE>
Summary of Loan Loss Experience
For the first three months of 1998, total charge-offs were $12,000 and
total recoveries were $43,000. The annualized ratio of net charge-offs
(recoveries) to average loans outstanding for the three months ended March 31,
1998 was (0.04%). The charge-offs were not concentrated in any particular
industry.
The following table summarizes loan balances at March 31, 1998 and
1997; changes in the allowance for loan losses arising from loans charged-off
and recoveries on loans previously charged-off, by loan category; and provisions
for loan losses which have been charged to expense:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
---- ----
<S> <C> <C>
Average balance of loans for period $ 332,966 $ 317,391
--------- ---------
Allowance for loan losses at beginning of period 6,009 4,545
Loans charged off:
Commercial and industrial 2 4
Real Estate-mortgage -- 2
Installments and other consumer loans 10 3
--------- ---------
Total charge offs 12 9
Recoveries on loans previously charged off:
Commercial and industrial 16 3
Agricultural 7 25
Residential Real Estate - mortgage -- 2
Installment and other consumer loans 20 24
--------- ---------
Total recoveries 43 54
Net loans charged off (recovered) (31) (45)
Provisions for loan losses 1 77
--------- ---------
Allowance for loan losses at end of period $ 6,041 $ 4,667
========= =========
Ratio of net charge offs during period to average
loans outstanding (annualized) (0.04)% (0.05%)
Allowance for loan losses to total loans 1.82% 1.45%
</TABLE>
42
<PAGE> 50
Allowance for Loan Losses.
At March 31, 1998 and December 31, 1997, the allowance for loan losses
as a percentage of total loans was 1.82% and 1.79%, respectively. Management
continually reviews the loan portfolio, and other factors, to determine the
appropriate allowance. The allowance for loan losses is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible based on evaluations of the collectibility of
loans and prior loan loss experience. In determining the additions to the
allowance charged to operating expenses, management considered historical loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, and current economic conditions that may affect the
borrower's ability to pay.
The following table summarizes the allocation of allowances for loan
losses and give a breakdown of the percentage of loans in each category at March
31, 1998:
<TABLE>
<CAPTION>
Percent of
loans in
each
Amount of category
reserve for to total
(in thousands) loan losses loans
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, industrial & agricultural $3,625 24.0%
Real estate - construction 20 0.2%
Real estate - mortgage 1,907 65.5%
Installment and other consumer loans 489 10.3%
------ -----
$6,041 100.0%
</TABLE>
Investment Portfolio.
At March 31, 1998, the investment portfolio decreased $6.8 million, or
3.8%, to $171.4 million from $178.2 million at December 31, 1997. At March 31,
1998 and December 31, 1997, the investment portfolio represented 31.4% and 32.6%
of total assets, respectively.
Deposits.
Total deposits at March 31, 1998 increased $3.8 million, or 0.8%, to
$450.4 million from $446.6 million at December 31, 1997. Interest-bearing
deposits at March 31, 1998 increased $7.5 million, or 1.8%, to $414.6 million
from $407.1 million at December 31, 1997. Total deposits continue to increase
steadily primarily due to internal growth.
Borrowings.
Short-term borrowing at March 31, 1998 were $23.2 million, as compared
to $27.1 million at December 31, 1997. Short-term borrowings consist primarily
of repurchase agreements and treasury tax and loan accounts. Other borrowed
funds were $7.3 million at March 31, 1998, as compared to $10.1 million at
December 31, 1997 and consist primarily of Federal Home Loan Bank debt. These
borrowings have decreased as the availability of funds from customer deposits
have increased and loan demand has decreased.
43
<PAGE> 51
Capital Adequacy
During the three months ended March 31, 1998, stockholders' equity
increased $2.7 million due to net income of $1.8 million in the first quarter
and an increase due to the effect of FASB 115 resulting in a net unrealized gain
on securities available for sale, offset by dividends paid to stockholders. At
March 31, 1998, BancSecurity's risk-based Tier 1 capital ratio was 16.4%. The
total risk-based capital ratio was 17.9% and the leverage ratio was 9.6%. All
such ratios exceed regulatory minimums of 4.0%, 8.0% and 4.0%, respectively. The
average equity to average assets ratio was 10.02% at March 31, 1998, compared
with 9.95% at March 31, 1997.
BancSecurity's common stock dividend payout ratio was 22.7% in the
first three months of 1998 as compared to 22.4% in the comparable 1997 period.
At March 31, 1998, each of the BancSecurity Banks was in compliance
with all applicable capital requirements, and management believes that the
capitalization of those banks is adequate.
During the first quarter, BancSecurity incurred minimal capital
expenditures for replacement and renovation of facilities. BancSecurity to date
has not committed to any major commitments to build or purchase facilities in
1998 and would finance any such expenditures through earnings and existing
capital resources.
Liquidity
As shown in BancSecurity's Consolidated Statements of Cash Flows for
the three months ended March 31, 1998, cash and cash equivalents increased by
$9.3 million during the period to $25.2 million at March 31, 1998. The increase
primarily reflected $1.4 million in net cash provided by operating activities
and $12.9 million in net cash provided by investing activities, offset by $5.0
million in net cash used in financing activities. Net cash provided by operating
activities primarily consisted of BancSecurity's net income in the period less
adjustments for non-cash debits. Net cash provided by investing activities
consisted primarily of a net increase in loans plus proceeds from maturities and
calls of securities offset by payment for the purchase of securities. Net cash
used in financing activities principally reflected a decrease in short-term and
other borrowings and dividends paid during the quarter.
BancSecurity manages its liquidity to provide adequate funds to support
the borrowing requirements and deposit flow of its customers. Management views
liquidity as the ability to raise cash at a reasonable cost or with a minimum of
loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of BancSecurity's
liquidity are investment securities available for sale and other marketable
assets maturing within one year. BancSecurity attempts, when possible, to match
relative maturities of assets and liabilities, while maintaining the desired net
interest margin. BancSecurity can also utilize borrowing capabilities if
appropriate.
See "1997 Compared with 1996 and 1995--Liquidity, Interest Sensitivity
and Market Risk Management" for further information on interest sensitivity and
market risk management.
1997 COMPARED WITH 1996 AND 1995
Results of Operations
Net income in 1997 decreased $3.7 million, or 54.8%, to $3.1 million
from $6.8 million in 1996 (compared with $6.1 million in 1995). Net income per
common share was $78.92 in 1997 compared with $174.43 in 1996 and $155.65 in
1995. Return on average assets was 0.57% in 1997, compared with 1.31% in 1996
and 1.24% in 1995. Return on average common stockholders' equity was 5.56% in
1997, compared with 14.21% in 1996 and 14.43% in 1995.
44
<PAGE> 52
Earnings for 1997 were affected by Merger related expenses of
approximately $2.2 million due to the pending Merger with F&M (see Note 14 of
the Notes to BancSecurity's Consolidated Financial Statements) and a $2.0
million provision associated in part with BancSecurity's investment in a
purchased lease portfolio. Increased net interest income, resulting from
internal growth, has also been a major factor affecting earnings over the last
three years. BancSecurity has been able to keep its net interest margin
relatively constant over this time period, while at the same time increasing its
interest earning assets.
The remainder of this section provides a more detailed explanation of
factors affecting the results of operations.
Net Interest Income
Net interest income is the most significant component of BancSecurity's
earnings. For analytical purposes, interest earned on tax exempt assets, such as
state and municipal obligations, is adjusted in this discussion to a
fully-taxable equivalent basis. This adjustment is based upon the statutory
federal corporate income tax rate, and any interest expense which is disallowed
as a deduction in connection with carrying these tax exempt assets, and thus
facilitates a meaningful comparison between taxable and nontaxable earning
assets.
Net interest income in 1997 increased $0.1 million, or 0.7%, to $19.2
million from $19.1 million in 1996. This increase is attributable to the
increase in asset volume due to BancSecurity's internal growth and relative
stability of BancSecurity's net interest margin. Net interest income in 1996
increased 5.6% from $18.1 million in 1995.
Changes in net interest income occur due to fluctuations in the
balances and/or mixes of interest-earning assets and interest-bearing
liabilities, and changes in their corresponding interest yields and costs. In
both 1997 and 1996, BancSecurity experienced asset growth in loans, which
enhanced BancSecurity's net interest income because loans tend to produce higher
rates of interest paid to BancSecurity than other types of interest earning
assets. Changes in non-performing assets, together with interest lost and
recovered on those assets also affect comparisons of net interest income.
45
<PAGE> 53
The following table presents the relative contribution of changes in
volume and interest rates on changes in net income for the periods indicated
using average interest-earning assets and interest-bearing liabilities balances.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997 VS 1996
-------------------------------------
INCREASE (DECREASE) DUE TO (1)
-------------------------------------
VOLUME RATE NET
- ---------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest earned on:
Loans (2) $1,723 ($605) $1,118
Taxable investment securities (108) 129 21
Non-taxable investment securities (2) (231) 9 (222)
Other interest income (74) (29) (103)
- ---------------------------------------------------------------------------------------
Total 1,310 (496) 814
- ---------------------------------------------------------------------------------------
Interest paid on:
Savings deposits 388 374 762
Time deposits (324) (70) (394)
Short-term borrowings 72 60 132
Other borrowings 163 10 173
- ---------------------------------------------------------------------------------------
Total 299 374 673
- ---------------------------------------------------------------------------------------
Net interest income $1,011 ($870) $141
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996 VS 1995 (1)
------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------
VOLUME RATE NET
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest earned on:
Loans (2) $1,289 ($176) $1,113
Taxable investment securities 964 0 964
Non-taxable investment securities (2) (324) (25) (349)
Other interest income 5 (209) (204)
- --------------------------------------------------------------------------------------
Total 1,934 (410) 1,524
- --------------------------------------------------------------------------------------
Interest paid on:
Savings deposits 857 14 871
Time deposits (139) (146) (285)
Short-term borrowings 136 (81) 55
Other borrowings (74) (51) (125)
- --------------------------------------------------------------------------------------
Total 780 (264) 516
- --------------------------------------------------------------------------------------
Net interest income $1,154 ($146) $1,008
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
46
<PAGE> 54
(2) The amount of interest income on nontaxable loans and investment securities
has been adjusted to its fully taxable equivalent.
The following table sets forth average consolidated balance sheet data
and average yield and rate data on a tax equivalent basis for the periods
indicated.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------------------------
(dollars in AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Loans (1), (2), (3) $324,824 $27,600 8.50% $305,163 $26,482 8.68% $290,243 $25,369 8.74%
Taxable investment
securities 153,021 10,435 6.82% 154,393 10,414 6.75% 140,063 9,450 6.75%
Nontaxable investment
securities (2) 26,397 2,776 10.52% 28,573 2,998 10.49% 31,654 3,347 10.57%
Other investments 5,589 404 7.23% 6,598 507 7.68% 6,551 711 10.85%
---------------------- --------------------- ------------------------
Total $509,831 $41,215 8.08% $494,727 $40,401 8.17% $468,511 $38,877 8.30%
Non-interest earning assets
Cash and due from banks 9,897 9,318 8,746
Premises & Equip - net 9,627 7,303 5,342
Other assets 10,743 9,887 8,303
Less: Allowance for loan
loss -4,863 -5,007 -4,087
------------ ----------- -----------
Total $535,235 $516,228 $486,815
============ =========== ===========
LIABILITIES & STOCKHOLDERS'
EQUITY
Interest bearing
liabilities
Savings deposits $173,007 $6,962 4.02% $163,213 $6,200 3.80% $140,745 $5,329 3.79%
Time deposits 228,931 13,158 5.75% 234,573 13,552 5.78% 236,882 13,837 5.84%
Short-term borrowings 24,095 1,248 5.18% 22,666 1,116 4.92% 19,991 1,061 5.31%
Other borrowings 10,712 624 5.83% 7,867 451 5.73% 9,161 576 6.29%
---------------------- --------------------- ------------------------
Total $436,745 $21,992 5.04% $428,319 $21,319 4.98% $406,779 $20,803 5.11%
Non-interest bearing
liabilities
Demand deposits 34,052 32,338 30,852
Other liabilities 9,392 7,903 7,246
Stockholders' equity 55,046 47,668 41,938
------------ ----------- -----------
Total $535,235 $516,228 $486,815
============ =========== ===========
Net interest income $19,223 $19,082 $18,074
Rate spread 3.05% 3.19% 3.18%
Net interest margin 3.77% 3.86% 3.86%
</TABLE>
- ------------------
(1) For purposes of these computations, non-accruing loans are
included in the daily average loan amounts outstanding.
47
<PAGE> 55
(2) The amount of interest income on non-taxable investment
securities and loans has been adjusted to its fully taxable
equivalent.
(3) Loan fees are included in total interest income as follows:
1997-$563,828; 1996-$616,645; 1995- $459,580.
The following table sets forth the mix of average interest-earning assets and
average interest-bearing liabilities.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans 63.7% 61.7% 61.9%
Taxable investment securities 30.0% 31.2% 29.9%
Non-taxable investment securities 5.2% 5.8% 6.8%
Other investments 1.1% 1.3% 1.4%
- ------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
============================================================================================================
Savings deposits 39.6% 38.1% 34.6%
Time deposits 52.4% 54.8% 58.2%
Short-term borrowings 5.5% 5.3% 4.9%
Other borrowings 2.5% 1.8% 2.3%
- ------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
============================================================================================================
</TABLE>
The preceding mix table reflects the results of management's strategy
to increase loans as a percent of earning assets coupled with generally strong
demand for loans. Based on the current economic conditions, management has
increased the percent of average loans to average earning assets while
decreasing average taxable and nontaxable investment securities. The table also
shows the effects of management's strategy to reduce reliance on time deposits
by increasing savings deposits as a percentage of interest-bearing liabilities.
As interest rates paid on liabilities fluctuated throughout 1997 and
increased overall, the mix of deposits changed, with saving deposits increasing
and time deposits decreasing. The increase was partially attributable to the
promotion of BancSecurity's money market product. Short-term borrowings
increased as depositors sought higher rates. other borrowed funds primarily
consist of advances from the Federal Home Loan Bank and were utilized by
BancSecurity to augment its growth in earning assets. For more information
regarding borrowing, see notes 3 and 7 of notes to BancsScurity's Consolidated
Financial Statements.
Provision for Loan Losses
The amount charged to provision for loan losses is based on
management's evaluation of the loan portfolio. Management determines the
adequacy of the allowance for loan losses, both on a bank-by-bank basis and on
an overall basis for BancSecurity, based on past loan loss experience, current
economic conditions, composition of the loan portfolio and the anticipated
potential for future loss. Management is also mindful of the expectations in
recent years of banking industry regulators for increased levels of allowances,
although no particular regulatory obligations have been imposed on BancSecurity
in this regard.
48
<PAGE> 56
The provision for loan losses was $2.4 million in 1997, compared with
$0.7 million in 1996 and $1.1 million in 1995. The increase in the provision for
loan losses was primarily due to the continuing levels of non-performing assets
held by BancSecurity relating to two separate credit relationships. See
"Non-Performing Assets" below for additional information. The allowance for loan
losses as a percentage of gross loans outstanding was 1.79% at December 31,
1997, as compared to 1.43% and 1.55% at December 31, 1996 and 1995,
respectively. Net charge-offs as a percentage of average loans outstanding were
0.27% in 1997, 0.27% in 1996 and 0.11% in 1995.
Non-Interest Income
BancSecurity stresses the importance of growth in non-interest income
as one of its key long-term strategies. Non-interest income for 1997 increased
$0.4 million or 9.8% when compared to 1996. This compares with an increase of
$0.2 million, or 6.1%, from 1995. The increase in non-interest income during
1997 was attributable primarily to increased commission income due to insurance
sales and the expansion of the activities of BancSecurity's insurance agency.
Other fees and income also increased due to greater trust revenues, an increase
in the cash surrender value recognized on insurance policies covering key
executives and a gain on the sale of other real estate owned. The increase in
service fees during 1996 was attributable primarily to increased services, along
with an increase in the amount charged for those services.
During all three periods, net security gains were minimal. These gains
were realized as management responded to market conditions and opportunities.
For additional detail see Note 3 of Notes to BancSecurity's Consolidated
Financial Statements.
Non-Interest Expense
BancSecurity's total non-interest expense in 1997 increased $3.6
million, or 31.4%, to $15.2 million from $11.6 million in 1996. The increase was
primarily due to expenses related to the pending Merger with F&M. Expenses
associated with the pending Merger consisted primarily of an investment banker
fee of approximately $1,875,000, and additional professional fees of
approximately $250,000. The addition of two new bank locations also increased
non-interest expense. Personnel expenses increased due to the new locations as
well as increased salary levels. Occupancy and equipment expenses increased due
to servicing of the new locations and operations. The total non-interest expense
in 1996 represents a 5.2% increase from $11.0 million in 1995. Personnel costs
increased due to increases in the number of employees and normal compensation
levels. Equipment costs also increased due to the implementation of a new data
processing system.
BancSecurity's overhead ratio (which is computed by subtracting
non-interest income, excluding security gains, from non-interest expense and
dividing the result by average total assets) was 2.11% in 1997 (1.70% excluding
the merger expenses), 1.58% in 1996, and 1.57% in 1995.
Due to the sensitivity of the overhead ratio to changes in the size of
the balance sheet, management also looks at trends in the efficiency ratio to
assess the changing relationship between operating expenses and income. The
efficiency ratio measures the amount of cost expended by BancSecurity to
generate a given level of revenues in the normal course of business. It is
computed by dividing total operating expense by the sum of net interest income
(on a fully-taxable equivalent basis) and non-interest income from ongoing
operations, excluding security gains. The efficiency ratio was 65.68% in 1997
(56.27% after adjusting for merger expenses of $2.2 million), 51.40% in 1996 and
51.39% in 1995. The increases in this ratio and the overhead ratio resulted from
the various factors set forth above.
49
<PAGE> 57
Income Taxes
BancSecurity's provision for income taxes in 1997 decreased $1.1
million, or 38.9%, to $1.6 million from $2.7 million in 1996. The 1996 level
represents a 18.9% increase from $2.3 million in 1995. As a percentage of
taxable income, the effective tax rate was 35.0% in 1997, 28.5% in 1996 and
27.2% in 1995 of income before taxes. For more information regarding income
taxes see Note 8 of Notes to BancSecurity's Consolidated Financial Statements.
Net Income
Net income decreased by $3.7 million in 1997, or 54.8% to $3.1 million
from $6.8 million in 1996. This compares with a increase in income of $0.7
million, or 11.9%, for 1996 from $6.1 million in 1995.
Earnings for 1997 were affected by Merger-related expenses of
approximately $2.2 million due to the pending Merger with F&M plus a $2.0
million provision in part associated with BancSecurity's purchased lease
portfolio. Increased net interest income, resulting from internal growth, has
also been a major factor affecting earnings over the last three years.
BancSecurity has been able to keep its net interest margin relatively constant
over this time period, while at the same time increasing its interest earning
assets.
Return on average common stockholders' equity was 5.56% in 1997
compared with 14.21% in 1996 and 14.43% in 1995. The return on average assets
was 0.57% in 1997 compared with 1.31% in 1996 and 1.24% in 1995.
Net income per common share was $78.92 in 1997 compared with $174.43 in
1996 and $155.65 in 1995.
Financial Condition
1997 was a year of growth for BancSecurity in total assets and equity.
Year end total assets in 1997 grew to $547 million, a 2.8% increase from $532
million in 1996. Total shareholders' equity at December 31, 1997 was $52
million, a 2.1% increase from $51 million in 1996. The balance of this section
further discusses changes in BancSecurity's assets, liabilities and equity.
50
<PAGE> 58
Loan Portfolio
The following table sets forth the major categories of loans
outstanding and the percentage of total loans for each category at the dates
indicated. (Real estate mortgage includes commercial and agricultural real
estate mortgages.)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------------------------------
(dollars in
thousands) AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 54,687 16.2% $ 54,905 17.2% $ 56,285 18.7%
Agricultural 23,731 7.1% 21,401 6.7% 19,761 6.6%
Real estate construction 3,557 1.1% 4,974 1.6% 4,225 1.4%
Real estate mortgage 218,913 65.2% 201,154 63.2% 174,568 58.1%
Installment and other consumer
loans 34,801 10.4% 35,911 11.3% 45,803 15.2%
- ----------------------------------------------------------------------------------------------------------------
Total $ 335,689 100.0% $ 318,345 100.0% $ 300,642 100.0%
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------------------------------
(dollars in
thousands) AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 68,489 24.6% $ 61,648 24.7%
Agricultural 21,688 7.7% 23,123 9.3%
Real estate construction 2,365 0.8% 3,231 1.3%
Real estate mortgage 143,094 51.0% 123,748 49.6%
Installment and other consumer
loans 44,693 15.9% 37,659 15.1%
- -----------------------------------------------------------------------------------------
Total $ 280,329 100.0% $ 249,409 100.0%
=========================================================================================
</TABLE>
Loan growth was 5.4% in 1997 compared with 5.9% in 1996. The 1997 and 1996
increases were primarily the result of loan production efforts.
During 1997 and 1996 the loan mix in BancSecurity's portfolio remained
relatively constant, with a trend toward more real estate mortgage loans, which
includes commercial, agricultural real estate and residential mortgages.
BancSecurity maintains a diversified loan portfolio and therefore,
management believes there is minimal exposure to losses due to loan
concentrations. At December 31, 1997, BancSecurity believes that there are no
loan concentrations to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
conditions affecting any particular industry. By maintaining a diversity of
types of borrowers, BancSecurity has attempted to prevent losses due to economic
difficulties of certain industries.
51
<PAGE> 59
The following table sets forth the scheduled repayments of the loan
portfolio and the sensitivity of loans to interest rate changes at December 31,
1997 (excluding real estate mortgages and consumer loans).
<TABLE>
<CAPTION>
MATURITY
----------------------------------------------------
OVER ONE
ONE YEAR YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS
----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Commercial and industrial $ 42,281 $ 6,578 $ 5,828
Agricultural 23,409 317 5
Real estate construction 3,557 0 0
- -------------------------------------------------------------------------------------------
Total $ 69,247 $ 6,895 $ 5,833
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
----------------------------------------
AMOUNT OF LOANS DUE AFTER ONE YEAR WITH: FIXED VARIABLE
RATE RATE
----------------------------------------
(In thousands)
<S> <C> <C>
Commercial and industrial $ 9,593 $ 2,813
Agricultural 322 0
- -------------------------------------------------------------------------------------------
Total $ 9,915 $ 2,813
===========================================================================================
</TABLE>
52
<PAGE> 60
Non-Performing Assets
Non-performing assets are a broad measure of problem loans. The
following table sets forth the amount of non-performing loans, other real estate
owned and non-performing assets, and each of their percentages to total loans as
of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
(dollars in thousands) 1997 % 1996 % 1995 %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans $ 5,367 1.60 % $ 7,816 2.45 % $ 4,153 1.38 %
Loans past due 90 days or more 1,445 0.43 465 0.15 268 0.09
Restructured loans 0 0.00 0 0.00 0 0.00
- --------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 6,812 2.03 8,281 2.60 4,421 1.47
Other real estate owned 604 0.18 36 0.01 377 0.13
- --------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 7,416 2.21 % $ 8,317 2.61 % $ 4,798 1.60 %
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
(dollars in thousands) 1994 % 1993 %
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-accrual loans $ 739 0.27 % $ 482 0.19 %
Loans past due 90 days or more 766 0.27 502 0.20
Restructured loans 0 0.00 0 0.00
- --------------------------------------------------------------------------------------------
Total non-performing loans 1,505 0.54 984 0.39
Other real estate owned 115 0.04 266 0.11
- --------------------------------------------------------------------------------------------
Total non-performing assets $ 1,620 0.58 % $ 1,250 0.50 %
============================================================================================
</TABLE>
Maintaining excellent credit quality continues to be a priority for
BancSecurity. Non-performing assets as a percentage of total loans outstanding
decreased in 1997 to 2.21% compared with 2.61% in 1996 and increased compared
with 1.60% in 1995. Loans past due 90 days or more increased in 1997 because of
developments with respect to a number of separate loans, in different locations
and industries. Management does not believe that there is any common reason or
general trend which accounts for the increase (or that it necessarily is an
indication of expected future developments). Management continues to make
aggressive collection efforts on these assets, carefully monitors these (and
other) loans, and regularly reviews and evaluates the non-performing credits to
determine appropriate handling and action.
Non-accrual loans at December 31, 1997 decreased 0.85% as a percentage
of total loans, as compared to 1996. Non-accrual loans are at a level
BancSecurity considers manageable, but management continues to work at reducing
the level of all non-performing loans. Furthermore, BancSecurity considers its
allowance for loan losses adequate to cover this level of non-accrual loans and
it regularly reviews the various factors used in determining the provision and
allowance for loan losses. Non-accrual loans for 1997 and 1996 include
commercial loans of $3.7 million and $4.4 million, respectively for leases
acquired through a party which is in bankruptcy proceedings and for which
settlement is in process with the bankruptcy trustee. In addition, the
non-accrual loans for 1997 include $1.2 million relating to a credit on a
specific real estate development. This property was acquired by
53
<PAGE> 61
BancSecurity via a sheriff deed in January 1998. Subsequently, BancSecurity has
entered into a sale agreement which is expected to close in April 1998, and no
loss is expected.
The gross interest income that would have been recognized on
non-accrual loans in 1997 if the loans had been current in accordance with their
original terms was approximately $640,000, of which there were no significant
amounts collected and included in BancSecurity's income for 1997.
It is the policy of BancSecurity to place a loan on non-accrual status
when the loan's principal and accrued interest are not expected to be collected
in full or when the loan becomes contractually past due 90 days or more as to
principal or interest and is not guaranteed by an outside source. Loans past due
90 days or more may be retained on accrual status if they are guaranteed by a
third party and BancSecurity believes that such guaranty will be adequate to
assure collection.
There were no particular loans as to which payments were current at
December 31, 1997, which in the opinion of management, and to its best
knowledge, will not be paid according to their terms.
54
<PAGE> 62
Summary of Loan Loss Experience
The following table summarizes loan balances at the end of each period;
changes in the allowance for loan losses arising from loans charged-off and
recoveries on loans previously charged-off, by loan category; and provisions for
loan losses which have been charged to expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balance of loans
for period $ 324,824 $ 305,163 $ 290,243 $ 266,632 $ 225,688
===============================================================================================================
Allowance for loan losses
at beginning of period 4,545 4,666 3,885 3,345 2,837
Loans charged off
Commercial and Industrial 1,012 723 289 197 51
Agricultural 0 62 91 180 82
Real Estate - Mortgage 12 2 0 0 55
Installments and Other
Consumer Loans 125 185 155 99 88
- ---------------------------------------------------------------------------------------------------------------
Total charge offs 1,149 972 535 476 276
Recoveries on loans
previously charged off
Commercial and Industrial 151 34 52 67 44
Agricultural 47 88 114 8 21
Real Estate - Mortgage 2 0 0 25 3
Installments and Other
Consumer Loans 60 34 57 46 28
- ---------------------------------------------------------------------------------------------------------------
Total recoveries 260 156 223 146 96
Net loans charged off 889 816 312 330 180
Provisions for loan losses 2,353 695 1,093 870 688
- ---------------------------------------------------------------------------------------------------------------
Allowance for loan losses
at end of period $ 6,009 $ 4,545 $ 4,666 $ 3,885 $ 3,345
===============================================================================================================
Ratio of net charge offs during period to
average loans outstanding 0.27 % 0.27 % 0.11 % 0.12 % 0.08 %
Allowance for loan losses
to total loans 1.79 % 1.43 % 1.55 % 1.39 % 1.34 %
</TABLE>
55
<PAGE> 63
Allocation of Allowance for Loan Losses
The following table summarizes the allocation of allowances for loan
losses and gives a breakdown of the percentage of loans in each category.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT OF IN EACH AMOUNT OF IN EACH AMOUNT OF IN EACH
RESERVE CATEGORY RESERVE CATEGORY RESEARCH CATEGORY
FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL
(dollars in thousands) LOSSES LOANS LOSSES LOANS LOSSES LOANS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, industrial, and
agricultural $ 3,789 23.3% 2,265 23.9% $2,552 25.3%
Real estate - construction 35 1.1 50 1.6 64 1.4
Real estate - mortgage 1,775 65.2 1,753 63.2 1,450 58.1
Installment and other consumer
loans 410 10.4 477 11.3 600 15.2
- ------------------------------------------------------------------------------------------------------------
6,009 100.0% 4,545 100.0% 4,666 100.0%
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
AMOUNT OF IN EACH AMOUNT OF IN EACH
RESERVE CATEGORY RESERVE CATEGORY
FOR LOAN TO TOTAL FOR LOAN TO TOTAL
(dollars in thousands) LOSSES LOANS LOSSES LOANS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, industrial, and
agricultural $1,943 32.3% $1,739 34.0%
Real estate - construction 42 0.8 44 1.3
Real estate - mortgage 1,317 51.0 1,072 49.6
Installment and other consumer
loans 583 15.9 490 15.1
- ----------------------------------------------------------------------------------
$3,885 100.0% $3,345 100.0%
==================================================================================
</TABLE>
The allowance for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluating known and inherent risks
in the loan portfolio. The allowance for loan losses is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible based on evaluations of the collectibility of
loans and prior loan loss experience. In determining the additions to the
allowance charged to operating expenses, management considered historical loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, and current economic conditions that may affect the
borrower's ability to pay.
The degree of risk associated with BancSecurity's loans is generally
greater in the commercial, industrial and agricultural categories, representing
23.3% of total loans at December 31, 1997. Accordingly, management has allocated
a significantly larger portion of the allowance for loan losses to these types
of loans and has increased the provision for loan loss to cover the risk
associated with two particular non-accrual loans mentioned above under
"Non-Performing Assets."
56
<PAGE> 64
The ultimate recovery of all loans is susceptible to future economic
factors beyond BancSecurity's control. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
Investment Portfolio
The following table sets forth the distribution of investments
(securities held to maturity and available for sale) and interest bearing
deposits and their percentage to total investments at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------
(DOLLARS IN
THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 47,149 26.3 % $ 34,967 18.9 % $ 29,706 16.0 %
Obligations of states and political
subdivisions 28,901 16.2 26,549 14.4 28,680 15.4
Mortgage-backed securities 88,530 49.5 106,898 57.8 113,750 61.1
Other investments 14,217 8.0 16,535 8.9 14,013 7.5
- ----------------------------------------------------------------------------------------------------------------------------
Total
Investments $ 178,797 100.0 % $ 184,949 100.0 % $ 186,149 100.0 %
============================================================================================================================
</TABLE>
The investment portfolio was relatively unchanged in total. The slight
decrease in 1997 is due primarily to the higher loan demand in 1997 and 1996.
The relative mix changed as payments received on mortgage- backed securities
were reinvested in U.S. Agency securities.
The following table shows the relative maturities and weighted average
interest rates on a tax equivalent basis of investment securities, excluding
equity securities, as of December 31, 1997.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN
THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies and corporations, including
mortgage-backed securities $ 3,743 7.09 % $ 87,229 7.06 $ 41,978 7.11 $ 2,729 7.95
States and political
subdivisions (domestic) 7,749 9.14 11,103 11.27 8,825 10.14 1,224 10.54
Other investments 631 4.01 3,553 6.73 0 0.00 0 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 12,123 8.24 % $ 101,885 7.51 $ 50,803 7.64 $ 3,953 8.75
===========================================================================================================================
</TABLE>
Inherent in any portfolio which includes mortgage-backed securities,
there exist both prepayment and maturity extension risk. BancSecurity is not
immune to these same types of risks. BancSecurity's investments in these types
of securities are predominantly in straight U.S. Agency-issued mortgage-backed
pass-throughs and lower risk types of real estate mortgage investments
conduit/collateralized mortgage obligations. The major categories of the
mortgage-backed security portfolio and dollar values as of December 31, 1997,
are as follows: fixed rate mortgage-backed pass-throughs-$33.0 million; variable
rate mortgage-backed pass-throughs-$47.5 million; fixed rate real estate
mortgage investment conduits/collateralized mortgage obligations-$1.1 million;
and floating rate real estate mortgage investment conduits/collateralized
mortgage obligations-$6.9 million.
57
<PAGE> 65
For more information regarding the investment portfolio, including the
breakdown between securities held to maturity and available for sale, see Note 3
of Notes to BancSecurity's Consolidated Financial Statements.
Deposits
The following table sets forth average deposits by type and the
percentage which each type represents of total average deposits at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 34,052 7.9 % $ 32,338 7.5 % $ 30,852 7.6 %
Interest-bearing demand 37,692 8.6 38,194 8.9 37,334 9.1
Savings deposits 135,315 31.0 125,019 29.1 103,411 25.3
Time deposits 228,931 52.5 234,573 54.5 236,882 58.0
- -----------------------------------------------------------------------------------------------------
Total $ 435,990 100.0 % $ 430,124 100.0 % $ 408,479 100.0 %
=====================================================================================================
</TABLE>
Year-end deposits increased 2.2% in 1997 compared with an increase of
2.0% in 1996 over 1995.
The aggregate principal amount of time certificates of deposit issued
in amounts of $100,000 or more and outstanding as of December 31, 1997 was
$33,325,000. Their maturing distribution is as follows:
-three months or less $15,982,000
-over three months and through twelve months $11,891,000
-over one year $ 5,452,000
Neither BancSecurity nor its subsidiaries have any deposits in foreign
banking offices.
Borrowings
Short-term borrowings at December 31, 1997 were $27.1 million, as
compared to $25.7 million at December 31, 1996. Short-term borrowings consisted
primarily of repurchase agreements and treasury tax and loan accounts. Other
borrowed funds were $10.1 million as compared to $9.7 million at December 31,
1996 and consisted primarily of Federal Home Loan Bank debt. During 1997,
BancSecurity maintained a stable balance of short-term and other borrowings used
to fund its loan demand. Use of short-term funds during 1997 reflected the
attractiveness of rates for those funds.
Capital Adequacy
Stockholders' equity increased in 1997 by $1.1 million. This increase
was a result of net income during the year, as reduced by dividends of $1.7
million paid to common stockholders and the SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" adjustment which decreased
stockholders' equity by $0.2 million.
At December 31, 1997, the risk-based capital ratio for Tier 1 capital
was 15.7% and the total risk-based capital ratio was 17.1%, as compared to
minimum regulatory requirements of 4.0% and 8.0%, respectively. The ratio of
average equity to average assets amounted to 10.28% at December 31, 1997
compared with 9.23% at
58
<PAGE> 66
December 31, 1996 and 8.61% at December 31, 1995. The Company's leverage
ratio at December 31, 1997 was 9.3%, as compared to a minimum regulatory
requirement of 4.0%.
At December 31, 1997, the BancSecurity subsidiary banks in the
aggregate could have paid approximately $15 million of additional dividends to
BancSecurity without prior regulatory approval. The payment of dividends is
subject to the statutes governing Iowa state chartered banks. At December 31,
1997, each of the BancSecurity banks was in compliance with all applicable
capital requirements, and management believes that the capital structure of the
BancSecurity banks is adequate. BancSecurity's common stock dividend payout
ratio was 54.5% in 1997, as compared to 22.1% in 1996 and 22.0% in 1995.
Liquidity, Interest Sensitivity and Market Risk Management
As shown in BancSecurity's Consolidated Statement of Cash Flows for
1997, cash and cash equivalents were stable between 1997 and 1996. The Statement
of Cash Flows reflected $6.4 million in net cash provided by operating
activities plus $9.8 million in net cash provided by financing activities offset
by $15.3 million in net cash used in investing activities. Net cash used in
investing activities consisted primarily of a net increase in loans of $18
million plus purchases of bank premises and equipment of $4 million. Net cash
provided by operating activities primarily consisted of BancSecurity's net
income in 1997, increased by adjustments for non-cash items. Net cash provided
by financing activities principally reflected a net increase in deposits and
short-term borrowings, offset by dividends paid.
BancSecurity manages its liquidity to provide adequate funds to support
the borrowing requirements and deposit flow of its customers. Management views
liquidity as the ability to raise cash at a reasonable cost and as a measure of
balance sheet flexibility to react to marketplace, regulatory and competitive
changes. The primary sources of BancSecurity's liquidity are marketable assets
maturing within one year. At December 31, 1997, the carrying value of securities
maturing within one year was $22.2 million, or 12.4% of the total investment
securities portfolio. BancSecurity attempts, when possible, to match relative
maturities of assets and liabilities, while maintaining the desired net interest
margin. Although the percentage of earning assets represented by loans is
increasing, management believes that liquidity is adequate.
Managing interest rate risk is fundamental to banking. Banking
institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking lines of business to achieve a
desired interest rate sensitivity position and to limit their exposure to
interest rate risk. BancSecurity manages its balance sheet to achieve maximum
shareholder value within the constraints of its interest rate risk discipline,
the maintenance of high credit quality, and sound leverage and liquidity
positions. Both the interest rate sensitivity and liquidity position of
BancSecurity are reviewed regularly. The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent in interest rate movements.
59
<PAGE> 67
A historical tool for measuring interest rate sensitivity is the gap
analysis. The following table shows BancSecurity's approximate consolidated rate
sensitivity gap position at December 31, 1997.
<TABLE>
<CAPTION>
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $ 85,596 $ 74,651 $ 89,370 $ 86,072 $335,689
Investment securities 71,097 43,705 43,548 20,447 178,797
Other earning assets 2,475 0 0 0 2,475
- ------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets (RSA) $159,168 $118,356 $132,918 $106,519 $516,961
==================================================================================================================
Savings deposits $121,698 $ 0 $ 0 $ 0 $121,698
Time deposits 63,617 101,401 55,023 6,240 226,281
Other non-deposit interest-bearing liabilities 36,285 566 331 0 37,182
- ------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities (RSL) $221,600 $101,967 $ 55,354 $ 6,240 $385,161
==================================================================================================================
Interest sensitivity gap $(62,432) $ 16,389 $ 77,564 $ 100,279 $131,800
==================================================================================================================
Cumulative interest sensitivity gap (62,432) (46,043) 31,521 131,800
==================================================================================================================
Ratio of cumulative rate sensitivity gap to RSA (39.2)% (38.9)% 23.7% 123.7%
Cumulative ratio of rate sensitive assets
to rate sensitive liabilities 71.8% 85.8% 108.3% 134.2%
</TABLE>
Rate-sensitive liabilities in the preceding table exclude 50% of
negotiable order of withdrawal interest-bearing demand accounts and 70% of
regular savings accounts because management believes, based on BancSecurity's
previous experience, that this treatment more closely approximates actual
results due to the relatively stable nature of these accounts.
Management's overall strategy is to coordinate the volume of
rate-sensitive assets and liabilities to minimize the impact of interest rate
movements on the net interest margin. The above table reflects a cumulative
negative gap position for the 90-day and 91-to-365-day intervals with a positive
position for the longer maturities. A negative position is favorable in a
falling interest rate environment; a positive position is favorable in a rising
interest rate environment. The gap is within the acceptable range established by
management at each level of maturity. The December 31, 1997 net interest margin
indicates that the actual change in interest rates for the year resulted in a
slight decrease in the margin to 3.77% from 3.86% for 1996. Since this is a
dynamic ratio, management has the ability to influence net interest income in a
positive manner when interest rate changes do occur.
While the gap position illustrated above is a useful tool that
management can assess for general positioning of BancSecurity's asset/liability
sensitivity and the BancSecurity balance sheets, management uses an additional
measurement tool to evaluate its asset/liability sensitivity. This additional
measurement tool determines exposure to changes in interest rates by measuring
the percentage change in net interest income due to changes in rates over a
one-year time horizon. Management measures such percentage change assuming an
instantaneous permanent parallel shift in the yield curve of 100 and 200 basis
points, both upward and downward. The model uses an option-based pricing
approach to estimate the sensitivity of mortgage loans. The most significant
embedded option in these types of assets is the prepayment option of the
borrowers. The model uses various prepayment assumptions depending upon the type
of mortgage instrument (residential mortgages, commercial mortgages,
mortgage-backed securities, etc.). Prepayment rates for mortgage instruments
ranged from 5 to 30 constant prepayment rate as of December 31, 1997.
60
<PAGE> 68
For administered rate core deposits (e.g. NOW and savings accounts),
the model utilizes interest rate floors equal to their current levels.
Utilizing this measurement concept, the interest rate risk of
BancSecurity expressed as a percentage change in net interest income over a
one-year time horizon due to changes in interest rates, at December 31, 1997, is
as follows:
<TABLE>
<CAPTION>
BASIS POINT CHANGE
-----------------------------------------------
+100 +200 -100 -200
-----------------------------------------------
<S> <C> <C> <C> <C>
Percentage change in net interest income due to an immediate
change in interest over a one-year time horizon................. (3.17%) (6.63%) 2.32% 3.22%
</TABLE>
BancSecurity does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors,
BancSecurity does not intend to engage in such activities in the immediate
future.
Interest rate risk is the most significant market risk affecting
BancSecurity. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of
BancSecurity's business activities.
YEAR 2000
Like other financial institutions, BancSecurity must assure that its
computer and other systems are "year 2000 compliant" (meaning that such systems
are capable of accommodating dates after December 31, 1999 and operating and
processing information correctly in and after the year 2000). In an effort to
make BancSecurity year 2000 compliant on a timely basis, BancSecurity has taken
or is planning to take a number of steps. BancSecurity has partially completed
an assessment of its systems and is monitoring year 2000 compliance efforts of
selected third parties. Some of BancSecurity's systems are contracted from third
parties and to a significant extent BancSecurity's ability to become year 2000
compliant depends upon such compliance being achieved by some of these third
parties. Subject to the identification of any material compliance problems of
important third parties, BancSecurity currently believes that it will be year
2000 compliant on a timely basis, thereby meeting regulatory requirements and
avoiding material operational disruptions. Only limited testing has been done to
date, but BancSecurity will be testing to confirm that it is year 2000
compliant. BancSecurity currently does not expect that its expenditures to
become year 2000 compliant will have a material effect on its operations. There
can be no assurance, however, that operational difficulties or material
expenditures relating to BancSecurity's effort to become year 2000 compliant
will not be identified or experienced in the future whether or not the Merger is
approved.
RECENT ACCOUNTING DEVELOPMENTS
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
BancSecurity adopted effective January 1, 1997. SFAS No. 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The statement provides guidelines for
classification of a transfer as a sale. The statement also requires liabilities
incurred or obtained by transferors as part of a transfer of financial assets be
initially recorded at fair value. Subsequent to acquisition, the servicing
assets and liabilities are to be amortized over the estimated net servicing
period.
61
<PAGE> 69
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income in a full set of general purpose financial
statements. This statement requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be reported
in a financial statement that is displayed with the same prominence as other
financial statements. This statement requires that an enterprise display an
amount representing total comprehensive income for the period in a financial
statement, but does not require a specific format for that financial statement.
This statement also requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and surplus in the equity section of the balance sheet. The statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management, at this time, cannot determine the
effect that adoption of this statement may have on the consolidated financial
statements of BancSecurity, as comprehensive income is dependent on the amount
and nature of assets and liabilities held which generate nonincome changes to
equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It also amends SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special
disclosure requirements for previously unconsolidated subsidiaries. The
statement is effective for fiscal years beginning after December 15,1997. In the
initial year of application, comparative information for earlier years is to be
restated. The statement is not expected to have an effect on the financial
position or operation results of BancSecurity, but may require additional
disclosures in the consolidated financial statements.
62
<PAGE> 70
BANCSECURITY CORPORATION
General
BancSecurity Corporation is a multi-bank holding company incorporated
under the laws of Iowa. BancSecurity's primary assets are its three wholly-owned
Iowa subsidiaries: Security Bank ("Security Bank") with its principal office in
Marshalltown, Iowa, Security Bank Jasper-Poweshiek ("Security Bank
Jasper-Poweshiek") with its principal office in Grinnell, Iowa; and Story County
Bank and Trust ("Story County") with its principal office in Story City, Iowa.
BancSecurity has no other subsidiary banks; however, Security Bank does own 100%
of Security BancServices Group, Inc. ("BancServices") which owns real estate
leased to Security Bank. BancServices also does business under the trade name
"Security Insurance Services," as an insurance agency selling personal and
commercial lines of property and casualty insurance and life insurance and
annuity products. BancServices provides discount brokerage services through Olde
Discount Brokerage. Story County owns 100% of Washlin Investment Company, a
subsidiary established in 1987 to purchase the parcel of land on which Story
County's Ames office was built in 1997.
Each of the BancSecurity Banks has multiple, highly visible locations
concentrated in Central Iowa and, in the aggregate, BancSecurity owns and
operates 14 full-service facilities. Each of the BancSecurity Banks is state
chartered and a member of the FDIC. BancSecurity was formed in 1983 to acquire
the shares of Security Bank, which then had two locations in Marshalltown, one
location in Laurel and one location in Gladbrook. BancSecurity has grown
internally and through acquisitions; since its formation in 1983 BancSecurity's
assets have increased from $144 million to $546 million.
BancSecurity purchased assets and assumed liabilities of a failed bank
from the FDIC to establish Story County as a second subsidiary bank with an
office in Story City in 1985. In 1986 Security Bank purchased assets and assumed
liabilities of a failed bank from the FDIC to establish its Prairie City
location. The Eldora and Steamboat Rock offices of Security Bank were acquired
in 1987. BancSecurity acquired a third subsidiary bank, Security Bank
Jasper-Poweshiek with offices in Kellogg and Sully in 1988. Security Bank
Jasper-Poweshiek opened a loan production office in Grinnell in 1989. In 1991,
Story County purchased assets and assumed liabilities of a failed thrift from
the Resolution Trust Corporation to establish its Ames office and Security Bank
Jasper-Poweshiek purchased assets and assumed liabilities of a failed thrift
from the Resolution Trust Corporation to establish its Newton office. In 1997
Security Bank Jasper-Poweshiek's loan production office in Grinnell was replaced
by a full service Grinnell location.
The BancSecurity Banks are engaged in single-family, multi-family,
commercial real estate, consumer, commercial and agricultural lending. They
accept and service demand, savings and time deposits, primarily from businesses
and families in the counties where they are located. The BancSecurity Banks
offer their customers a variety of services tailored to the needs of
individuals, small businesses and larger corporations and offer an array of
products with a focus on producing a high level of quality customer service in
convenient locations.
63
<PAGE> 71
Management
The following persons are directors of BancSecurity. Directors are
elected annually.
<TABLE>
<CAPTION>
Name Principal Occupation Director Since
---- -------------------- --------------
<S> <C> <C>
James H. Boyd Retired; former Senior Vice President of Fischer 1983
Controls
Ronald E. Fenton President and Chief Executive Officer of 1983
BancSecurity and Security Bank; Chairman of the
Board of Story County Bank and Trust and of
Security Bank Jasper-Poweshiek
Leo E. Herrick Executive Vice President of Security Bank; 1993
President and CEO of Story County Bank and
Trust; Vice President of BancSecurity
William A. Lane, Jr. Chairman of the Board of BancSecurity and 1983
Security Bank
Gordon G. Leth Executive Vice President and Secretary of 1983
BancSecurity; Secretary of Security Bank
William N. Whitehill, Jr. Retired; former President of Marshall Printing 1983
Company
</TABLE>
The table below shows the officers of BancSecurity, who are elected by the
Board of Directors of BancSecurity to one-year terms.
<TABLE>
<CAPTION>
Years at Years in
BancSecurity Financial
Name or Predecessor Industry Title
---- -------------- -------- -----
<S> <C> <C> <C>
Ronald E. Fenton 22 35 President and CEO, BancSecurity; Board
Chairman of Story County Bank & Trust and
of Security Bank Jasper-Poweshiek
Leo E. Herrick 22 36 Vice President, BancSecurity; Executive Vice
President, Security Bank; President and
CEO, Story County Bank & Trust
William A. Lane, Jr. 54 54 Chairman of the Board of BancSecurity and
Security Bank
Gordon G. Leth 33 51 Executive Vice President and Secretary of
BancSecurity; Secretary of Security Bank
</TABLE>
At December 31, 1997, BancSecurity and the BancSecurity Banks together
employed 214 employees on a full-time equivalent basis.
64
<PAGE> 72
Share Ownership
The table below sets forth information regarding the beneficial
ownership of shares of BancSecurity Common (both the number of shares owned and
the percent of the class) by BancSecurity's directors, by BancSecurity's
directors and executive officers as a group, and by persons who are known to
BancSecurity to beneficially own more than 5% of BancSecurity Common as of May
8, 1998.
<TABLE>
<CAPTION>
Name Number of Shares Percent
---- ---------------- -------
<S> <C> <C>
James H. Boyd 1,026 2.6%
Ronald E. Fenton 2,410 6.2%
Leo E. Herrick 314 *
William A. Lane, Jr. 1,765 4.6%
Gordon G. Leth 1,463 3.8%
William N. Whitehill, Jr. 848 2.2%
All directors and
executive officers as
a group 7,826 20.2%
Other 5% owners:
Bettie L. Smith 3,493 9.0%
Bank One, Arizona, NA, as Trustee
of the Virginia Horne Henry Charitable
Trust F/B/O Marshalltown Young Men's
Christian Association and Marshalltown
Young Women's Christian Association 2,240 5.8%
</TABLE>
- ----------------------
* Less than 1%
Directors and executive officers of BancSecurity individually or as a
group own no shares of F&M Common. BancSecurity and F&M are unaware of any
ownership of BancSecurity Common by directors or executive officers of F&M.
65
<PAGE> 73
INFORMATION AS TO SECURITIES
F&M Common
The Articles of F&M, provide that F&M has authority to issue twenty
million (20,000,000) shares of F&M Common Stock. As part of the F&M Special
Meeting, F&M shareholders will be asked to approve the Amendment to the Articles
to increase the number of authorized shares of F&M Common that F&M is authorized
to issue from twenty million (20,000,000) shares to fifty million (50,000,000)
shares. See "Proposed Amendment to F&M's Articles of Incorporation Regarding
Authorized Shares." The outstanding shares of F&M Common are, and the shares to
be issued in transactions will be, fully paid and nonassessable, except for
statutory liability of shareholders under Section 180.0622(2) (b) of the WBCL,
as judicially interpreted, for certain unpaid indebtedness to employees for
services rendered.
The holders of F&M Common are entitled to one vote for each share held
of record on each matter submitted to a vote of shareholders. Shareholders have
no cumulative voting rights, which means that the holders of shares entitled to
exercise more than 50% of the voting rights are able to elect all of the
directors. F&M's Articles and Bylaws provide for classification of the board of
directors into three classes, one class being subject to election in each year
for three-year terms.
Dividends may be paid to holders of F&M Common when, as and if declared
by the board of directors out of funds legally available therefor, subject to
any contractual restrictions on the payment of dividends. In the event of any
liquidation, dissolution or winding-up of F&M, the holders of F&M Common will be
entitled to receive a pro rata share of the assets of F&M remaining after
payment or provision for payment of the debts and other liabilities of F&M. The
holders of F&M Common are not entitled to any preemptive, subscription,
redemption or conversion rights. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Financial Condition--Capital
Adequacy" and Note 15 of Notes to F&M's Consolidated Financial Statements in the
F&M 1997 10-K (which are incorporated herein by reference) for discussions of
restrictions on F&M Banks' ability to pay dividends to F&M.
Certain Statutory Provisions
Except as may otherwise be provided by law, the requisite affirmative
vote of shareholders for certain corporate actions, including a merger or share
exchange with another corporation, sale of all or substantially all of the
corporate property and assets, or voluntary liquidation of F&M, is a majority of
all the votes entitled to be cast on the transaction by each voting group of
outstanding shares entitled to vote thereon. Sections 180.1130 through 180.1134
of the WBCL provide generally that, in addition to the vote otherwise required
by law or the articles of incorporation of a "resident domestic corporation"
(defined to mean a corporation domiciled in Wisconsin with at least 500
shareholders of record, including 100 shareholders of record who have unlimited
voting rights and are Wisconsin residents), certain "business combinations" not
meeting certain adequacy-of-price standards specified in the statute must be
approved by (a) the holders of at least 80% of the votes entitled to be cast and
(b) two-thirds of the votes entitled to be cast by the corporation's outstanding
voting shares owned by persons other than a "significant shareholder" who is a
party to the transaction or an affiliate or associate thereof. Section 180.1130
defines "business combination" to include, subject to certain exceptions, a
merger or share exchange of the issuing public corporation (or any subsidiary
thereof) with or the sale or other disposition of substantially all assets of
the issuing public corporation to, any significant shareholder or affiliate
thereof. "Significant shareholder" is defined generally to mean a person that is
the beneficial owner of 10% or more of the voting power of the outstanding
voting shares of the issuing public corporation. The statute also restricts the
repurchase of shares and the sale of corporate assets by an issuing public
corporation in response to a take-over offer. F&M presently meets the definition
of "issuing public corporation."
Also, Section 180.1150 of the WBCL provides that the voting power of
shares of a "resident domestic corporation" which are held by any person in
excess of 20% of the voting power of the issuing public
66
<PAGE> 74
corporation's shares shall be limited to 10% of the full voting power of such
excess shares. This statutory voting restriction is not applicable to shares
acquired directly from F&M, to shares acquired in a transaction incident to
which shareholders of F&M vote to restore the full voting power of such shares
and under certain other circumstances.
Sections 180.1140 through 180.1144 of the WBCL prohibit certain
"business combinations" between a "resident domestic corporation" and a person
beneficially owning 10% or more of the outstanding voting stock of such
corporation (an "interested shareholder") within three years after the date such
person became a 10% beneficial owner (the "acquisition date"), unless the
business combination or the acquisition of such stock has been approved before
the acquisition date by the corporation's board of directors. After such
three-year period, a business combination with the interested shareholder may be
consummated only with the approval of the holders of a majority of the voting
stock not beneficially owned by the interested shareholder, unless the
combination satisfies certain adequacy-of-price standards intended to provide a
fair price for shares held by disinterested shareholders. F&M presently meets
the definition of a "resident domestic corporation."
The foregoing provisions of the WBCL, the classification of F&M's board
of directors and the ability to issue additional shares of F&M Common without
further shareholder approval (except as may be required under NASDAQ Stock
Market corporate governance standards), could have the effect, among others, of
discouraging take-over proposals for F&M or impeding a business combination
between F&M and a major shareholder.
BancSecurity Common
The Articles of Incorporation of BancSecurity provide that BancSecurity
has authority to issue one million shares of BancSecurity Common, of which
38,726 shares are issued and outstanding. The Articles of Incorporation of
BancSecurity do not provide for any other class or series of stock. All
outstanding shares of BancSecurity Common are validly issued, fully paid and
nonassessable and not subject to any preemptive rights.
BancSecurity's Articles and bylaws do not provide for classification of
its board of directors; therefore, its directors are elected annually.
BancSecurity shareholders do not have cumulative voting rights.
The Articles of BancSecurity require that approval of a plan of merger
requires the affirmative vote of at least 75% of the outstanding shares of
BancSecurity Common. Most other matters requiring a shareholder vote require
majority approval.
Section 1108 of the IBCA provides that a director, in determining what
is in the best interest of the corporation when considering a proposal for
merger, may properly consider any or all of the following community interest
factors in addition to considering the effects of any actions on shareholders:
a. The effects of the action on the corporation's employees,
suppliers, creditors, and customers.
b. The effects of the action on the communities in which the
corporation operates.
c. The long-term as well as short-term interest of the corporation
and its shareholders, including the possibility that these interests may be best
served by the continued independence of the corporation.
Section 1108 of the IBCA also provides that consideration of any or all
of the community interest factors is not a violation of the business judgment
rule or any duty of the director, even if the director reasonably determines
that a community interest factor or factors outweigh the financial or other
benefits.
67
<PAGE> 75
Comparison of F&M Common with BancSecurity Common
Because F&M and BancSecurity are organized under the WBCL and IBCA,
respectively, their respective common stocks, and the rights of their common
shareholders, are different in the following respects:
1. Shares of F&M Common trade on the NASDAQ Stock Market, and
several regional brokerage firms foster a trading market in F&M Common. F&M
Common is a class of securities registered with the Commission and F&M is
subject to periodic public reporting with respect thereto. F&M is unaware of any
active market for shares of BancSecurity Common, and BancSecurity is not subject
to Commission reporting requirements.
2. F&M is subject to the statutory anti-takeover provisions of
Sections 180.1130 through 180.1150 of the WBCL because it currently meets the
definitions of "issuing public corporation" and "resident domestic corporation"
thereunder. (See the discussion thereof under "F&M Common--Certain Statutory
Provisions" above.) Section 1108 of the IBCA provides that a director, in
determining what is in the best interest of the corporation when considering a
proposal for merger, may properly consider any or all of certain community
interest factors in addition to considering the effects of any actions on
shareholders. See the discussion of Section 1108 of the IBCA above under
"Information as to Securities--BancSecurity Common".
3. The Articles and bylaws of F&M provide for the classification of
the Board of Directors into three classes, whereby directors serve three-year
terms and one of the three classes of directors is subject to election at each
annual meeting. The Articles and bylaws of BancSecurity do not provide for such
classification, and each of BancSecurity's directors is elected annually for a
one-year term.
4. F&M Common is fully paid and not liable to any calls or
assessments except under Section 180.0622(b) of the WBCL. See the discussion of
Section 180.0622(b) above under "Information as to Securities--F&M Common." No
similar provision exists under the IBCA.
PROPOSED AMENDMENT TO F&M'S ARTICLES OF INCORPORATION
REGARDING AUTHORIZED SHARES
F&M's Board of Directors recommends the adoption of the Amendment to
the Articles to increase the number of authorized shares of F&M Common. The
proposed amendment was unanimously supported by all of the directors of F&M. The
Articles currently authorize up to twenty million shares of Common Stock, $1.00
par value. The Board recommends that the Articles of Incorporation be amended to
increase the total number of shares of F&M Common authorized from twenty million
to fifty million.
The proposed amendment provides that more shares of F&M Common will be
available for issuance in the future. The Board believes it is prudent to
provide flexibility by authorizing a sufficient number of shares to avoid the
necessity, as well as delay and expense, of an additional shareholder vote in
the foreseeable future. At May 8, 1998, of the twenty million authorized shares,
approximately 9,900,000 were issued and outstanding. An additional approximately
4,900,000 shares have been allocated (but are as yet unissued) for utilization
in F&M's stock option plans and the pending acquisitions of BancSecurity and
Jefferson, leaving only approximately 5,200,000 shares unissued and available
for issuance. While none of these actions would require the Amendment, the Board
wishes to plan ahead in the event of future needs for shares.
The Board of Directors has chosen the particular number of shares
primarily to save Wisconsin Department of Financial Institutions filing fees in
the future. Under Wisconsin statutes, the filing fee for any change in articles
of incorporation increasing the number of authorized shares by one million or
more is $10,000, irrespective of the number of additional shares authorized.
Because the Board of Directors determined that at least one million additional
shares should be authorized to anticipate possible corporate needs, it
determined that it
68
<PAGE> 76
would be advisable at this time to authorize a higher number to save future
filing fees should more shares be required in future years.
While management is actively investigating and expects to continue to
investigate business opportunities and considerations which may require the
issuance of stock for cash or other consideration or in acquisitions or stock
distributions, there are presently no definite plans, commitments or
arrangements for the issuance of additional shares of stock except as described
above. The Board believes that it is in F&M's best interest to have the
authority to issue additional shares of F&M Common for use in possible
acquisitions, as well as a means of obtaining additional capital and for other
corporate purposes. Although management could use such shares to block an
attempt to take over F&M, the increase in authorized shares is not proposed for
that purpose. Although F&M has a classified Board of Directors, neither F&M's
Articles of Incorporation nor Bylaws contain any other provisions which are
intended to inhibit a takeover of F&M. Certain provisions of the WBCL may
restrict voting power of any shareholders owning more than 20% of F&M's shares,
impose super majority voting requirements in certain business combinations
involving shareholders (or affiliates) owning more than 10% of F&M's shares, and
impose certain other limitations on persons taking control of a corporation
without the approval of its board.
Depending upon the consideration for which they may be issued, the
future issuance of shares may have a dilutive effect on F&M's per share earnings
or book value per share. However, F&M does not have any current plans for the
issuance of shares which is expected to have a materially dilutive effect.
The Board of Directors has, as to the presently authorized shares, and
will have as to the newly authorized shares, the power to issue shares for such
lawful consideration (not less than the par value) as may be fixed from time to
time by the Board. It is not anticipated that further shareholder approval for
the issuance of additional shares would be solicited or required, except as may
be required by NASDAQ listing requirements in connection with certain
compensation programs or significant acquisitions. No shareholder, as such, has
any preemptive or preferential rights to purchase shares of F&M or any
obligations of F&M which are convertible into shares.
The affirmative vote of the holders of a majority of shares of F&M
Common outstanding on May 8, 1998 is required to adopt the proposed amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSED
AMENDMENT.
OTHER MATTERS
The respective Boards of Directors of F&M and BancSecurity have not
been informed and are not aware that any other matters will be brought before
the Meetings except as set forth herein. However, proxies may be voted with
discretionary authority with respect to any other matters that may properly be
presented at the meeting.
SHAREHOLDER PROPOSALS
Shareholder proposals must be received by F&M no later than December
20, 1998, in order to be considered for inclusion in the Proxy Statement for
next year's annual shareholders meeting.
LEGAL OPINIONS
Quarles & Brady, Milwaukee, Wisconsin, special counsel for F&M, and
McCarty, Curry, Wydeven, Peeters & Haak, LLP, Kaukauna, Wisconsin, general
counsel for F&M, will render opinions on the legality of the shares being
offered hereby and as to certain other matters in connection with the Merger.
McCarty, Curry, Wydeven, Peeters & Haak, LLP will also render a tax opinion as
to the Merger. At May 1, 1998, two Quarles & Brady attorneys providing services
with respect to the Merger owned an aggregate of 8,625 shares of F&M Common. At
that date, six McCarty, Curry, Wydeven, Peeters & Haak, LLP attorneys providing
services with
69
<PAGE> 77
respect to the Merger owned an aggregate of 12,342 shares of F&M Common. Certain
legal matters in connection with the Merger, will be passed upon for
BancSecurity by Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, Iowa.
EXPERTS/AUDITORS
The consolidated financial statements of F&M as of December 31, 1997
and 1996, and for the three years ended December 31, 1997 incorporated by
reference in this Joint Proxy Statement/Prospectus, and the other consolidated
financial statements from which the selected financial data included herein have
been derived, have been audited by Wipfli Ullrich Bertelson LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included or incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.
The consolidated financial statements of BancSecurity as of December
31, 1997 and 1996, and for the three years ended December 31, 1997 included in
this Joint Proxy Statement/Prospectus have been audited by McGladrey & Pullen,
LLP, independent certified public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
Representatives of Wipfli Ullrich Bertelson LLP are expected to be
present at the F&M Special Meeting, and representatives of McGladrey & Pullen,
LLP are expected to be present at the BancSecurity Special Meeting, to answer
questions, if requested.
70
<PAGE> 78
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
HEREIN
BANCSECURITY CORPORATION
<S> <C>
Independent Auditor's Report................................................... F-1
Consolidated Balance Sheets at March 31, 1998 (unaudited),
December 31, 1997 and 1996.................................................. F-2
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 (unaudited) and for the years ended
December 31, 1997, 1996 and 1995............................................ F-3
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1998 and 1997 (unaudited) and
the years ended December 31, 1997, 1996 and 1995............................ F-4
Consolidated Statements of Stockholders' Equity for the three months
ended March 31, 1998 and 1997 (unaudited) and for the years
ended December 31, 1997, 1996 and 1995...................................... F-5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited) and for the years ended
December 31, 1997, 1996 and 1995............................................ F-6
Notes to Financial Statements.................................................. F-8
</TABLE>
F&M BANCORPORATION, INC.
Historical Financial Information
Historical audited F&M financial statements at December
31, 1996 and 1997, and for the three years ended December 31,
1997, are incorporated herein by reference from the F&M 1997 10-K. Historical
unaudited interim period F&M financial statements at March 31, 1998 and for the
quarters ended March 31, 1998 and 1997, are incorporated herein by reference
from the F&M 3/31/98 10-Q.
Unaudited Pro Forma Financial Information
<TABLE>
<S> <C>
Pro Forma Consolidated Balance Sheet at March 31, 1998......................... F-28
Pro Forma Consolidated Statements of Income for the quarter
ended March 31, 1998 and for the years ended December 31, 1997,
1996 and 1995................................................................ F-29
Notes to Pro Forma Financial Statements........................................ F-32
</TABLE>
71
<PAGE> 79
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
BancSecurity Corporation
Marshalltown, Iowa
We have audited the accompanying consolidated statements of financial condition
of BancSecurity Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BancSecurity
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997, 1996
and 1995, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Des Moines, Iowa
January 28, 1998
F-1
<PAGE> 80
BANCSECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------------------
ASSETS 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks (Note 2) $ 9,777,767 $ 13,424,804 $ 13,349,069
Federal funds sold 15,450,000 2,475,000 1,575,000
---------------------------------------------------------
CASH AND CASH EQUIVALENTS 25,227,767 15,899,804 14,924,069
Interest-bearing deposits 566,980 631,024 413,792
Securities available for sale, net (Notes 3 and 7) 112,802,768 114,222,266 114,187,558
Securities held to maturity, fair value of $62,307,081 in 1998,
$67,280,724 in 1997 and $73,603,871 in 1996 (Note 3) 58,598,675 63,943,640 70,347,779
Loans, net (Notes 4, 7 and 11) 325,673,767 329,679,868 313,800,750
Bank premises and equipment, net (Note 5) 10,960,509 10,960,146 8,005,608
Accrued income receivable 4,672,412 4,763,558 4,813,523
Other assets (Notes 8 and 9) 6,548,696 6,572,919 5,147,232
---------------------------------------------------------
$ 545,051,574 $ 546,673,225 $ 531,640,311
=========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 3):
Noninterest-bearing demand deposits $ 35,755,293 $ 39,488,503 $ 40,302,693
Interest-bearing demand deposits 37,622,940 39,052,227 38,208,054
Savings 159,634,345 141,772,495 126,041,887
Time (Note 6) 217,358,114 226,281,440 232,358,451
---------------------------------------------------------
450,370,692 446,594,665 436,911,085
Short-term borrowed funds (Notes 3 and 7) 23,198,434 27,085,015 25,724,491
Other borrowed funds (Note 7) 7,331,107 10,097,492 9,712,276
Accrued interest payable 3,562,276 4,058,953 3,745,492
Other liabilities (Note 8) 5,808,062 6,747,365 4,509,466
---------------------------------------------------------
490,270,571 494,583,490 480,602,810
---------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)
STOCKHOLDERS' EQUITY (Note 12)
Common stock, $25 par value; authorized 1,000,000 shares;
issued March 31, 1998 and December 31, 1997
38,726 shares and December 31, 1996 38,791 shares 968,150 968,150 969,775
Surplus 3,975,907 3,975,907 3,982,581
Retained earnings 46,787,791 45,370,448 44,059,979
Accumulated other comprehensive income, unrealized
appreciation on securities available for sale, net 3,049,155 1,775,230 2,025,166
---------------------------------------------------------
54,781,003 52,089,735 51,037,501
---------------------------------------------------------
$ 545,051,574 $ 546,673,225 $ 531,640,311
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 81
BANCSECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months For the Year
Ended March 31, Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, interest and fees $ 7,089,414 $ 6,649,990 $ 27,531,364 $ 26,447,963 $ 25,340,018
Securities:
Taxable 2,430,307 2,608,057 10,434,892 10,414,043 9,449,902
Tax-exempt 508,337 475,497 1,927,722 2,082,137 2,323,790
Federal funds sold 76,920 15,780 97,949 132,367 343,448
Other 54,465 92,408 306,133 375,025 367,959
-----------------------------------------------------------------------------------
10,159,443 9,841,732 40,298,060 39,451,535 37,825,117
-----------------------------------------------------------------------------------
Interest expense:
Deposits 5,083,403 4,875,238 20,119,936 19,752,247 19,165,938
Short-term borrowings 303,113 273,033 1,247,567 1,115,797 1,061,453
Other borrowings 141,734 146,027 623,551 450,729 575,576
-----------------------------------------------------------------------------------
5,528,250 5,294,298 21,991,054 21,318,773 20,802,967
-----------------------------------------------------------------------------------
NET INTEREST INCOME 4,631,193 4,547,434 18,307,006 18,132,762 17,022,150
Provision for loan losses (Note 4) 1,200 77,898 2,352,805 695,114 1,092,507
-----------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS 4,629,993 4,469,536 15,954,201 17,437,648 15,929,643
-----------------------------------------------------------------------------------
Noninterest income:
Trust fees 130,500 113,465 538,437 510,866 464,332
Service fees 437,737 391,200 1,684,443 1,655,461 1,542,878
Commissions income 266,427 212,494 950,103 812,870 820,631
Other fees and income 129,995 240,146 772,553 476,199 535,904
Securities gains, net (Note 3) - 18,370 20,741 156,977 40,316
-----------------------------------------------------------------------------------
964,659 975,675 3,966,277 3,612,373 3,404,061
-----------------------------------------------------------------------------------
Noninterest expense:
Personnel (Note 9) 1,807,121 1,649,115 7,149,103 6,369,253 5,833,652
Equipment 191,108 208,696 1,057,708 863,385 643,714
Occupancy 194,961 171,732 750,924 646,941 609,486
Merger costs - - 2,179,550 - -
Other 865,403 814,142 4,079,937 3,704,004 3,929,166
-----------------------------------------------------------------------------------
3,058,593 2,843,685 15,217,222 11,583,583 11,016,018
-----------------------------------------------------------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,536,059 2,601,526 4,703,256 9,466,438 8,317,686
Provision for income taxes (Note 8) 702,411 743,900 1,644,768 2,693,460 2,266,058
-----------------------------------------------------------------------------------
NET INCOME $ 1,833,648 $ 1,857,626 $ 3,058,488 $ 6,772,978 $ 6,051,628
===================================================================================
EARNINGS PER COMMON
SHARE $ 47.35 $ 47.91 $ 78.92 $ 174.43 $ 155.65
===================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 82
BANCSECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Three Months For the Year
Ended March 31, Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 1,833,648 $ 1,857,626 $ 3,058,488 $ 6,772,978 $ 6,051,628
-----------------------------------------------------------------------------------
Other comprehensive income,
before tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 2,031,780 795,632 (419,363) 2,820,594 2,383,026
Less reclassification adjustments
for gains included in net income - 18,370 20,741 156,977 40,316
-----------------------------------------------------------------------------------
Other comprehensive income (loss),
before tax 2,031,780 777,262 (398,622) 2,663,617 2,342,710
Income tax expense (credit) related
to items of other comprehensive
income 757,855 289,919 (148,686) 993,529 873,830
-----------------------------------------------------------------------------------
Other comprehensive income (loss),
net of tax 1,273,925 487,343 (249,936) 1,670,088 1,468,880
-----------------------------------------------------------------------------------
Comprehensive income $ 3,107,573 $ 2,344,969 $ 2,808,552 $ 8,443,066 $ 7,520,508
===================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 83
BANCSECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 972,750 $ 3,994,799 $ 34,174,881 $ (1,113,802) $ 38,028,628
Comprehensive income - - 6,051,628 1,468,880 7,520,508
Cash dividends declared
($34.25 per share) - - (1,331,297) - (1,331,297)
Purchase and retirement of 40 -
shares of common stock (1,000) (4,107) (33,013) - (38,120)
--------------------------------------------------------------------------------------
Balance, December 31, 1995 971,750 3,990,692 38,862,199 355,078 44,179,719
Comprehensive income - - 6,772,978 1,670,088 8,443,066
Cash dividends declared
($38.50 per share) - - (1,493,454) - (1,493,454)
Purchase and retirement of 79
shares of common stock (1,975) (8,111) (81,744) - (91,830)
--------------------------------------------------------------------------------------
Balance, December 31, 1996 969,775 3,982,581 44,059,979 2,025,166 51,037,501
Comprehensive income - - 3,058,488 (249,936) 2,808,552
Cash dividends declared
($43.00 per share) - - (1,665,218) - (1,665,218)
Purchase and retirement of 65
shares of common stock (1,625) (6,674) (82,801) - (91,100)
--------------------------------------------------------------------------------------
Balance, December 31, 1997 968,150 3,975,907 45,370,448 1,775,230 52,089,735
Comprehensive income (unaudited) - - 1,833,648 1,273,925 3,107,573
Cash dividends declared (unaudited)
($10.75 per share) - - (416,305) - (416,305)
--------------------------------------------------------------------------------------
Balance, March 31, 1998 (unaudited) $ 968,150 $ 3,975,907 $ 46,787,791 $ 3,049,155 $ 54,781,003
======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 84
BANCSECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 1,833,648 $ 1,857,626 $ 3,058,488 $ 6,772,978 $ 6,051,628
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 181,260 186,086 373,560 695,672 516,228
Provision for loan losses 1,200 77,898 2,352,805 695,114 1,092,507
Deferred taxes - - (794,300) (108,328) (369,575)
Amortization (accretion), net (166,945) 17,478 (195,824) 507,035 569,179
Stock dividends received - - - - (49,000)
Securities (gains), net - (18,370) (20,741) (156,977) (40,316)
(Gain) on sale of bank premises
and equipment - - (10,904) - (5,844)
Changes in assets and liabilities:
(Increase) decrease in accrued
income receivable 91,146 62,805 49,965 (308,570) (631,392)
(Increase) in other assets (733,631) (198,632) (800,277) (1,110,107) (592,953)
Increase (decrease) in accrued
interest payable and other
liabilities 229,238 433,781 2,379,596 (598,395) 1,985,567
------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,435,916 2,418,672 6,392,368 6,388,422 8,526,029
-----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from maturities of
securities available for sale 12,535,340 5,777,129 50,433,172 28,080,368 19,893,160
Proceeds from the sales of securities
available for sale - 550,267 550,267 757,474 -
Proceeds from maturities and calls of
securities held to maturity 2,681,337 3,218,647 9,378,666 13,116,109 17,091,574
Purchase of securities available for sale (6,258,630) (12,959,700) (51,230,950) (28,555,489) (49,045,523)
Purchase of securities held to maturity - - (2,875,100) (9,321,115) (2,448,575)
(Increase) decrease in interest-bearing
deposits, net 64,044 1,991 (217,232) (8,956) (299,144)
(Increase) decrease in loans, net 4,010,041 342,529 (17,983,028) (18,943,906) (20,795,887)
Proceeds from sale of bank premises
and equipment - - 650,740 - 9,025
Purchase of bank premises and
equipment (181,623) (628,473) (3,967,934) (2,287,826) (2,183,795)
------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES 12,850,509 (3,697,610) (15,261,399) (17,163,341) (37,779,165)
------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-6
<PAGE> 85
BANCSECURITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in deposits $ 3,776,027 $ 12,371,079 $ 9,683,580 $ 8,660,612 $ 37,265,781
Net increase (decrease) in
short-term borrowings (3,886,581) (3,621,738) 1,360,524 4,793,118 2,934,735
Proceeds from borrowings from
FHLB 36,200,000 40,900,000 148,775,000 123,550,000 75,775,000
Payments of principal to FHLB (38,900,000) (44,450,000) (148,525,000) (123,225,000) (82,975,000)
Proceeds from borrowings on other
debt 168,000
Payments of principal on other debt (66,385) (32,784) (32,784) (32,784) (32,784)
Dividends paid (2,081,523) (1,493,454) (1,493,454) (1,331,297) (1,196,483)
Purchase of common stock for
retirement (27,300) (91,100) (91,830) (38,120)
----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES (4,958,462) 3,645,803 9,844,766 12,322,819 31,733,129
----------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 9,327,963 2,366,865 975,735 1,547,900 2,479,993
CASH AND CASH EQUIVALENTS
Beginning 15,899,804 14,924,069 14,924,069 13,376,169 10,896,176
----------------------------------------------------------------------------------------------
Ending $ 25,227,767 $ 17,290,934 $ 15,899,804 $ 14,924,069 $ 13,376,169
==============================================================================================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash payments for:
Interest on deposits $ 5,572,126 $ 5,143,819 $ 19,807,373 $ 20,172,747 $ 17,731,171
Other interest 552,801 425,177 1,870,220 1,569,306 1,633,030
Income taxes -- -- 2,612,890 3,143,813 2,402,649
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 86
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. ORGANIZATION AND NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and nature of business: BancSecurity Corporation (the Company) is a
holding company which owns 100% of the stock of its subsidiaries, Security Bank,
Story County Bank & Trust and Security Bank Jasper-Poweshiek. The banks are
state chartered banks that conduct operations from their main offices located in
Marshalltown, Story City and Grinnell, Iowa, and eleven branch offices located
in various Central Iowa communities.
Significant accounting policies are as follow:
Accounting estimates and assumptions: The consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and contingent assets and liabilities as of the date of the
financial statements for the reporting period. Actual results could differ
from those estimates.
Principles of consolidation: The consolidated financial statements include
the accounts of BancSecurity Corporation and its wholly-owned bank
subsidiaries, Security Bank, Story County Bank & Trust and Security Bank
Jasper-Poweshiek. All material intercompany balances and transactions have
been eliminated in consolidation.
Unaudited interim financial statements: The accompanying unaudited
consolidated financial statements have been prepared in accordance with the
requirements for presentation of interim financial statements and, therefore,
do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, all adjustments consisting only of normal recurring adjustments
that are necessary for a fair presentation for interim periods presented have
been reflected. The results of operations for interim periods are not
necessarily indicative of the results of operations for the entire year.
Cash and cash equivalents: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and noninterest-bearing deposits in
correspondent banks and federal funds sold. Generally federal funds are
purchased and sold for one day periods.
Trust assets: Assets of the trust department, other than cash on deposit, are
not included in these consolidated financial statements because they are not
assets of the Company.
Investment in debt and equity securities: The Company has investments in debt
and equity securities. Debt securities consist primarily of obligations of
the U.S. government, state governments and domestic corporations.
F-8
<PAGE> 87
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Securities available for sale: Securities classified as available for sale
are those debt and equity securities that the Company intends to hold for an
indefinite period of time, but not necessarily to maturity. Any decision to
sell a security classified as available for sale would be based on various
factors, including significant movements in interest rates, changes in
maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized appreciation or
depreciation are reported as increases or decreases in stockholders' equity,
net of the related deferred tax effect. Realized gains or losses, determined
on the basis of the cost of specific securities sold, are included in
earnings.
Securities held to maturity: Securities classified as held to maturity are
those debt securities the Company has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are carried at cost
adjusted for amortization of premium and accretion of discounts, computed by
the interest method over their contractual lives.
Loans and allowance for loan losses: The Company grants commercial, real
estate, consumer and other loans to customers throughout Central Iowa.
Although the Company has a diversified loan portfolio, a substantial portion
of their debtors' ability to honor their contracts is dependent upon their
local economic sectors. Loans are stated at the amount of unpaid principal,
reduced by an allowance for loan losses.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Company makes continuous credit reviews of the loan
portfolio and considers current economic conditions, historical loan loss
experience, and other factors in determining the adequacy of the allowance.
While management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are significant
changes in economic conditions. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when it is probable the creditor
will be unable to collect all contractual principal and interest payments due
in accordance with the terms of the loan agreement.
Loan origination fees and direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
Interest on loans is accrued daily on the outstanding balances. Accrual of
interest is discontinued on a loan when management believes, after
considering collection efforts and other factors, that the borrower's
financial condition is such that collection of interest is doubtful and the
loan is deemed impaired.
Bank premises and equipment: Company premises and equipment are stated at
cost less accumulated depreciation. Buildings and improvements are
depreciated primarily on an accelerated basis over estimated useful lives of
10 to 39 years. Furniture and equipment are depreciated primarily on an
accelerated basis over estimated useful lives of 5 to 15 years.
F-9
<PAGE> 88
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases.
Earnings per common share: The equation for computing basic earnings per
share is "income available to common stockholders/weight-average shares of
common stock outstanding."
Note 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain reserve balances in cash or on deposit with
Federal Reserve Banks. The total of those required reserve balances was
approximately $1,676,000 at December 31, 1997.
F-10
<PAGE> 89
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. SECURITIES
Debt and equity securities have been classified in the consolidated statements
of financial condition according to management's intent. The carrying amount of
securities and their approximate fair values at March 31 and December 31 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
March 31, 1998 (unaudited):
Obligations of U.S.
Government agencies
and corporations $ 35,954,415 $ 139,140 $ -- $ 36,093,555
Obligations of states and
political subdivisions 4,285,000 19,227 -- 4,304,227
Corporate bonds 3,548,758 -- -- 3,548,758
Mortgage-backed securities 56,827,809 390,306 104,927 57,113,188
Other (equity securities) 7,323,700 4,419,340 -- 11,743,040
---------------------------------------------------------------------------
$ 107,939,682 $ 4,968,013 $ 104,927 $ 112,802,768
===========================================================================
December 31, 1997:
Obligations of U.S.
Government agencies
and corporations $ 44,968,302 $ 116,079 $ 18,610 $ 45,065,771
Obligations of states and
political subdivisions 1,485,000 -- -- 1,485,000
Corporate bonds 3,553,103 563 387 3,553,279
Mortgage-backed securities 54,088,354 307,551 310,311 54,085,594
Other (equity securities) 7,296,200 2,736,422 -- 10,032,622
---------------------------------------------------------------------------
$ 111,390,959 $ 3,160,615 $ 329,308 $ 114,222,266
===========================================================================
December 31, 1996:
U.S. Treasury $ 1,498,008 $ 1,524 $ $ 1,499,532
Obligations of U.S.
Government agencies
and corporations 30,351,071 76,786 44,621 30,383,236
Corporate bonds 3,566,215 -- -- 3,566,215
Mortgage-backed securities 66,254,322 280,737 351,652 66,183,407
Other (equity securities) 9,288,013 3,267,155 -- 12,555,168
---------------------------------------------------------------------------
$ 110,957,629 $ 3,626,202 $ 396,273 $ 114,187,558
===========================================================================
</TABLE>
F-11
<PAGE> 90
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
March 31, 1998 (unaudited):
Obligations of U.S.
Government agencies
and corporations $ 1,814,551 $ 9,899 $ -- $ 1,824,450
Obligations of states and
political subdivisions 24,085,896 2,326,837 -- 26,412,733
Mortgage-backed securities 32,698,228 1,377,429 5,759 34,069,898
-------------------------------------------------------------------------
$ 58,598,675 $ 3,714,165 $ 5,759 $ 62,307,081
=========================================================================
December 31, 1997:
Obligations of U.S.
Government agencies
and corporations $ 2,082,857 $ 11,491 $ 17 $ 2,094,331
Obligations of states and
political subdivisions 27,415,586 1,967,642 1,003 29,382,225
Mortgage-backed securities 34,445,197 1,391,831 32,860 35,804,168
-------------------------------------------------------------------------
$ 63,943,640 $ 3,370,964 $ 33,880 $ 67,280,724
=========================================================================
December 31, 1996:
Obligations of U.S.
Government agencies
and corporations $ 3,084,051 $ 18,777 $ 48 $ 3,102,780
Obligations of states and
political subdivisions 26,548,977 2,269,927 29,049 28,789,855
Mortgage-backed securities 40,714,751 1,124,773 128,288 41,711,236
-------------------------------------------------------------------------
$ 70,347,779 $ 3,413,477 $ 157,385 $ 73,603,871
=========================================================================
</TABLE>
F-12
<PAGE> 91
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and fair value of securities available for sale and held to
maturity as of December 31, 1997 by contractual maturities are shown below.
Maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities available for sale Securities held to maturity
---------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,009,682 $ 3,026,300 $ 7,749,349 $ 7,849,381
Due after one year through
five years 10,038,103 10,056,229 11,673,287 12,483,790
Due after five years through
ten years 34,474,456 34,532,039 8,848,169 9,860,119
Due after ten years 2,484,164 2,489,482 1,227,638 1,283,266
---------------------------------------------------------------------------
50,006,405 50,104,050 29,498,443 31,476,556
Mortgage-backed securities,
subject to early payoff 54,088,354 54,085,594 34,445,197 35,804,168
Other (equity securities) 7,296,200 10,032,622
---------------------------------------------------------------------------
$ 111,390,959 $ 114,222,266 $ 63,943,640 $ 67,280,724
===========================================================================
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $22,145 and none, respectively in 1997; $116,262 and none,
respectively in 1996; none and none, respectively in 1995.
Securities with carrying amounts of $55,273,797 and $55,897,666 at December 31,
1997 and 1996, respectively, are pledged as collateral on public deposits and
for other purposes as required by law.
Note 4. LOANS
The composition of net loans is as follows:
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------------
1998 1997 1996
---------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Commercial and industrial $ 57,205,967 $ 54,686,635 $ 54,905,227
Agricultural 22,214,644 23,730,890 21,401,221
Real estate construction 776,372 3,557,104 4,974,106
Real estate mortgage 217,255,203 218,913,314 201,154,171
Installment 34,262,852 34,801,382 35,910,599
---------------------------------------------------------
331,715,038 335,689,325 318,345,324
Less allowance for loan losses 6,041,271 6,009,457 4,544,574
---------------------------------------------------------
$ 325,673,767 $ 329,679,868 $ 313,800,750
=========================================================
</TABLE>
F-13
<PAGE> 92
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
-------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning $ 6,009,457 $ 4,544,574 $ 4,544,574 $ 4,665,961 $ 3,884,662
Provision charged
to operations 1,200 77,898 2,352,805 695,114 1,092,507
Recoveries of amounts
charged off 43,309 54,000 260,003 156,238 223,601
-------------------------------------------------------------------------------------
6,053,966 4,676,472 7,157,382 5,517,313 5,200,770
Amounts charged off 12,695 9,000 1,147,925 972,739 534,809
-------------------------------------------------------------------------------------
Balance, ending $ 6,041,271 $ 4,667,472 $ 6,009,457 $ 4,544,574 $ 4,665,961
=====================================================================================
</TABLE>
Impairment of loans having recorded investments of approximately $1,698,000 at
March 31, 1998 (unaudited) and December 31, 1997 and $3,319,000 at December 31,
1996 has been recognized in conformity with FASB Statement No. 114, as amended
by FASB Statement No. 118. Recorded investments in other impaired loans were
approximately $3,667,000 at March 31, 1998 (unaudited) and December 31, 1997 and
$4,367,000 at December 31, 1996. The average recorded investment in impaired
loans during 1997 and 1996 was approximately $6,688,000 and $7,062,000,
respectively. The total allowance for loan losses related to these loans was
approximately $1,430,000 on March 31, 1998 (unaudited) and on December 31, 1997
and $741,000 on December 31, 1996, respectively.
Note 5. BANK PREMISES AND EQUIPMENT, NET
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
December 31,
March 31, -----------------------------
1998 1997 1996
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $ 1,376,229 $ 1,373,241 $ 1,367,658
Buildings and improvements 10,554,591 10,426,733 7,690,178
Furniture and equipment 5,585,288 5,534,510 4,948,551
--------------------------------------------------------
17,516,108 17,334,484 14,006,387
Less accumulated depreciation 6,555,599 6,374,338 6,000,779
--------------------------------------------------------
$ 10,960,509 $ 10,960,146 $ 8,005,608
========================================================
</TABLE>
F-14
<PAGE> 93
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. DEPOSITS
The aggregate amount of jumbo time deposits, each with a minimum denomination of
$100,000, was approximately $33,325,000 and $37,696,000 at December 31, 1997 and
1996, respectively.
At December 31, 1997, the approximate maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1998 $ 166,007,000
1999 35,747,000
2000 13,178,000
2001 5,169,000
2002 and thereafter 6,180,000
-------------------
$ 226,281,000
===================
</TABLE>
Note 7. SHORT-TERM BORROWED FUNDS AND OTHER BORROWED FUNDS AT DECEMBER 31, 1997
Short-term borrowed funds of $27,085,015 and $25,724,491 at December 31, 1997
and 1996, respectively, consisted of securities sold under repurchase agreements
and treasury tax and loan accounts.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
<S> <C> <C>
Average balance during the year $ 22,592,921 $ 23,902,600
Average interest rate during the year 4.59% 4.46%
Maximum month-end balance during the year 26,184,382 25,752,691
Mortgage-backed securities underlying the agreements at year-end:
Amortized cost $ 40,714,509 $ 39,082,602
Estimated fair value 40,989,853 39,272,726
</TABLE>
F-15
<PAGE> 94
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mortgage-backed securities sold under repurchase agreements are held by the
Company. The agreements may be terminated by either the Company or the customers
upon written notice at any time.
Other borrowed funds at December 31, 1997 consist of the following:
The Company has notes payable to the Federal Home Loan Bank of Des Moines
(FHLB) totaling $8,000,000 at December 31, 1997. The notes are variable rate,
carrying interest rates ranging from 5.54% to 6.05% at December 31, 1997, and
include a $500,000 note due on June 26, 1998, a $5,000,000 note due on
December 30, 1998 and a $2,500,000 note due July 19, 2000 callable every 3
months.
At December 31, 1997, the Company also has lines of credit at the FHLB
totaling $6,500,000, of which $1,700,000 is outstanding. These lines of
credit and related borrowings expire in 1998. The lines of credit have
variable interest rates, 5.85% at December 31, 1997.
Pursuant to the collateral agreements with the FHLB these notes and lines of
credit are secured by $2,572,800 of stock in the FHLB and $147,661,000 of
qualifying first mortgage loans.
The Company also has unsecured notes payable to individuals totaling
$397,492. The notes bear interest from 7% to 8%. Aggregate maturities are:
1998 $66,385; 1999 $66,385; 2000 $66,385; 2001 $66,385; 2002 $66,385 and
thereafter $65,567.
Note 8. INCOME TAXES
Net deferred tax assets are included in other assets and consist of the
following components:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
---------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for losses $ 1,872,000 $ 1,331,500
Other 530,369 363,417
---------------------------------------
2,402,369 1,694,917
---------------------------------------
Deferred tax liabilities:
Prepaid pension costs 138,891 225,739
Unrealized appreciation on securities 1,056,078 1,204,764
---------------------------------------
1,194,969 1,430,503
---------------------------------------
Net deferred tax assets $ 1,207,400 $ 264,414
=======================================
</TABLE>
F-16
<PAGE> 95
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,024,570 $ 2,347,694 $ 2,228,515
State 414,498 454,094 407,118
Deferred (794,300) (108,328) (369,575)
-----------------------------------------------------------
$ 1,644,768 $ 2,693,460 $ 2,266,058
===========================================================
</TABLE>
Taxes on income differ from the "expected" amounts computed by applying the
federal income tax rate of 34% to income before taxes for the following reasons:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
taxes on net income $ 1,599,107 34.0% $ 3,218,589 34.0% $ 2,828,013 34.0%
State income taxes, net of
federal benefit 200,024 4.3 280,533 3.0 289,541 3.5
Tax-exempt interest and
dividends (621,488) (13.2) (642,899) (6.8) (694,301) (8.3)
Merger expenses 744,730 15.8
Low income housing
credit (96,541) (2.1) (96,541) (1.0) (90,507) (1.1)
Other (181,064) (3.8) (66,222) (0.7) (66,688) (0.9)
-------------------------------------------------------------------------------------
PROVISION FOR
INCOME TAXES $ 1,644,768 35.0% $ 2,693,460 28.5% $ 2,266,058 27.2%
=====================================================================================
</TABLE>
Income taxes payable included in other liabilities were $465,360 and $639,182 at
December 31, 1997 and 1996, respectively.
F-17
<PAGE> 96
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of its
employees. The plan is noncontributory on the part of employees and benefits are
payable based on years of credited service. The Company's funding policy is to
contribute annually an amount that will satisfy the funding requirements of
ERISA.
The components of pension expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 330,325 $ 305,119 $ 218,555
Interest cost on projected benefit obligation 434,246 391,259 353,265
Actual return on plan assets (516,066) (443,051) (582,218)
Net amortization and deferral (15,669) (34,898) 164,088
--------------------------------------------------------
NET PENSION EXPENSE $ 232,836 $ 218,429 $ 153,690
========================================================
</TABLE>
The following table sets forth the plan's funded status and the amounts
recognized in the accompanying consolidated statements of financial condition:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 4,721,743 $ 4,234,972 $ 3,841,436
========================================================
Accumulated benefits $ 4,811,644 $ 4,313,329 $ 3,893,924
========================================================
Projected benefits $ (6,753,977) $ (5,867,944) $ (5,287,985)
Plan assets at fair value, primarily corporate
bonds 6,629,365 6,285,625 5,642,532
--------------------------------------------------------
PLAN ASSETS, NET OF PROJECTED
BENEFIT OBLIGATION (124,612) 417,681 354,547
Unrecognized net loss 490,363 180,928 99,250
Unrecognized prior service cost 80,982 90,598 100,214
Unrecognized net (asset) (72,279) (81,917) (91,555)
--------------------------------------------------------
PREPAID PENSION COST IN OTHER
ASSETS $ 374,454 $ 607,290 $ 462,456
========================================================
</TABLE>
F-18
<PAGE> 97
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Assumptions used by the Company in the determination of pension plan information
consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.50% 7.50%
Rate of increase in compensation levels 5.50 5.50 5.50
Expected long-term rate of return on plan assets 8.50 8.50 8.50
</TABLE>
On March 1, 1995, the Company adopted a 401(k) savings plan covering all
employees who have completed one year of service and are twenty-one years of age
or older. The plan allows eligible employees to contribute up to fifteen percent
of their compensation, with the Company matching a portion of each employee's
contribution. The Company's contributions were $60,170, $56,850 and $43,669 for
the years ending December 31, 1997, 1996 and 1995, respectively.
Note 10. COMMITMENTS AND CONTINGENT LIABILITIES
Financial instruments with off-balance-sheet risk: The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contractual amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments. Loan commitments were approximately $41,594,000 and standby letters
of credit totaled approximately $4,340,000 as of December 31, 1997.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the party. Collateral
held varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Company deems
necessary.
F-19
<PAGE> 98
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Concentrations of credit risk: The majority of the Company's loans, commitments
to extend credit and standby letters of credit have been granted to customers in
the Company's market area. The concentrations of credit by type of loan are set
forth in Note 4. The distribution of commitments to extend credit approximates
the distribution of loans outstanding.
Contingent liabilities: Management believes that the aggregate liability as to
any legal proceedings pending against the Company, incidental to the ordinary
course of business, will not be material.
Note 11. TRANSACTIONS WITH RELATED PARTIES
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties) on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others.
Aggregate loan transactions with these persons and firms were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
March 31, --------------------------------------
1998 1997 1996
-----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Balance, beginning $ 5,016,935 $ 3,543,559 $ 3,669,940
New loans 2,005,453 8,764,099 7,267,418
Repayments (1,537,860) (7,290,823) (7,393,799)
-----------------------------------------------------------
Balance, ending $ 5,484,528 $ 5,016,835 $ 3,543,559
===========================================================
Maximum unpaid balance during the year $ 5,484,528 $ 5,016,835 $ 3,669,940
===========================================================
</TABLE>
Note 12. REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possible additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and rations (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Company meets all capital adequacy requirements to which it is subject.
F-20
<PAGE> 99
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1997, the most recent notification from the federal banking
regulators categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. Management
believes there are no conditions or events since that notification that have
changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Minimum For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998
(unaudited):
Total capital (to risk
weighted assets) $ 56,426 17.9% $ 25,285 8.0% $ 31,606 10.0%
Tier 1 Capital (to risk
weighted assets) 51,732 16.4 12,643 4.0 18,964 6.0
Tier 1 (Core) Capital
(to average assets) 51,732 9.6 21,666 4.0 27,082 5.0
As of December 31, 1997:
Total capital (to risk
weighted assets) $ 54,817 17.1% $ 25,644 8.0% $ 32,055 10.0%
Tier 1 Capital (to risk
weighted assets) 50,314 15.7 12,822 4.0 19,233 6.0
Tier 1 (Core) Capital
(to average assets) 50,314 9.3 21,711 4.0 27,138 5.0
As of December 31, 1996:
Total capital (to risk
weighted assets) $ 52,762 17.3% $ 24,336 8.0% $ 30,420 10.0%
Tier 1 Capital (to risk
weighted assets) 48,943 16.1 12,168 4.0 18,252 6.0
Tier 1 (Core) Capital
(to average assets) 48,943 9.2 21,214 4.0 26,518 5.0
</TABLE>
Banking regulations restrict the amount of dividends that may be paid by the
Banks and the Company without prior approval of bank supervisory authorities.
F-21
<PAGE> 100
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating the
value of its financial instruments:
Cash and due from banks: The carrying amounts reported in the consolidated
statements of financial condition for cash and due from banks approximate
their fair values.
Interest-bearing deposits: The carrying amounts reported in the consolidated
statements of financial condition for interest-bearing deposits approximate
their fair values.
Securities: Fair values of securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Federal funds sold: The carrying amounts reported in the consolidated
statements of financial condition for federal funds sold approximate their
fair values.
Loans and accrued income receivable: The fair values for loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers with similar credit
quality. The carrying amount of accrued income receivable approximates its
fair value.
Deposit liabilities and accrued interest payable: The carrying amount
reported in the consolidated statements of financial condition for demand and
savings deposits, which represents the amount payable on demand, approximates
their fair values. Fair values for fixed-rate and variable-rate time deposits
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered to a schedule of aggregated expected maturities
on time deposits. The carrying value of accrued interest payable approximates
its fair value.
Securities sold under agreements to repurchase and other borrowed funds: The
carrying amounts of borrowings under repurchase agreements and other
short-term borrowings approximate their fair values. The fair values of the
Company's long-term borrowings (other than deposits) are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
F-22
<PAGE> 101
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Commitments to extend credit and standby letters of credit: The fair value of
commitments and standby letters of credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The carrying value and fair value of commitments to extend
credit and standby letters of credit are not significant.
The approximate carrying amounts and estimated fair values are as follows at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
----------------------------------------
Carrying Fair
Amount Value
----------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 13,425,000 $ 13,425,000
Interest bearing deposits 631,000 631,000
Securities available for sale 114,222,000 114,222,000
Securities held to maturity 63,944,000 67,281,000
Federal funds sold 2,475,000 2,475,000
Loans, net 329,680,000 333,271,000
Accrued income receivable 4,764,000 4,764,000
Financial liabilities:
Deposits 446,595,000 446,324,000
Securities sold under repurchase agreements 22,648,000 22,648,000
Other borrowed funds 14,534,000 14,534,000
Accrued interest payable 4,059,000 4,059,000
<CAPTION>
1996
--------------------------------------
Carrying Fair
Amount Value
--------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 13,349,000 $ 13,349,000
Interest bearing deposits 414,000 414,000
Securities available for sale 114,188,000 114,188,000
Securities held to maturity 70,348,000 73,604,000
Federal funds sold 1,575,000 1,575,000
Loans, net 313,801,000 314,610,000
Accrued income receivable 4,814,000 4,814,000
Financial liabilities:
Deposits 436,911,000 436,928,000
Securities sold under repurchase agreements 23,482,000 23,482,000
Other borrowed funds 11,954,000 11,954,000
Accrued interest payable 3,745,000 3,745,000
</TABLE>
F-23
<PAGE> 102
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. PENDING MERGER
In December 1997 the Company entered into a Definitive Agreement with F&M
Bancorporation, Inc. (F&M) located in Kaukauna, Wisconsin.
The Definitive Agreement provides for a 100% stock-for-stock exchange with the
Company's stockholders. F&M will issue stock with an aggregate value of $145
million, based on F&M common stock trading values between $35.80 and $40.00 per
share. The price may be greater or less if F&M stock is more than or less than
the values described. This transaction is subject to regulatory approvals,
shareholder approvals, and other customary conditions, with an estimated
completion date in the second quarter of 1998.
Note 15. RECLASSIFICATION
Certain reclassifications on the December 31, 1996 consolidated statements of
financial condition and income have been made to be consistent with the
classifications as of December 31, 1997 with no effect on retained earnings.
F-24
<PAGE> 103
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16. PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------------
ASSETS 1998 1997 1996
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ 630 $ 860 $ 900
Interest bearing deposits 202,398 85,148 492,768
Securities available for sale, net 4,698,740 3,013,323 3,574,055
Investment in subsidiaries 53,330,255 52,055,386 48,500,126
Other assets 36,203 1,741,003 1,557,703
--------------------------------------------------------
$ 58,268,226 $ 56,895,720 $ 54,125,552
========================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES
Other borrowed funds $ 196,707 $ 229,492 $ 262,276
Accrued interest payable 3,880 9,255 10,247
Other liabilities 3,286,636 4,567,238 2,815,528
--------------------------------------------------------
3,487,223 4,805,985 3,088,051
--------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 968,150 968,150 969,775
Surplus 3,975,907 3,975,907 3,982,581
Retained earnings 46,787,791 45,370,448 44,059,979
Accumulated other comprehensive income 3,049,155 1,775,230 2,025,166
--------------------------------------------------------
54,781,003 52,089,735 51,037,501
--------------------------------------------------------
$ 58,268,226 $ 56,895,720 $ 54,125,552
========================================================
</TABLE>
F-25
<PAGE> 104
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------------------------------------------
1998 1997 1997 1996 1995
------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income:
Equity in net income
of subsidiaries $ 1,854,500 $ 1,869,201 $ 5,318,766 $ 6,895,923 $ 6,412,472
Interest 713 4,926 22,053 48,897 36,965
Securities gains 116,262
------------------------------------------------------------------------------------
1,855,213 1,874,127 5,340,819 7,061,082 6,449,437
------------------------------------------------------------------------------------
Interest expense, other
borrowings 3,880 4,385 18,075 20,709 24,349
Operating expenses 28,540 18,101 2,303,852 367,923 558,018
------------------------------------------------------------------------------------
32,420 22,486 2,321,927 388,632 582,367
------------------------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES
(CREDITS) 1,822,793 1,851,641 3,018,892 6,672,450 5,867,070
Income taxes (credits) (10,855) (5,985) (39,596) (100,528) (184,558)
------------------------------------------------------------------------------------
NET INCOME $ 1,833,648 $ 1,857,626 $ 3,058,488 $ 6,772,978 $ 6,051,628
====================================================================================
</TABLE>
F-26
<PAGE> 105
BANCSECURITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------------------------------------------------------
1998 1997 1997 1996 1995
-------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 1,833,648 $ 1,857,626 $ 3,058,488 $ 6,772,978 $ 6,051,628
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed net
income of subsidiaries (1,062,757) (1,872,954) (3,601,450) (5,572,521) (4,844,167)
(Gain) on the sale of
securities available for
sale (116,262)
Amortization 57,002 520,000
Decrease in other assets 1,704,800 1,546,500 25,000 74,778 1,004
Increase (decrease) in
accrued interest payable
and other liabilities (244,363) (398,071) 1,727,640 (288,948) 307,537
-------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,231,328 1,133,101 1,209,678 927,027 2,036,002
-------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
(Increase) decrease in
interest
deposits (117,250) 420,407 407,620 330,622 (759,615)
Proceeds from the sale of
securities available for
sale 189,262
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED
IN) INVESTING
ACTIVITIES (117,250) 420,407 407,620 519,884 (759,615)
-------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Principal payments on other
borrowed funds (32,785) (32,784) (32,784) (32,784) (32,784)
Dividends paid (2,081,523) (1,493,454) (1,493,454) (1,331,297) (1,196,483)
Purchase of common stock
for retirement -- (27,300) (91,100) (91,830) (38,120)
-------------------------------------------------------------------------------
NET CASH (USED IN)
FINANCING ACTIVITIES (2,114,308) (1,553,538) (1,617,338) (1,455,911) (1,267,387)
-------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS (230) (30) (40) (9,000) 9,000
CASH AND CASH
EQUIVALENTS
Beginning 860 900 900 9,900 900
-------------------------------------------------------------------------------
Ending $ 630 $ 870 $ 860 $ 900 $ 9,900
===============================================================================
</TABLE>
F-27
<PAGE> 106
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
F&M BANCORPORATION, INC.
AT MARCH 31, 1998
The following unaudited pro forma condensed consolidated balance sheet
combines the historical consolidated balance sheets of F&M and BancSecurity,
giving effect to the acquisition of BancSecurity, which is expected to be
accounted for using the pooling of interests method of accounting, as if it had
been effective on March 31, 1998. This information should be read in
conjunction with the historical consolidated financial statements (and notes
thereto) of F&M and BancSecurity. The pro forma financial data presented below
is not necessarily indicative of the actual financial position that would have
occurred had the acquisition been consummated on March 31, 1998, or that may
result in the future.
<TABLE>
<CAPTION>
Pro Forma
Adjustments (A) Pro Forma
F&M BancSecurity Debit Credit Consolidated
--- ------------ ----- ------ ------------
ASSETS (In thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 44,088 $ 9,778 $ 53,866
Investment securities--
Held to maturity 130,074 58,599 188,673
Available for sale 182,083 113,370 295,453
Federal funds sold 18,056 15,450 33,506
Loans - net 1,239,570 325,674 1,565,244
Bank premises and equipment 33,531 10,961 44,492
Other assets 37,266 11,220 48,486
---------- -------- ----------
Total assets $1,684,668 $545,052 $2,229,720
========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $1,379,387 $450,371 $1,829,758
Short-term borrowings 62,020 23,198 85,218
Other borrowings 69,929 7,331 77,260
Other liabilities 16,615 9,371 25,986
Common stock 9,923 968 2,657 13,548
Surplus 88,262 3,976 2,657 89,581
Retained earnings 58,798 46,788 105,586
Unrealized gains (losses) 103 3,049 3,152
Treasury stock (369) 0 (369)
---------- -------- ----------
Total liabilities and
stockholders' equity $1,684,668 $545,052 $2,229,720
========== ======== ==========
</TABLE>
F-28
<PAGE> 107
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
F & M BANCORPORATION, INC.
QUARTER ENDED MARCH 31, 1998
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following unaudited pro forma condensed consolidated statements of
income combine the historical consolidated statements of income of F&M and
BancSecurity giving effect to the acquisition of BancSecurity, which is expected
to be accounted for using the pooling of interests method of accounting, as if
it had been effective as of the beginning of the period indicated. This
information should be read in conjunction with the historical consolidated
financial statements (and notes thereto) of both F&M and BancSecurity. The pro
forma financial data presented below is not necessarily indicative of the actual
financial results which would have occurred had the acquisition been consummated
on the dates indicated, or that may result in the future.
QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Pro Forma
F&M BancSecurity Consolidated
--- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income $33,130 $10,159 $43,289
Interest expense 15,615 5,528 21,143
------- ------- -------
Net interest income 17,515 4,631 22,146
Provision for loan losses 692 1 693
------- ------- -------
Net interest income after provision
for loan losses 16,823 4,630 21,453
Non-interest income 2,467 965 3,432
Non-interest expense 11,267 3,059 14,326
------- ------- -------
Income before income taxes 8,023 2,536 10,559
Income taxes 2,525 702 3,227
------- ------- -------
Net income $ 5,498 $ 1,834 $ 7,332
======= ======= =======
Net income per share - Basic $ 0.56 $ 0.54
======= =======
Net income per share - Diluted $ 0.55 $ 0.54
======= =======
</TABLE>
F-29
<PAGE> 108
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
F&M BancSecurity Consolidated
--- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income $122,547 $ 40,298 $162,845
Interest expense 57,845 21,991 79,836
-------- -------- --------
Net interest income 64,702 18,307 83,009
Provision for loan losses 2,826 2,353 5,179
-------- -------- --------
Net interest income after provision
for loan losses 61,876 15,954 77,830
Non-interest income 8,814 3,966 12,780
Non-interest expense 41,354 15,217 56,571
-------- -------- --------
Income before income taxes 29,336 4,703 34,039
Income taxes 9,011 1,645 10,656
-------- -------- --------
Net income $ 20,325 $ 3,058 $ 23,383
======== ======== ========
Net income per share - Basic $ 2.09 $ 1.75
======== ========
Net income per share - Diluted $ 2.08 $ 1.74
======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma
F&M BancSecurity Consolidated
--- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income $ 98,909 $ 39,452 $138,361
Interest expense 45,374 21,319 66,693
-------- -------- --------
Net interest income 53,535 18,133 71,668
Provision for loan losses 2,904 695 3,599
-------- -------- --------
Net interest income after provision
for loan losses 50,631 17,438 68,069
Non-interest income 6,587 3,612 10,199
Non-interest expense 34,820 11,584 46,404
-------- -------- --------
Income before income taxes 22,398 9,466 31,864
Income taxes 6,992 2,693 9,685
-------- -------- --------
Net income $ 15,406 $ 6,773 $ 22,179
======== ======== ========
Net income per share - Basic $ 1.73 $ 1.77
======== ========
Net income per share - Diluted $ 1.73 $ 1.77
======== ========
</TABLE>
F-30
<PAGE> 109
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pro Forma
F&M BancSecurity Consolidated
--- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income $ 87,572 $ 37,825 $125,397
Interest expense 39,406 20,803 60,209
-------- -------- --------
Net interest income 48,166 17,022 65,188
Provision for loan losses 1,713 1,092 2,805
-------- -------- --------
Net interest income after provision
for loan losses 46,453 15,930 62,383
Non-interest income 5,356 3,404 8,760
Non-interest expense 31,860 11,016 42,876
-------- -------- --------
Income before income taxes 19,949 8,318 28,267
Income taxes 6,109 2,266 8,375
-------- -------- --------
Net income $ 13,840 $ 6,052 $ 19,892
======== ======== ========
Net income per share - Basic $ 1.59 $ 1.61
======== ========
Net income per share - Diluted $ 1.59 $ 1.61
======== ========
</TABLE>
F-31
<PAGE> 110
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. ACCOUNTING TREATMENT.
The pro forma consolidated financial statements have been prepared
using the pooling of interests method of accounting to give effect to the
acquisition by F&M of BancSecurity. As a result of the use of the pooling of
interests method of accounting for the acquisitions, past consolidated financial
statements of F&M are being restated, and therefore the pro forma consolidated
financial statements have been restated to reflect the acquisition as if it had
occurred prior to the dates of the statements. The computations of weighted
average shares outstanding and period-end shares outstanding include the
conversions of shares of BancSecurity Common into shares of F&M Common, as
indicated below. These statements do not reflect a pending F&M acquisition, or
other 1998 or prior F&M acquisitions for which financial statements were not
restated, which are not considered to be significant, either individually or in
the aggregate.
2. PENDING ACQUISITION OF BANCSECURITY.
On December 1, 1997, the Company entered into a Merger Agreement
providing for the acquisition of BancSecurity in a merger transaction, based
upon the defined common equity value of BancSecurity and the market value of F&M
Common. Subject to certain exceptions, BancSecurity will be valued in the
aggregate at $145 million. The total number of shares of F&M Common to be issued
in the acquisition will equal the aggregate consideration divided by a defined
market value of the F&M Common, valuing F&M Common at not less than $35.80 per
share nor more than $40.00 per share. For purposes of these pro forma
statements, it is assumed that shares of F&M are valued at $40.00 per share,
that the exchange ratio will equal 93.6064 shares of F&M Common for each of the
38,726 shares of BancSecurity Common, and that, in the aggregate, 3,625,000
shares of F&M Common will be issued. See "Summary -- Comparative Unaudited Per
Share Data" and "The Merger -- Conversion of BancSecurity Common with F&M
Common."
3. EXPLANATION OF PRO FORMA ADJUSTMENTS.
A. Issuance of F&M Common in the acquisition of BancSecurity,
assuming no dissenters and a 93.6064-to-1 exchange ratio. Reflects
a transfer of $2,657,000 from Surplus to Common Stock resulting
from the greater aggregate par value of 3,625,000 shares of F&M
Common ($3,625,000) than the par value of 38,726 shares of
BancSecurity Common ($968,000).
4. EARNINGS PER SHARE.
Earnings per share are based on the weighted average number of shares
of common stock and common stock equivalents outstanding during the year. The
resulting number of shares used in computing the pro forma consolidated basic
earnings per share is 13,524,387 for the quarter ended March 31, 1998 and
13,370,459; 12,515,517; and 12,319,464 for the years ended December 31, 1997,
1996, and 1995, respectively. The number of shares used in computing the pro
forma consolidated diluted earnings per share is 13,575,240 for the quarter
ended March 31, 1998 and 13,418,484; 12,545,524; and 12,338,050 for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-32
<PAGE> 111
APPENDIX A
May 21, 1998
Board of Directors
BancSecurity Corporation
11 North First Avenue
Marshalltown, IA 50158
Members of the Board:
BancSecurity Corporation ("BancSecurity"), an Iowa corporation,
BancSecurity Acquisition Corporation ("Acquisition Subsidiary"), an Iowa
corporation, and F&M Bancorporation, Inc. (the "Buyer"), a Wisconsin
corporation, have entered into an Agreement and Plan of Merger (the "Agreement")
dated December 1, 1997, pursuant to which Acquisition Subsidiary will be merged
with and into BancSecurity, and thereby BancSecurity will become a wholly-owned
subsidiary of the Buyer (the "Merger"). As is set forth in the Agreement, at the
effective time of the Merger each of the outstanding shares of BancSecurity
common stock ("BancSecurity Common") will be converted into a certain number of
shares of F&M common stock ("F&M Common"). The number of shares of F&M Common
which each holder of BancSecurity Common will be entitled to receive (the
"Merger Consideration") will be determined by the exchange ratio ("Exchange
Ratio") established pursuant to Section 2.1(a) of the Agreement. In connection
therewith, you have requested our opinion as to the fairness, from a financial
point of view, of the Merger Consideration to the shareholders of BancSecurity.
Hovde Financial, Inc. ("Hovde") specializes in providing investment
banking and financial advisory services to commercial bank and thrift
institutions. Our principals are experienced in the independent valuation of
securities in connection with negotiated underwritings, subscription and
community offerings, private placements, merger and acquisition transactions and
recapitalizations. We are familiar with BancSecurity, having acted as its
financial advisor in connection with, and having participated in the
negotiations leading to, the Agreement.
We were retained by BancSecurity to act as its exclusive financial
advisor with respect to a review of BancSecurity's strategic alternatives and
the possible sale, merger, consolidation, or other business combination, in one
or a series of transactions, involving all or a substantial amount of the
business, securities or assets of BancSecurity. We will receive compensation
from BancSecurity in connection with our services, a significant portion of
which is contingent upon the consummation of the Merger. At your direction, we
solicited the interest of third parties regarding a possible business
combination with BancSecurity. The Agreement is the result of this solicitation.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of BancSecurity and the
Buyer and material prepared in connection with the proposed transaction,
including the following: the Agreement; certain historical publicly available
information concerning BancSecurity and the Buyer; the terms of recent merger
and acquisition transactions involving banks and bank holding companies that we
considered relevant; historical market prices and trading volumes for F&M
Common; and financial and other information provided to us by the managements of
BancSecurity and the Buyer.
In addition, we have conducted meetings with members of the senior
management of BancSecurity and the Buyer for the purpose of reviewing the future
prospects of BancSecurity and the Buyer. We also evaluated the pro forma
ownership of F&M Common by BancSecurity's shareholders relative to the pro forma
contribution of BancSecurity's assets, liabilities, equity and earnings to the
pro forma Buyer, and conducted such other studies, analyses and examinations as
we deemed appropriate. We also took into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our knowledge of the bank and thrift industries and our
general experience in securities valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us by
BancSecurity
A-1
<PAGE> 112
and the Buyer publicly available information as to other transactions, the
representations and warranties contained in the Merger Agreement, and in the
discussions with BancSecurity and the Buyer management. We did not independently
verify and have relied on and assumed that the aggregate allowances for loan
losses set forth in the balance sheets of each of BancSecurity and the Buyer at
September 30, 1997 were adequate to cover such losses and complied fully with
applicable law, regulatory policy and sound banking practices as of the date of
such financial statements. We were not retained to and did not conduct a
physical inspection of any of the properties or facilities of BancSecurity or
the Buyer, nor did we make any independent evaluation or appraisal of the
assets, liabilities or prospects of BancSecurity or the Buyer, nor were we
furnished with any such evaluation or appraisal, and we were not retained to and
did not review any individual credit files.
We have assumed that the Merger is, and will be, in compliance with all
laws and regulations that are applicable to BancSecurity and the Buyer. In
rendering this opinion, we have been advised by BancSecurity and the Buyer and
we have assumed that there are no factors that would impede any necessary
regulatory or governmental approval for the Merger and we have further assumed
that in the course of obtaining the necessary regulatory and governmental
approvals, no restriction will be imposed on the Buyer or BancSecurity that
would have a material adverse effect on the Buyer or the contemplated benefits
of the Merger. We have also assumed that there would not occur any change in the
applicable law or regulation that would cause a material adverse change in the
prospects or operations of the Buyer or BancSecurity after the Merger.
Our opinion is based solely upon the information available to us and
the economic, market and other circumstances as they exist as of the date
hereof. Events occurring and information that becomes available after the date
hereof could materially affect the assumptions and analyses used in preparing
this opinion. We have not undertaken to reaffirm or revise this opinion or
otherwise comment upon any events occurring or information that becomes
available after the date hereof.
We are not expressing any opinion herein as to the prices at which
shares of F&M Common issued in the Merger may trade if and when they are issued
or at any future time, nor does our opinion constitute a recommendation to any
holder of BancSecurity Common as to how such holder should vote with respect to
the Agreement at any meeting of holders of BancSecurity Common.
This letter is for the information of the Board of Directors of
BancSecurity and is not to be used, circulated, quoted or otherwise referred to
for any other purpose, nor is it to be filed with, included in or referred to in
whole or in part in any registration statement, proxy statement or any other
document, except in each case in accordance with our prior written consent which
shall not be unreasonably withheld; provided, however, that we hereby consent to
the inclusion and reference to this letter in any registration statement, proxy
statement, information statement or tender offer document to be delivered to the
holders of BancSecurity Common in connection with the Merger if and only if this
letter is quoted in full or attached as an exhibit to such document and this
letter has not been withdrawn prior to the date of such document.
Subject to the foregoing and based on our experience as investment
bankers, our activities and assumptions as described above, and other factors we
have deemed relevant, we are of the opinion as of the date hereof that the
Merger Consideration is fair, from a financial point of view, to the
shareholders of BancSecurity.
Sincerely,
/s/ Hovde Financial, Inc.
HOVDE FINANCIAL, INC.
A-2
<PAGE> 113
APPENDIX B
TEXT OF DIVISION XIII OF THE IOWA BUSINESS CORPORATION ACT
DIVISION XIII
DISSENTERS' RIGHTS
PART A
490.1301 DEFINITIONS FOR DIVISION XIII.
In this division:
1. "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 490.1302 and who exercises that right when and in
the manner required by sections 490.1320 through 490.1328.
4. "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
5. "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
6. "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
7. "Shareholder" means the record shareholder or the beneficial
shareholder.
490.1302 SHAREHOLDERS' RIGHT TO DISSENT.
1. A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
a. Consummation of a plan of merger to which the corporation is a party
if either of the following apply:
(1) Shareholder approval is required for the merger by
section 490.1103 or the articles of incorporation and
the shareholder is entitled to vote on the merger.
(2) The corporation is a subsidiary that is merged with
its parent under section 490.1104.
b. Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan.
<PAGE> 114
c. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to a plan by
which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of sale.
d. An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it does any
or all of the following:
(1) Alters or abolishes a preferential right of the
shares.
(2) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the
shares.
(3) Alters or abolishes a preemptive right of the holder
of the shares to acquire shares or other securities.
(4) Excludes or limits the right of the shares to vote on
any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or
other securities with similar voting rights.
(5) Reduces the number of shares owned by the shareholder
to a fraction of a share if the fractional share so
created is to be acquired for cash under section
490.604.
(6) Extends, for the first time after being governed by
this chapter, the period of duration of a corporation
organized under chapter 491 or 496A and existing for
a period of years on the day preceding the date the
corporation is first governed by this chapter.
e. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
2. A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter is not entitled to challenge the
corporate action creating the shareholder's entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
490.1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
1. A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in that shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
2. A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if the shareholder does both of the
following:
a. Submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights.
b. Does so with respect to all shares of which the shareholder is the
beneficial shareholder or over which that beneficial shareholder has power to
direct the vote.
490.1304 THROUGH 490.1319 Reserved.
<PAGE> 115
PART B
490.1320 NOTICE OF DISSENTERS' RIGHTS.
1. If proposed corporate action creating dissenters' rights under
section 490.1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this part and be accompanied by a copy of this part.
2. If corporate action creating dissenters' rights under section
490.1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in section
490.1322.
490.1321 NOTICE OF INTENT TO DEMAND PAYMENT.
1. If proposed corporate action creating dissenters' rights under
section 490.1302 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights must do all of the
following:
a. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for the shareholder's shares if
the proposed action is effectuated.
b. Not vote the dissenting shareholder's shares in favor of the
proposed action.
2. A shareholder who does not satisfy the requirements of subsection 1,
is not entitled to payment for the shareholder's shares under this part.
490.1322 DISSENTERS' NOTICE.
1. If proposed corporate action creating dissenters' rights under
section 490.1302 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of section 490.1321.
2. The dissenters' notice must be sent no later than ten days after the
proposed corporate action is authorized at a shareholders' meeting, or, if the
corporate action is taken without a vote of the shareholders, no later than ten
days after the corporate action is taken, and must do all of the following:
a. State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited.
b. Inform holders of uncertificated shares to what extend transfer of
the shares will be restricted after the payment demand is received.
c. 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
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date.
d. Set a date by which the corporation must receive the payment demand,
which date shall not be fewer than thirty nor more than sixty days after the
date the dissenters' notice is delivered.
e. Be accompanied by a copy of this division.
<PAGE> 116
490.1323 DUTY TO DEMAND PAYMENT.
1. A shareholder sent a dissenters' notice described in section
490.1322 must demand payment, certify whether the shareholder acquired
beneficial ownership of the shares before the date required to be set forth in
the dissenters' notice pursuant to section 490.1322, subsection 2, paragraph
"c", and deposit the shareholder's certificates in accordance with the terms of
the notice.
2. The shareholder who demands payment and deposits the shareholder's
shares under subsection 1 retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
3. A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this division.
490.1324 SHARE RESTRICTIONS.
1. The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section 490.1326.
2. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
490.1325 PAYMENT.
1. Except as provided in section 490.1327, at the time the proposed
corporate action is taken, or upon receipt of a payment demand, whichever occurs
later, the corporation shall pay each dissenter who complied with section
490.1323 the amount the corporation estimates to be the fair value of the
dissenter's shares, plus accrued interest.
2. The payment must be accompanied by all of the following:
a. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any.
b. A statement of the corporation's estimate of the fair value of the
shares.
c. An explanation of how the interest was calculated.
d. A statement of the dissenter's right to demand payment under section
490.1328.
e. A copy of this division.
<PAGE> 117
490.1326 FAILURE TO TAKE ACTION.
1. If the corporation does not take the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
2. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 490.1322 as if the corporate action was taken
without a vote of the shareholders and repeat the payment demand procedure.
490.1327 AFTER-ACQUIRED SHARES.
1. A corporation may elect to withhold payment required by section
490.1325 from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action.
2. To the extent the corporation elects to withhold payment under
subsection 1, after taking the proposed corporate action, it shall estimate the
fair value of the shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of the dissenter's
demand. The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was calculated,
and a statement of the dissenter's right to demand payment under section
490.1328.
490.1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
1. A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under
section 490.1325, or reject the corporation's offer under section 490.1327 and
demand payment of the fair value of the dissenter's shares and interest due, if
any of the following apply:
a. The dissenter believes that the amount paid under section 490.1325
or offered under section 490.1327 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated.
b. The corporation fails to make payment under section 490.1325 within
sixty days after the date set for demanding payment.
c. The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for demanding
payment.
2. A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the dissenter's
demand in writing under subsection 1 within thirty days after the corporation
made or offered payment for the dissenter's shares.
490.1329 Reserved.
<PAGE> 118
PART C
490.1330 COURT ACTION.
1. If a demand for payment under section 490.1328 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
2. The corporation shall commence the proceeding in the district court
of the county where a corporation's principal office or, if none in this state,
its registered office is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
3. The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
5. Each dissenter made a party to the proceeding is entitled to
judgment for either of the following:
a. The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation.
b. The fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under section 490.1327.
490.1331 COURT COSTS AND COUNSEL FEES.
1. The court in an appraisal proceeding commenced under section
490.1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extend the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 490.1328.
2. The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable, for
either of the following:
a. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of section 490.1320 through 490.1328.
b. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this chapter.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
<PAGE> 119
APPENDIX C
AGREEMENT AND PLAN OF MERGER
dated as of December 1, 1997
among
F&M BANCORPORATION, INC.
and
BANCSECURITY ACQUISITION CORPORATION
and
BANCSECURITY CORPORATION
<PAGE> 120
TABLE OF CONTENTS TO THE MERGER AGREEMENT
<TABLE>
<S> <C>
MERGER AGREEMENT .................................................................................................1
ARTICLE I - THE MERGER ..........................................................................................2
1.1 Effective Time of the Merger ...................................................................1
1.2 Closing ........................................................................................1
1.3 Effects of the Merger ..........................................................................2
ARTICLE II - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES ......................................................2
2.1 Effect on Capital Stock.........................................................................2
2.2 Exchange of Certificates........................................................................3
ARTICLE III - REPRESENTATIONS AND WARRANTIES .....................................................................5
3.1 Representations and Warranties of BancSecurity .................................................5
3.2 Representations and Warranties of the Buyer....................................................16
ARTICLE IV - COVENANTS OF THE BUYER AND BANCSECURITY.............................................................20
4.1 Covenants of BancSecurity .....................................................................20
4.2 Covenants of Buyer ............................................................................26
4.3 Covenants of Buyer and BancSecurity ...........................................................28
ARTICLE V - ADDITIONAL AGREEMENTS ...............................................................................28
5.1 Regulatory Matters ............................................................................28
5.2 Letters of Officers ...........................................................................29
5.3 Access to Information .........................................................................29
5.4 Employee Benefit Plans ........................................................................30
5.5 Expenses ......................................................................................30
5.6 Additional Agreements; Reasonable Efforts .....................................................30
5.7 Affiliates ....................................................................................30
ARTICLE VI - CONDITIONS PRECEDENT ...............................................................................31
6.1 Conditions to Each Party's Obligation to Effect the Merger ...................................31
6.2 Conditions to Obligations of Buyer ............................................................32
6.3 Conditions to Obligations of BancSecurity .....................................................33
ARTICLE VII - TERMINATION AND AMENDMENT .........................................................................34
7.1 Termination ...................................................................................34
7.2 Effect of Termination .........................................................................35
7.3 Amendment .....................................................................................35
7.4 Extension; Waiver .............................................................................35
ARTICLE VIII - GENERAL PROVISIONS ...............................................................................35
8.1 Non-Survival of Representations and Warranties.................................................35
</TABLE>
C-i
<PAGE> 121
<TABLE>
<C> <C> <C>
8.2 Notices........................................................................................35
8.3 Interpretation ................................................................................36
8.4 Counterparts ..................................................................................36
8.5 Entire Agreement: Third Party Beneficiaries; Rights of Ownership ..............................36
8.6 Governing Law .................................................................................37
8.7 Publicity .....................................................................................37
8.8 Assignment ....................................................................................37
8.9 Enforcement of Agreement ......................................................................37
</TABLE>
C-ii
<PAGE> 122
MERGER AGREEMENT
AGREEMENT, dated as of December 1, 1997 (the "AGREEMENT"), by and among
BANCSECURITY CORPORATION ("BANCSECURITY"), an Iowa corporation and bank holding
company; BANCSECURITY ACQUISITION CORPORATION ("ACQUISITION SUBSIDIARY"), an
Iowa corporation; and F&M BANCORPORATION, INC., a Wisconsin corporation and bank
holding company (the "BUYER").
WHEREAS, the Boards of Directors of BancSecurity, Acquisition
Subsidiary, and the Buyer have approved, and deem it advisable and in the best
interests of their respective companies and their stockholders to consummate the
business transaction provided for herein in which Acquisition Subsidiary will be
merged with and into BancSecurity, and BancSecurity thereby becomes a
wholly-owned subsidiary of the Buyer (the "MERGER");
WHEREAS, BancSecurity is the sole owner of all of the outstanding
shares of stock of Security Bank Jasper-Poweshiek, Kellogg, Iowa; Security Bank,
Marshalltown, Iowa; and Story County Bank & Trust, Story City, Iowa (together
the "BANKS");
WHEREAS, Buyer is a multi-bank holding company with a number of bank
and non-bank subsidiaries (hereinafter the term "Buyer" includes Buyer's bank
and non-bank subsidiaries unless the context otherwise requires);
WHEREAS, as a result of the Merger the Buyer will be the parent company
of BancSecurity and the parent bank holding company of the Banks;
WHEREAS, BancSecurity and the Buyer desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, for Federal income tax purposes, it is intended that the
Merger qualify as a reorganization under the provisions of Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "CODE").
NOW, THEREFORE, in consideration of the foregoing representations,
warranties, covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:
ARTICLE I
THE MERGER
1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, articles of merger and accompanying plan of merger in substantially
the form as attached hereto as EXHIBIT A (the "ARTICLES OF MERGER") shall be
duly prepared, executed and acknowledged by BancSecurity and Acquisition
Subsidiary and thereafter delivered for filing to the Iowa Secretary of State,
as provided in the Iowa Business Corporation Act (the "IBCA"), on the Closing
Date (as defined in Section 1.2). The Merger shall become
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effective at the effective time and date of the Articles of Merger (the
"EFFECTIVE TIME"). Notwithstanding the immediately preceding sentence, however,
the parties intend that the effective date and time of the Closing, as defined
in Section 1.2 below, for both financial and tax reporting purposes, shall be as
of the close of business on the Closing Date.
1.2 Closing. Subject to the terms and conditions hereof, the closing of
the Merger (the "CLOSING") will take place after the satisfaction or waiver
(subject to applicable law) of the latest to occur of the conditions set forth
in Article VI hereof (the "CLOSING DATE"), at the offices of Dickinson,
Mackaman, Tyler & Hagen, P.C., Des Moines, Iowa, unless another time, date or
place is agreed to in writing by the parties hereto.
1.3 Effects of the Merger. At the Effective Time: (i) the separate
existence of Acquisition Subsidiary shall cease and Acquisition Subsidiary shall
be merged with and into BancSecurity (the "SURVIVING CORPORATION", after giving
effect to the Merger) and the shares of stock of Acquisition Subsidiary owned by
Buyer prior to the Effective Time will convert into the same number of shares of
stock of the Surviving Corporation as of the Effective Time without any action
on the part of Buyer or the Surviving Corporation; (ii) the Articles of
Incorporation of Acquisition Subsidiary, as amended and restated as a result of
the Merger, shall be the Articles of Incorporation of the Surviving Corporation
until duly amended in accordance with applicable law; (iii) the By-laws of
Acquisition Subsidiary, as in effect immediately prior to the Effective Time
shall be the By-laws of the Surviving Corporation until amended in accordance
with applicable law; (iv) the Buyer, as the holder of all of the outstanding
common stock of the Surviving Corporation, shall be the sole shareholder of
Surviving Corporation; and (v) the holders of certificates representing shares
of BancSecurity Common Stock (as defined in Section 2.1(a) below) shall cease to
have any rights as shareholders of BancSecurity, except such rights, if any, as
they may have pursuant to Division XIII of the IBCA, and their sole right shall
be the right to receive (A) the number of whole shares of Buyer Common Stock (as
defined in Section 2.1(a) below) into which their shares of BancSecurity Common
Stock have been converted in the Merger as provided herein (together with any
dividend payments with respect thereto, to the extent provided in Section 2.2(c)
below), and (B) the cash value of any fraction of a share of the Buyer Common
Stock into which their shares of BancSecurity Common Stock have been converted
as provided herein.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock.
(a) Conversion of Common Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of common
stock, $25.00 par value per share, of BancSecurity ("BANCSECURITY COMMON
STOCK"), but subject to Sections 2.2(e) and 6.2(f) hereof, 38,726 issued and
outstanding shares of BancSecurity Common Stock, other than shares of
BancSecurity Common Stock held by persons who have taken all steps required to
perfect their right to be paid the fair value of such shares under Division XIII
of the IBCA, shall be converted into that number of shares of validly issued,
fully paid and nonassessable shares of common stock of Buyer, $1.00 par value
("BUYER COMMON STOCK") which when multiplied by the average closing price of
Buyer Common Stock on the NASDAQ National Market
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System for the last 30 trading days in which trades occurred ending at the end
of the third trading day immediately preceding the Closing Date (as
appropriately and proportionately adjusted in the event that, between the date
hereof and the termination of such 30 trading day period, shares of Buyer Common
Stock shall be changed into a different number of shares or a different class of
shares by reason of any reclassification, recapitalization, split-up,
combination, exchange of shares or readjustment or stock dividend) (the "AVERAGE
PRICE") equals the total price of $145,000,000.00 (the "EXCHANGE RATIO");
provided, however, if the Average Price is equal to or less than $35.80, then
the number of shares of Buyer Common Stock issued will not be further increased
and if the Average Price is equal to or more than $40.00, then the number of
shares of Buyer Common Stock issued will not be further reduced and, provided,
further, in the event the Average Price is less than $32.00, then Buyer must
either increase the number of shares of Buyer Common Stock to be exchanged for
BancSecurity Common Stock so that the aggregate value of the Buyer Common Stock
equals at least $129,600,000.00 or else BancSecurity will have the option to
terminate the transaction.
At the Effective Time, all such shares of BancSecurity Common Stock
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist. Each BancSecurity shareholder's certificate or
certificates previously representing shares of the BancSecurity Common Stock
(each a "BANCSECURITY CERTIFICATE") shall be aggregated (if a single stockholder
holds more than one BancSecurity Certificate) and exchanged for a certificate
representing whole shares of Buyer Common Stock and cash in lieu of any
fractional share issued in consideration therefor upon the surrender of such
BancSecurity Certificates in accordance with Section 2.2, without any interest
thereon. In the event that, subsequent to the date of this Agreement but prior
to the Effective Time, the outstanding shares of Buyer Common Stock shall have
been increased, decreased, changed into or exchanged for a different number or
kind of shares or securities through a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or other
similar change in Buyer's capitalization, then an appropriate and proportionate
adjustment shall be made to the Exchange Ratio, so that the number of shares of
Buyer Common Stock into which a share of BancSecurity Common Stock shall be
converted will equal the number of shares of Buyer Common Stock that the holders
of shares of BancSecurity Common Stock would have received pursuant to such
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar change had the record date therefor been
immediately following the Closing Date.
(b) Shareholders' Right of Dissent. Any holder of shares of
BancSecurity Common Stock who does not vote in favor of the Merger at the
meeting of shareholders of BancSecurity and has given notice in writing to the
presiding officer prior to the Merger vote that he or she intends to demand
payment for his or her shares of BancSecurity Common Stock if the Merger is
effectuated, shall be entitled to receive the value of the Buyer Common Stock so
held by him or her in accordance with Division XIII of the IBCA.
2.2 Exchange of Certificates.
(a) Exchange Agent. At the Closing, Buyer shall deposit with Firstar
Trust Company or such other bank or trust company acceptable to the parties (the
"EXCHANGE AGENT"), for the benefit of the holders of shares of BancSecurity
Common Stock, certificates dated the Closing Date representing the shares of
Buyer Common Stock and the cash to be paid in lieu of fractional shares to be
issued and paid pursuant to Section 2.1(a) in exchange for the outstanding
shares of BancSecurity Common Stock. (Such cash and
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certificates for shares of Buyer Common Stock together with any dividends or
distributions with respect thereto, are hereinafter referred to as the "EXCHANGE
FUND").
(b) Exchange Procedures. Within five (5) business days after the
Closing Date, Buyer shall cause the Exchange Agent to mail to each holder of
record as of the record date of a BancSecurity Certificate(s) (i) a letter of
transmittal which shall specify that delivery shall be effective, and risk of
loss and title to BancSecurity Certificate(s) shall pass, only upon delivery of
BancSecurity Certificate(s) to the Exchange Agent and which shall be in such
form and have such other provisions as Buyer and BancSecurity may reasonably
specify not later than five business days before the Closing Date and (ii)
instructions for use in effecting the surrender of such holder's BancSecurity
Certificate(s) in exchange for a certificate representing shares of Buyer Common
Stock and the cash to be paid in lieu of any fractional share. Upon surrender of
a shareholder's BancSecurity Certificate(s) for cancellation to the Exchange
Agent together with such letter of transmittal, duly executed, the holder of
such BancSecurity Certificate(s) shall be entitled to receive in exchange
therefor (1) a certificate representing the number of whole shares of Buyer
Common Stock and (2) a check representing the amount of the cash to be paid in
lieu of a fractional share, if any, and unpaid dividends and distributions, if
any, which such holder has the right to receive in respect of such holder's
BancSecurity Certificate(s) surrendered, as provided in Section 2.2(c) below,
and such holder's BancSecurity Certificate(s) so surrendered shall forthwith be
canceled. No interest will be paid on the cash in lieu of fractional shares and
unpaid dividends and distributions, if any, payable to holders of BancSecurity
Certificates. In the event of a transfer of ownership of BancSecurity Common
Stock which is not registered in the transfer records of BancSecurity, a Buyer
Certificate representing the proper number of shares of Buyer Common Stock,
and/or a check for the cash to be paid, may be issued to such a transferee if
BancSecurity Certificate(s) representing such BancSecurity Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer. Any applicable stock transfer taxes shall be
paid by Buyer.
(c) Distributions with Respect to Unexchanged Shares; Voting. The
Exchange Agent shall receive and hold, for distribution without interest to the
record holders of the certificate or certificates representing shares of
BancSecurity Common Stock, all dividends and other distributions paid on shares
of Buyer Common Stock held in the Exchange Agent's name as agent. Holders of
unsurrendered BancSecurity Certificates shall not be entitled to vote after the
Closing Date at any meeting of Buyer shareholders until they have exchanged
their BancSecurity Certificates.
(d) Transfers. After the Effective Time, there shall be no transfers on
the stock transfer books of BancSecurity of the shares of BancSecurity Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, BancSecurity Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for the shares of Buyer Common
Stock and cash, in amounts as determined in accordance with the provisions of
Sections 2.1(a) and this Section 2.2, deliverable in respect thereof pursuant to
this Agreement. BancSecurity Certificates surrendered for exchange by any person
constituting an "affiliate" of BancSecurity for purposes of Rule 145(c) under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), shall not be
exchanged until Buyer has received a written agreement from such person as
provided in Section 5.4 of this Agreement.
(e) Fractional Shares. No fractional shares of Buyer Common Stock shall
be issued pursuant hereto. In lieu of the issuance of any fractional share, cash
adjustments will be paid to holders in respect of
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any fractional share of Buyer Common Stock that would otherwise be issuable, and
the amount of such cash adjustment shall be equal to such fractional proportion
of the Average Price of a share of Buyer Common Stock represented by the
holder's BancSecurity Common Stock not eligible to be exchanged for Buyer Common
Stock. For purposes of calculating fractional shares, a holder of BancSecurity
with more than one BancSecurity Certificate shall receive cash only for the
fractional share remaining after aggregating all of its, his or her BancSecurity
Common Stock to be exchanged.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Buyer Common Stock)
that remains unclaimed by the shareholders of BancSecurity for twelve months
after the Closing Date shall be paid to Buyer. Any shareholders of BancSecurity
who have not theretofore complied with this Article II shall thereafter look
only to Buyer for payment of their shares and cash in an amount as determined in
accordance with the provisions of Section 2.1(a) and this Section 2.2, without
any interest thereon. Notwithstanding the foregoing, none of Buyer, the Exchange
Agent nor any other person shall be liable to any former holder of shares of
BancSecurity Common Stock for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) Lost or Destroyed Shares. In the event any BancSecurity Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such BancSecurity Certificate to be lost,
stolen or destroyed and, if required by the Exchange Agent, the posting by such
person of a bond in such amount as Buyer may direct as indemnity against any
claim that may be made against it with respect to such BancSecurity Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
BancSecurity Certificate the shares of Buyer Common Stock, and/or cash in an
amount as determined in accordance with the provisions of Sections 2.1(a), and
this Section 2.2, deliverable in respect thereof pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of BancSecurity. In order to induce
Buyer to enter into this Agreement, BancSecurity represents and warrants to
Buyer, in all material respects, as of the date of this Agreement (except as
otherwise expressly provided) and except as disclosed on the attached EXHIBIT B
(the "BANCSECURITY DISCLOSURE SCHEDULE") and the schedules thereunder which are
numbered to correspond to the representations set forth below as follows:
(a) Organization. BancSecurity is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Iowa and is
a bank holding company duly registered under the Banks Holding Company Act of
1956, as amended (the "BHCA"). The Banks are each duly organized, validly
existing and in good standing under the laws of the State of Iowa. BancSecurity
and the Banks each has the corporate power and authority to carry on its
business as it is now conducted and to own, lease and operate its properties,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted or the properties or
assets owned or leased by it makes such qualification necessary, except where
the absence thereof, would not, individually or in the aggregate, have a
Material Adverse Effect as herein as defined in Section 3.1(h), below. Each
Bank's deposits are insured by the Bank Insurance Fund of the FDIC to the
maximum extent permitted by law. Other than the Banks, BancSecurity
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has no direct or indirect subsidiaries except Washlin Investment Company and
Security Bancservices Group, Inc. BancSecurity owns 100% of the outstanding
shares of stock of each Bank, free and clear of all claims, liens, mortgages,
pledges, security interests or other encumberances. BancSecurity owns 100% of
the outstanding shares of stock of Washlin Investment Company and Security
Bancservices Group, Inc., free and clear of all claims, liens, mortgages,
pledges, security interests or other encumberances.
(b) Capital Structure.
(i) The authorized capital stock of BancSecurity consists of
1,000,000 shares of BancSecurity Common Stock, $25.00 par value per
share (the "BANCSECURITY COMMON STOCK"). As of the date of this
Agreement, 38,726 shares of BancSecurity Common Stock were issued and
outstanding. All outstanding shares of BancSecurity Common Stock are
validly, issued, fully paid and nonassessable and not subject to any
preemptive rights.
(ii) BancSecurity is not a party to or bound by any
outstanding subscriptions, options, warrants, calls, rights,
convertible securities, commitments or agreements of any character
obligating BancSecurity to issue, deliver or sell, or cause to be
issued, delivered or sold, any additional shares of capital stock of
BancSecurity or obligating BancSecurity to grant, extend or enter into
any such option, warrant, call, right, convertible securities,
commitments or agreements. As of the date hereof, there are no
outstanding contractual obligations of BancSecurity or the Banks to
repurchase, redeem or otherwise acquire any shares of capital stock of
BancSecurity or the Banks, respectively.
(c) Authority. BancSecurity has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement by the requisite vote of the shareholders of BancSecurity and approval
of Regulatory Agencies (as defined in Section 3.1(g)(ii)), to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement,
and, subject to the approval of this Agreement by the requisite vote of the
shareholders of BancSecurity and approval of Regulatory Agencies, the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of BancSecurity. This Agreement
has been duly executed and delivered by BancSecurity. Assuming due execution and
delivery by the Acquisition Subsidiary and the Buyer, this Agreement constitutes
a valid and binding obligation of BancSecurity, enforceable in accordance with
its terms subject to applicable conservatorship, receivership, bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, whether
applied in a court of law or a court of equity.
(d) Shareholder Approval; Fairness Opinion. The affirmative vote of
three-fourths of the outstanding shares of BancSecurity Common Stock is required
for approval of this Agreement and to consummate the transactions contemplated
hereby. The Board of Directors of BancSecurity has received a preliminary
opinion of Hovde Financial, Inc. to the effect that the Exchange Ratio is fair,
from a financial point of view, to BancSecurity shareholders, and will receive a
final opinion at the time the proxy statement is delivered to its shareholders.
(e) No Violations. Subject to approval of this Agreement by
BancSecurity's shareholders and the Regulatory Agencies, the execution, delivery
and performance of this Agreement by BancSecurity does not, and the consummation
of the transactions contemplated hereby by BancSecurity will not, constitute (i)
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a breach or violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement, indenture
or instrument of BancSecurity or the Banks or to which BancSecurity or the Banks
(or any of their respective properties) is subject, which breach, violation or
default would, individually or in the aggregate, have a Material Adverse Effect
(as defined herein) on BancSecurity, (ii) a breach or violation of, or a default
under, the articles of incorporation, association or bylaws of BancSecurity or
the Banks or (iii) a breach or violation of, or a default under (or an event
which with due notice or lapse of time or both would constitute a default
under), or result in the termination of, accelerate the performance required by,
or result in the creation of any lien, pledge, security interest, charge or
other encumbrance upon any of the properties or assets of BancSecurity or the
Banks under, any of the terms, conditions or provisions of any note, bond,
indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which BancSecurity or the Banks is a party, or to which any of
their respective properties or assets may be bound or affected, except for in
the case of (iii) any of the foregoing that, individually or in the aggregate,
would not have a Material Adverse Effect on BancSecurity.
(f) Consents. Except as referred to herein and in connection, or in
compliance, with the provisions of the Securities Act, the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), the BHCA, the rules and
regulations of the Board of Governors of the Federal Reserve System (the "FRB"),
the Iowa Division of Banking (the "DIVISION") and the Federal Deposit Insurance
Corporation (the "FDIC"), as applicable, and the corporation, securities or
"blue sky" laws or regulations of the various states, no filing or registration
with, or authorization, consent or approval of, any public body or authority is
necessary for the consummation by BancSecurity of the Merger or the other
transactions contemplated by this Agreement.
(g) Financial Statements and Reports.
(i) As of their respective dates, neither BancSecurity's
Financial Statements (as defined below), nor any subsequent
BancSecurity Financial Statements prepared subsequent to September 30,
1997 (collectively the "FINANCIAL STATEMENTS"), contained or will
contain any untrue statement of a material fact or omitted or will omit
to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under
which they were made, not misleading; provided, that no representation
is made herein with respect to any exhibits to the Financial Statements
that are not specifically incorporated by reference therein. Each of
the balance sheets of BancSecurity contained or specifically
incorporated by reference in the Financial Statements (including in
each case any related notes and schedules) fairly presented the
financial position of the entity or entities to which it relates as of
its date and each of the statements of income and of changes in
shareholders equity and of cash flows of BancSecurity, contained or
specifically incorporated by reference in the Financial Statements
(including in each case any related notes and schedules) fairly
presented the results of operations, shareholders equity and cash
flows, as the case may be, of the entity or entities to which it
relates for the periods set forth therein (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments), in
each case in all material respects in accordance with generally
accepted accounting principles ("GAAP") consistently applied during the
period involved, except as may be noted therein.
(ii) BancSecurity has filed all material reports,
registrations and statements together with any amendments required to
be made with respect thereto, that it was required to file since
September 30, 1997 with the FDIC, the FRB or the Division
(collectively, the "REGULATORY
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AGENCIES") and has paid all fees and assessments due and payable in
connection therewith, except for those reports, registrations and
statements and those fees and assessments that would not have a
Material Adverse Effect on BancSecurity.
(h) Absence of Certain Changes or Events. Except as disclosed in
Section 3.1(h) of the BancSecurity Disclosure Schedule, (i) from September 30,
1997 to the date hereof, BancSecurity and the Banks have not incurred any
liability, other than in the ordinary course of its business consistent with
past practice, and (ii) since September 30, 1997, there has not been any
condition, event, change or occurrence that, individually or in the aggregate,
has had, or is reasonably likely to have, a Material Adverse Effect on
BancSecurity. "MATERIAL ADVERSE EFFECT," with respect to a party to this
Agreement, means a material adverse effect upon (A) the business, properties,
assets, financial condition or results of operations of such party, taken as a
whole or (B) the ability of such party to consummate the transactions
contemplated by this Agreement; it being understood that a Material Adverse
Effect shall not include: (i) a mandatory change with respect to, or effect on,
a party resulting from a change in law, rule, regulation, GAAP or regulatory
accounting principles; (ii) a change with respect to, or effect on, a party
resulting from expenses (such as legal, accounting and investment bankers' fees)
incurred in connection with this Agreement or the transactions contemplated
hereby; (iii) a material change with respect to, or effect on, a party resulting
from any other matter affecting depository institutions generally; (iv) any
damage, destruction or loss covered by insurance with respect to any assets of a
party; (v) actions contemplated by this Agreement; (vi) changes attributable to
or resulting from changes in general economic conditions affecting banks,
savings institutions or their holding companies generally, including changes in
the prevailing level of interest rates; (vii) any declaration, setting aside or
payment of any dividends or distributions in respect of shares of BancSecurity
common stock permitted by Section 4.1(l)(xxii) of this Agreement; (viii) any
adjustments due to the application of FAS 115; (ix) any strike, work stoppage,
slowdown or other labor disturbance, suffered by BancSecurity or the Banks; or
(x) any union organizing relating to the employees of BancSecurity or the Banks.
Each party agrees to provide written notification to the other party if an event
or series of events occurs which reduces or is reasonably likely to reduce
anticipated earnings in calendar year 1997 or 1998 of BancSecurity by
$500,000.00 or more and of Buyer by $1,000,000.00 or reduces or is reasonably
likely to reduce the stockholder's equity of BancSecurity by $1,000,000.00 or of
Buyer by $2,000,000.00. Such notice shall not, of itself, create any presumption
that such reduction or possible reduction in earnings or capital is a Material
Adverse Effect.
(i) Taxes. Except as disclosed in Section 3.1(i) of the BancSecurity
Disclosure Schedule, all federal, state, and local tax returns required to be
filed by or on behalf of BancSecurity and the Banks have been timely filed or
requests for extensions have been timely filed (and any such extension shall
have been granted and not have expired). All taxes, shown on such returns, all
taxes required to be shown on returns for which extensions have been granted,
and any penalties, interest or other governmental charges related thereto have
been paid in full or adequate provision has been made for any such taxes on
BancSecurity's balance sheet as of September 30, 1997 (in all material respects
in accordance with GAAP). As of the date of this Agreement, there is no audit
examination (whether concluded or in progress), deficiency, claim, or refund
litigation with respect to any taxes of BancSecurity or the Banks that could
reasonably be expected to result in a Material Adverse Effect, and no claim or
assessment that could reasonably be expected to result in a Material Adverse
Effect has been made by any authority in a jurisdiction where BancSecurity or
the Banks does not file tax returns and BancSecurity or any of the Banks is
subject to taxation. Neither BancSecurity nor any of the Banks has executed an
extension or waiver of any statute of limitations on the
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assessment or collection of any material tax due that is currently in effect.
BancSecurity and the Banks have withheld and paid all taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder or other third party, and
BancSecurity and the Banks have timely complied with all applicable information
reporting requirements under Part III, Subchapter A of Chapter 61 of the Code
and similar applicable state and local information reporting requirements,
except in each case for such failure to withhold, pay or comply that would not,
individually or in the aggregate result in a Material Adverse Effect on
BancSecurity. Neither BancSecurity nor any of the Banks is responsible for the
taxes of any person other than BancSecurity or the Banks under Treasury
Regulation 1.1502-6 or any similar provision of federal, state or foreign law.
(j) Absence of Claims. Except as disclosed in Section 3.1(j) of the
BancSecurity Disclosure Schedule, neither BancSecurity, any of the Banks nor any
of their respective directors and officers, in their respective capacities as
directors and officers, is a party to any pending litigation, legal,
administrative, arbitration or other proceeding, before any court or
governmental agency ("CLAIM") which is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on BancSecurity, and there is no
threatened Claim against BancSecurity or any of the Banks, which is reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect.
(k) Absence of Regulatory Actions. Neither BancSecurity nor any of the
Banks is a party to any cease and desist order, written agreement or memorandum
of understanding with, or a party to any commitment letter or similar written
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depository institution holding companies or engaged in the
insurance of bank deposits nor has either been advised by any Regulatory
Agencies that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar written undertaking.
(l) Agreements. Except for this Agreement and as contemplated thereby
and except as disclosed in Section 3.1(l) of the BancSecurity Disclosure
Schedule, neither BancSecurity nor any of the Banks is a party to a written or,
to BancSecurity's or to any of the Banks' knowledge, oral (A) agreement not
terminable by BancSecurity or any of the Banks, as the case may be, on thirty
(30) days' or less notice, and providing for payments in excess of $50,000.00,
(B) agreement with any executive officer or other key employee of BancSecurity
or any of the Banks the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving
BancSecurity of the nature contemplated by this Agreement, (C) agreement with
respect to any executive officer or key employee of BancSecurity or the Banks
providing for other than at-will employment, (D) agreement or plan, including
any stock option plan, stock appreciation rights plan, restricted stock plan,
stock purchase plan, or any other non-qualified compensation plan, any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement, or (E) agreement containing covenants that limit the ability of
BancSecurity or any of the Banks to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which or
method by which, BancSecurity or any of the Banks (including any successor
thereof) may carry on its business (other than as may be required by law or any
regulatory
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agency). The Banks and BancSecurity have performed in all material respects all
obligations required to be performed by them to date, and are not in material
default under, and no event has occurred which, with the lapse of time or action
by a third party, could result in a material default under any of the
aforedescribed agreements to which any of the Banks or BancSecurity is a party
or by which any of the Banks or BancSecurity is bound.
(m) Labor Matter. Neither BancSecurity nor any of the Banks is a party
to, or is bound by, any collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization with respect
to its employees. Neither BancSecurity nor any of the Banks is the subject of
any proceeding asserting that it has committed an unfair labor practice or
seeking to compel it to bargain with any labor organization as to wages and
conditions of employment, nor is the management of BancSecurity or any of the
Banks aware of any strike, other labor dispute or organizational effort
involving BancSecurity or any of the Banks that is pending or threatened that
individually or in the aggregate would result in a Material Adverse Effect on
BancSecurity.
(n) Employee Benefit Plans.
(i) Section 3.1(n) of the BancSecurity Disclosure Schedule
contains a complete list of all employee, retiree or director pension,
retirement, stock option, stock purchase, restricted stock, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, supplemental income, supplemental retirement, consulting,
bonus, group insurance, key executive officer insurance, severance and
any other benefit plans, employment contracts (providing termination,
change in control, or severance payments), agreements, arrangements, or
policies including, but not limited to, employee benefit plans, as
defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), incentive and welfare policies,
contracts, plans and arrangements and all trust agreements related
thereto, maintained at the date hereof or at any time within three (3)
years prior to the date hereof with respect to any present or former
directors, officers, or other employees of BancSecurity and the Banks
(hereinafter referred to collectively as the "EMPLOYEE PLANS"). All of
the Employee Plans comply in all material respects with all applicable
requirements of ERISA, the Code and other applicable laws and have been
operated in material compliance with their terms. Neither BancSecurity
nor the Banks has engaged in a "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Code) with respect to any
Employee Plan which is likely to result in any material penalties or
taxes to BancSecurity or the Banks under Section 502(i) of ERISA or
Section 4975 of the Code. Neither BancSecurity nor any entity which is
considered one employer with BancSecurity under Section 4001 of ERISA
or Section 414 of the Code (an "ERISA AFFILIATE") has ever maintained,
or contributed to any plan subject to either Title IV of ERISA or
Section 9412 of the Code. Each Employee Plan of BancSecurity and the
Banks which is an employee "pension benefit plan" (as defined in
Section 3(2) of ERISA) and which is intended to be qualified under
Section 401(a) of the Code (a "QUALIFIED PLAN") has received a
favorable determination letter from the Internal Revenue Service
("IRS") that the pension benefit plan complies with all applicable
legislative and regulatory requirements for tax qualification that were
in effect at the time that the determination letter was issued and
BancSecurity is not aware of any circumstances likely to result in
revocation of any such favorable determination letter. No Employee Plan
is an "employee stock ownership plan" (as defined in Section 4975(e)(7)
of the Code).
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(ii) There is no pending or, to BancSecurity's knowledge,
threatened litigation, administrative action or proceeding relating to
any Employee Plan. There has been no announcement or commitment by
BancSecurity to create an additional Employee Plan or to amend an
Employee Plan except for amendments required by applicable law which do
not materially increase the cost of such Employee Plan.
(iii) With respect to each Employee Plan to the extent
applicable, BancSecurity will supply, within 30 days, to Buyer a true
and complete copy of (A) the annual report on the applicable form of
the Form 5500 series filed with the IRS with all the attachments filed
for 1994, 1995 and 1996 plan years, (B) such Employee Plan, including
amendments thereto (or a copy of the substantive provisions of each
Employee Plan for which no plan document exists), (C) each trust
agreement and insurance contract relating to such Employee Plan,
including amendments thereto, (D) the most recent summary plan
description for such Employee Plan, including amendments thereto, if
the Employee Plan is subject to Title I of ERISA, (E) any material
written communication to employees relating to Employee Plans and (F)
the most recent determination letter issued by the IRS if such Employee
Plan is a Qualified Plan.
(o) Title to Assets. Except as set forth in Section 3.1(o) of the
BancSecurity Disclosure Schedule, BancSecurity and the Banks have title to all
material assets and properties, whether real or personal, tangible or
intangible, that they purport to own, including without limitation all real and
personal assets and properties reflected in their Consolidated Reports of
Condition and Income as of September 30, 1997 or acquired subsequent thereto
(except to the extent that such assets and properties have been disposed of for
fair value in the ordinary course of business since September 30, 1997), subject
to no liens, mortgages, security interests, encumbrances or charges of any kind,
except (i) as noted in said Consolidated Reports or the Schedules thereto; (ii)
statutory liens for taxes not yet delinquent; (iii) security interests granted
to secure deposits of funds by federal, state or other governmental agencies;
(iv) minor defects and irregularities in title and encumbrances that do not
materially impair the use thereof for the purposes for which they are held by
the Banks as of the date hereof; and (v) such liens, mortgages, security
interests, encumbrances and charges that are not in the aggregate material to
the assets and properties of BancSecurity and the Banks. Liens shall mean any
claim, encumbrance, or charge on property for payment of a debt, obligation or
duty. Since September 30, 1997, no assets of BancSecurity or the Banks have
sustained (whether or not covered by insurance) any loss, damage or other
destruction that would have a Material Adverse Effect on BancSecurity. The
assets of BancSecurity and the Banks are in good operating condition, normal
wear and tear excepted. The only assets of BancSecurity or the Banks which are
leased are identified in Section 3.1(o) of the BancSecurity Disclosure Schedule.
(p) Fees. Except as set forth in Section 3.1(p) of the BancSecurity
Disclosure Schedule and other than financial advisory services performed for
BancSecurity by Hovde Financial, Inc., neither BancSecurity nor the Banks, nor
to BancSecurity's or the Banks' knowledge any of their respective officers,
directors, employees or agents, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions, or
finder's fees, and no broker or finder has acted directly or indirectly for
BancSecurity or the Banks, in connection with this Agreement or the transactions
contemplated hereby. Buyer shall not be liable for any financial services fees
incurred by BancSecurity or the Banks, all of which shall be paid or fully
accrued as of the Closing Date. Neither BancSecurity nor the Banks shall be
liable for any financial services advisory fees incurred by Buyer.
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(q) Compliance with Laws. BancSecurity and the Banks hold all licenses,
certificates, permits, franchises and rights from all appropriate federal, state
or other public authorities necessary for the conduct of its and their business
as it is presently conducted except where the absence thereof would not,
individually or in the aggregate, have a Material Adverse Effect on BancSecurity
or except where the absence thereof would not delay the Merger. BancSecurity and
the Banks have conducted their business so as to comply in all respects with all
applicable federal, state and local statutes, ordinances, regulations or rules,
except for possible violations which would not, individually or in the
aggregate, have a Material Adverse Effect on BancSecurity; and neither
BancSecurity nor the Banks is presently charged with, or, to BancSecurity's or
the Banks' knowledge, under governmental investigation with respect to, any
actual or alleged material violations of any statute, ordinance, regulation or
rule which would have a Material Adverse Effect; and neither BancSecurity nor
the Banks is the subject of any pending or, to BancSecurity's or the Banks'
knowledge, threatened material proceeding by any regulatory authority having
jurisdiction over its business, properties or operations which would have a
Material Adverse Effect on BancSecurity.
(r) Environmental Matters.
(i) For purposes of this Agreement, the following terms shall
have the following respective meanings:
(A) "ENVIRONMENTAL LAW(S)" means any law, regulation,
rule, ordinance or similar requirement which governs or
protects the environment enacted by the United States, any
state, or any county, city or agency or subdivision of the
United States or any state.
(B) "HAZARDOUS MATERIAL(S)" means any material or
substance: (1) which is a "hazardous substance," "pollutant,"
or "contaminant," pursuant to the Comprehensive Environmental
Response Compensation and Liability Act (42 U.S.C. 9601 et
seq.) as amended and regulations promulgated thereunder; (2)
containing gasoline, oil, diesel fuel or other petroleum
products; (3) which is "hazardous waste" pursuant to the
Federal Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.) as amended and regulations promulgated
thereunder; (4) containing polychlorinated biphenyls (PCBs);
(5) containing asbestos; (6) which is radioactive; (7) the
presence of which requires investigation or remediation under
any Environmental Law (defined above); or (8) which is defined
or identified as a "hazardous waste," "hazardous substance,"
"pollutant," "contaminant," or "biologically Hazardous
Material" under any Environmental Law.
(C) "PROPERTIES" means (1) the real estate owned or
leased by BancSecurity or the Banks and used as a banking
related facility; (2) other real estate owned ("OREO") by
BancSecurity or the Banks as defined by any other federal or
state financial institution regulatory agency with regulatory
authority for BancSecurity or the Banks; (3) real estate that
is in the process of pending foreclosure or forfeiture
proceedings conducted by BancSecurity or the Banks; and (4)
real estate owned or leased by a partnership or joint venture
in which BancSecurity or the Banks has an ownership interest.
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(ii) Except as disclosed in Schedule 3.1(r) of BancSecurity
Disclosure Schedule, to the best of BancSecurity's knowledge there are
no present conditions on the Properties, involving or resulting from a
past or present storage, spill, discharge, leak, emission, injection,
escape, dumping, release or migration of any Hazardous Materials or
from any generation, transportation, treatment, storage, disposal, use
or handling of any Hazardous Materials, that may reasonably be expected
to result in a Material Adverse Effect on BancSecurity.
(iii) To the best of BancSecurity's knowledge BancSecurity and
the Banks are in substantial compliance with all applicable
Environmental Laws. Neither BancSecurity nor the Banks has received
notice of, nor are there outstanding or pending, any public or private
claims, lawsuits, citations, penalties, unsatisfied abatement
obligations or notices or orders of non-compliance relating to the
environmental condition of the Properties or BancSecurity or the
Banks's compliance with Environmental Laws.
(iv) Except as disclosed in Schedule 3.1(r) of BancSecurity
Disclosure Schedule, to the best of BancSecurity's knowledge no
Properties are currently undergoing or are scheduled to undergo
remediation or clean-up of Hazardous Materials or other environmental
conditions.
(v) BancSecurity and the Banks have all governmental permits,
licenses, certificates of inspection and other authorizations governing
or protecting the environment necessary to conduct its present
business, and are and at all times have been in material compliance
therewith.
(s) Loans and Investments.
(i) Except for matters outside the reasonable knowledge of
senior officers of BancSecurity and except as disclosed in Schedule
3.1(s) of the BancSecurity Disclosure Schedule, as of the date hereof
each outstanding loan of the Banks as of the date hereof is evidenced
by appropriate and sufficient documentation and constitutes the legal,
valid and binding obligation of the obligor named therein, enforceable
in accordance with its terms except to the extent that the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles
affecting the rights of creditors generally. No obligor named therein
is seeking to avoid the enforceability of the terms of any loan under
any such laws or equitable principles and no loan is subject to any
defense, offset or counterclaim. The documentation relating to loans
made by the Banks and relating to all security interests, mortgages and
other liens with respect to all collateral for such loans, taken as a
whole, is adequate for the enforcement of the material terms of such
loans and of the related security interests, mortgages and other liens.
(ii) In originating, underwriting, servicing, and discharging
loans, mortgages, land contracts, and other contractual obligations,
either for their own account or for the account of others, the Banks
have complied with all applicable terms and conditions of such
obligations and with all applicable laws, regulations, rules,
contractual requirements, and procedures in which failure to do so
would have a Material Adverse Effect on BancSecurity. The terms of such
loans and of the related security interests, mortgages and other liens
comply in all material respects with all
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applicable laws, rules and regulations (including laws, rules and
regulations relating to the extension of credit).
(t) Allowance for Loan Losses. Except as disclosed in Schedule 3.1(t)
of the BancSecurity Disclosure Schedule, BancSecurity's consolidated allowance
for losses on loans included in the Financial Statements as of September 30,
1997 was $5,517,305.00, representing 1.66% of its total consolidated loans held
in portfolio. In BancSecurity's reasonable judgment, the amount of such
allowance for losses on loans was adequate to absorb reasonably expectable
losses in the loan portfolio of the Banks. To the knowledge of BancSecurity,
there are no facts which would require it to increase the level of such
allowance for losses on loans. There are no loans, leases, other extensions of
credit or commitments to extend credit of the Banks that in the opinion of
management for BancSecurity, should have been or should in accordance with GAAP,
have been classified by the Banks as nonaccrual, as restructured, as 90 days
past due, as still accruing and doubtful of collection or any comparable
classification. BancSecurity and the Banks have disclosed to Buyer in writing
prior to the date hereof the amounts of all loans, leases, advances, credit
enhancements, other extensions of credit, commitments and interest-bearing
assets of the Banks that have been classified as of September 30, 1997 as "Other
Loans Specially Mentioned," "Special Mention," "Substandard," "Doubtful,"
"Loss," "Classified," "Criticized," "Delinquent Loans," "Credit Risk Assets,"
"Concerned Loans" (in the latter two cases, to the extent available) or words of
similar import. BancSecurity has provided to Buyer such written information
concerning the loan portfolios of the Banks as Buyer has requested, which
information is true, correct and complete in all material respects. From and
after the date hereof, BancSecurity and the Banks promptly will provide Buyer
with a copy of each quarterly classified asset report and a delinquency trend
report it provides to its Board of Directors. The OREO included in any
non-performing assets of BancSecurity is carried net of reserves at the lower of
cost or fair value.
(u) Material Interests of Certain Persons. No director or executive
officer of BancSecurity or the Banks, nor any holder of ten percent or more of
the outstanding capital stock of BancSecurity, nor any affiliate of such person
as that term is defined under 12 USC 371(c) ("BANK PRINCIPAL") (i) is or has
during the period subsequent to December 31, 1996, been a party (other than as a
depositor) to any transaction with the Banks, whether as a borrower or
otherwise, which (a) was made other than in the ordinary course of business; (b)
was made on other than substantially the same terms, including interest rate and
collateral, as those prevailing at the time for comparable transactions for
other persons; or (c) involves more than the normal risk of collectibility or
presents other unfavorable features; or (ii) is a party to any loan or loan
commitment, whether written or oral, from the Banks involving an amount in
excess of $10,000. Except as set forth in Section 3.1 (u) of BancSecurity
Disclosure Schedule, no Bank Principal holds any position with any depository
organization other than the Banks or BancSecurity. For the purposes of this
provision, the term "depository organization" means a commercial bank, a savings
bank, a trust company, a savings and loan association, a homestead association,
a cooperative bank, an industrial bank, a credit union, or a depository
organization holding company.
(v) Insurance. BancSecurity and the Banks are presently insured, and
since January 1, 1994 each has been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business located in the State of Iowa would, in
accordance with good business practice, customarily be insured. BancSecurity has
not received any notice of lapse or cancellation of any insurance currently in
effect. Since September 30, 1997, no act or omission has occurred which may
cause any lapse in or termination of the insurance maintained by BancSecurity or
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the Banks. BancSecurity has delivered to Buyer true, accurate and complete
copies of all insurance policies of BancSecurity and the Banks as of the date of
this Agreement. Each such policy is in full force and effect, with all premiums
due thereon on or prior to the date of this Agreement having been paid as and
when due. The Banks have not filed any claim under their bankers blanket bond
during the past five years. There are no unresolved claims.
(w) Investment Securities. Except as set forth in Section 3.1(w) of the
BancSecurity Disclosure Schedule, none of the investments reflected in the
balance sheet of BancSecurity as of September 30, 1997, and none of such
investments with face value of in excess of $100,000 made by it since September
30, 1997 is subject to any restriction (contractual or statutory), other than
applicable securities laws, that would materially impair the ability of the
entity holding such investment freely to dispose of such investment at any time,
except to the extent any such investments are pledged in the ordinary course of
business (including in connection with hedging arrangements or programs or
reverse repurchase arrangements) consistent with prudent banking practice to
secure obligations of BancSecurity and the Banks, as applicable. Since September
30, 1997, BancSecurity and the Banks have not sold, transferred or otherwise
disposed of any securities prior to maturity or call date.
(x) Registration Obligations. BancSecurity is not under any obligation,
contingent or otherwise, to register any of its securities under the Securities
Act or any state securities laws.
(y) Books. The books and records of BancSecurity and the Banks are
complete and accurate in all material respects and have been, and are being,
maintained in accordance with applicable legal and accounting requirements.
(z) Corporate Documents. BancSecurity and the Banks have delivered to
Buyer true and complete copies of their respective certificate of incorporation,
articles of incorporation and bylaws, as amended to date, which are currently in
full force and effect.
(aa) Absence of Knowledge. As of the date hereof, BancSecurity is not
aware of any reason why it would be unable to obtain all the necessary approvals
required from the Regulatory Agencies in order to consummate the transactions
contemplated by this Agreement.
(bb) Accounting and Tax Treatment. To the knowledge of BancSecurity,
BancSecurity has not engaged in any act that would preclude or adversely affect
the Merger from qualifying as a tax-free reorganization under Section 368 of the
Code or from using the pooling of interests method of accounting for this
transaction, nor has BancSecurity or any of the Banks changed any accounting
policies since December 31, 1996.
(cc) SEC and Regulatory Filings. None of the information regarding
BancSecurity or the Banks which is prepared by or reviewed by BancSecurity or
the Banks for inclusion or included in (i) the proxy or information statement to
be mailed to shareholders of BancSecurity (the "PROXY STATEMENT"), (ii) the
registration statement on Form 4 to be filed with the Securities and Exchange
Commission ("SEC") by Buyer for the purpose of registering the shares of Buyer
Common Stock to be exchanged for shares of BancSecurity Common Stock pursuant to
the provisions of this Agreement (the "REGISTRATION STATEMENT"), if applicable,
or (iii) any other documents to be filed with the SEC or any Regulatory Agencies
in connection
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with the transactions contemplated hereby will, at the respective times such
documents are filed with the SEC or any Regulatory Agencies and, in the case of
the Registration Statement, if applicable, when it becomes effective and, with
respect to the Proxy Statement, when mailed, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements therein not misleading or, in the case of the Proxy
Statement or any amendment thereof or supplement thereto, at the time of the
meeting of BancSecurity stockholders referred to in Section 4.1(b) of this
Agreement, be false or misleading with respect to any material fact, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for such meeting.
(dd) Derivative Contracts. Neither BancSecurity nor the Banks is a
party to or has agreed to enter into an exchange-traded or over-the-counter
swap, forward, future, option, cap, floor or collar financial contract or
agreement, or any other contract or agreement not included in Financial
Statements of BancSecurity which is a financial derivative contract (including
various combinations thereof) ("DERIVATIVE CONTRACTS").
(ee) Deposits. None of the deposits of the Banks are subject to any
encumbrances, legal restraint or other legal process other than in the ordinary
course of business, except as set forth in Section 3.l(ee) of the BancSecurity
Disclosure Schedule, which would have a Material Adverse Effect on BancSecurity.
(ff) Compensation. Since September 30, 1997, neither BancSecurity nor
any Bank has granted any increase in compensation or benefits except in the
ordinary course of business or as previously announced and disclosed to Buyer in
Section 3.1(ff) of the BancSecurity Disclosure Schedule.
3.2 Representations and Warranties of Buyer. In order to induce
BancSecurity to enter into this Agreement, Buyer represents and warrants to
BancSecurity, in all material respects, as of the date of this Agreement (except
as otherwise expressly provided) as follows, except as disclosed on the attached
EXHIBIT C (the "BUYER DISCLOSURE SCHEDULE") and the schedules thereunder which
are numbered to correspond to the representations set forth below:
(a) Organization. Buyer is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Wisconsin and is a
bank holding company duly registered under the BHCA. Buyer owns 100% of the
outstanding capital stock of the commercial banks listed on Section 3.2(a) of
the Buyer Disclosure Schedule. Each of its subsidiary banks is duly organized,
validly existing and in good standing under the laws of the State of Wisconsin
or the United States of America. Buyer and its subsidiary banks each have the
corporate power and authority to carry on its business as it is now conducted
and to own, lease and operate its properties, and each is duly qualified to do
business and is in good standing in each jurisdiction in which the nature of the
business conducted or the properties or assets owned or leased by it makes such
qualification necessary, except where the absence thereof, would not,
individually or in the aggregate, have a Material Adverse Effect as herein as
defined in 3.1(h), above. Each subsidiary bank's deposits are insured by the
Bank Insurance Fund of the FDIC to the maximum extent permitted by law. Other
than the subsidiary banks, Buyer has no direct or indirect subsidiaries except
as listed on Section 3.2(a) of the Buyer Disclosure Schedule. Acquisition
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Iowa. Buyer owns 100% of the outstanding
capital stock of Acquisition Subsidiary. Acquisition Subsidiary has all
requisite corporate power and authority to enter into this Agreement. The
execution, delivery, and performance of this Agreement by Acquisition Subsidiary
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and the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of Acquisition Subsidiary. Subject to
approval by the Regulatory Agencies and other governing bodies having regulatory
authority over Acquisition Subsidiary as may be required by statute or
regulation, this Agreement constitutes a valid and binding obligation of
Acquisition Subsidiary, enforceable against it in accordance with its terms.
(b) Capital Structure.
(i) The authorized capital stock of Buyer consists of
20,000,000 shares of Buyer Common Stock, $1.00 par value per share (the
"BUYER COMMON STOCK"). As of November 30, 1997, 9,749,980 shares of
Buyer Common Stock were issued and outstanding. All outstanding shares
of Buyer Common Stock are validly, issued, fully paid and nonassessable
and not subject to any preemptive rights. Buyer will promptly notify
BancSecurity of any changes or actions to change the number of shares
of Buyer's common stock issued and outstanding.
(ii) Buyer is not a party to or bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible
securities, commitments or agreements of any character obligating Buyer
to issue, deliver or sell, or cause to be issued, delivered or sold,
any additional shares of capital stock of Buyer or obligating Buyer to
grant, extend or enter into any such option, warrant, call, right,
convertible securities, commitments or agreements except as listed on
Section 3.2(b) of the Buyer Disclosure Schedule. As of the date hereof,
there are no outstanding contractual obligations of Buyer or the
subsidiary banks to repurchase, redeem or otherwise acquire any shares
of capital stock of Buyer or the subsidiary banks, respectively, except
as listed on Section 3.2(a) of the Buyer Disclosure Schedule.
(c) Reports. Buyer and its subsidiary banks have filed all reports,
registrations and statements, together with any required amendments thereto,
that they were required to file with (i) the SEC, including, but not limited to,
Forms 10-K, Forms 10-Q and proxy statements, (ii) the FRB, (iii) the FDIC, (iv)
the OCC and (v) any applicable state securities or banking authorities. All such
reports and statements filed with any such regulatory body or authority are
collectively referred to herein as the "BUYER REPORTS." As of their respective
dates, the Buyer Reports complied in all material respects with all the rules
and regulations promulgated by the SEC, the FRB, the FDIC, the OCC and any
applicable state securities or banking authorities, as the case may be, and did
not contain any untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Buyer
has timely filed with the SEC all reports, statements and forms required to be
filed pursuant to the Exchange Act.
(d) Enforceability. Buyer has all requisite corporate power and
authority to enter into this Agreement and the execution, delivery, and
performance of this Agreement by Buyer and the consummation of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
Buyer. Subject to approval by the Regulatory Agencies and other governing bodies
having regulatory authority over Buyer as may be required by statute or
regulation, and subject to approval of this Agreement by the requisite vote of
the shareholders, this Agreement constitutes a valid and binding obligation of
Buyer, enforceable against it in accordance with its terms. The affirmative vote
of a majority of the outstanding shares of
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Buyer's Common Stock is required for approval of this Agreement and to
consummate the transactions contemplated hereby.
(e) No Violations. Subject to approval of the Regulatory Agencies, the
execution, delivery and performance of this Agreement by Buyer does not, and the
consummation of the transactions contemplated hereby by Buyer will not,
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of Buyer or to which Buyer (or any of its
properties) is subject, which breach, violation or default would, individually
or in the aggregate, have a Material Adverse Effect on Buyer, (ii) a breach or
violation of, or a default under, the articles of incorporation, association or
bylaws of Buyer or (iii) a breach or violation of, or a default under (or an
event which with due notice or lapse of time or both would constitute a default
under), or result in the termination of, accelerate the performance required by,
or result in the creation of any lien, pledge, security interest, charge or
other encumbrance upon any of the properties or assets of Buyer hereunder, any
of the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan agreement or other agreement, instrument or obligation to which
Buyer is a party, or to which any of its properties or assets may be bound or
affected, except for any of the items described in (iii) of this subsection
that, individually or in the aggregate, would not have a Material Adverse Effect
on Buyer.
(f) Consents. Except as referred to herein or in connection, or in
compliance, with the provisions of the Securities Act, the Exchange Act, the
BHCA, the rules and regulations of the FRB, the Division, and the FDIC, as
applicable, and the environmental, corporation, securities or "blue sky" laws or
regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Buyer of the Merger or the other transactions
contemplated by this Agreement.
(g) Financial Statements and Reports.
(i) As of their respective dates, neither Buyer's Financial
Statements (as defined below), nor any subsequent Buyer Financial
Statements prepared subsequent to September 30, 1997 (collectively the
"BUYER'S FINANCIAL STATEMENTS"), contained or will contain any untrue
statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading; provided, that no representation is made
herein with respect to any exhibits to the Buyer's Financial Statements
that are not specifically incorporated by reference therein. Each of
the balance sheets of Buyer contained or specifically incorporated by
reference in the Buyer's Financial Statements (including in each case
any related notes and schedules) fairly presented the financial
position of the entity or entities to which it relates as of its date,
and each of the statements of income and of changes in shareholders
equity and of cash flows of Buyer, contained or specifically
incorporated by reference in the Buyer's Financial Statements
(including in each case any related notes and schedules) fairly
presented the results of operations, shareholders equity and cash
flows, as the case may be, of the entity or entities to which it
relates for the periods set forth therein (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments), in
each case in all material respects in accordance with GAAP consistently
applied during the period involved, except as may be noted therein.
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(ii) Buyer has filed all material reports, registrations and
statements together with any amendments required to be made with
respect thereto, that it was required to file since September 30, 1997
with the applicable Regulatory Agencies and other applicable state
regulatory agencies and has paid all fees and assessments due and
payable in connection therewith, except for those reports,
registrations and statements and those fees and assessments that would
not have a Material Adverse Effect on Buyer.
(h) Absence of Certain Changes or Events. From September 30, 1997 to
the date hereof, Buyer has not incurred any liability, other than in the
ordinary course of its business consistent with past practice, and since
September 30, 1997, there has not been any condition, event, change or
occurrence that, individually or in the aggregate, has had, or is reasonably
likely to have, a Material Adverse Effect on Buyer.
(i) Taxes. All federal, state, and local tax returns required to be
filed by or on behalf of Buyer have been timely filed or requests for extensions
have been timely filed (and any such extension shall have been granted and not
have expired). All taxes, shown on such returns, all taxes required to be shown
on returns for which extensions have been granted, and any penalties, interest
or other governmental charges related thereto have been paid in full or adequate
provision has been made for any such taxes on Buyer's balance sheet as of
September 30, 1997 (in all material respects in accordance with GAAP).
(j) Absence of Claims. Neither Buyer nor any of its directors and
officers, in their capacities as directors and officers, is a party to any
pending litigation, legal, administrative, arbitration or other proceeding,
before any court or governmental agency ("CLAIM"), and to the knowledge of the
executive officers of Buyer, there is no threatened Claim against Buyer which is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Buyer.
(k) Absence of Regulatory Actions. Buyer is not a party to any cease
and desist order, written agreement or memorandum of understanding with, or a
party to any commitment letter or similar written undertaking to, or subject to
any order or directive by, or a recipient of any extraordinary supervisory
letter from any Regulatory Authority, nor has it been advised by any Regulatory
Authority that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar written undertaking.
(l) Compliance with Laws. Buyer and its subsidiaries hold all licenses,
certificates, permits, franchises and rights from all appropriate federal, state
or other public authorities necessary for the conduct of its and their business
as it is presently conducted except where the absence thereof would not,
individually or in the aggregate, have a Material Adverse Effect on Buyer, or
delay the Merger. Buyer has conducted its business so as to comply in all
respects with all applicable federal, state and local statutes, ordinances,
regulations or rules, except for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect on Buyer; and
Buyer is not presently charged with, or, to Buyer's knowledge, under
governmental investigation with respect to, any actual or alleged material
violations of any statute, ordinance, regulation or rule, and Buyer is not the
subject of any pending or, to Buyer's knowledge, threatened material proceeding
by any Regulatory Authority having jurisdiction over its business, properties or
operations.
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(m) Absence of Knowledge. As of the date hereof, Buyer is not aware of
any reason why it would be unable to obtain all the necessary approvals required
in order to consummate the transactions contemplated by this Agreement.
(n) Accounting and Treatment. To the knowledge of Buyer, Buyer has not
engaged in any act that would preclude or adversely affect the Merger from
qualifying as a tax-free reorganization under Section 368 of the Code or from
using the pooling of interests method of accounting for this transaction.
(o) Information Supplied. None of the information supplied or to be
supplied by Buyer for inclusion or incorporation by reference in (i) the
Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading and (ii) the Proxy Statement and
any amendment or supplement thereto will, at the date of mailing to the
BancSecurity stockholders and at the time of the meeting of stockholders of the
BancSecurity to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The Registration Statement will comply as to form in all material
respects with applicable law.
(p) No Plan to Transfer Assets. Buyer has no plan or intention to sell
or otherwise dispose of any of the assets of the BancSecurity to be acquired in
the Merger, except for dispositions in the ordinary course of business or
transfers to controlled subsidiaries as described in Section 368(a)(2)(C) of the
Code.
ARTICLE IV
COVENANTS OF BANCSECURITY AND BUYER
4.1 Covenants of BancSecurity. During the period from the date of this
Agreement and continuing until the Effective Time, BancSecurity agrees as
follows:
(a) Ordinary Course. Except as otherwise required under this Agreement
or consented to by Buyer, BancSecurity and the Banks will carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and use all reasonable efforts to
preserve intact their present business organizations, maintain their rights and
franchises and preserve their relationships with customers, suppliers and others
having business dealings with them to the end that their goodwill and ongoing
businesses shall not be impaired in any material respect. BancSecurity shall
not, nor shall it permit the Banks to (i) enter into any new material line of
business, (ii) increase or decrease the current number of the directors of
BancSecurity and the Banks, (iii) change its or the Banks's lending, investment,
liability management or other banking policies in any respect that would have a
Material Adverse Effect with respect to such party; or (iv) incur or commit to
any capital expenditures (or any obligations or liabilities in connection
therewith) other than capital expenditures (and obligations or liabilities in
connection therewith) committed to prior to the date of this Agreement unless
otherwise permitted by this Agreement.
(b) Shareholder Meeting. BancSecurity will cause to be duly called, and
will cause to be held not later than forty-five (45) days following the
effective date of the Registration Statement, a meeting of
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its shareholders and will direct that this Agreement be submitted to a vote at
such meeting. BancSecurity will (i) cause proper notice of such meeting to be
given to its shareholders in compliance with the IBCA and other applicable laws
and regulations; (ii) recommend by the affirmative vote of a majority of the
Board of Directors a vote in favor of approval of this Agreement; and (iii) use
its best efforts to solicit from its shareholders proxies in favor thereof.
(c) Registration Statement. BancSecurity will promptly furnish or cause
to be furnished to Buyer all of the information concerning BancSecurity and the
Banks required for inclusion in, and will cooperate with Buyer in the
preparation of, the Registration Statement and Proxy Statement (including
audited financial statements, prepared in accordance with generally accepted
accounting principles, in form suitable for inclusion in the Registration
Statement and Proxy Statement), or any statement or application made by Buyer to
any governmental body in connection with the Merger. BancSecurity agrees
promptly to advise Buyer if at any time prior to the Effective Date of the
Merger, any information provided by or on behalf of BancSecurity becomes
incorrect or incomplete in any material respect and to provide the information
needed to correct such inaccuracy or omission. At the time of mailing thereof to
BancSecurity shareholders, at the time of BancSecurity shareholders's meeting
referred to in Section 4.1 (b) hereof and at the Effective Time of the Merger,
the Proxy Statement included as part of the Registration Statement or any
amendment thereof or supplement thereto, will not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which they are
made, not misleading or omit to state a material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for BancSecurity shareholders' meeting; provided, however, that none of
the provisions of this subparagraph shall apply to statements in or omissions
from the Registration Statement or the Proxy Statement made in reliance upon and
in conformity with information furnished by Buyer for use in the Registration
Statement or the Proxy Statement.
(d) Confidential Information. BancSecurity will hold in confidence all
documents and nonpublic information concerning Buyer and its subsidiaries
furnished to BancSecurity and its representatives in connection with the Merger
and will not release or disclose such information to any other person, except as
required by law and except to BancSecurity's outside professional advisers in
connection with this Agreement, with the same undertaking from such professional
advisers. If the Merger contemplated by this Agreement shall not be consummated,
such confidence shall be maintained and such information shall not be used in
competition with Buyer (except to the extent that such information can be shown
to be previously known to BancSecurity, in the public domain, or later acquired
by BancSecurity from other legitimate sources) and, upon request, all such
documents, any copies thereof and extracts therefrom shall immediately
thereafter be returned to Buyer.
(e) Benefit Plans. BancSecurity and the Banks will, to the extent
legally permissible, take all action necessary or required (i) to terminate or
amend, if requested by Buyer and at Buyer's cost, all qualified pension and
welfare benefit plans and all non-qualified benefit plans and compensation
arrangements as of the Effective Time; (ii) to amend the Plans to comply with
the provisions of the Tax Reform Act of 1986, as amended, and regulations
thereunder and other applicable law as of the Effective Time; and (iii) to
submit application to the IRS for a favorable determination letter for each of
the Plans which is subject to the qualification requirements of Section 401 (a)
of the Code prior to the Effective Time. With respect to each such Plan to the
extent applicable, to the best knowledge of BancSecurity the termination of the
Plan will
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not result in an unfunded or underfunded liability that will result in a
Material Adverse Effect with respect to BancSecurity.
Except as otherwise required pursuant to this Section 4.1(e),
BancSecurity agrees as to itself and the Banks that it will not, without the
prior written consent of Buyer, (i) enter into, adopt, amend (except as may be
required by law) or terminate any Plan, as the case may be, or any other
employee benefit plan or any agreement, arrangement, plan or policy between
BancSecurity or any of the Banks and one or more of its directors or officers;
provided, however, that BancSecurity or the Banks may amend any of the Plans to
reduce or eliminate a requirement of mandatory periodic contributions.
(f) Compensation. Except for normal increases in the ordinary course of
business consistent with past practice, neither BancSecurity nor any of the
Banks shall increase the compensation of any officer, director, or employee or
enter into or renew any contract, agreement, commitment or arrangement providing
for the payment to any director, officer or employee of BancSecurity or the
Banks of compensation or benefits contingent, or the terms of which are
materially altered, upon the occurrence of the Merger. BancSecurity will notify
Buyer if there is an increase in the aggregate compensation of the officers,
directors, and employees of BancSecurity or the Banks which exceeds four percent
(4%) of the aggregate compensation of such individuals as of September 30, 1997
or, in the case of any one individual, exceeds six percent (6%) of his or her
compensation as of September 30, 1997. Such notification in and of itself does
not necessarily mean that the increase is outside the ordinary course of
business or inconsistent with past practice.
(g) No Solicitations. BancSecurity shall not nor shall it permit the
Banks to, authorize or permit any of its or their officers, directors or
employees or any investment banker, financial advisor, attorney, accountant or
other representative or agent retained by it or the Banks to solicit, or take
any other action to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any takeover
proposal (as defined below), or agree or endorse any takeover proposal, or
participate in any discussions or negotiations, or provide third parties with
any nonpublic information, relating to any such inquiry or proposal.
BancSecurity shall promptly advise Buyer orally and in writing of any such
inquiries or proposals, including all of the material terms thereof. As used in
this Agreement, "takeover proposal" shall mean any tender or exchange offer,
proposal for a merger, consolidation or other business combination involving
BancSecurity or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of BancSecurity other
than the transactions contemplated or permitted by this Agreement.
(h) No Acquisitions. BancSecurity shall not, nor shall it permit the
Banks to, acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, limited
liability company, partnership, association or division thereof or otherwise
acquire or agree to acquire any substantial amount of assets in each case;
provided, however, that the foregoing shall not prohibit (i) internal
reorganizations, consolidations or dissolutions involving only the Banks as
permitted or directed by this Agreement, (ii) foreclosures and other
acquisitions related to previously contracted debt, in each case in the ordinary
course of business, or (iii) acquisitions of BancSecurity assets in each case in
the ordinary course of business.
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(i) Insurance. BancSecurity and the Banks shall maintain the insurance
coverage (or coverage of a like kind and amount) referenced in Section 3.1(v)
through the Effective Time.
(j) Pooling Restrictions. From and after the date of this Agreement,
neither BancSecurity nor the Banks shall take any action which, with respect to
BancSecurity, would disqualify the Merger as a "pooling of interests" for
accounting purposes.
(k) Financial Statements. BancSecurity shall prepare, file and submit
to Buyer all quarterly and management prepared financial statements for any
periods ending at least 30 days before the Closing Date.
(l) Additional Covenants of BancSecurity. From the date of this
Agreement to the Closing Date, BancSecurity, except with the prior written
consent of Buyer which will not be unreasonably withheld, or as specifically
required under the Agreement, shall not, nor shall it allow the Banks to:
(i) Issue, sell or commit to issue or sell any shares of
capital stock of BancSecurity or the Banks, securities convertible into
or exchangeable for capital stock of BancSecurity or the Banks,
warrants, options or other rights to acquire such stock, or enter into
any agreement with respect to the foregoing other than issuance by the
Banks of capital stock to BancSecurity;
(ii) Redeem, purchase or otherwise acquire (except for trust
account shares) directly or indirectly, any shares of capital stock of
BancSecurity or the Banks or any securities convertible or exercisable
for any shares of capital stock of BancSecurity or the Banks;
(iii) Split, combine or reclassify any capital stock of
BancSecurity or the Banks or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of, or in substitution
for shares of capital stock of BancSecurity or the Banks;
(iv) Assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other
individual, corporation or other entity, in any material amount except
for letters of credit or other similar instruments in the normal course
of business;
(v) Other than in the ordinary course of business, discharge
or satisfy any material lien or encumbrance on the properties or assets
of the Banks or pay any material liability;
(vi) Mortgage, pledge or subject to any lien or other
encumbrance any of its assets, except (A) in the ordinary course of
business, (B) liens and encumbrances for current property taxes not yet
due and payable, and (C) liens and encumbrances which do not materially
affect the value or interfere with the current use or ability to convey
the property subject thereto or affected thereby;
(vii) Other than the sale of its former bank office premises
in Ames, Iowa, sell, assign or transfer any tangible or intangible
assets including but not limited to any securities prior to maturity or
call date with a book value greater than $250,000.00, except in the
ordinary course of business (which includes the sale of the guaranteed
portions of government guaranteed loans);
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(viii) Enter into any individual employment, agency or other
contract or arrangement for the performance of personal services for an
amount in excess of $100,000.00 (except for service agreements in the
ordinary course of business). BancSecurity agrees to give Buyer prior
written notice of all individual employment, agency or other written
contract or arrangement for the performance of personal services of
$50,000.00 or more;
(ix) Amend the Banks' or BancSecurity's Articles of
Incorporation, Bylaws, or other governing documents;
(x) Cancel any material debt or claim or waive any right of
material value, except in the ordinary course of business;
(xi) Repurchase or enter into any agreement to repurchase all
or any portion of any loan previously participated to any other
financial institution other than loans repurchased in compliance with
all applicable laws and regulations;
(xii) Originate any loan which is thereafter participated to
another financial institution providing for payment upon default on any
basis other than pro rata;
(xiii) Make or agree to make any loan to any Bank Principal or
any person, corporation or entity in violation of any state or federal
law or regulation;
(xiv) Incur any obligation or liability with respect to
capital expenditures which exceeds $400,000.00 in the aggregate.
BancSecurity agrees to give Buyer prior notice of any purchase of a
capital item that exceeds $25,000.00, the acquisition of which or
obligation to pay therefor was not previously committed as of the date
of this Agreement.
(xv) Fail to timely pay and discharge all federal and state
taxes and other accounts payable for which it is liable, provided, that
the Banks may contest liability for such taxes or accounts payable and
deposit an amount equal to any such taxes, in lieu of the payment
thereof, into a reserve account, determined consistently with prior
practices, from which such taxes will be paid when and to the extent
they are found to be properly due and payable;
(xvi) Except as provided in Section 4.1(f) of the BancSecurity
Disclosure Schedules, pay or commit to pay any additional salary or
other compensation to any of the Bank's officers, directors or
employees;
(xvii) Except as otherwise required pursuant to Section
4.1(e), enter into, adopt, amend (except as may be required by law),
terminate or make or grant any increase above current funding levels in
any of the Plans (other than normal premium increases on current health
care insurance);
(xviii) Fail to charge and pay interest rates on loans and
deposits, respectively, not materially consistent with practices in the
Banks' marketplace;
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(xix) Fail to use its reasonable efforts to comply with any
law, rule, regulation or order applicable to the Banks and/or
BancSecurity if such failure would have a Material Adverse Effect upon
BancSecurity;
(xx) Fail to make all appropriate and required transfers to
the Banks' loan loss reserves based upon existing policies of the Banks
or at the request of any regulatory agency;
(xxi) Change any accounting methods, practices or procedures
with respect to the accumulation and presentation of financial
information, except as directed by applicable law or regulation or to
conform with applicable accounting standards;
(xxii) Declare or pay any dividends or distributions with
respect to its Common Stock in excess of (a) $43.00 per common share of
stock on or about January 1998 for the calendar year 1997, (b) a
quarterly dividend in the first quarter of 1998 equal to $10.75 per
common share of stock, and (c) in each calendar quarter thereafter a
quarterly dividend in an amount equal to the dividend the BancSecurity
shareholders would have received had they been shareholders of Buyer in
the event either the Closing does not occur in the pertinent quarter or
the Closing Date is after the record date for the holders of Buyer's
Common Stock to receive a quarterly dividend in the pertinent quarter,
provided, that in the case of each dividend payment the availability of
the pooling of interests accounting treatment will not be adversely
effected; or
(xxiii) Fail to use its reasonable efforts to obtain the
consent or approval of each person other than the government
authorities referred to in Section 6.l(c) whose consent or approval is
required in order to permit a succession by the Surviving Corporation
pursuant to the Merger to any obligation, right or interest of
BancSecurity or the Banks under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument.
(xxiv) Shall not create any indebtedness other than (i) short
term indebtedness incurred in the normal course of business, (ii)
indebtedness incurred pursuant to an existing contract previously
disclosed to Buyer, (iii) indebtedness to the FHLB, or (iv)
indebtedness other than as necessary to do the acts and things
contemplated by this Agreement.
(xxv) Shall promptly notify Buyer of any lawsuits, claims,
proceedings, regulatory actions or investigations that may be
threatened, brought, asserted or commenced against it or by its
officers, directors, employees or agents involving in any way the
business, properties or assets of BancSecurity or any of the Banks
which would have a Material Adverse Effect on BancSecurity.
(xxvi) Sell, transfer or otherwise dispose of any investment
securities prior to maturity or call date.
(xxvii) Maintain a consolidated allowance for losses on loans
based on required reserves determined pursuant to quarterly loan loss
analysis consistent with past practices and procedures.
As of September 30, 1997, this amount was $5,017,033.
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4.2 Covenants of Buyer. During the period from the date of this
Agreement and continuing until the Effective Time (except for subsection (i)
which covenant shall survive the Effective Time), Buyer agrees as follows:
(a) Ordinary Course. Buyer shall carry on its business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted.
(b) Application. Subject to the required cooperation of BancSecurity
and its affiliates, Buyer shall use its reasonable efforts to prepare and submit
within thirty (30) days of the date hereof an application to the Federal Reserve
Bank of Chicago for prior approval pursuant to Section 3(a)(5) of the BHCA of
the proposed transaction, and to prosecute all required federal and state
applications. Buyer shall provide BancSecurity and its counsel, copies of all
applications as filed and any correspondence exchanged with appropriate federal
and state regulatory agencies.
(c) Cooperation. Buyer will furnish to BancSecurity all the information
concerning Buyer required for inclusion in, and will cooperate in the
preparation of, the Proxy Statement to be sent to the shareholders of
BancSecurity. Buyer agrees promptly to advise BancSecurity if at any time prior
to the Effective Date of the Merger, any information provided by Buyer in the
Proxy Statement becomes incorrect or incomplete in any material respect and to
provide the information needed to correct such inaccuracy or omission.
(d) Registration Statement. As promptly as practicable after the
execution of this Agreement, Buyer will file with the SEC the Registration
Statement and any other applicable documents, which will include a prospectus
and joint Proxy Statement, and will use its best efforts to cause the
Registration Statement to become effective under the Securities Act and
applicable state securities laws as soon as practicable. Buyer shall advise
BancSecurity promptly when the Registration Statement has become effective and
of any supplements or amendments thereto, and Buyer shall furnish BancSecurity
with copies of all such documents. At the time the Registration Statement
becomes effective, the Registration Statement and the Proxy Statement will
comply in all material respects with the provisions of the Securities Act and
the published rules and regulations thereunder, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they are made, not misleading. At the time of
mailing thereof to BancSecurity shareholders, at the time of BancSecurity
shareholders's meeting referred to in Section 4.1(b) hereof and at the Effective
Time of the Merger, the Proxy Statement included as part of the Registration
Statement or any amendment thereof or supplement thereto, will not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements contained therein, in light of the circumstances under
which they are made, not misleading or omit to state a material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of any proxy for BancSecurity shareholders' meeting; provided,
however, that none of the provisions of this subparagraph shall apply to
statements in or omissions from the Registration Statement or the Proxy
Statement made in reliance upon and in conformity with information furnished by
BancSecurity or the Banks for use in the Registration Statement or the Proxy
Statement. Buyer shall bear the costs of all SEC filing fees with respect to the
Registration Statement, the costs of printing the Proxy Statement, and the costs
of qualifying the shares of Buyer Common Stock under state blue sky laws as
necessary.
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(e) Listing. Buyer will file all documents required to be filed to
obtain approval for listing the Buyer Common Stock to be issued pursuant to the
Merger on the NASDAQ National Market System and use its best efforts to effect
said listing.
(f) Shares to be Issued. The shares of Buyer Common Stock to be issued
by Buyer to the shareholders of BancSecurity pursuant to this Agreement will,
upon such issuance and delivery to said shareholders pursuant to the Agreement,
be duly authorized, validly issued, fully paid and nonassessable except as
otherwise provided by Section 180.0622 of the Wisconsin Business Corporation
Act. The shares of Buyer Common Stock to be delivered to the shareholders of
BancSecurity pursuant to this Agreement are and will be free of any preemptive
rights of the stockholders of Buyer.
(g) Blue Sky. Buyer will file all documents required to obtain prior to
the Effective Time of the Merger all necessary Blue Sky permits and approvals,
if any, required to carry out the transactions contemplated by this Agreement,
will pay all expenses incident thereto and will use its best efforts to obtain
such permits and approvals.
(h) Confidential Information. Buyer will hold in confidence all
documents and information concerning BancSecurity and the Banks furnished to it
and its representatives in connection with the transactions contemplated by this
Agreement and will not release or disclose such information to any other person,
except as required by law and except to its outside professional advisers in
connection with this Agreement, with the same undertaking from such professional
advisers. If the transactions contemplated by this Agreement shall not be
consummated, such confidence shall be maintained and such information shall not
be used in competition with BancSecurity or the Banks (except to the extent that
such information can be shown to be previously known to Buyer, in the public
domain, or later acquired by Buyer from other legitimate sources) and, upon
request, all such documents, copies thereof or extracts therefrom shall
immediately thereafter be returned to BancSecurity.
(i) Indemnification. From and after the Effective Time through the
tenth anniversary of the Effective Time, Buyer shall indemnify and hold harmless
each present and former director, officer and employee of BancSecurity and the
Banks and each officer or employee of BancSecurity and the Banks that is serving
or has served as a director or trustee of another entity expressly at
BancSecurity's or a Bank's request or direction (each, an "INDEMNIFIED PARTY"),
against any costs or expenses (including reasonable attorneys' fees), judgment,
fines, losses, claims, damages or liabilities (collectively, the "COSTS")
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, and
whether or not the Indemnified Party is a party thereto, arising out of matters
existing or occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement), whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent then permitted under
applicable law and regulation; provided that Buyer shall not be obligated to
provide any indemnification under this subsection for any acts or omissions
which are the result of any conduct which is fraudulent or grossly negligent,
violates any state or federal criminal statute, or outside the scope of such
officer's, director's or employee's scope of employment, office or duties.
Subject to any prohibition or restriction under applicable law or regulation,
Buyer further agrees to advance any such costs to each Indemnified Party as they
are from time to time incurred (subject to receipt of an undertaking to repay
such advances if it is ultimately judicially determined that such Indemnified
Party is not entitled to indemnification).
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(j) Indemnification Contracts. Buyer agrees to honor without
reservation and, after the Effective Time, to cause its BancSecurity subsidiary
to honor without reservation the individual indemnification agreements by and
between certain directors and officers of BancSecurity and the Banks.
(k) Employment Contracts and Benefits. Buyer agrees to honor without
reservation and, after the Effective Time, to cause its BancSecurity subsidiary
to honor without reservation all existing written employment, supplemental
retirement and salary continuation contracts and will provide the same employee
benefits currently offered by Buyer to its employees.
4.3 Covenants of Buyer and BancSecurity. During the period from the
date of this Agreement and continuing until the Effective Time, Buyer and
BancSecurity agree as to themselves and their subsidiaries that, except as
expressly contemplated or permitted by this Agreement, or to the extent that the
parties shall otherwise consent in writing:
(a) Governing Documents. No party shall amend its Certificate or
Articles of Incorporation or Bylaws.
(b) Other Actions. Unless such action is required by law or sound
banking practice, no party knowingly and intentionally shall, or shall permit
any of its subsidiaries to, take any action that (i) is intended to result in
any of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect, or in any of the conditions to the
Merger set forth in Article VI not being satisfied or in a violation of any
provision of this Agreement, or (ii) would adversely affect the ability of any
of them to obtain any of the Requisite Regulatory Approvals (as defined in
Section 5.1(b)) without imposition of a condition or restriction of the type
referred to in Section 6.1(f) hereof except, in every case, as may be required
by applicable law or this Agreement.
(c) Advice of Changes; Government Filings. Each party shall promptly
advise the other orally and in writing of any change or event constituting a
material breach of any of the representations, warranties or covenants of such
party contained herein. Buyer shall file all reports required to be filed by it
with the SEC between the date of this Agreement and the Effective Time and shall
deliver to BancSecurity copies of all such reports promptly after the same are
filed. BancSecurity, Buyer and each subsidiary of BancSecurity or Buyer that is
a bank shall file all reports with the appropriate Regulatory Agencies and all
other reports, applications and other documents required to be filed with the
appropriate Regulatory Agencies between the date hereof and the Closing Date and
shall make available to the other party copies of all such reports promptly
after the same are filed.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Regulatory Matters.
(a) Buyer shall use its reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as practicable
after such filing, and, following the record date for the
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stockholder meeting of BancSecurity, thereafter mail the Proxy Statement to the
stockholders of BancSecurity.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all necessary applications, notices, petitions, filings
and other documents, and to obtain as promptly as practicable all necessary
permits, consents, and authorizations of all governmental entities necessary to
consummate the Merger ("REQUISITE REGULATORY APPROVALS"). Subject to applicable
laws relating to the exchange of information, BancSecurity and Buyer shall have
the right to review in advance, and to the extent practicable each will consult
the other on all the information relating to BancSecurity or Buyer, as the case
may be, and any of their respective subsidiaries, which appear in any filing
made with, or written materials submitted to any governmental entity in
connection with the Merger. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable.
(c) BancSecurity and Buyer shall promptly furnish each other with
copies of written communications received by BancSecurity or Buyer, as the case
may be, or any of their respective Subsidiaries, Affiliates or Associates (as
such items are deemed 12b-2 under the Exchange Act as in effect on the date
hereof) from, or delivered by any of the foregoing to, any governmental entity
in respect of the Merger.
5.2 Letters of Officers. BancSecurity shall cause to be delivered to
Buyer a letter of BancSecurity's chief executive officer in substantially the
form shown on EXHIBIT 5.2A dated (i) the date on which the Registration
Statement shall become effective and (ii) the business day prior to the Closing
Date, and addressed to Buyer.
Buyer shall cause to be delivered to BancSecurity a letter of Buyer's
chief financial officer in substantially the form shown on EXHIBIT 5.2B dated
(i) the date on which the Registration Statement shall become effective and (ii)
the business day prior to the Closing Date, and addressed to BancSecurity.
5.3 Access to Information. Upon reasonable notice and subject to
applicable laws relating to the exchange of information, BancSecurity and Buyer
shall each (and cause each of its subsidiaries to) afford to the officers,
employees, accountants, counsel and other representatives of the other party,
access during normal business hours during the period prior to the Effective
Time, to all its properties, books, contracts, commitments and records for the
purpose of updating any review of such items performed prior to the date of this
Agreement and, during such period. BancSecurity and Buyer shall (and shall cause
each of its subsidiaries to) make available to the other: (a) a copy of each
report, schedule, registration statement and other document filed or received by
it during such period pursuant to the requirements of federal or state
securities laws or federal or state banking laws (other than reports or
documents which either party is not permitted to disclose under applicable law);
and (b) all other information concerning its business, properties and personnel
as either party may reasonably request. It is the intention of the parties that
Buyer shall conduct an examination of BancSecurity and the Banks prior to the
Closing Date in order to confirm compliance with the representations, warranties
and covenants set forth in this Agreement. It is the intention of the parties
that BancSecurity shall conduct an examination of Buyer and its subsidiaries
prior to the Closing Date in order to confirm compliance with the
representations, warranties and covenants set forth in
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this Agreement. No investigation by either party shall affect the
representations and warranties set forth herein or waive any right or remedy
hereunder.
5.4 Employee Benefit Plans. Each person who is an employee of the Banks
as of the Effective Time ("BANK EMPLOYEES") shall be a participant in the
employee welfare plans, and shall be eligible for participation in the pension
plans of Buyer, as in effect from time to time, subject to any eligibility
requirements (with full credit for years of past service to any of the Banks, or
to any predecessor-in-interest of the Banks to the extent such service is
presently given credit under the Plans of the Banks described in Section 3.1 (n)
hereof, for the purpose of satisfying any eligibility and vesting periods)
applicable to such plans (but not subject to any preexisting condition
exclusions) and shall either continue to be covered by the current welfare plan
or enter each welfare plan immediately after the Effective Time, subject to such
eligibility requirements, and shall enter, subject to such eligibility
requirements, each pension plan not later than January 1 of the year after the
Effective Time. For the purpose of determining each Bank Employee's benefit for
the year in which the merger occurs under the Buyer vacation program, vacation
taken by a Bank Employee prior to the Effective Time shall be deducted from the
Bank Employee's entitlement under the BancSecurity vacation program; vacation
taken by the Bank Employee after the Effective Time shall be deducted from his
or her entitlement under the Buyer vacation program, which commences at the
Effective Time. Any vacation days of a Bank Employee under the BancSecurity
program which are accrued and unused as of the Effective Time shall be in
addition to the Bank Employee's entitlement under Buyer's vacation program and
shall be taken not later than June 30, 2000. Each Bank Employee shall be
eligible for participation, as a new employee with the credit for past service
described above, in the Buyer Plans under the terms thereof.
5.5 Expenses. Except as otherwise stated herein, whether or not the
Merger is consummated, all costs and expenses incurred in connection with this
Agreement, and the transactions contemplated hereby shall be paid by the party
incurring such expense, except that the expenses of printing and filing the
Registration Statement and the Proxy Statement/Prospectus and all SEC and other
regulatory filings incurred in connection herewith shall be born solely by the
Buyer. "Expenses" as used in this agreement shall include all reasonable
out-of-pocket expenses (including, without limitation, all fees and expenses of
consul, accountants, investment bankers, experts and consultants to the party
and its affiliates) incurred by a party or on its behalf in connection with or
related to the authorization, preparation and execution of this agreement, the
solicitation of shareholder approvals and all other matters related to the
closing of the transactions contemplated hereby.
5.6 Additional Agreements: Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its
reasonable efforts to take all actions and to do all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, including, without limitation,
cooperating fully with the other party hereto, providing the other party hereto
with any appropriate information and making all necessary filings in connection
with the Requisite Regulatory Approvals.
5.7 Affiliates. BancSecurity and Buyer shall use their reasonable
efforts to cause each director, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act) of BancSecurity
or Buyer to deliver to the other party hereto, as soon as practicable after the
date hereof, and at least 32 days prior to the Closing Date, a written agreement
substantially in the form of EXHIBIT 5.7.
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of three-fourths of the
outstanding shares of BancSecurity Common Stock entitled to vote thereon and by
the affirmative vote of the holders of a majority of the outstanding shares of
Acquisition Subsidiary entitled to vote thereon and the holders of a majority of
the outstanding shares of Buyer entitled to vote thereon.
(b) NASDAQ Listing. The shares of Buyer Common Stock issuable to
BancSecurity stockholders pursuant to this Agreement shall have been approved
for listing on the NASDAQ National Market System, upon notice of issuance.
(c) Other Approvals. Other than the filing provided for by Section 1.1,
all consents, orders or approvals of, or declarations or filings with, and all
expirations of waiting periods imposed by, any governmental entity
(collectively, the "CONSENTS") that are prescribed by law as necessary for the
consummation of the Merger and the other transactions contemplated hereby (other
than immaterial Consents) shall have been filed, occurred or been obtained and
all such Requisite Regulatory Approvals shall be in full force and effect.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "INJUNCTION") preventing the consummation of the
Merger or any of the transactions contemplated hereby shall be in effect, nor
shall any proceeding by any governmental entity seeking any such Injunction be
pending. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, or enforced by any governmental entity which prohibits,
restricts or makes illegal consummation of the Merger.
(f) No Unduly Burdensome Condition. There shall not be any action taken
by any person or entity not a party to this Agreement, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger or any of the transactions contemplated hereby, by any federal or state
governmental entity which, in connection with the grant of a Requisite
Regulatory Approval, imposes any condition or restriction upon Buyer,
BancSecurity, or any of their subsidiaries which would cause a Material Adverse
Effect on the economic or business benefits of the transactions contemplated by
this Agreement as to render inadvisable, in the reasonable business judgment of
the Board of Directors of either Buyer or BancSecurity, the consummation of the
Merger.
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(g) Election of New Director. Immediately following the Closing Date
Ronald E. Fenton will be added to the Board of Directors of the Buyer in
accordance with the terms and conditions of a resolution of the Buyer's Board of
Directors adopted prior to the Closing Date electing Ronald E. Fenton to the
Board of Directors of the Buyer contingent only upon (i) the Closing having
occurred; and (ii) Ronald E. Fenton having agreed in writing to serve as a
director of the Buyer following the Closing Date.
(h) In addition to and not in substitution of the indemnification
contracts with certain directors and officers of BancSecurity, prior to the
Effective Time BancSecurity shall use its best efforts, subject to availability
and reasonable premium charges, to purchase, and for a period of ten (10) years
after the Effective Time, the Buyer shall maintain, directors and officers
liability insurance "tail" or "runoff" coverage of the same type and coverage
provided by Buyer to the officers and directors of its subsidiaries with respect
to wrongful acts and/or omissions committed or allegedly committed prior to the
Effective Time. Such coverage shall have an aggregate coverage limit over the
term of such policy in an amount no less than the annual aggregate coverage
limit provided by Buyer under its existing directors and officers liability
policy, as adjusted from time to time, and in all other respects shall be at
least comparable to such existing policy to the same extent such coverage is
provided to Buyer's officers and directors.
In the event the Buyer or the Surviving Corporation of any of its
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially all
of its properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors and assigns of the Buyer or the
Surviving Corporation, as the case may be, assume the obligations set forth in
this subsection.
In addition to the other indemnification obligations set forth in this
subsection, the Buyer will fulfill the obligations to indemnify directors and
officers of BancSecurity contained in BancSecurity's and the Banks' respective
Articles of Incorporation and in those indemnification contracts with certain
directors and officers of BancSecurity.
The provisions of this Subsection are intended to be for the benefit
of, and shall be enforceable by, each indemnified party and his or her heirs and
representatives.
6.2 Conditions to Obligations of Buyer. The obligation of Buyer to
effect the Merger are also subject to the satisfaction or waiver by Buyer prior
to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of BancSecurity set forth in this Agreement shall be true and correct in all
material respects as of the date of the Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on the Closing Date, except where the failure to be true and
accurate in all material respects would not have or would not be reasonably
expected to have a Material Adverse Effect on BancSecurity, and Buyer shall have
received a certificate signed on behalf of BancSecurity by the Chief Executive
Officer of BancSecurity to such effect.
(b) Performance of Obligations of BancSecurity. BancSecurity shall have
performed in all materials respects all obligations required to be performed by
it under this Agreement at or prior to the
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Closing Date, and Buyer shall have received a certificate signed on behalf of
BancSecurity by the Chief Executive Officer of BancSecurity to such effect.
(c) Pooling Letter. Buyer shall have received a letter from its
accountants, in form and substance reasonably satisfactory to Buyer, approving
the accounting treatment of the Merger as a "pooling of interests" in accordance
with generally accepted accounting principles, as of a date no more than five
business days prior to the Closing Date; in support of the its accountants
pooling letter, its accountants and Buyer shall have received a letter from
BancSecurity's accountants, in form and substance reasonably satisfying to its
accountants, confirming certain facts on behalf of BancSecurity.
(d) Legal Opinion. Buyer shall have received the opinion of Dickinson,
Mackaman, Tyler & Hagen, P.C., counsel to BancSecurity, dated the Closing Date,
in substantially the form attached as EXHIBIT 6.2(D), and such opinion shall not
have been withdrawn prior to the Effective Time.
(e) Dissenting Shareholders. Holders of less than ten percent (10%) of
the shares of BancSecurity Common Stock shall have exercised their dissenter's
rights under Division XIII of the IBCA.
(f) Minimum Capital. BancSecurity's equity as of March 31, 1998,
determined in accordance with generally accepted accounting principles, assuming
the payment of the proposed January, 1998 dividend of $43.00 per share and
excluding year-end accounting adjustments requested by Buyer, the costs related
to this transaction, and any adjustment (positive or negative) to such equity
pursuant to FASB 115 (the "ACCOUNTING ADJUSTMENTS"), must, as of the last day of
the month prior to the Effective Time, be equal to or greater than the sum of
Fifty-three Million Dollars ($53,000,000.00) plus Five Hundred Ninety Thousand
Dollars ($590,000.00) per month for each month from April 1, 1998 to the
Effective Time less any quarterly dividends declared for and payable after the
first quarter of 1998 as permitted by Section 4.1(l)(xxii) of this Agreement
(the "MINIMUM EQUITY"). If BancSecurity's actual equity at the Effective Time
after making the Accounting Adjustments is less than the Minimum Equity, then
the total price under Section 2.1(a) of this Agreement shall be reduced by an
amount equal to the difference between BancSecurity's actual equity at the
Effective Time, after making the Accounting Adjustments, and the Minimum Equity
multiplied by one hundred and fifty percent (150%).
6.3 Conditions to Obligations of BancSecurity. The obligation of
BancSecurity to effect the Merger is also subject to the satisfaction or waiver
by BancSecurity prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Buyer set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on the Closing Date, except as otherwise contemplated by
this Agreement, and BancSecurity shall have received a certificate signed on
behalf of Buyer by the Chairman and Chief Executive Officer of Buyer to such
effect.
(b) Performance of Obligations of Buyer. Buyer and the Acquisition
Subsidiary shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or
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prior to the Closing Date, and BancSecurity shall have received a certificate
signed on behalf of Buyer and the Acquisition Subsidiary by the Chairman and
Chief Executive Officer of Buyer to such effect.
(c) Consents Under Agreements. Buyer shall have obtained the consent or
approval of each person whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or credit
agreement, note, mortgage, indenture, lease, license or other agreement or
instrument to which Buyer or any of its subsidiaries is a party or is otherwise
bound, except those for which failure to obtain such consents and approvals
would not, in the reasonable opinion of BancSecurity, individually or in the
aggregate, have a material adverse effect on Buyer or upon the consummation of
the transactions contemplated hereby.
(d) Tax Opinion. BancSecurity and Buyer shall have received the opinion
of McCarty, Curry, Wydeven, Peeters & Haak, counsel to Buyer, dated the Closing
Date, to the effect that (i) the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
(ii) BancSecurity and Buyer will each be a party to that reorganization within
the meaning of Section 368(b) of the Code, (iii) shareholders of BancSecurity
who exchange their shares of BancSecurity Common Stock for shares of Buyer
Common Stock will not recognize gain or loss, for purposes of federal income
tax, except to the extent of the cash received in lieu of fractional shares, and
(iv) BancSecurity will not recognize gain or loss, for purposes of federal
income tax, as a result of consummation of the Merger.
(e) Legal Opinion. BancSecurity shall have received the opinion of
McCarty, Curry, Wydeven, Peeters & Haak, counsel to Buyer, dated the Closing
Date, in substantially the form shown on EXHIBIT 6.3(E), and such opinion shall
not have been withdrawn prior to the Effective Time.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated in writing at any
time prior to the Effective Time, whether before or after approval of the Merger
by the stockholders of Buyer or BancSecurity, only in the following
circumstances:
(a) by mutual consent of BancSecurity and Buyer in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) by either BancSecurity or Buyer if (i) any Requisite Regulatory
Approval shall have been denied; or (ii) any governmental entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement;
(c) by either BancSecurity or Buyer if the Merger shall not have been
consummated on or before August 31, 1998; provided, however, that all parties
shall use their respective reasonable efforts to consummate the transaction as
soon as practicable, it being the desire of Buyer and BancSecurity that the
transaction be completed by June 30, 1998, unless extended for not more than
three (3) months by mutual written consent of parties as provided for in Section
7.4. This right of termination shall be unavailable to a party if the failure of
consummation shall be due to the failure of the party seeking to terminate to
perform
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or observe in all material respects the covenants and agreements hereunder to be
performed or observed by such party; or
(d) by either BancSecurity or Buyer if there shall have been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the other party, which breach shall not have been cured before the
Closing or within twenty (20) business days following receipt by the breaching
party of written notice of such breach from the other party, whichever occurs
first.
7.2 Effect of Termination. In the event of termination of this
Agreement by either BancSecurity or Buyer as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect except that the
obligations under Sections 4.1(d), 4.2(h), 5.5 and 7.2 shall survive termination
of this Agreement; provided, however, that no party shall be relieved or
released from any liabilities or damages arising out of the willful breach by
such party of any provision of this Agreement. As used herein, a failure of any
of the representations and warranties set forth in Section 3.1 or Section 3.2,
as the case may be, shall not constitute a "willful breach" of the Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of Buyer and BancSecurity, provided, however, that after any
such approval, no amendment shall be made which by law requires further approval
by such stockholders, without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any of the Schedules; and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. No representation,
warranty, or covenant contained in this Agreement shall survive the Merger or
the termination of this Agreement (except for Section 4.2(i) which covenant
shall survive the Effective Time).
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when received by the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
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(a) if to BancSecurity
or the Banks, to: Ronald E. Fenton
BancSecurity Corporation
11 N First Avenue
PO Box 370
Marshalltown IA 50158-0370
with a copy to: Howard O. Hagen
Dickinson, Mackaman, Tyler & Hagen
P.C.
699 Walnut, Suite 1600
Des Moines IA 50309-3986
and
(b) if to Buyer, to: Gail E. Janssen
F&M Bancorporation, Inc.
One Bank Avenue
PO Box 920
Kaukauna, WI 54130-0920
with copies to: Randall A. Haak
McCarty, Curry, Wydeven, Peeters &
Haak
120 East Fourth Street
PO Box 860
Kaukauna, WI 54130-0860
8.3 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
8.4 Counterparts. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries; Rights of Ownership.
This Agreement (including the documents and the instruments referred to herein)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder, except that
Sections 3.2 and 4.2 are intended for the benefit of BancSecurity shareholders;
and Section 5.4 is intended for the benefit of employees of the Bank. Buyer
shall be liable to such third-party beneficiaries for damages caused by the
breach of such Sections. No party shall
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have the right to acquire or shall be deemed to have acquired shares of common
stock of the other party pursuant to the Merger until consummation thereof.
8.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Iowa.
8.7 Publicity. Except as otherwise required by law or the rules of the
NASDAQ or the National Association of Securities Dealers, so long as this
Agreement is in effect, neither BancSecurity nor Buyer shall, nor shall either
of them permit any of its subsidiaries to, issue or cause the publication of any
press release or other public announcement with respect to the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
8.8 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.9 Enforcement of Agreement. Each of the parties hereto agrees that it
will not object if the other party seeks to obtain an injunction to prevent
breaches of this Agreement or to enforce specifically the terms and provision
hereof in any court in the United States or any state have jurisdiction. The
enforcing party shall be entitled to recover its attorneys fees incurred in the
successful enforcement of the terms and provisions of this Agreement.
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IN WITNESS WHEREOF, BancSecurity and Buyer have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first above written.
BANCSECURITY CORPORATION F&M BANCORPORATION, INC.
By: /s/ Ronald E. Fenton By: /s/ Gail E. Janssen
---------------------------- ------------------------------
Ronald E. Fenton, President Gail E. Janssen, Chairman
of the Board
BANCSECURITY ACQUISITION CORPORATION
By: /s/ John W. Johnson
-----------------------------
John W. Johnson, President
TABLE OF EXHIBITS
EXHIBIT A -- Articles of Merger and Plan of Merger
EXHIBIT B -- BancSecurity Disclosure Schedule
EXHIBIT C -- Buyer Disclosure Schedule
EXHIBIT 5.2A -- Letter of BancSecurity Chief Financial Officer
EXHIBIT 5.2B -- Letter of Buyer Chief Financial Officer
EXHIBIT 5.7 -- Affiliate Agreement
EXHIBIT 6.2(d) -- Dickinson Opinion
EXHIBIT 6.3(e) -- McCarty Opinion
[Exhibits other than Exhibit A are omitted]
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EXHIBIT A
ARTICLES OF MERGER
OF
BANCSECURITY ACQUISITION CORPORATION
INTO
BANCSECURITY CORPORATION
BancSecurity Corporation, an Iowa corporation, hereby certifies as
follows:
First: A Plan of Merger among the constituent corporations (the "PLAN
OF MERGER") is attached hereto;
Second: Shareholder approval was required.
Third: The Plan of Merger was approved by the shareholders of the
constituent corporations. The shares outstanding and entitled to vote
separately on the plan as to BancSecurity Corporation was 38,726. The
shares outstanding and entitled to vote separately on the plan as to
BancSecurity Acquisition Corporation was 1,000. The number of votes
cast for the plan by the sole shareholder of BancSecurity Acquisition
Corporation was 1,000. The number of votes cast for the plan by the
shareholders of BancSecurity Corporation was _______ . The number of
votes cast for the plan by each voting group eligible to vote
separately on the merger was sufficient for approval by that voting
group.
Fourth: The Articles of Merger shall be effective at ______ a.m., CST,
on ___________________, 1998.
IN WITNESS WHEREOF, the constituent corporations have caused this
Certificate to be signed by their respective duly-authorized officers this
_________ day of _______________, 1998.
BANCSECURITY CORPORATION BANCSECURITY ACQUISITION
CORPORATION
By By
------------------------------ --------------------------------
Ronald E. Fenton, President John W. Johnson, President
F&M BANCORPORATION, INC.
By
------------------------------
Gail E. Janssen,
Chairman of the Board
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PLAN OF MERGER
OF
BANCSECURITY ACQUISITION CORPORATION
WITH AND INTO
BANCSECURITY CORPORATION
I. CORPORATIONS PARTICIPATING IN THE MERGER.
BancSecurity Acquisition Corporation, an Iowa corporation (the "MERGING
CORPORATION") shall merge with and into BancSecurity Corporation, an Iowa
corporation ("BANCSECURITY" or the "SURVIVING CORPORATION").
II. NAME OF SURVIVING CORPORATION.
Upon the effectiveness of the merger ("EFFECTIVE TIME"), the name of
the Surviving Corporation shall be BancSecurity Corporation.
III. TERMS AND CONDITIONS OF THE MERGER.
Subject to the terms of the Merger Agreement dated December 1, 1997 by
and among Surviving Corporation, Merging Corporation, and F&M Bancorporation,
Inc. ("F&M") (the "AGREEMENT"), at the Effective Time: (i) the separate
existence of Merging Corporation shall cease and Merging Corporation shall be
merged with and into the Surviving Corporation and the shares of stock of
Merging Corporation owned by F&M prior to the Effective Time will convert into
the same number of shares of stock of the Surviving Corporation as of the
Effective Time without any action on the part of F&M or the Surviving
Corporation; (ii) the Articles of Incorporation of Merging Corporation, as in
effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation and shall be amended and restated as
set forth in EXHIBIT A hereto; (iii) the By-laws of Merging Corporation, as in
effect immediately prior to the Effective Time shall be the By-laws of the
Surviving Corporation; (iv) the holder of all of the outstanding common stock of
the Surviving Corporation after the Effective Time shall be the sole shareholder
of Surviving Corporation; and (v) the holders of certificates representing
shares of Surviving Corporation common stock prior to the Effective Time (as
defined in Section 2.1(a) of the Agreement) shall cease to have any rights as
shareholders of Surviving Corporation, except such rights, if any, as they may
have pursuant to Division XIII of the Iowa Business Corporation Act ("IBCA"),
and their sole right shall be the right to receive (A) the number of whole
shares of F&M common stock (as defined in Section 2.1(a) of the Agreement) into
which their shares of Surviving Corporation common stock have been converted in
the merger as provided in the Agreement (together with any dividend payments
with respect thereto, to the extent provided in Section 2.2(c) of the
Agreement), and (B) the cash value of any fraction of a share of F&M common
stock into which their shares of Surviving Corporation common stock have been
converted as provided herein.
IV. EFFECTIVENESS OF THE MERGER.
The merger shall be effective as provided in the Articles of Merger.
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V. CONVERSION OF COMMON STOCK.
(a) At the Effective Time, by virtue of the merger and without any
action on the part of any holder of shares of common stock, $25.00 par value per
share, of BancSecurity ("BANCSECURITY COMMON STOCK"), but subject to paragraph
(c) hereof, 38,726 issued and outstanding shares of BancSecurity Common Stock,
other than shares of BancSecurity Common Stock held by persons who have taken
all steps required to perfect their right to be paid the fair value of such
shares under Division XIII of the IBCA, shall be converted into that number of
shares of validly issued, fully paid and nonassessable shares of common stock of
F&M, $1.00 par value ("F&M COMMON STOCK") which when multiplied by the average
closing price of F&M Common Stock on the NASDAQ National Market System for the
last 30 trading days in which trades occurred ending at the end of the third
trading day immediately preceding the Closing Date (as appropriately and
proportionately adjusted in the event that, between the date hereof and the
termination of such 30 trading day period, shares of F&M Common Stock shall be
changed into a different number of shares or a different class of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment or stock dividend) (the "AVERAGE PRICE")
equals at least $145,000,000.00 (the "EXCHANGE RATIO"); provided, however, if
the Average Price is equal to or less than $35.80, then the number of shares of
F&M Common Stock issued will not be further increased and if the Average Price
is equal to or more than $40.00, then the number of shares of F&M Common Stock
issued will not be further reduced and, provided, further, in the event the
Average Price is less than $32.00, then F&M must either increase the number of
shares of F&M Common Stock to be exchanged for BancSecurity Common Stock so that
the aggregate value of the F&M Common Stock equals at least $129,600,000.00 or
else BancSecurity will have the option to terminate the transaction.
(b) At the Effective Time, all such shares of BancSecurity Common Stock
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist. Each BancSecurity shareholder's certificate or
certificates previously representing shares of the BancSecurity Common Stock
(each a "BANCSECURITY CERTIFICATE") shall be aggregated (if a single stockholder
holds more than one BancSecurity Certificate) and exchanged for a certificate
representing whole shares of F&M Common Stock and cash in lieu of any fractional
share issued in consideration therefor upon the surrender of such BancSecurity
Certificates in accordance with Section 2.2 of the Agreement, without any
interest thereon. In the event that, subsequent to the date of the Agreement but
prior to the Effective Time, the outstanding shares of F&M Common Stock shall
have been increased, decreased, changed into or exchanged for a different number
or kind of shares or securities through a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or other
similar change in F&M's capitalization, then an appropriate and proportionate
adjustment shall be made to the Exchange Ratio, so that the number of shares of
F&M Common Stock into which a share of BancSecurity Common Stock shall be
converted will equal the number of shares of F&M Common Stock that the holders
of shares of BancSecurity Common Stock would have received pursuant to such
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar change had the record date therefor been
immediately following the Closing Date.
(c) No fractional shares of F&M Common Stock shall be issued pursuant
hereto. In lieu of the issuance of any fractional share, cash adjustments will
be paid to holders in respect of any fractional share of F&M Common Stock that
would otherwise be issuable, and the amount of such cash adjustment shall be
equal to such fractional proportion of the Average Price of a share of F&M
Common Stock represented by
C-41
<PAGE> 163
the holder's BancSecurity Common Stock not eligible to be exchanged for F&M
Common Stock. For purposes of calculating fractional shares, a holder of
BancSecurity with more than one BancSecurity Certificate shall receive cash only
for the fractional share remaining after aggregating all of its, his or her
BancSecurity Common Stock to be exchanged.
VI. TERMINATION AND ABANDONMENT OF PLAN.
This Plan of Merger may be terminated and the merger abandoned at any
time prior to the Effective Time upon termination of the Agreement.
C-42
<PAGE> 164
F&M BANCORPORATION, INC.
1998 SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gail E. Janssen, John W. Johnson and Daniel E.
Voet, and each of them, proxies, with full power of substitution, to represent
and to vote as designated herein all shares of stock the undersigned is entitled
to vote at a Special Meeting of Shareholders of F&M Bancorporation, Inc. to be
held at the Paper Valley Hotel and Conference Center, 333 West College Avenue,
Appleton, Wisconsin 54911, on Monday, June 29, 1998, at 10:00 a.m., Central
Time, and at any adjournment thereof, hereby revoking any and all proxies
heretofore given:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE TRANSACTION IN PROPOSAL 1 AND FOR THE AMENDMENT IN PROPOSAL
2.
DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED
(1) MERGER Approval of the transactions contemplated by an Agreement and
Plan of Merger (the "Agreement") providing for the merger (the
"Merger") of a wholly-owned subsidiary of F&M into BancSecurity
Corporation, an Iowa corporation ("BancSecurity") in which outstanding
shares of BancSecurity Common Stock will be converted into the right to
receive shares of F&M Common Stock:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) AMENDMENT OF ARTICLES Amending the Articles of Incorporation of F&M to
increase the number of authorized shares of F&M Common Stock that F&M
is authorized to issue from twenty million (20,000,000) shares to fifty
million (50,000,000) shares:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) OTHER MATTERS: In their discretion, on such other matters as may
properly come before the meeting or any adjournment thereof;
all as set out in the Notice of Meeting and Joint Proxy
Statement/Prospectus relating to the meeting and the Merger, receipt of
which is hereby acknowledged.
Address Change?
Mark Box [ ]
Indicate changes below:
Date , 1998
----------------
NO. OF SHARES
---------------------------------------
Signature(s) in box
PLEASE SIGN PERSONALLY AS NAME APPEARS AT
LEFT. When signing as attorney, executor,
administrator, personal representative,
trustee or guardian, given full title as
such. If signer is a corporation, sign full
corporate name by duly authorized officer. If
stock is held in the name of two or more
persons, all should sign.
<PAGE> 165
BANCSECURITY CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald E. Fenton and Leo E. Herrick, and each of
them, proxies, with full power of substitution, to represent and to vote as
designated herein all shares of stock the undersigned is entitled to vote at the
Special Meeting of Shareholders (the "Special Meeting") of BancSecurity
Corporation ("BancSecurity") to be held at Security Bank, 11 N. 1st Avenue,
Marshalltown, Iowa, on Monday, June 29, 1998, at 4:30 p.m., Central Time, and
at any adjournment thereof, hereby revoking any and all proxies heretofore
given:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE TRANSACTIONS IN THE PROPOSAL DESCRIBED BELOW.
MERGER Approval of the transactions contemplated by an Agreement and
Plan of Merger providing for the merger (the "Merger") of a
wholly-owned subsidiary of F&M Bancorporation, Inc. ("F&M") into
BancSecurity in which outstanding shares of BancSecurity Common Stock
will be converted into the right to receive shares of F&M Common Stock:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
all as set out in the Notice of Meeting and Joint Proxy Statement/Prospectus
relating to the Special Meeting and the Merger, receipt of which is hereby
acknowledged. BancSecurity does not expect any other matter to come before the
Special Meeting. By law, the only business that may be conducted at the Special
Meeting is the business described in the notice of the Special Meeting.
Date , 1998
-------------------
-----------------------------------------------
-----------------------------------------------
Signature(s)
PLEASE SIGN PERSONALLY AS NAME APPEARS AT LEFT.
When signing as attorney, executor, administrator,
personal representative, trustee or guardian,
given full title as such. If signer is a
corporation, sign full corporate name by duly
authorized officer. If stock is held in the name
of two or more persons, all should sign.
