-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pzf1KzEUNjoOMPfjSJlbAhfEOxWjHxqCU7E5PYYXqluLi2ZHt56RcBeNakETy14e pvih7QNio5VYmuPEiessSA== 0000950131-94-001257.txt : 19940808 0000950131-94-001257.hdr.sgml : 19940808 ACCESSION NUMBER: 0000950131-94-001257 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940721 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19940805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANK SYSTEM INC CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06880 FILM NUMBER: 94542077 BUSINESS ADDRESS: STREET 1: 601 SECOND AVE S STREET 2: FIRST BANK PL CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): July 21, 1994 FIRST BANK SYSTEM, INC. -------------------------- (Exact name of registrant as specified in its charter) Delaware 1-6880 41-0255900 - ------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS employer of incorporation) file number) identification No.) 601 Second Avenue South, Minneapolis, Minnesota 55402 ----------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (612) 973-1111 -------------- Not Applicable --------------------------------------------------------------- (Former name or former address, if changed since last report) Item 2. On July 21, 1994, First Bank System, Inc. ("FBS") and Metropolitan Financial Corporation ("MFC") entered into an Agreement of Merger and Consolidation (the "Merger Agreement"), pursuant to which MFC will be merged into FBS. In connection with the merger, each outstanding share of Common Stock of MFC will be converted into .6803 shares of Common Stock of FBS. In addition, each outstanding share of Series B Preferred Stock of MFC will be converted into the right to receive $27.00 (plus accumulated and unpaid dividends) in cash and the outstanding warrants to purchase 249,100 shares of MFC Common Stock will be converted to warrants to purchase 169,462 shares of FBS Common Stock at $6.96 per share. The conversion ratio for the MFC Common Stock will be proportionately adjusted if the average closing price of FBS Common Stock during the 20 trading days ending three business days before the stockholders' meetings scheduled to consider the merger is less than $33.00 or more than $40.50. Either party may terminate the merger if the average closing price of FBS Common Stock during the 20 trading days ending three business days before the stockholders' meetings scheduled to consider the merger is less than $29.50. The merger is intended to be tax free for federal income tax purposes to the holders of MFC Common Stock receiving shares of FBS Common Stock and to be accounted for as a "pooling of interests". In connection with the Merger Agreement, FBS and MFC entered into a Stock Option Agreement pursuant to which FBS has the right to purchase up to 19.9% of MFC's outstanding Common Stock at a price of $24.66 per share if, under certain circumstances, MFC enters into (or the MFC Board of Directors recommends that the MFC stockholders approve or accept) an agreement to be merged with or acquired by a third party (including the acquisition of 20% or more of MFC's outstanding Common Stock) or a third party acquires 20% or more of the outstanding MFC Common Stock. The merger is subject to various conditions, including the approval of the stockholders of MFC and FBS and required regulatory approvals. The Merger Agreement and the Stock Option Agreement are attached hereto as Exhibits 2.1 and 2.2 and are incorporated herein by reference. -2- Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. ------------------------------------------------------------------ (a) Financial Statements of Metropolitan Financial Corporation ---------------------------------------------------------- Consolidated Statements of Condition as of December 31, 1993 and December 31, 1992 Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements for the years ended December 31, 1993, 1992 and 1991 Report of Independent Auditors Condensed Consolidated Statements of Condition--March 31, 1994 and December 31, 1993 (unaudited) Condensed Consolidated Statements of Income--Three months ended March 31, 1994 and 1993 (unaudited) Condensed Consolidated Statement of Shareholders' Equity--Three months ended March 31, 1994 (unaudited) Condensed Consolidated Statements of Cash Flows--Three months ended March 31, 1994 and 1993 (unaudited) Notes to Condensed Consolidated Financial Statements--March 31, 1994 (b) Pro Forma Financial Information ------------------------------- As permitted by Item 7 of Form 8-K, because it is impracticable to file the pro forma financial information required to be filed reflecting the acquisition of MFC on the date of filing of this Form 8-K, such information will be filed not later than 60 days after the date of filing of this Form 8-K. (c) Exhibits Exhibit No. Description ----------- ----------- 2.1 Agreement of Merger and Consolidation, dated July 21, 1994, by and between First Bank System, Inc. and Metropolitan Financial Corporation. Omitted from this Exhibit, as filed, are the schedules and exhibits referenced in such agreement. FBS will furnish supplementally a copy of any such exhibits to the Commission upon request. 2.2 Stock Option Agreement, dated July 21, 1994, by and between First Bank System, Inc. and Metropolitan Financial Corporation. 23.1 Consent of Ernst & Young LLP. -3- CONSOLIDATED STATEMENTS OF CONDITION
December 31 (Dollars in thousands, except share and per share data) 1993 1992 ASSETS Cash and due from banks $ 85,084 $ 95,370 Short term interest bearing deposits 82,364 157,489 Assets available-for-sale, at market 873,938 162,304 Investment securities (market: $423,774) _ 419,129 Mortgage-backed securities (market: 1993 - $954,908; 1992 - $1,632,794) 943,193 1,612,801 Loans (net of allowance: 1993 - $42,905; 1992 - $35,832) 4,585,410 3,267,131 Federal Home Loan Bank stock, at cost 59,719 64,096 Accrued interest 36,817 36,393 Real estate (net of allowance: 1993 - $9,533; 1992 - $9,874) 56,110 51,915 Office properties and equipment 91,632 71,955 Goodwill 61,517 62,715 Deferred taxes 53,089 51,300 Other assets 77,912 93,913 Total Assets $7,006,785 $6,146,511 LIABILITIES Transaction and passbook deposits $1,560,667 $1,498,578 Certificates 3,793,968 3,708,447 Total deposits 5,354,635 5,207,025 Federal Home Loan Bank advances 921,801 252,643 Other borrowings 133,159 166,343 Accrued interest 42,485 41,262 Other liabilities 50,322 52,594 Total Liabilities 6,502,402 5,719,867 SHAREHOLDERS' EQUITY Preferred stock, par value $.01 per share; authorized 10,000,000 shares; issued 1993 and 1992 - 488,750 shares 5 5 Common stock, par value $.01 per share; authorized 60,000,000 shares; issued 1993 - 31,992,275 shares, 1992 - 26,718,855 shares 320 267 Additional paid-in capital 231,881 148,890 Retained earnings 280,813 278,424 Net unrealized gains on securities available-for-sale (net of tax) 4,209 _ Less cost of common stock in treasury: 1993 - 813,522 shares; 1992 - 85,789 shares (12,845) (942) Total Shareholders' Equity 504,383 426,644 Total Liabilities and Shareholders' Equity $7,006,785 $6,146,511
See notes to consolidated financial statements. -4- CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (Dollars in thousands, except per share data) 1993 1992 1991 INTEREST INCOME Loans $331,921 $ 268,210 $ 216,985 Mortgage-backed securities 122,649 137,274 145,124 Investments 18,156 19,281 19,001 FSLIC notes and covered assets _ _ 25,910 472,726 424,765 407,020 INTEREST EXPENSE Transaction and passbook deposits 29,559 37,497 43,541 Certificates 202,260 196,820 212,527 FHLB advances 31,522 32,528 38,078 Other borrowings 11,271 5,363 7,762 274,612 272,208 301,908 Net interest income 198,114 152,557 105,112 Provision for loan losses 7,859 8,316 8,000 Net interest income after provision for loan losses 190,255 144,241 97,112 NONINTEREST INCOME Gains related to mortgage banking activities 16,271 9,264 225 Other gains on sale of mortgage-backed and other securities _ 44,377 33,366 Mortgage loan servicing fees 3,826 5,107 10,705 Realty commission income 35,350 32,113 26,172 Title closing fees 13,706 11,494 8,001 Service charges on deposit accounts 11,450 6,870 5,414 Financial services income 4,587 852 67 Other income 4,647 4,325 5,491 89,837 114,402 89,441 NONINTEREST EXPENSE Compensation and related items 77,871 60,250 47,963 Occupancy 24,459 16,729 15,201 Data processing 10,476 7,542 6,585 Advertising 11,856 13,816 9,491 Deposit insurance premium 11,099 9,305 8,012 Amortization of goodwill 4,083 4,000 5,352 Real estate owned 6,684 3,917 6,673 Other general and administrative 47,105 33,022 25,410 193,633 148,581 124,687 Income before income taxes, extraordinary item and cumulative effect of accounting change 86,459 110,062 61,866 Income tax expense 21,285 42,543 4,427 Income before extraordinary item and cumulative effect of accounting change 65,174 67,519 57,439 Extraordinary item: Penalty for prepayment of FHLB advances (net of tax benefit of $4,064) _ (6,329) _ Cumulative effect of accounting change _ 75,941 _ Net Income $ 65,174 $ 137,131 $ 57,439 EARNINGS PER SHARE Primary: Income per share before extraordinary item and cumulative effect of accounting change $ 2.01 $ 2.34 $ 2.42 Extraordinary item _ (0.22) _ Cumulative effect of accounting change _ 2.66 _ Net Primary $ 2.01 $ 4.78 $ 2.42 Fully Diluted: Income per share before extraordinary item and cumulative effect of accounting change $ 2.01 $ 2.17 $ 1.96 Extraordinary item _ (0.21) _ Cumulative effect of accounting change _ 2.47 _ Net Fully Diluted $ 2.01 $ 4.43 $ 1.96
See notes to consolidated financial statements. -5- Consolidated Statements of Changes in Shareholders' Equity
Net Unrealized Gains on Dollars in thousands, Additional Securities Total (except share and Preferred Stock Common Stock Paid-In Retained Available- Treasury Stock Shareholders' per share data) Shares Amount Shares Amount Capital Earnings for-sale Shares Amount Equity Balance, December 31, 1990 2,328,750 $23 18,127,453 $181 $133,432 $ 95,025 $ _ (286,302)$ (2,915) $225,746 Stock options exercised 1,208,454 12 4,143 4,155 Warrants exercised 2,500 13 13 Net treasury stock sold 342 36,315 386 728 Common stock cancelled (17,540) Dividends declared: Preferred (5,085) (5,085) Common _ $.19 per share (4,233) (4,233) Net income 57,439 57,439 Balance, December 31, 1991 2,328,750 23 19,320,867 193 137,930 143,146 _ (249,987) (2,529) 278,763 Issuance of common stock 1,013,367 10 6,732 7,240 13,982 Stock options exercised 599,895 6 3,494 3,500 Warrants exercised 31,560 164 164 Net treasury stock sold 1,430 164,198 1,587 3,017 Redemption/Conversion of series "A" preferred (1,840,000) (18) 5,753,166 58 (860) (820) Dividends declared: Preferred (1,405) (1,405) Common _ $.27 per share (7,688) (7,688) Net income 137,131 137,131 Balance, December 31, 1992 488,750 5 26,718,855 267 148,890 278,424 _ (85,789) (942) 426,644 Issuance of common stock: Western Financial Corporation acquisition 935,772 9 16,991 17,000 Other 619,406 7 8,759 8,766 Stock options exercised 700,314 7 7,046 7,053 Warrants exercised 194,628 2 921 923 Stock dividends, 10% 2,823,300 28 49,274 (49,302) _ Net treasury stock acquired (727,733) (11,903) (11,903) Net unrealized gain 4,209 4,209 Dividends declared: Preferred (1,405) (1,405) Common _ $.39 per share (12,078) (12,078) Net income 65,174 65,174 December 31, 1993 488,750 $ 5 31,992,275 $320 $231,881 $280,813 $4,209 (813,522) $(12,845) $504,383
See notes to consolidated financial statements. -6- Consolidated Statements of Cash Flows
Year Ended December 31 (In thousands) 1993 1992 1991 Net income $ 65,174 $ 137,131 $ 57,439 Reconciliation to cash provided by operating activities: Extraordinary item (net of tax) - 6,329 - Cumulative effect of accounting change _ (75,941) _ Net amortization of loan fees, discounts and premiums 32,751 14,606 7,639 Provision for loan losses 7,859 8,316 8,000 Decrease in deferred tax asset 11,610 24,641 _ Depreciation and amortization 9,291 6,654 4,244 Amortization of goodwill 4,083 4,000 5,352 Decrease in accrued interest receivable 4,405 6,111 11,011 (Decrease) increase in accrued interest payable (3,864) 6,480 2,734 Net Cash Provided by Operating Activities 131,309 138,327 96,419 Acquisitions of subsidiaries, net of cash received (6,719) 321,507 _ Increase in loans (1,475,603) (1,106,401) (733,150) Purchase of: Loans (172,494) (104,942) (144,453) Investment securities held-to-maturity (39,793) (565,148) (112,468) Mortgage-backed securities available-for-sale (86,236) (29,183) (75,612) Mortgage-backed securities held-to-maturity (319,604) (460,398) (580,444) Proceeds from the sale and maturity of: Investment securities held-to-maturity 284,416 285,924 217,864 Proceeds from the sale of: Mortgage-backed securities available-for-sale 713,303 1,274,920 702,701 Loans held-for-sale 169,271 108,734 56,655 Covered assets _ _ 19,403 Real estate 35,294 41,433 24,710 Principal repayments of mortgage-backed securities: Available-for-sale 48,741 69,379 29,915 Held-to-maturity 617,612 222,523 30,197 Settlement of FSLIC assistance agreement _ _ 47,933 Other investing activities 27,184 (31,971) (30,471) Net Cash (Used) Provided by Investing Activities (204,628) 26,377 (547,220) Net increase (decrease) in: Short term borrowings _ (2,394) (224,144) Deposits (530,503) (19,210) 175,666 Purchase of deposits _ 231,535 254,228 Proceeds from: Settlement of FSLIC notes receivable _ _ 365,778 FHLB advances 770,000 1,933,000 310,700 Issuance of subordinated notes _ 86,250 _ Issuance of common stock 5,478 716 _ Exercise of common stock options and warrants 7,976 3,664 4,168 Net sale (purchase) of stock (11,903) 3,017 728 Repayment of: FHLB advances (186,108) (2,197,297) (422,625) Other borrowings (35,656) (30,823) (19,161) Redemption of preferred stock _ (820) _ Cash dividends (13,483) (9,093) (9,318) Other financing activities (17,893) (4,112) (10,989) Net Cash (Used) Provided by Financing Activities (12,092) (5,567) 425,031 Net (Decrease) Increase in Cash and Cash Equivalents (85,411) 159,137 (25,770) Cash and cash equivalents at beginning of year 252,859 93,722 119,492 Ending Cash and Cash Equivalents $ 167,448 $ 252,859 $ 93,722
See notes to consolidated financial statements. Notes to Consolidated Financial Statements -7- Note A Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts and results of operations of Metropolitan Financial Corporation (the "Company") and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. Trading Account Assets Trading account assets are mortgage-backed securities held for sale in conjunction with mortgage banking activities. These mortgage-backed securities are collateralized by 30-year fixed-rate and adjustable-rate mortgage loans and are stated at fair value. Gains and losses, both realized and unrealized, are included in net gains related to mortgage banking activities. The Company carried no trading account assets at December 31, 1993. Securities Held-To-Maturity and Available-For-Sale Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income with interest and dividends. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. Loans Held-For-Sale Loans held for sale are valued at the lower of cost or market. Market value is calculated on the aggregate basis, based on commitments outstanding from investors and current quoted market prices. Net unrealized losses due to declines in the market value are included in the determination of net income. Loan Fees and Discounts Loan origination fees and certain direct costs are deferred and amortized using the interest method over the contractual lives of the related loans, adjusted for prepayments, as a yield adjustment. Discounts and premiums on loans purchased, net of deferred fees, which are considered yield adjustments, are amortized using methods which approximate a level yield over the estimated remaining lives. Allowance for Loan Losses Provisions for possible losses on mortgage and other loans are charged to operations based upon management's review of the loan portfolio. The allowance is based upon an assessment of the net realizable value of collateral securing loans, loss experience and management's judgment as the risk inherent in the loan portfolio. Loans Loans are carried at amortized cost, net of allowance for loan losses. Interest on loans is recorded as it is earned. Allowances are established for uncollected interest on loans for which payments are more than 90 days past due. Real Estate Real estate represents properties acquired through foreclosure, in judgment (foreclosed real estate for which a redemption period still remains), and in- substance foreclosure (real estate loans in which the borrower has little or no equity, repayment can be expected to come only from sale or operation of the real estate and the borrower has formally or effectively abandoned control) and is carried at the lower of cost or fair value. Intangible Assets Goodwill, the excess of cost over fair value of net assets acquired, is amortized to expense using the straight line and interest methods over periods approximating the asset life of related long term assets, to a maximum of 25 years. Premiums paid for loan servicing rights are amortized against servicing fee income over the estimated average life, adjusted for prepayments, of the servicing portfolio acquired using the interest method. Accumulated amortization of goodwill was $42.5 million and $38.4 million at December 31, 1993 and 1992, respectively. Intangible assets are reviewed periodically for possible impairment. -8- Office Properties and Equipment Office properties and equipment are stated at cost less accumulated depreciation computed using the straight line method based on estimated useful lives. Interest Rate Exchange Agreements Interest rate exchange agreements ("swaps") are designated as hedges against future fluctuation's in the interest rates of specifically identified assets and liabilities. The net interest differential resulting from floating rate interest payments exchanged for fixed rate interest payments is recorded as incurred. Protected Rate Agreements Protected rate agreements ("caps") are designated as hedges against future fluctuation's in the interest rates of specially identified liabilities. The interest received is recorded on a current basis. The cost of the caps is amortized on a straight line basis over the life of the caps. Mortgage Options Mortgage options ("puts") are designated as hedges against future fluctuation's in the price of specific mortgage loans held for sale. The premium paid for the put is accounted for as a component of the book value of the mortgage loans and is realized upon settlement of the loan sales. Income Taxes A consolidated federal income tax return is filed for the Company and its subsidiaries. Deferred taxes are recorded to reflect the tax consequences on future years' differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end and the expected future benefit of net operating loss and alternative minimum tax credit carryforwards. Cash Flow Information Cash equivalents include cash and due from banks, short term interest bearing deposits and federal funds sold. Cash paid for interest expense in 1993, 1992 and 1991 was $278.5 million, $265.7 million and $299.2 million, respectively. Cash paid during 1993, 1992 and 1991 for income taxes was $8.5 million, $3.5 million and $684,000, respectively. Cash received during 1993, 1992 and 1991 as a recovery of income tax was $343,000, $379,000 and $97,000, respectively. Earnings Per Share Earnings per share has been computed using the weighted average number of shares of common stock outstanding during the period. Per share data reflects the 10 percent stock dividend declared in July 1993, the 100 percent stock dividend declared in June 1992, and the 20 percent stock dividend declared in September 1991. Amounts equal to the fair market value of the additional shares issued in 1993 have been charged to retained earnings and credited to common stock and paid-in capital. The stock dividends in 1992 and 1991 represent stock splits effected in the form of a dividend, an accounted for as such. The weighted average number of common and common equivalent shares outstanding used to compute primary earnings per share were 31,662,000, 28,384,000 and 21,646,000 for the year ended December 31, 1993, 1992 and 1991, respectively. The weighted average number of common and common equivalent shares outstanding used to compute fully diluted earnings per share were 31,692,000, 30,613,000 and 28,494,000 for the year ended December 31, 1993, 1992 and 1991, respectively. Note B Business Combinations On June 11, 1993, the acquisition of Western Financial Corporation ("Western") and its federally chartered savings and loan association subsidiary Columbia Savings Association F.A. ("Columbia") was completed. Pursuant to the agreement and plan of merger, Western was merged into the Company and Columbia was merged into Metropolitan Federal Bank, fsb, ("the Bank"). Total merger consideration of approximately $21.9 million was paid in the form of cash and the Company's stock. The transaction was accounted for as a purchase and, accordingly, the purchase price was allocated to assets and liabilities based on the estimated fair value as of the acquisition date. Based on their election, Western shareholders received .55 shares of the Company's common stock or $10 in cash for each Western share owned. The results of operations of Western for the period since June 12, 1993 have been included in the Company's consolidated results. On August 6, 1993, the Bank completed its acquisition of Eureka Savings Bank, fsb, Eureka, Kansas ("Eureka"). The acquisition consideration of approximately $20.8 million was paid in cash and the transaction was accounted for as a purchase. The results of operations of Eureka have been included in the Company's consolidated results of operations for the period since August 7, 1993. -9- During 1992, the Company completed several acquisitions designed to expand into markets not previously served by the Bank. The acquisitions of Home Owners Savings Bank of Fergus Falls, Minnesota ("Home Owners") and American Charter Federal Savings and Loan Association of Lincoln, Nebraska ("American Charter"), were completed December 1 and December 16, respectively. Home Owners was acquired from the RTC and American Charter was acquired through a voluntary supervisory conversion merger. These acquisitions were accounted for as purchase transactions. The operating results of Home Owners and American Charter have been included in the Company's consolidated results of operations from the dates of acquisition. On September 30, 1992 the Company completed the acquisition of Security Financial Group, Inc., St. Cloud, Minnesota ("Security Financial"). The Company issued 963,740 shares of common stock, valued at $12.8 million at the time of the transaction. The acquisition of Security Financial was accounted for as a pooling of interests. Security Financial is not material to the financial condition or operating results of the Company, and therefore, prior years balances were not restated. However, 1992 amounts were adjusted to reflect the transaction as if it had occurred January 1, 1992. The unaudited pro forma consolidated results of operations for the years ended December 31, 1993 and 1992, assuming the acquisitions of Western, Eureka, Home Owners and American Charter were consummated as of January 1, 1992 are as follows:
Year Ended December 31 (Dollars in thousands, except per share data) 1993 1992 Net interest income $212,391 $203,321 Income before extraordinary item and cumulative effect of accounting change 79,610 89,538 Net income 79,610 159,150 Per share data:Income before extraordinary item and cumulative effect of accounting change $ 2.47 $ 2.79 Net income 2.47 4.99
This unaudited pro forma information may not be indicative of the results that would actually have occurred if the combination had been in effect on the dates indicated or which may be obtained in the future. In February 1993 the Office of Thrift Supervision notified the Bank that its application to acquire Rocky Mountain Financial Corporation ("Rocky Mountain"), Cheyenne, Wyoming, and its bank subsidiary, Rocky Mountain Bank, fsb, had been approved. Rocky Mountain had assets of $537 million and deposits of $428 million at December 31, 1993. The banking subsidiary operates 14 branches located throughout Wyoming. The Bank will pay Rocky Mountain shareholders approximately $64.2 million in cash as consideration after payment of approximately $3.0 million of transaction expenses. The transaction will be accounted for as a purchase and is expected to close in March 1994. Note C Fair Value of Financial Instruments The following schedule includes the book value and estimated fair value of all financial assets and liabilities, as well as specific off-balance sheet items, as of December 31, 1993. The aggregate fair value amounts presented do not represent the underlying value of the Company. The fair values indicated for nonfinancial assets and liabilities, including real estate, office properties and equipment, goodwill, deferred taxes, other assets (excluding unamortized premiums on interest rate caps and purchased mortgage servicing rights), and other liabilities, represent the book value as of December 31, 1993.
(In thousands) Book Value Fair Value Assets Cash and cash equivalents $ 167,448 $ 167,448 Assets available-for-sale 873,938 873,938 Mortgage-backed securities 943,193 954,908 Loans 4,585,410 4,602,925 FHLB stock 59,719 59,719 Nonfinancial assets 363,601 363,601 Other assets 13,476 31,306 Total Assets $7,006,785 $7,053,845 Liabilities Transaction and passbook deposits $1,560,667 $1,560,667 Certificates 3,793,968 3,829,568 FHLB advances 921,801 928,185 Other borrowings 133,159 134,901 Other liabilities 92,807 92,807 Total Liabilities $6,502,402 $6,546,128 Off-balance Sheet Items: Rate swaps $ _ $ (1,293) Commitments _ 658 Total Off-balance Sheet Items $ _ (635) Total Shareholders' Equity $ 504,383 $ 507,082
-10- The following valuation methods and assumptions were used by the Company in estimating the fair value of financial instruments: Cash and Cash Equivalents The book value of cash and due from banks and short-term interest bearing deposits approximates fair value. Assets Available-For-Sale The book value represents market value of these instruments. Loans Held-For-Sale The book value represents the lower of cost or market value of these instruments determined on an aggregate basis based on commitments outstanding and current quoted market prices. Mortgage-backed Securities Fair values are based on quoted market prices. Loans The fair values for fixed rate, one to four family residential mortgage loans, commercial real estate, commercial business, and consumer loans are calculated using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. FHLB Stock Fair value for FHLB stock is based on the price at which it may be resold to the FHLB. Other Assets Other assets represent unamortized premiums on interest rate caps and purchased mortgage servicing rights. The fair value of the interest rate caps is determined using quoted market prices for instruments with similar rate and maturity characteristics. The fair value of the loan servicing rights is based on average loan balances, interest rates, pass-through rates and estimated servicing cost per loan adjusted for assumptions on prepayments, delinquencies and foreclosures. Deposits The fair values disclosed for demand deposits (i.e., interest and noninterest bearing checking, passbook savings and money market accounts) are equal to the amount payable on demand at the reporting date. Fair values for fixed- maturity certificates of deposit are calculated using a discounted cash flow analysis that applies interest rates currently being offered on certificates. Borrowings The carrying amounts of short-term borrowings approximate their fair value. The fair value of the Bank's long-term borrowing is calculated using a discounted cash flow analysis, based on the Bank's current incremental borrowing rate for similar types of borrowing. The subordinated notes are valued according to the quoted market price. Rate Swaps The fair value of interest rate swaps is derived from a pricing model that discounts the cash flows of both the paying side and receiving side of the swap using quoted market rates of similar term instruments. Commitments Off-balance sheet commitments include commitments to originate mortgage loans and sell mortgage-backed securities. Outstanding commitments approximate fair value. -11- Note D Assets Available-For-Sale In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As permitted under the Statement, the Company has elected to adopt the provisions of the Statement as of the end of 1993. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle and there were no cumulative adjustments to income as a result of adopting the standard. However, the ending balance of shareholders' equity was increased by $4.2 million (net of $2.8 million in deferred income taxes) to reflect net unrealized gains on securities classified as available-for-sale previously carried at amortized cost or LOCOM. Assets available-for-sale consisted of the following:
December 31, 1993 Gross Gross Book Unrealized Unrealized Market (In thousands) Value Gains Losses Value Mortgage-backed Securities: GNMA $190,164 $ 61 $ _ $190,225 FNMA 36,873 452 (365) 36,960 FHLMC 130,890 1,397 (232) 132,055 Collateralized mortgage obligations 256,352 3,301 (776) 258,877 ________________________________________________________________________ 614,279 5,211 (1,373) 618,117 Investments: U.S. Treasury 12,900 118 (6) 13,012 U.S. government agencies 118,336 2,981 (36) 121,281 Corporate debt securities 10,000 44 _ 10,044 Commercial paper 39,793 _ _ 39,793 Other 11,027 19 _ 11,046 ________________________________________________________________________ 192,056 3,162 (42) 195,176 Loans Held For Sale 60,645 _ _ 60,645 ________________________________________________________________________ $866,980 $8,373 $(1,415) $873,938
Assets Held-For-Sale
1992 (In thousands) Book Value Market Value U.S. Agency $ 97 $ 97 GNMA 3,712 3,712 FNMA _ _ FHLMC _ _ Collateralized mortgage obligations 7,594 7,594 Loans 150,901 150,901 $162,304 $162,304
The amortized cost and market value of assets available-for-sale by contractual maturity at December 31, 1993 are as follows:
Book Market (In thousands) Value Value Investments: One year or less $ 90,721 $ 90,974 Over one year through five years 92,509 95,357 Over five years through ten years 153 153 Over ten years 8,673 8,692 192,056 195,176 Mortgage-backed securities 614,279 618,117 Mortgage loans 60,645 60,645 $866,980 $873,938
Proceeds from the sale of assets available-for-sale were $835.8 million and $1.4 billion during 1993 and 1992, respectively. Gross gains on these sales were $19.3 million and $54.1 million during 1993 and 1992, respectively. Gross losses were $3.0 million during 1993. Accrued interest on assets available/held-for-sale at December 31, 1993 and 1992 was $7.0 million and $1.2 million, respectively. Assets available-for- sale with a book value of $138.1 million were pledged to secure public and private deposit accounts at December 31, 1993. At December 31, 1993 and 1992, $59.8 million and $152.4 million, respectively, of loans were committed to be sold with settlement dates of January through March 1994 and 1993, respectively. -12- Note E Investment Securities Investment securities held-to-maturity consisted of the following:
December 31, 1992 Gross Gross Book Unrealized Unrealized Market (In thousands) Value Gains Losses Value U.S. Treasury $ 10,654 $ 44 $ _ $ 10,698 U.S. government agencies 236,392 4,288 (82) 240,598 Corporate debt securities 10,000 395 _ 10,395 Commercial paper 146,745 _ _ 146,745 Other 15,338 _ _ 15,338 $419,129 $4,727 $ (82) $423,774
All investment securities are classified as available-for-sale as of December 31, 1993 and are shown in Note D. Accrued interest on investment securities at December 31, 1992 was $5.2 million. Investment securities with a book value of $158.7 million at December 31, 1992 were pledged to secure public and private deposit accounts. Note F Mortgage-backed Securities Mortgage-backed securities held-to-maturity consisted of the following:
December 31, 1993 December 31, 1992 Book Market Book Market (In thousands) Value Value Value Value GNMA $ 83,295 $ 86,705 $ 189,516 $ 193,523 FNMA 134,598 134,197 126,639 129,372 FHLMC 86,341 87,630 232,880 237,100 Collateralized mortgage obligations 29,913 29,981 438,307 445,262 Participation certificates 609,046 616,395 625,459 627,537 $943,193 $954,908 $1,612,801 $1,632,794
The market value of mortgage-backed securities held-to-maturity includes gross unrealized gains of $14.9 million and $24.4 million and gross unrealized losses of $3.2 million and $4.4 million for 1993 and 1992, respectively. Accrued interest on mortgage-backed securities at December 31, 1993 and 1992 was $5.4 million and $10.5 million, respectively. Mortgage-backed securities with a book value of $181.7 million and $437.9 million at December 31, 1993 and 1992, respectively, were pledged to secure public and private deposit accounts. Mortgage-backed securities at December 31, 1993 include current year loan production with original principal balances of approximately $39 million. During 1993, 1992 and 1991 the Company securitized $690 million, $234 million and $500 million of mortgage loans, respectively. Note G Loans Loans consisted of the following:
(In thousands) December 31, 1993 December 31, 1992 Real Estate Mortgage: Residential $2,700,214 $2,068,300 Commercial 513,870 318,814 Construction 12,185 9,623 Commercial 6,402 9,457 Manufactured home 41,797 53,164 Consumer and other 1,353,847 843,605 4,628,315 3,302,963 Less: Allowance for losses 42,905 35,832 $4,585,410 $3,267,131
Changes in the allowance for loan losses were as follows:
Year Ended December 31 (In thousands) 1993 1992 1991 Balance at beginning of year $35,832 $26,272 $30,386 Provision for loan losses 7,859 8,316 8,000 Acquisitions 11,508 11,845 93 Net transfer of allowance to covered assets and real estate owned _ _ (4,543) Net charge-offs (12,294) (10,601) (7,664) $42,905 $35,832 $26,272
-13- Accrued interest on loans was $24.5 million and $19.9 million at December 31, 1993 and 1992, respectively. Origination of residential mortgage loans and consumer loans is concentrated in the states of North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin and Arizona. The ability of borrowers to honor these loan obligations is influenced by the general economic health of the region. The Company's loans are generally secured by readily marketable collateral. In addition, the Company requires some form of mortgage insurance, either government sponsored or private, on residential mortgage loans with a greater than 80 percent loan to value ratio. The Company's exposure to loss is equal to the net carrying value of these loans. At December 31, 1993, approximately $176 million of commitments to make residential real estate mortgage loans at specific rates were outstanding. These commitments are subject to the same credit risk, total risk of loss and collateral policies, as originated loans. Loans serviced for others totaled $3.3 billion and $3.5 billion at December 31, 1993 and 1992, respectively. Residential mortgage loans sold with recourse totaled $1.0 billion and $1.1 billion at December 31, 1993 and 1992, respectively. Recourse provisions for loans sold relate primarily to defaults. Substantially all loans sold with recourse have either government sponsored or private mortgage insurance. Loans at December 31, 1993 include $43.2 million of restructured loans, of which $16.4 million are performing in accordance with the restructured terms. The remaining $26.8 million are included in the Company's nonperforming loans. In May 1993 the Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," effective for years beginning after December 15, 1994. SFAS No. 114 requires that impaired loans be valued at the present value of expected cash flows. The Company will be adopting SFAS No. 114 during the first quarter of 1994 and does not expect the statement to be material to the Company's financial position or results of operations. Note H Real Estate Real estate consisted of the following:
December 31 (In thousands) 1993 1992 Acquired through foreclosure and in-substance foreclosures $61,300 $60,781 Held for investment 1,976 _ In judgment and subject to redemption 2,367 1,008 65,643 61,789 Less allowance for losses 9,533 9,874 $56,110 $51,915
Changes in the allowance for real estate losses were as follows:
Year Ended December 31 (In thousands) 1993 1992 1991 Balance at beginning of year $9,874 $3,845 $2,707 Provision for decline in value of real estate owned 4,540 4,491 2,900 Acquisitions 1,983 3,524 23 Net transfers _ _ 2,282 Net charge-offs (6,864) (1,986) (4,067) $9,533 $9,874 $3,845
Note I Office Properties and Equipment Office properties and equipment consisted of the following:
December 31 (In thousands) 1993 1992 Land $ 10,579 $ 7,841 Buildings 67,574 51,787 Furniture and equipment 52,972 41,683 131,125 101,311 Less allowance for depreciation 39,493 29,356 $ 91,632 $ 71,955
-14- Note J Deposits Deposits consisted of the following:
Weighted Average Interest Rates at December 31 December 31 (Dollars in thousands) 1993 1992 1993 1992 Checking: Noninterest bearing $ 254,204 $ 232,010 Interest bearing 390,149 334,600 1.65% 2.45% Money market demand 185,440 182,953 2.33 2.95 Passbook and statement 730,874 749,015 3.17 3.23 Certificates: Nine months and less 416,415 612,616 3.24 3.71 Over 9 to 30 months 2,187,970 2,230,348 4.28 5.11 Over 30 months 1,189,583 865,483 6.54 7.45 $5,354,635 $5,207,025 4.10% 4.65%
Accrued interest on deposits was $38.6 million and $36.2 million at December 31, 1993 and 1992, respectively. A summary of interest expense on deposits is as follows:
Year Ended December 31 (In thousands) 1993 1992 1991 Checking $ 6,601 $ 7,755 $ 7,090 Money market demand 3,933 4,901 11,648 Passbook and statement 19,025 24,841 24,803 Certificates 202,260 196,820 212,527 $231,819 $234,317 $256,068
The following table sets forth the maturities of certificates in denominations of $100,000 or more at December 31, 1993.
(In thousands) Maturity Amount Under three months $ 8,590 Three to six months 40,447 Over six to 12 months 54,077 Over 12 months 302,465 $405,579
Note K FHLB Advances and Other Borrowings FHLB advances and other borrowings consisted of the following:
Weighted Average Interest Rates at December 31, December 31 (Dollars in thousands) 1993 1992 1993 1992 Federal Home Loan Bank advances $ 921,801 $ 252,643 5.15% 5.22% Other Borrowings: Medium term notes _ 18,998 _ 8.70 Collateralized mortgage obligation 39,931 54,909 7.37 8.98 Subordinated debt 86,250 86,250 8.25 8.25 Notes payable to banks and others 6,978 6,186 4.46 4.79 Total other borrowings 133,159 166,343 $ 1,054,960 $ 418,986 5.48% 6.49% Borrowings due within one year $ 165,177 $ 120,941 4.45% 4.19%
At December 31, 1993 and 1992, borrowings due within one year consisted primarily of FHLB line of credit and FHLB advances of $165.0 million at an average rate of 4.45 percent and $99.5 million at an average rate of 3.37 percent, respectively. Maturities of borrowings at December 31, 1993, were:
(Dollars in thousands) Year of Maturity Amount 1994 $ 165,177 1995 100,823 1996 212,182 1997 165,000 1998 215,000 Thereafter 196,778 $1,054,960
At December 31, 1993, the Company had an existing line of credit with the FHLB of $100 million. The Company had no balance drawn on this line of credit as of December 31, 1993. The rate paid on the FHLB line varies daily based on the federal funds rate. -15- At December 31, 1993, borrowings were secured by the following: FHLB advances--FHLB stock, real estate loans and mortgage-backed securities with a carrying value of $1.6 billion. Collateralized mortgage obligations--mortgage-backed securities with a carrying value of $41.5 million. Accrued interest on borrowings was $849,000 and $1.4 million at December 31, 1993 and 1992, respectively. Note L Interest Rate Exchange and Protected Rate Agreements The Company has entered into interest rate exchange agreements ("swaps") with primary securities dealers to stabilize its cost of funds. The notional principal amount of interest rate exchange agreements totaled $200 million and $250 million for 1993 and 1992, respectively. The Company pays a fixed rate and receives a variable rate of interest on the stated notional principal amount for a fixed period of time. The Company's exposure to market risk results from a declining interest rate environment in which the fixed rate paid exceeds the variable rate received. These agreements are subject to the counterparty's ability to perform in accordance with the terms of the agreements. The Company's risk of loss is equal to the interest payments due from the counterparty. Net accrued interest payable on swaps was $3.0 million and $3.8 million on December 31, 1993 and 1992, respectively. In connection with its asset and liability management program, during 1993 the Company entered into protected rate agreements ("caps") in the aggregate notional amount of $450 million with varying maturities. Under the terms of the caps, the Company will be reimbursed for increases in the three-month London Inter-Bank Offer Rate ("LIBOR") for any quarter during the agreement in which such rate exceeds the "strike price", which ranges from 6 percent to 8 percent depending on the maturity of the cap. These agreements are subject to the counterparty's ability to perform in accordance with the terms of the agreements. The Company's risk of loss is equal to the original premiums paid to enter into these agreements. A summary of the interest rate caps is as follows:
Strike Price (In millions) 6.00 - 6.50% 7.00 - 7.50% 8.00%+ Total Mature in 1994 $250 $100 $ 50 $400 Mature in 1995 50 _ _ 50 $300 $100 $ 50 $450
Note M Shareholders' Equity Preferred Stock The Company has 10,000,000 shares of $.01 par value preferred stock authorized. At December 31, 1993, the Company had 488,750 units of Series B, $2.875 Cumulative Perpetual Preferred Stock, issued and outstanding. The Company, at its option, redeemed the outstanding 1,840,000 shares of Series A, $2.00 cumulative convertible preferred stock on April 20, 1992, for 5,753,166 shares of common stock and $400,000 to holders exercising the options to receive cash. Each unit of Series B preferred stock consists of one share of Cumulative Perpetual Preferred Stock and one warrant to purchase 1.32 shares of Common Stock. The preferred stock is redeemable at the option of the Company at a rate of $25 per share. Redemption can occur at any time on or after January 31, 1996. Each warrant entitles the holder to purchase 1.32 shares of the Company's Common Stock at a price of $6.25. The warrants became exercisable on February 19, 1991, and expire November 20, 2000. Warrants outstanding at December 31, 1993 allow for the purchase of 408,751 shares of Common Stock and would result in total proceeds to the Company, if exercised, of approximately $1.9 million. The Company's Series B preferred stock ranks prior to Common Stock as to dividends and liquidation. The liquidation preference of the preferred stock is $25 per share plus accumulated unpaid dividends. Dividends on the preferred stock are cumulative and are to be paid at an annual rate of $2.875. Shares of the Company's preferred stock have no voting rights except in the event of certain arrearages in which event holders of the preferred stock will be entitled to elect two additional directors to the Company's Board of Directors. -16- Regulatory Capital Requirements The Bank and its subsidiaries are required to meet capital requirements as defined by the Office of Thrift Supervision ("OTS") for Tangible, Core and Risk- based Capital. The requirements call for measures of capital as a percentage of assets. Required capital levels increase through July 1, 1994, at which time the fully phased in capital requirements will be effective. At December 31, 1993, the Bank exceeds all fully phased in requirements. Note N Income Taxes Income tax expense consisted of the following:
Year Ended December 31 (In thousands) 1993 1992 1991 Current Federal $ 6,670 $ 5,015 $4,373 State 3,005 3,058 54 9,675 8,073 4,427 Deferred Federal $ 9,121 $28,657 _ State 2,489 5,813 _ 11,610 34,470 _ $21,285 $42,543 $4,427
The provision for federal income tax differs from that computed at the statutory corporate tax rate as follows:
Year Ended December 31 (In thousands) 1993 1992 1991 Tax at 35% statutory $30,261 $37,421 $21,035 rate (34% in 1992 and 1991) State income taxes, net of federal tax benefit 4,364 5,474 36 Change in valuation allowance (10,902) _ _ Tax effect of: Amortization of goodwill 1,429 1,360 1,839 FSLIC assistance and tax exempt interest _ _ (8,768) Bad debt deduction _ _ (5,743) Effect of operating losses _ _ (810) Other, net (3,867) (1,712) (3,162) $21,285 $42,543 $ 4,427
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In 1992, Metropolitan established a valuation allowance for a portion of the operating loss carryforwards as a result of unresolved matters with taxing authorities. During 1993, certain tax issues were resolved which were previously considered in management's assessment of the valuation allowance. As a result, the Company has reduced the remaining valuation allowance. The change in the deferred tax asset valuation allowance of $10.9 million was recorded as a reduction of income tax expense. The adjustments to the net deferred tax asset in 1993 identified as the "Effect of acquisitions and other transactions" result primarily from the acquisitions of Western Financial Corporation and Eureka Savings Bank, fsb and the exercise of compensatory stock options. At December 31, 1993, Metropolitan had the following income tax net operating loss carryforwards available for income tax purposes:
Expiration (Dollars in thousands) Date Amount Federal regular tax operating loss carryforwards acquired through business combinations 2002 $ 3,933 Federal regular tax operating loss carryforwards from other than business combinations 2005 43,451 _______________________________________________________________ $47,384 Federal AMT operating loss carryforwards 2002 $ 4,594
-17- The components of and changes in the net deferred tax asset were as follows:
Effect of Deferred Acquisitions January 1, (expense) and other December 31, (In thousands) 1993 benefit transactions 1993 Loan fees and discounts $ 6,366 $ (840) $ _ $ 5,526 Discounts on loans and mortgage-backed securities arising from acquisitions 10,998 (8,125) 6,504 9,377 Bad debt deduction 2,160 1,241 3,819 7,220 FHLB stock dividends (6,833) 3,248 (2,781) (6,366) Other 1,161 2,814 (2,097) 1,878 Net temporary differences 13,852 (1,662) 5,445 17,635 Carryforwards: Federal regular tax operating loss carryforwards 35,993 (22,933) 2,718 15,778 Federal regular tax operating loss carryforwards acquired in purchase business combinations 1,948 29 (600) 1,377 State regular tax operating loss carryforwards 7,836 (4,430) 238 3,644 State regular tax operating loss carryforwards acquired in purchase business combinations 4,844 (135) _ 4,709 Federal AMT credit carryforwards 3,327 6,619 _ 9,946 Total carryforwards 53,948 (20,850) 2,356 35,454 67,800 (22,512) 7,801 53,089 Valuation allowance (16,500) 10,902 5,598 _ Deferred tax asset $51,300 $(11,610) $13,399 $53,089
During the first quarter of 1992, the Company prospectively adopted SFAS No. 109, "Accounting for Income Taxes." In accordance with this statement, the Company recognized deferred tax assets reflecting the benefit expected to be realized from the utilization of net operating loss carryforwards ("NOLs") of $182.4 million and net deductible temporary differences of approximately $35.8 million. The Company had taxable income and pre-tax book income for the periods presented as follows:
(In thousands) 1993 1992 1991 Taxable income $68,490 $ 74,707 $15,471 Pre-tax book income 86,459 110,062 61,866
The primary difference between taxable income and pre-tax book income in 1992 and 1993 relates to the reversal of net deductible temporary differences. In 1991 the primary difference between taxable income and pre-tax book income related to the federally assisted acquisitions of seven insolvent thrift institutions in 1988 and the related tax exempt assistance received in the form of interest on FSLIC notes and covered assets and other assistance payments. The tax exempt assistance is also the primary cause of NOLs. The Company generated net taxable income in 1993, 1992 and 1991 resulting in the utilization of a portion of the NOLs. Except for the effects of the reversal of net deductible temporary differences, the Company is not currently aware of any factors which would cause any significant differences between taxable income and pre-tax book income in future years. However, there can be no assurances that there will be no significant differences in the future between taxable income and pre-tax book income if circumstances change (such as changes in tax laws or the Company's financial condition or performance). In adopting SFAS No. 109 the Company recorded income and a deferred tax asset equal to the cumulative effect of the accounting change of $75.9 million, $53.1 million of which remains at December 31, 1993. To fully realize the deferred tax asset the Company will need to generate future taxable income of approximately $133 million prior to expiration of the NOLs which will begin to expire in 2002. Based on the Company's historical and current pre-tax earnings, management believes it is more likely than not that the Company will realize the benefit of the NOLs existing at December 31, 1993 before they begin to expire in 2002. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or specific level of continuing earnings. -18- The bank qualifies as a savings and loan institution as defined by the Internal Revenue Code. As a qualifying savings and loan, the Bank is able to utilize an available special tax provision for the bad debt reserve deduction which allows the use of either the "experience" method or the "percentage of taxable income" method in determining the annual allowable deduction. Note O Employee Benefits Pension Plan The Company has a defined benefit plan covering substantially all employees. The benefits are based on years of service, minimum age requirements, and the employee's compensation while employed with the Company. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The actuarial cost method used to compute pension cost is the Projected Unit Credit method. Net pension cost (income) included the following components:
Year Ended December 31 (In thousands) 1993 1992 1991 Service cost-benefits earned during the period $1,289 $ 792 $ 218 Interest cost on projected benefit obligation 580 336 363 Actual return on plan assets (1,453) (2,009) (2,761) Net amortization and deferral 240 1,167 2,020 Net periodic pension cost (income) $ 656 $ 286 $ (160)
The following table sets forth the plan's funded status and amounts recognized in the Company's statements of financial condition:
December 31 (In thousands) 1993 1992 Actuarial present value of accumulated benefit obligation including vested benefits of $3,623 in 1993 and $5,330 in 1992 $(4,401) $(5,860) Actuarial present value of projected benefit obligation (7,401) (7,661) Plan assets at market value, primarily certificates of deposit, U.S. Treasury securities and listed stock, including $2,615 in 1993 and $2,523 in 1992 of Company stock 12,064 12,236 Plan assets in excess of projected benefit obligation 4,663 4,575 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (562) (655) Prior service cost not yet recognized in net periodic pension cost (1,119) (1,233) Unrecognized net assets at end of year (3,980) (3,035) Pension liability $ (998) $ (348)
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7 percent at both December 31, 1993 and 1992. The expected long term rate of return on plan assets in 1993, 1992 and 1991 was 7 percent. -19- Postretirement Benefit Plan In addition to the Company's defined pension benefit plan, the Company sponsors a defined benefit health care plan that provides postretirement benefits to eligible employees. The benefits, based on years of service, is contributory and contains cost-sharing features such as deductibles and coinsurance. The Company's policy is to fund the cost of medical benefits in amounts determined by management. In 1993, the Company adopted Financial Accounting Standard No. 106 "Employers Accounting For Postretirement Benefits Other than Pensions." The Company's total postretirement benefit cost for 1993 was $545,000. Postretirement benefit costs for 1992 and 1991, which were recorded on a cash basis, have not been restated. The postretirement benefit liability at December 31, 1993 was $499,000. Upon adoption, the accumulated postretirement obligation was $2.4 million and increased to $2.9 million at December 31, 1993. The weighted average annual assumed rate of increase in the per capita cost of covered benefits is 13 percent for 1993 and is assumed to decrease gradually to 6 percent for 2001 and remain at that level thereafter. The health care cost trend rate assumption has minimal effect on the amounts reported. Increasing the assumed health care trend rates by one percentage point in each year would increase the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1993 by $160,000. The weighted average discount rate used in determining postretirement benefit obligation was 7 percent at December 31, 1993. The board of directors has approved a directors' retirement plan subject to shareholder approval. In November 1992, the Financial Accounting Standards Board issued SFAS No. 112, "Employers Accounting for Post Employment Benefits." The Company is required to adopt this Statement in 1994. As of December 31, 1993, the Company had not adopted Statement No. 112. No material effect on the financial condition of the Company is anticipated when the statement is adopted. Savings Plans The Company has a defined contribution savings plan covering substantially all employees. Eligibility is based on years of service and minimum age requirements. Employees elect to contribute a percentage of their compensation. Contributions are invested, at the direction of the employee, in one or more funds or can be directed to purchase common stock of the Company at fair market value. The Company makes matching contributions, invested solely in common stock of the Company, up to a specified percentage of employee's compensation. Company contributions vest over a period of five years. Total savings plan expense was $2.5 million $2.0 million and $1.5 million for the years ended December 31, 1993, 1992 and 1991, respectively. Stock Purchase Plan The Company established a shareholder approved Employee Stock Purchase Plan (the "Plan") in 1992 for which 440,000 shares have been reserved. Under the Plan, the Company conducts a series of offerings (each an "Offering") of its Common Stock, each continuing for three months, beginning on January 1, April 1, July 1 and October 1 of each year (the "Offering Date") and ending on March 31, June 30, September 30 and December 31 of each year (the "Offering Period"). The per share purchase price of the shares offered in a given Offering is the lower of 85 percent of the fair market value of one share of the Common Stock of the Company on the first day of the Offering Period or the last day of the Offering Period. Employees, subject to restrictions regarding length of service and age, may designate a payroll deduction limited to a minimum deduction of $25 per pay period and not exceeding an amount which would result in the purchase of Common Stock with a fair value of more than $25,000 in any calendar year. During 1993, a total of 353,450 shares were issued under the plan for an aggregate purchase price of $4.4 million. Stock Option and Incentive Plans The Company has three board of director approved stock option and incentive plans, initiated in 1984, 1990 and 1993. The 1993 plan is pending shareholder approval. Two types of options are granted under the plans, incentive and nonqualified. Incentive options are exercisable on a phased in basis beginning one year after issuance. Nonqualified options before October 1993 are fully exercisable on the grant date. Nonqualified options after October 1993 are exercisable on a phased in basis beginning one year after issuance. All options expire ten years from the grant date. Under the 1993 plan,restricted stock awards, performance units, stock bonuses and stock appreciation rights may also be granted. The company initiated a non-employee director stock option plan, approved by the shareholders, in 1993. The options are exercisable one year after issuance. The grant of incentive and nonqualified stock options is to be made at the discretion of the committee responsible for administering the plans and is to be set forth in the option agreement. -20- Shares reserved and options outstanding under all plans are as follows:
Options Outstanding Shares Reserved Total Number and Exercisable Price For Future Grant Of Shares Total Shares Per Share Balance at December 31, 1990 1,371,102 2,805,567 2,805,567 $1.57 _ 4.90 Granted (413,248) 413,248 413,248 4.35 _ 4.35 Exercised _ (1,329,299) (1,329,299) 1.57 _ 4.90 Balance at December 31, 1991 957,854 1,889,516 1,889,516 1.57 _ 4.90 Share allocated 660,000 _ _ _ Granted (767,800) 767,800 767,800 9.72 _ 15.23 Cancelled 79,068 (79,068) (79,068) 4.35 _ 9.72 Exercised _ (574,497) (574,497) 1.84 _ 4.90 Balance at December 31, 1992 929,122 2,003,751 2,003,751 1.57 _ 15.23 Shares allocated 2,275,000 _ _ _ Granted (1,000,900) 1,000,900 553,400 15.13 _ 18.30 Cancelled _ _ _ _ Exercised _ (725,992) (725,992) 1.57 _ 16.02 Balance at December 31, 1993 2,203,222 2,278,659 1,831,159 $2.85 _ 18.30
Note P Parent Company Financial Information The Company's ability to pay cash dividends depends upon the cash dividends it receives from the Bank, Edina Realty and Equity Title. The Bank is required to give the OTS thirty day notice prior to declaration of a cash dividend to the parent company. The Bank's dividends to the parent company are generally limited to the calendar year's earnings plus 50 percent of the surplus capital (the percentage by which the ratio of its regulatory capital to assets ratio exceeds the fully phased in ratio) at the beginning of the year. -21- The summarized financial information of Metropolitan Financial Corporation, the parent company, is as follows: Condensed Statements of Condition
(In thousands) December 31, 1993 December 31, 1992 Assets Cash and investments $ 12,254 $ 12,966 Equity in net assets of subsidiaries 578,046 503,107 Other assets 12,504 8,632 Total Assets $602,804 $524,705 Liabilities Payable to subsidiaries $ 37 $ 1,180 Other borrowings 92,521 93,857 Other liabilities 5,863 3,024 Total Liabilities 98,421 98,061 Shareholders' Equity Preferred stock 5 5 Common stock 320 267 Additional paid-in capital 231,881 148,890 Retained earnings 280,813 278,424 Net unrealized gains on securities available-for-sale (net of tax) 4,209 _ Less cost of common stock in treasury (12,845) (942) Total Shareholders' Equity 504,383 426,644 Total Liabilities and Shareholders' Equity $602,804 $524,705
Condensed Statements of Income
Year Ended December 31 (In thousands) 1993 1992 1991 Net interest expense $ (7,756) $ (2,070) $ (434) Cash dividends received from subsidiaries 23,672 17,136 8,930 Management fee income 20,906 15,364 11,979 Noninterest expense (20,731) (15,093) (11,545) Income before equity in earnings of subsidiaries 16,091 15,337 8,930 Undistributed equity in earnings of subsidiaries 46,137 121,794 48,509 Income before income taxes 62,228 137,131 57,439 Income tax benefit 2,946 _ _ Net Income $65,174 $137,131 $57,439
-22- Condensed Statements of Cash Flows
Year Ended December 31 (In thousands) 1993 1992 1991 Operating Activities Net income $ 65,174 $137,131 $57,439 Adjustment to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiaries (46,137) (121,794) (48,509) Net Cash Provided by Operating Activities 19,037 15,337 8,930 Investing Activities Capital contribution to subsidiary _ (78,000) _ Net Cash Used by Investing Activities _ (78,000) _ Financing Activities (Decrease) increase in receivables from or payables to subsidiaries (1,123) 68 (410) Proceeds from: Issuance of borrowings _ 86,250 _ Issuance of common stock 16,742 4,380 4,168 Sale of common stock held in Treasury _ 3,131 810 Repayment of borrowings (3,860) (3,048) (4,248) Purchase of common stock held in Treasury (11,903) (114) (82) Dividends (13,483) (9,093) (9,318) Other financing activities (6,122) (9,480) 395 Net Cash (Used) Provided by Financing Activities (19,749) 72,094 (8,685) (Decrease) Increase in Cash and Cash Equivalents (712) 9,431 245 Cash and cash equivalents at beginning of year 12,966 3,535 3,290 Ending Cash and Cash Equivalents $ 12,254 $ 12,966 $ 3,535
-23- Note Q Segment Information The following summarizes financial data for the Company's business segments:
Year Ended December 31 (In thousands) 1993 1992 1991 Revenues: The Bank $ 507,995 $ 492,907 $ 460,288 Edina Realty 36,267 33,905 28,105 Equity Title 13,714 11,503 8,001 MFS 4,587 852 67 562,563 539,167 496,461 Expenses: The Bank 430,110 388,980 400,480 Edina Realty 33,093 30,855 27,052 Equity Title 10,693 9,113 7,009 MFS 2,208 157 54 476,104 429,105 434,595 Net income before income tax expense, extraordinary item and cumulative effect of accounting change: The Bank 77,885 103,927 59,808 Edina Realty 3,174 3,050 1,053 Equity Title 3,021 2,390 992 MFS 2,379 695 13 $ 86,459 $ 110,062 $ 61,866
Nearly all assets are attributable to the financial institutions segment. -24- Report of Independent Auditors Board of Directors and Shareholders Metropolitan Financial Corporation Minneapolis, Minnesota We have audited the accompanying consolidated statements of condition of Metropolitan Financial Corporation and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Metropolitan Financial Corporation and subsidiaries at December 31, 1993 and 1992 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note D to the financial statements, in 1993 the Company changed its method of accounting for certain debt and equity securities. Also, as discussed in Note O to the financial statements, in 1993 the Company changed its method of accounting for certain postretirement benefits provided to its employees. Ernst & Young LLP Minneapolis, Minnesota January 19, 1994 -25- CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (Dollar amounts in thousands, except per share data) (Unaudited)
March 31, December 31, 1994 1993 Assets Cash and due from banks $89,251 $85,084 Short term interest bearing deposits 50,644 82,364 Loans held-for-sale 31,659 60,645 Securities available-for-sale 604,406 813,293 Mortgage-backed securities (market: March 31, 1994-$1,092,878; December 31, 1993-$954,908) 1,102,019 943,193 Loans (net of allowance: March 31, 1994-$42,832; December 31, 1993-$42,905) 5,479,505 4,585,410 Federal Home Loan Bank stock, at cost 73,062 59,719 Accrued interest 42,260 36,817 Real estate (net of allowance: March 31, 1994-$7,144; December 31, 1993-$9,533) 59,007 56,110 Office properties and equipment 101,631 91,632 Goodwill 90,874 61,517 Deferred taxes 57,173 53,089 Other assets 73,354 77,912 Total Assets $7,854,845 $7,006,785 Liabilities Transaction and passbook deposits $1,663,892 $1,560,667 Certificates 4,033,849 3,793,968 Federal Home Loan Bank advances 1,248,141 921,801 Reverse repurchase agreements 175,000 -- Other borrowings 122,428 133,159 Accrued interest 45,593 42,485 Other liabilities 66,705 50,322 Total Liabilities 7,355,608 6,502,402 Shareholders' Equity Preferred stock, par value $.01 per share; authorized 10,000,000 shares; issued--488,750 5 5 Common stock, par value $.01 per share; authorized 60,000,000 shares; issued March 31, 1994-32,217,674 shares, December 31, 1993-31,992,275 shares 322 320 Additional paid-in capital 234,537 231,881 Retained earnings 286,453 280,813 Net unrealized (losses) gains on securities available-for-sale (net of tax) (1,715) 4,209 Less: cost of common stock in treasury; March 31, 1994-1,305,338 shares; December 31, 1993-813,522 shares (20,365) (12,845) Total Shareholders' Equity 499,237 504,383 Total Liabilities and Shareholders' Equity $7,854,845 $7,006,785 See notes to condensed consolidated financial statements
-26- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollar amounts in thousands, except per share data) (Unaudited)
Three Months Ended March 31, 1994 1993 Interest Income Mortgage-backed securities $ 22,692 $ 32,169 Loans 95,178 74,557 Investments 4,157 5,347 122,027 112,073 Interest Expense Transaction and passbook deposits 7,050 8,038 Certificates 46,649 51,080 Federal Home Loan Bank advances 12,679 3,628 Reverse repurchase agreements 609 -- Other borrowings 2,475 3,332 69,462 66,078 Net interest income 52,565 45,995 Provision for loan losses 2,575 1,500 Net interest income after provision for loan losses 49,990 44,495 Noninterest Income Gains related to mortgage banking activities 347 525 Mortgage loan servicing fees 2,126 2,189 Realty commission income 6,306 5,379 Title closing fees 2,202 1,874 Service charges on deposit accounts 3,079 1,885 Financial services income 1,835 702 Other income 1,651 1,193 17,546 13,747 Noninterest Expense Compensation and related items 19,751 20,163 Occupancy 6,474 5,864 Data processing 2,859 2,748 Advertising 2,942 2,909 Deposit insurance premium 3,102 2,372 Amortization of goodwill 1,035 1,016 Real estate owned expense 914 1,752 Other general and administrative 10,807 12,598 47,884 49,422 Income Before Income Taxes 19,652 8,820 Income tax expense (benefit) 7,467 (6,467) Net Income $12,185 $15,287 Earnings Per Share: Primary $0.37 $0.49 Fully diluted $0.37 $0.48 See notes to condensed consolidated financial statements.
-27- CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands, except per share data) (Unaudited)
Net Unrealized Gains (Losses) Additional on Securities Total Preferred Stock Common Stock Paid-In Retained Available- Treasury Stock Shareholders' Shares Amount Shares Amount Capital Earnings For-Sale Shares Amount Equity Balance December 31, 1993 488,750 $5 31,992,275 $320 $231,881 $280,813 $4,209 (813,522) $(12,845) $504,383 Issuance of common stock 105,610 1 1,825 1,826 Stock options exercised 85,337 1 669 670 Warrants exercised 34,452 162 162 Net treasury stock acquired (491,816) (7,520) (7,520) Net unrealized losses on securities available-for-sale (5,924) (5,924) Dividends declared: Preferred (351) (351) Common-$.20 per share (6,194) (6,194) Net income 12,185 12,185 March 31, 1994 488,750 $5 32,217,674 $322 $234,537 $286,453 $(1,715) (1,305,338) $(20,365) $499,237 See notes to condensed consolidated financial statements.
-28- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands) (Unaudited)
Three Months Ended March 31, 1994 1993 Operating Activities Net income $ 12,185 $ 15,287 Reconciliation to cash provided by operating activities: Net amortization of loan fees, discounts and premiums 6,801 5,744 Provision for loan losses 2,575 1,500 Decrease (increase) in deferred tax asset 3,479 (7,633) Depreciation and amortization 2,692 2,091 Amortization of goodwill 1,035 1,016 Increase in accrued interest receivable (2,810) (1,704) Increase in accrued interest payable 54 1,442 ______________________ Net Cash Provided by Operating Activities 26,011 17,743 Investing Activities Acquisitions of subsidiaries, net of cash received (50,304) -- Increase in loans (267,059) (258,716) Purchase of: Loans (466,417) (100,000) Investment securities available-for-sale (39,475) -- Mortgage-backed securities available-for-sale (9,945) (17,291) Mortgage-backed securities held-to-maturity (233,446) (290,053) Proceeds from the maturity of investment securities: Available-for-sale 105,528 -- Held-to-maturity -- 193,849 Proceeds from the sale of: Mortgage-backed securities available-for-sale 315,267 143,545 Loans held-for-sale 18,255 15,655 Real estate 10,192 6,450 Principal repayments of mortgage-backed securities: Available-for-sale 82,082 704 Held-to-maturity 113,404 88,259 Other investing activities 7,336 32,521 ______________________ Net Cash Used by Investing Activities (414,582) (185,077) Financing Activities Net increase (decrease) in: Short-term borrowings 175,000 -- Deposits (90,939) (103,901) Purchase of deposits 11,105 -- Proceeds from: Federal Home Loan Bank advances 402,000 240,000 Issuance of common stock 1,826 1,914 Exercise of common stock options and warrants 528 1,118 Net purchase of stock (7,520) (21) Repayment of: Federal Home Loan Bank advances (120,195) (34,694) Other borrowings (10,731) (22,653) Cash dividends (6,545) (3,028) Other financing activities 6,489 1,399 ______________________ Net Cash Provided by Financing Activities 361,018 80,134 ______________________ Net Decrease in Cash and Cash Equivalents (27,553) (87,200) Cash and cash equivalents at beginning of year 167,448 252,859 ______________________ Ending Cash and Cash Equivalents $139,895 $165,659 See notes to condensed consolidated financial statements.
-29- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A--Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and periodic changes in estimates) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1994, are not necessarily indicative of the results that may be expected for the year ending December 31, 1994. Amounts have been reclassified to conform to the current period presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 1993. NOTE B--Income Taxes Income tax expense (benefit) consisted of the following:
Three Months Ended March 31, March 31, (In thousands) 1994 1993 Current Federal $3,115 $ (53) State 873 366 _________________ 3,988 313 Deferred Federal 2,930 (7,226) State 549 446 _________________ 3,479 (6,780) _________________ $7,467 $(6,467)
The provision for federal income taxes differs from that computed at the statutory corporate tax rate as follows:
Three Months Ended March 31, March 31, (In thousands) 1994 1993 Tax statutory rate $6,878 $ 2,999 State income taxes, net of federal benefit 1,057 531 Change in the deferred tax asset valuation allowance -- (10,000) Tax effect of: Amortization of goodwill 362 346 Other, net (830) (343) $7,467 $ (6,467)
-30- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The components of and changes in the net deferred tax asset were as follows:
Effect of Deferred Acquisitions December 31, (Expense) and Other March 31, (In thousands) 1993 Benefit Transactions 1994 Loan fees and discounts $ 5,526 $(1,289) $ 4,237 Discounts on loans and mortgage-backed securities 9,377 130 $ (898) 8,609 Bad debt deduction 7,220 (1,227) 1,159 7,152 Federal Home Loan Bank stock dividends (6,366) 92 (1,138) (7,412) Other 1,878 1,536 3,967 7,381 _________________________________________________________ Net temporary differences 17,635 (758) 3,090 19,967 Carryforwards: Federal regular tax operating loss carryforwards 15,778 (5,212) 251 10,817 Federal regular tax operating loss carryforwards acquired in purchase business combinations 1,377 (158) 3,701 4,920 State regular tax operating loss carryforwards 3,644 (88) 16 3,572 State regular tax operating loss carryforwards acquired in purchase business combinations 4,709 (440) -- 4,269 Federal AMT credit carryforwards 9,946 3,177 505 13,628 _________________________________________________________ Total carryforwards 35,454 (2,721) 4,473 37,206 _________________________________________________________ Deferred tax asset $53,089 $(3,479) $7,563 $57,173 =========================================================
The adjustments to the net deferred tax asset in 1994 identified as the "Effect of acquisitions and other transactions" result primarily from the acquisition of Rocky Mountain Financial Corporation and the exercise of compensatory stock options. A valuation allowance is provided when it is more likely than not, that some portion of the deferred tax asset will not be realized. The Company established a valuation allowance for a portion of the operating loss carryforwards as a result of unresolved matters with taxing authorities. During 1993, certain tax issues were resolved which were previously considered in management's assessment of the valuation allowance. As a result, the Company reduced the valuation allowance by $10 million during the first quarter of 1993. The remaining $6.5 million valuation allowance was eliminated in the last half of 1993. Approximately $10.6 million of the change in the deferred tax asset valuation allowance ($10 million in first quarter 1993) was allocated as a reduction of income tax expense. At March 31, 1994, the Company had the following net operating loss carryforwards available for income tax purposes:
Expiration (Dollars in thousands) Date Amount Federal regular tax operating loss carryforwards acquired through business combinations 1995-2002 $13,366 Federal regular tax operating loss carryforwards from other than business combinations 2005 29,071 42,437 Federal AMT operating loss carryforwards 1995-2002 $14,718
-31- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE C--Acquisitions On March 25, 1994, the Bank completed the acquisition of Rocky Mountain Financial Corporation ("RMFC"), and its federally chartered thrift subsidiary Rocky Mountain Bank, FSB ("Rocky Mountain"), Cheyenne, Wyoming. Pursuant to the stock purchase agreement, the Bank purchased all of the outstanding stock of RMFC, which was liquidated and dissolved and Rocky Mountain was merged into the Bank. Total consideration of $64.2 million was paid in cash to the stockholders of RMFC, after consideration of approximately $3.0 million of transaction expenses. The transaction was accounted for as a purchase. Rocky Mountain had assets of $537 million and deposits of $428 million as of March 25, 1994. The results of operations of RMFC and Rocky Mountain for the period March 26, 1994 through March 31, 1994 have been included in the Company's consolidated first quarter results. In addition, on March 11, 1994, the Bank completed the acquisition of $12.5 million in deposits of two branches of Pioneer Federal Savings and Loan Association, a failed thrift in Kansas. Unaudited pro forma income and income per share information as if RMFC and Rocky Mountain had been combined with the Company at the beginning of each of the respective periods is as follows:
Three Months Ended (Amounts in thousands, except March 31, per share data) 1994 1993 Net Interest Income $56,085 $49,998 Net Income 13,170 16,474 Per Share Data: Primary $0.40 $0.52 Diluted $0.40 $0.52
-32- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: August 5, 1994 FIRST BANK SYSTEM, INC. -------------- /s/ David J. Parrin ------------------------------------ David J. Parrin Senior Vice President and Controller -33- EX-2.1 2 AGREEMENT OF MERGER & CO Exhibit 2.1 AGREEMENT OF MERGER AND CONSOLIDATION BY AND BETWEEN FIRST BANK SYSTEM, INC. AND METROPOLITAN FINANCIAL CORPORATION DATED: JULY 21, 1994
TABLE OF CONTENTS Page ARTICLE 1 MERGER.................................................................... 2 1.1. Effect of Merger............................................... 2 1.2. Effect on Outstanding Shares of MFC Capital Stock.............. 2 1.3. FBS Common Stock Adjustments................................... 3 1.4. Rights of Holders of MFC Capital Stock; Capital Stock of FBS... 4 1.5. No Fractional Shares........................................... 4 1.6. Procedure for Exchange of Stock................................ 5 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF FBS..................................... 7 2.1. Organization and Qualification................................. 7 2.2. Authority Relative to this Agreement; Non-Contravention........ 7 2.3. Validity of FBS Common Stock................................... 8 2.4. Capital Stock.................................................. 8 2.5. 1934 Act Reports............................................... 9 2.6. No Material Adverse Changes.................................... 9 2.7. Prospectus/Proxy Statement..................................... 10 2.8. Litigation..................................................... 10 2.9. Reports and Filings............................................ 10 2.10. Compliance with Laws........................................... 10 2.11. Regulatory Approvals........................................... 10 2.12. Disclosure..................................................... 11 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF MFC..................................... 11 3.1. Organization and Qualification................................. 11 3.2. Authority Relative to this Agreement; Non-Contravention........ 11 3.3. Capitalization................................................. 12 3.4. 1934 Act Reports............................................... 12 3.5. Financial Statements........................................... 13 3.6. Loans.......................................................... 14 3.7. Reports and Filings............................................ 14 3.8. Subsidiaries................................................... 15 3.9. Absence of Undisclosed Liabilities............................. 15 3.10. No Material Adverse Changes.................................... 15 3.11. Absence of Certain Developments................................ 15 3.12. Properties..................................................... 17 3.13. Tax Matters.................................................... 19
-i-
3.14. Contracts and Commitments...................................... 20 3.15. Litigation..................................................... 21 3.16. No Brokers or Finders.......................................... 21 3.17. Employees...................................................... 21 3.18. Employee Benefit Plans......................................... 22 3.19. Insurance...................................................... 25 3.20. Affiliate Transactions......................................... 25 3.21. Compliance with Laws; Permits.................................. 25 3.22. Administration of Fiduciary Accounts........................... 26 3.23. Disclosure..................................................... 26 3.24. Prospectus/Proxy Statement..................................... 26 3.25. Pooling of Interests........................................... 27 3.26. Regulatory Approvals........................................... 27 3.27. Interest Rate Risk Management Instruments...................... 27 ARTICLE 4 CONDUCT OF BUSINESS PENDING THE MERGER..................................... 27 4.1. Conduct of Business............................................. 27 ARTICLE 5 ADDITIONAL COVENANTS AND AGREEMENTS........................................ 30 5.1. Filings and Approvals........................................... 30 5.2. Certain Loans and Related Matters............................... 31 5.3. Monthly Financial Statements.................................... 31 5.4. Expenses........................................................ 31 5.5. No Negotiations, etc. .......................................... 31 5.6. Notification of Certain Matters................................. 32 5.7. Access to Information; Confidentiality.......................... 32 5.8. Filing of Tax Returns and Adjustments........................... 33 5.9. Registration Statement.......................................... 34 5.10. Affiliate Letters............................................... 35 5.11. Establishment of Accruals....................................... 36 5.12. Employee Matters................................................ 36 5.13. Pooling of Interests; Tax Treatment............................. 38 5.14. Stock Options and Warrants...................................... 39 5.15. Indemnification and Insurance................................... 40 5.16. Edina Realty Litigation Matters................................. 41 5.17. FBS SEC Reports................................................. 42 5.18. SEC Reports..................................................... 42 5.19. Stock Exchange Listing.......................................... 42 5.20. Shareholder Approvals........................................... 42 5.21. FBS Board of Directors; Consulting Agreement.................... 42
-ii-
ARTICLE 6 CONDITIONS................................................................. 43 6.1. Conditions to Obligations of Each Party......................... 43 6.2. Additional Conditions to Obligation of MFC...................... 45 6.3. Additional Conditions to Obligation of FBS...................... 46 ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER......................................... 50 7.1. Termination.................................................... 50 7.2. Effect of Termination.......................................... 51 7.3. Amendment...................................................... 52 7.4. Waiver......................................................... 52 ARTICLE 8 GENERAL PROVISIONS........................................................ 52 8.1. Public Statements.............................................. 52 8.2. Notices........................................................ 52 8.3. Interpretation................................................. 53 8.4. Severability................................................... 54 8.5. Miscellaneous.................................................. 54 8.6. Survival of Representations, Warranties and Covenants.......... 54 8.7. Schedules...................................................... 54 SIGNATURES................................................................ 55
-iii- AGREEMENT OF MERGER AND CONSOLIDATION AGREEMENT OF MERGER AND CONSOLIDATION dated July 21, 1994, by and between FIRST BANK SYSTEM, INC., a Delaware corporation ("FBS"), and METROPOLITAN FINANCIAL CORPORATION, a Delaware corporation ("MFC"). WHEREAS, the Boards of Directors of FBS and MFC have determined that it is in the best interests of FBS and MFC and their respective shareholders to consummate the merger of MFC with and into FBS as described in Article 1 (the "Merger"); WHEREAS, as a result of the Merger, all of the outstanding common stock, $0.01 par value, of MFC ("MFC Common Stock") will be converted into common stock, $1.25 par value, of FBS ("FBS Common Stock") and all of the outstanding preferred stock, $0.01 par value, of MFC ("MFC Preferred Stock") will be converted into the right to receive cash, all on the terms and subject to the conditions set forth in this Agreement; WHEREAS, (a) MFC (i) owns all of the issued and outstanding capital stock of Metropolitan Federal Bank, fsb (the "Bank") and (ii) owns all of the issued and outstanding capital stock of LMN Management Corp. and Edina Realty, Inc. (collectively, the "Direct Nonbanking Subsidiaries"); (b) the Bank owns, directly or indirectly, all of the issued and outstanding capital stock of the entities listed on Schedule A hereto (collectively, the "Indirect Nonbanking Subsidiaries"); and (c) Edina Realty, Inc. owns all of the issued and outstanding capital stock of the entities listed on Schedule B hereto (collectively, the "Edina Realty Subsidiaries" and together with the Bank, the Direct Nonbanking Subsidiaries and the Indirect Nonbanking Subsidiaries, the "Subsidiaries"); WHEREAS, as a condition and inducement to FBS's willingness to enter into this Agreement, FBS and MFC are entering into immediately after the execution and delivery hereof a Stock Option Agreement dated as of the date hereof (the "Stock Option Agreement") pursuant to which MFC shall grant to FBS an option to purchase shares of MFC Common Stock; and WHEREAS, FBS and MFC desire that the Merger be made on the terms and subject to the conditions set forth in this Agreement and qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the representations, warranties and covenants contained herein, the parties hereto agree as follows: ARTICLE 1 MERGER Subject to the satisfaction or waiver of the conditions set forth in Article 6, on a date mutually satisfactory to the parties as soon as practicable following receipt of all necessary regulatory approvals of the Board of Governors of the Federal Reserve System ("FRB") and the Office of Thrift Supervision (the "OTS"), MFC will merge with and into FBS. FBS, in its capacity as the corporation surviving the Merger, is sometimes referred to herein as the "Surviving Corporation." The Merger will be effected pursuant to the provisions of, and with the effect provided in, Section 251 of the Delaware General Corporation Law (the "DGCL"). 1.1. Effect of Merger. ---------------- (a) On the Effective Date (as defined in Section 1.1(d)), MFC shall be merged with and into FBS, and the separate existence of MFC shall cease. The Charter (as defined Section 2.2) and Bylaws of FBS, as in effect immediately prior to the Effective Date, shall be the Charter and the Bylaws of the Surviving Corporation until further amended as provided therein and in accordance with law. The directors of FBS immediately prior to the Effective Date will be the directors of the Surviving Corporation until their successors are elected and qualify. (b) The Surviving Corporation shall thereupon and thereafter be responsible and liable for all the liabilities, debts, obligations and penalties of each of FBS and MFC. (c) The Surviving Corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises, of a public as well as of a private nature, of each of FBS and MFC; all property, real, personal and mixed, and all debts due on whatever account, and all and every other interest, of or belonging to or due to each of FBS and MFC, shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed; and the title to any real estate or any interest therein, vested in FBS and MFC, shall not revert or be in any way impaired by reason of the Merger. (d) To effect the Merger, the parties hereto will cause a certificate of merger relating to the Merger to be filed with the Secretary of State of Delaware. The Merger shall be effective upon the filing of such certificate of merger. As used herein, the term "Effective Date" shall mean the date on which the certificate of merger is filed with the Secretary of State of Delaware. 1.2. Effect on Outstanding Shares of MFC Capital Stock. ------------------------------------------------- To effectuate the Merger and subject to the terms and conditions of this Agreement: -2- (a) each issued and outstanding share of MFC Common Stock (other than shares held as treasury stock of MFC or shares held directly or indirectly by FBS, other than shares held in a fiduciary capacity or in satisfaction of a debt previously contracted) shall be converted into .6803 shares of FBS Common Stock, and FBS shall issue to holders of MFC Common Stock .6803 shares of FBS Common Stock (the "Exchange Ratio"), subject to adjustment as provided in Section 1.3, in exchange for each such share of MFC Common Stock; (b) all outstanding options and warrants to purchase shares of MFC Common Stock shall be exchanged for options and warrants to purchase FBS Common Stock, or shares of FBS Common Stock, as provided in Section 5.14; (c) each issued and outstanding share of MFC Preferred Stock (other than shares as to which the holders thereof have asserted and not effectively withdrawn or otherwise lost their appraisal rights pursuant to Section 262 of the DGCL ("Dissenters' Shares")) shall be converted into the right to receive $27.00 in cash, plus any accumulated and unpaid dividends on such shares of MFC Preferred Stock to, but excluding, the Effective Date calculated as set forth in the terms of such MFC Preferred Stock, without interest, from FBS (the "Preferred Consideration"), and FBS shall pay to holders of such MFC Preferred Stock the Preferred Consideration in exchange for each such share of MFC Preferred Stock; (d) Dissenters' Shares shall be purchased and paid for in accordance with Section 262 of the DGCL; and (e) each share of MFC Common Stock held as treasury stock of MFC or held directly or indirectly by FBS, other than shares held in a fiduciary capacity or in satisfaction of a debt previously contracted, shall be canceled, retired and cease to exist, and no exchange or payment shall be made with respect thereof. 1.3. FBS Common Stock Adjustments. ---------------------------- (a) If the average of the closing prices of FBS Common Stock as quoted on the New York Stock Exchange (the "NYSE") for the 20 trading days ending three business days prior to the last date of the meetings of shareholders scheduled to obtain the shareholder approvals referred to in Section 5.20 (the "Average Price") is less than $33.00, then, subject to Section 7.1(e), the Exchange Ratio will be adjusted by multiplying the Exchange Ratio by the quotient of (i) $33.00 divided by (ii) the Average Price. (b) If the Average Price is greater than $40.50, then the Exchange Ratio will be adjusted by multiplying the Exchange Ratio by the quotient of (i) $40.50 divided by (ii) the Average Price. (c) If, between the date hereof and the Effective Date, shares of FBS 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, -3- combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the number of shares of FBS Common Stock issued to holders of MFC Common Stock pursuant to this Agreement will be appropriately and proportionately adjusted so that the number of such shares of FBS Common Stock (or such class of shares into which shares of FBS Common Stock have been changed) that will be issued to holders of MFC Common Stock will equal the number of such shares that holders of MFC Common Stock would have received pursuant to such classification, recapitalization, split-up, combination, exchange of shares or readjustment had the record date therefor been immediately following the Effective Date. 1.4. Rights of Holders of MFC Capital Stock; Capital Stock of FBS. ------------------------------------------------------------ (a) On and after the Effective Date and until surrendered for exchange, each outstanding stock certificate which immediately prior to the Effective Date represented shares of MFC Common Stock shall be deemed for all purposes, except as provided in Section 1.6(c), to evidence ownership of and to represent the number of whole shares of FBS Common Stock into which such shares of MFC Common Stock shall have been converted, and the record holder of such outstanding certificate shall, after the Effective Date, be entitled to vote the shares of FBS Common Stock into which such shares of MFC Common Stock shall have been converted on any matters on which the holders of record of FBS Common Stock, as of any date subsequent to the Effective Date, shall be entitled to vote. In any matters relating to such certificates, FBS may rely conclusively upon the record of shareholders maintained by MFC containing the names and addresses of the holders of record of MFC Common Stock on the Effective Date. (b) On and after the Effective Date and until surrendered for exchange, each outstanding stock certificate which immediately prior to the Effective Date represented shares of MFC Preferred Stock (other than Dissenters' Shares) shall be deemed for all purposes to represent the right to receive the Preferred Consideration from FBS. In any matters relating to such certificates, FBS may rely conclusively upon the record of shareholders maintained by MFC containing the names and address of the holders of record of MFC Preferred Stock on the Effective Date. (c) On and after the Effective Date, each share of FBS Common Stock issued and outstanding immediately prior to the Effective Date shall remain an issued and existing share of common stock of the Surviving Corporation and shall not be affected by the Merger. (d) On and after the Effective Date, FBS shall reserve a sufficient number of authorized but unissued shares of FBS Common Stock for issuance in connection with the conversion of MFC Common Stock into FBS Common Stock as provided herein. 1.5. No Fractional Shares. No fractional shares of FBS Common Stock, and no certificates representing such fractional shares, shall be issued upon the -4- surrender for exchange of certificates representing MFC Common Stock. In lieu of any fractional share, FBS shall pay to each holder of MFC Common Stock who otherwise would be entitled to receive a fractional share of FBS Common Stock an amount of cash (without interest) determined by multiplying (a) the closing price per share of FBS Common Stock on the Effective Date times (b) the fractional share interest to which such holder would otherwise be entitled. 1.6. Procedure for Exchange of Stock. ------------------------------- (a) After the Effective Date, holders of certificates theretofore evidencing outstanding shares of MFC Common Stock or MFC Preferred Stock, upon surrender of such certificates to an exchange agent appointed by FBS (the "Exchange Agent"), shall be entitled to receive, (i) in the case of MFC Common Stock, (A) certificates representing the number of whole shares of FBS Common Stock into which shares of MFC Common Stock theretofore represented by the certificates so surrendered shall have been converted as provided in Section 1.2(a) and (B) cash payments in lieu of fractional shares, if any, as provided in Section 1.5, and (ii) in the case of MFC Preferred Stock, the Preferred Consideration. As soon as practicable after the Effective Date, FBS shall cause the Exchange Agent to mail appropriate and customary transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of MFC Common Stock or MFC Preferred Stock shall pass, only upon proper delivery of such certificates to the Exchange Agent) to each holder of MFC Common Stock and MFC Preferred Stock of record as of the Effective Date advising such holder of the effectiveness of the Merger and the procedure for surrendering to the Exchange Agent outstanding certificates formerly evidencing MFC Common Stock in exchange for new certificates for FBS Common Stock and outstanding certificates formerly evidencing MFC Preferred Stock in exchange for the Preferred Consideration. FBS shall not be obligated to deliver the consideration to which any former holder of shares of MFC Common Stock or MFC Preferred Stock is entitled as a result of the Merger until such holder surrenders the certificate or certificates representing such shares for exchange as provided in such transmittal materials and this Section 1.6(a). In addition, certificates surrendered for exchange by any person deemed an "affiliate" of MFC (as defined in Section 5.10), shall not be exchanged for such consideration until FBS has received a written agreement from such person as provided in Section 5.10. Upon surrender, each certificate evidencing MFC Common Stock or MFC Preferred Stock shall be canceled. (b) On the Effective Date, FBS shall deposit, or shall cause to be deposited, with the Exchange Agent, for exchange in accordance with this Section 1.6, certificates representing the shares of FBS Common Stock and the cash in lieu of fractional shares and cash for payment of the Preferred Consideration (such certificates and cash, hereinafter referred to as the "Exchange Fund") to be issued or paid by FBS pursuant to this Article 1 in connection with the Merger. (c) Until outstanding certificates formerly representing MFC Common Stock are surrendered as provided in Section 1.6(a), no dividend or distribution -5- payable to holders of record of FBS Common Stock shall be paid to any holder of such outstanding certificates, but upon surrender of such outstanding certificates by such holder there shall be paid to such holder the amount of any dividends or distributions (without interest) theretofore paid with respect to such whole shares of FBS Common Stock, but not paid to such holder, and which dividends or distributions had a record date occurring on or subsequent to the Effective Date. (d) After the Effective Date, there shall be no further registration of transfers on the records of MFC of outstanding certificates formerly representing shares of MFC Common Stock or MFC Preferred Stock and, if a certificate formerly representing such shares is presented to MFC or FBS, it shall be forwarded to the Exchange Agent for cancellation and exchange for certificates representing shares of FBS Common Stock or the Preferred Consideration, as applicable, as herein provided. (e) All shares of FBS Common Stock and cash for any fractional shares issued and paid upon the surrender for exchange of MFC Common Stock and all Preferred Consideration paid upon the surrender for exchange of MFC Preferred Stock in accordance with the above terms and conditions shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to such shares of MFC Common Stock and MFC Preferred Stock, respectively. (f) Any portion of the Exchange Fund (including the proceeds of any investments thereof and any FBS Common Stock or any dividends or distributions thereon) that remains unclaimed by the holders of MFC Common Stock or MFC Preferred Stock for six months after the Effective Date shall be repaid to FBS. Any holders of MFC Common Stock or MFC Preferred Stock who have not theretofore complied with this Section 1.6 shall thereafter look only to FBS for payment of their shares of FBS Common Stock, cash in lieu of fractional shares and any unpaid dividends and distributions on the FBS Common Stock deliverable in respect of each share of MFC Common Stock or cash in an amount equal to the Preferred Consideration payable in respect of each share of MFC Preferred Stock, as the case may be, that such holder holds as determined pursuant to this Agreement, in each case, without any interest thereon. If outstanding certificates for shares of MFC Common Stock or MFC Preferred Stock are not surrendered or the payment for them not claimed prior to the date on which such payments would otherwise escheat to or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by abandoned property and any other applicable law, become the property of FBS (and to the extent not in its possession shall be paid over to it), free and clear of all claims or interest of any person previously entitled to such claims. Notwithstanding the foregoing, none of FBS, the Exchange Agent or any other person shall be liable to any former holder of MFC Common Stock or MFC Preferred Stock for any amount delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any certificate for MFC Common Stock or MFC Preferred Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue and -6- pay in exchange for such lost, stolen or destroyed certificate, upon the making of an affidavit of that fact by the holder thereof, (i) in the case of MFC Common Stock, such shares of FBS Common Stock and cash for fractional shares, if any, and (ii) in the case of MFC Preferred Stock, such Preferred Consideration, each as may be required pursuant to this Agreement; provided, however, that FBS may, in its discretion and as a condition precedent to the issuance and payment thereof, require the owner of such lost, stolen or destroyed certificate to deliver a bond in such sum as it may direct as indemnity against any claim that may be made against FBS, MFC, the Exchange Agent or any other party with respect to the certificate alleged to have been lost, stolen or destroyed. (h) Any Dissenters' Shares shall not be converted into the Preferred Consideration or the right to receive the Preferred Consideration unless and until the holder of such Dissenters' Shares shall have effectively withdrawn or otherwise lost the right to appraisal of and payment for such shares under the DGCL, at which time such shares shall be converted into the Preferred Consideration, and the right to receive the Preferred Consideration, as provided in Section 1.2(c). MFC shall give prompt notice to FBS of any demands received from holders of MFC Preferred Stock for appraisal of and payment for their shares. MFC shall not, except with the prior written consent of FBS, voluntarily make any payment with respect to, or settle or offer to settle, any such demands for appraisal. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF FBS FBS hereby represents and warrants to MFC as follows: 2.1. Organization and Qualification. FBS is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite corporate power to carry on its business as now conducted. FBS is registered as a bank holding company under Section 1841 et seq. of Title 12, United States Code (the "Bank Holding Company Act"). FBS is licensed or qualified to do business in every jurisdiction in which the nature of its business or its ownership of property requires it to be licensed or qualified, except where the failure to be so licensed or qualified would not have or would not reasonably be expected to have a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole. 2.2. Authority Relative to this Agreement; Non-Contravention. FBS has the requisite corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement by FBS and the consummation by FBS of the transactions contemplated hereby have been duly authorized by the Board of Directors of FBS, and, except for approval of this Agreement and the Merger by the shareholders of FBS, no other corporate proceedings on the part of FBS are necessary to authorize this Agreement and such -7- transactions. This Agreement has been duly executed and delivered by FBS and constitutes a valid and binding obligation of FBS, enforceable in accordance with its terms. FBS is not subject to, or obligated under, any provision of (a) its Charter (as hereinafter defined) or Bylaws, (b) any agreement, arrangement or understanding, (c) any license, franchise or permit or (d) subject to obtaining the approvals referred to in the next sentence, any law, regulation, order, judgment or decree, which would be breached or violated, or in respect of which a right of termination or acceleration or any encumbrance on any of its or any of its subsidiaries' assets would be created, by its execution, delivery and performance of this Agreement and the consummation by it of the transactions contemplated hereby, other than any such breaches or violations which will not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole, or the consummation of the transactions contemplated hereby. Other than in connection with obtaining any approvals required by the Bank Holding Company Act, Section 1730a of Title 12, United States Code (the "Savings and Loan Holding Company Act"), the Home Owners Loan Act (the "HOLA"), the Federal Deposit Insurance Act (the "FDIA"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "1933 Act"), the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "1934 Act"), rules of the NYSE, state securities or blue sky laws, and the rules and regulations thereunder ("Blue Sky Laws"), rules and regulations of any applicable state insurance regulatory authority ("Applicable Insurance Regulations") and the filing of a certificate of merger with the Secretary of State of Delaware, no authorization, consent or approval of, or filing with, any public body, court or authority is necessary on the part of FBS for the consummation by it of the transactions contemplated by this Agreement, except for such authorizations, consents, approvals and filings as to which the failure to obtain or make would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole, or the consummation of the transactions contemplated hereby. As used in this Agreement, the term "Charter" with respect to any corporation or banking association shall mean those instruments that at that time constitute its charter as filed or recorded under the general corporation or other applicable law of the jurisdiction of incorporation or association, including the articles or certificate of incorporation or association, any amendments thereto and any articles or certificate of merger or consolidation. 2.3. Validity of FBS Common Stock. The shares of FBS Common Stock to be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued, fully paid and nonassessable. 2.4. Capital Stock. The authorized capital stock of FBS consists of 200,000,000 shares of FBS Common Stock and 10,000,000 shares of preferred stock, par value $1.00 per share (the "FBS Preferred Stock"). As of June 30, 1994, (a) 116,300,311 shares of FBS Common Stock were issued and outstanding (including 2,144,277 shares of FBS Common Stock, par value $1.25 per share, held in treasury), -8- 10,982,385 shares of FBS Common Stock were reserved for issuance pursuant to FBS's 1987 Stock Option Plan, 1991 Stock Incentive Plan, 1994 Stock Incentive Plan, Restated Employee Stock Purchase Plan and Dividend Reinvestment Plan, the Western Capital Investment Corp. 1984 Stock Option and Incentive Plan and the 1988 Equity Participation Plan and 3,655,684 shares of FBS Common Stock were reserved for issuance upon conversion of FBS's $3.5625 Cumulative Preferred Stock, Series 1991A (the "Series 1991A Preferred"); (b) 2,118,500 shares of Series 1991A Preferred were outstanding; (c) 12,750 shares of Adjustable Rate Cumulative Preferred Stock, Series 1990A were reserved for issuance pursuant to certain periodic stock purchase rights and risk event warrants issued by FBS; and (d) 1,400,000 shares of Series A Junior Participating Preferred Stock were reserved for issuance upon exercise of rights to purchase shares of Junior Participating Preferred Stock of FBS pursuant to the Rights Agreement dated as of December 21, 1988, between FBS and First Chicago Trust Company of New York, as Rights Agent. 2.5. 1934 Act Reports. ---------------- (a) Prior to the execution of this Agreement, FBS has delivered to MFC complete and accurate copies of (a) FBS's Annual Reports on Form 10-K for the years ended December 31, 1991, 1992 and 1993, as amended (the "FBS 10-K Reports"), as filed under the 1934 Act with the Securities and Exchange Commission (the "SEC"), (b) all FBS proxy statements and annual reports to shareholders used in connection with meetings of FBS shareholders held since January 1, 1992, and (c) FBS's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the "FBS 10-Q Report"), as filed under the 1934 Act with the SEC. As of their respective dates, such documents (i) did 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 therein, in light of the circumstances under which they were made, not misleading and (ii) complied as to form in all material respects with the applicable laws and rules and regulations of the SEC. Since January 1, 1991, FBS has filed in a timely manner all reports that it was required to file with the SEC pursuant to the 1934 Act. (b) The FBS financial statements (including any footnotes thereto) contained in the FBS 10-K Reports and the FBS 10-Q Report were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and fairly present the consolidated financial position of FBS and its subsidiaries as of the dates thereof and the consolidated results of operations, changes in shareholders' equity and cash flows for the periods then ended. 2.6. No Material Adverse Changes. Since March 31, 1994, there has been no material adverse change in, and no event, occurrence or development in the business of FBS or its subsidiaries that, taken together with other events, occurrences and developments with respect to such business, has had or would reasonably be expected to have a material adverse effect on, the business operations or financial condition of FBS and its subsidiaries, taken as a whole, or the ability of FBS to consummate the transactions contemplated hereby. -9- 2.7. Prospectus/Proxy Statement. At the time the Registration Statement (as defined in Section 5.9(a)) becomes effective and at the time the Prospectus/Proxy Statement (as defined in Section 5.9(a)) is mailed to the shareholders of FBS and MFC for purposes of obtaining the approvals referred to in Section 5.9(a) and at all times subsequent to such mailing up to and including the times of such approvals, the Registration Statement and the Prospectus/Proxy Statement (including any amendments or supplements thereto), with respect to all information set forth therein relating to FBS, the FBS Common Stock, this Agreement, the Merger and all other transactions contemplated hereby, will (a) comply in all material respects with applicable provisions of the 1933 Act and the 1934 Act and (b) 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 were made, not misleading. 2.8. Litigation. There are no actions, suits, proceedings, orders or investigations pending or, to the best knowledge of FBS threatened, against FBS or any of its subsidiaries which if determined adversely to FBS or its subsidiaries could reasonably be expected to have a material adverse effect on the financial condition, business or operations of FBS and its subsidiaries, taken as a whole, or would have a material adverse effect on the ability of FBS to consummate the transactions contemplated hereby. 2.9. Reports and Filings. Since January 1, 1991, each of FBS and its subsidiaries has filed each report or other filing it was required to file with any federal or state banking or bank holding company or other regulatory authority having jurisdiction over it (together with all exhibits thereto, the "FBS Regulatory Reports"), except for such reports and filings which the failure to so file would not have a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole, or the ability of FBS to consummate the transactions contemplated hereby. As of their respective dates or as subsequently amended prior to the date hereof, each of the FBS Regulatory Reports was true and correct in all material respects and complied in all material respects with applicable laws, rules and regulations. 2.10. Compliance with Laws. Each of FBS and its subsidiaries has complied in all material respects with applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof which affect the business or any owned or leased properties of FBS or any of its subsidiaries and to which FBS or any of its subsidiaries may be subject, except where the failure to so comply would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole, or the ability of FBS to consummate the transactions contemplated hereby. 2.11. Regulatory Approvals. As of the date hereof, FBS is not aware of any reason that the regulatory approvals specified in Section 5.1 and required to be obtained by FBS would not be obtained. -10- 2.12. Disclosure. The representations and warranties contained in this Agreement are true and correct in all material respects, and such representations and warranties do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact known to FBS which has not been disclosed to MFC pursuant to this Agreement, the FBS 10-K Reports and the FBS 10-Q Report, all taken together as a whole, which would have or would reasonably be expected to have a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole, or the ability of FBS to consummate the transactions contemplated hereby. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF MFC MFC hereby represents and warrants to FBS as follows: 3.1. Organization and Qualification. MFC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. MFC is registered as a savings and loan holding company under the Savings and Loan Holding Company Act. The Bank is a federally chartered savings bank duly organized, validly existing and in good standing under the laws of the United States and has the requisite corporate power to carry on its business as now conducted. Each of the Subsidiaries (other than the Bank) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. The copies of the Charter and Bylaws of each of MFC and the Subsidiaries which have been made available to FBS prior to the date of this Agreement are correct and complete and reflect all amendments made thereto through such date. Each of MFC and the Subsidiaries is licensed or qualified to do business in every jurisdiction in which the nature of its respective business or its ownership of property requires it to be licensed or qualified, except where the failure to be so licensed or qualified would not have or would not reasonably be expected to have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole. 3.2. Authority Relative to this Agreement; Non-Contravention. MFC has the requisite corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement by MFC and the consummation by MFC of the transactions contemplated hereby have been duly authorized by the Board of Directors of MFC and, except for approval of this Agreement and the Merger by the affirmative vote of the holders of a majority of the outstanding MFC Common Stock, no other corporate proceedings on the part of MFC are necessary to authorize this Agreement and such transactions. This Agreement has been duly executed and delivered by MFC and constitutes a valid and binding obligation of MFC, enforceable in accordance with its terms. -11- None of MFC or the Subsidiaries is subject to, or obligated under, any provision of (a) its Charter or Bylaws, (b) any agreement, arrangement or understanding, (c) any license, franchise or permit or (d) subject to obtaining the approvals referred to in the next sentence, any law, regulation, order, judgment or decree, which would be breached or violated, or in respect of which a right of termination or acceleration or any encumbrance on any of its assets would be created, by the execution, delivery or performance of this Agreement, the Stock Option Agreement or the consummation of the transactions contemplated hereby or thereby, other than any such breaches or violations which will not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, or the consummation of the transactions contemplated hereby or thereby. Other than in connection with obtaining any approvals required by the Bank Holding Company Act, the Savings and Loan Holding Company Act, the HOLA, the FDIA, the HSR Act, the 1933 Act, the 1934 Act, the rules of the NYSE, Blue Sky Laws, Applicable Insurance Regulations and the filing of a certificate of merger with the Secretary of State of Delaware, no authorization, consent or approval of, or filing with, any public body, court or authority is necessary on the part of MFC or any of the Subsidiaries for the consummation by MFC of the transactions contemplated by this Agreement, except for such authorizations, consents, approvals and filings as to which the failure to obtain or make would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, or the consummation of the transactions contemplated hereby. 3.3. Capitalization. The authorized and issued and outstanding capital stock of each of MFC and the Subsidiaries as of the date hereof is correctly set forth on Schedule 3.3. The issued and outstanding shares of capital stock of each of MFC and the Subsidiaries are duly authorized, validly issued, fully paid and nonassessable and have not been issued in violation of any preemptive rights. Except as disclosed on Schedule 3.3 and as permitted in Section 4.1, there are no options, warrants, conversion privileges or other rights, agreements, arrangements or commitments obligating MFC or any Subsidiary to issue, sell, purchase or redeem any shares of its capital stock or securities or obligations of any kind convertible into or exchangeable for any shares of its capital stock or of any of its subsidiaries or affiliates, nor are there any stock appreciation, phantom or similar rights outstanding based upon the book value or any other attribute of any of the capital stock of MFC or any of the Subsidiaries, or the earnings or other attributes of MFC or any of the Subsidiaries. MFC has heretofore delivered to FBS true and correct copies of all such agreements, arrangements (including all stock option plans) or commitments identified on Schedule 3.3. 3.4. 1934 Act Reports. Prior to the execution of this Agreement, MFC has delivered or made available to FBS complete and accurate copies of (a) MFC's Annual Reports on Form 10-K for the years ended December 31, 1991, 1992 and 1993 (the "MFC 10-K Reports") as filed under the 1934 Act with the SEC, (b) all MFC proxy statements and annual reports to shareholders used in connection with meetings of -12- MFC shareholders held since January 1, 1992 and (c) MFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the "MFC 10-Q Report") as filed under the 1934 Act with the SEC. As of their respective dates, such documents (i) did 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 therein, in light of the circumstances under which they were made, not misleading and (ii) complied as to form in all material respects with the applicable laws and rules and regulations of the SEC. Since January 1, 1991, MFC has filed in a timely manner all reports that it was required to file with the SEC pursuant to the 1934 Act. 3.5. Financial Statements. -------------------- (a) The MFC financial statements (including any footnotes thereto) contained in the MFC 10-K Reports and the MFC 10-Q Report have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and fairly present the consolidated financial position of MFC and the Subsidiaries as of the dates thereof and the results of operations, changes in shareholders' equity and cash flows for the periods then ended. MFC has furnished FBS with copies of the consolidated balance sheet of MFC as of June 30, 1994 (the "Latest MFC Balance Sheet") and the related statements of income and changes in shareholders' equity for the six months ended June 30, 1994 (the "Related MFC Statements"). The Latest MFC Balance Sheet and the Related MFC Statements have been prepared in accordance with generally accepted accounting principles and fairly present the consolidated financial position of MFC and the Subsidiaries, subject to normal recurring year-end adjustments, as of the date thereof and the results of operations and changes in shareholders' equity for the six-month period then ended. (b) MFC has furnished FBS with copies of the balance sheets of the Bank as of December 31, 1991, 1992 and 1993 and as of June 30, 1993 and 1994 and the related statements of income, changes in shareholder's equity and cash flows for the years and six-month periods then ended (except that no statement of cash flows for the six months ended June 30, 1994 have been so furnished), respectively (collectively, together with any footnotes thereto, the "Bank Financial Statements"). The balance sheet of the Bank as of June 30, 1994 are referred to herein as the "Latest Bank Balance Sheet," and the related statements of income and changes in shareholder's equity for the six-month period then ended are referred to herein as the "Related Bank Financial Statements." The Bank Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and fairly present the financial position of the Bank, subject in the case of the Latest Bank Balance Sheet and the Related Bank Financial Statements to normal recurring year-end adjustments, as of the dates thereof and the results of operations, changes in shareholder's equity and cash flows for the periods then ended. (c) MFC has furnished FBS with copies of the balance sheets of each of Edina Realty, Inc., MFC Insurance Corporation and Equity Title Services, Inc. -13- (collectively, the "Principal Nonbanking Subsidiaries") as of December 31, 1991, 1992 and 1993 and as of June 30, 1993 and 1994 and the related statements of income for the years and six-month periods then ended (except that no statement of cash flows for the six months ended June 30, 1994 have been so furnished), respectively (collectively, together with any footnotes thereto, the "Principal Nonbanking Subsidiaries Financial Statements"). The balance sheets of each of the Principal Nonbanking Subsidiaries as of June 30, 1994 are herein referred to as the "Latest Principal Nonbanking Subsidiaries Balance Sheets," and the related statement of income and changes in shareholder's equity for the six- month period then ended are herein referred to as the "Related Principal Nonbanking Subsidiaries Financial Statements." The Principal Nonbanking Subsidiaries Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and fairly present the financial position of each of the Principal Nonbanking Subsidiaries covered thereby, subject in the case of the Latest Principal Nonbanking Subsidiaries Balance Sheet and the Related Principal Nonbanking Subsidiaries Financial Statements to normal recurring year-end adjustments, as of the dates thereof and the results of operations, changes in shareholder's equity and cash flows for the periods then ended. The Latest MFC Balance Sheet, the Latest Bank Balance Sheet and the Latest Principal Nonbanking Subsidiaries Balance Sheets are collectively referred to herein as the "Latest Balance Sheets," and the Related MFC Financial Statements, the Related Bank Financial Statements and the Related Principal Nonbanking Subsidiaries Financial Statements are collectively referred to herein as the "Related Statements." 3.6. Loans. ----- (a) The documentation relating to each loan made by the Bank and relating to all security interests, mortgages and other liens with respect to all collateral for each such loan, taken as a whole, are adequate for the enforcement of the material terms of each such loan and of the related security interests, mortgages and other liens. The terms of each such loan and of the related security interests, mortgages and other liens comply in all material respects with all applicable laws, rules and regulations (including, without limitation, laws, rules and regulations relating to the extension of credit). (b) Except as set forth in Schedule 3.6, (i) as of June 30, 1994, there are no loans, leases, other extensions of credit or commitments to extend credit of the Bank that have been or, to MFC's knowledge, should have been classified by the Bank as non-accrual, as restructured, as 90 days past due, as still accruing and doubtful of collection or any comparable classification, (ii) MFC has provided to FBS true, correct and complete in all material respects written information concerning the loan portfolios of the Bank, and (iii) no material information with respect to the loan portfolios of the Bank has been withheld from FBS. 3.7. Reports and Filings. Since January 1, 1991, each of MFC and the Subsidiaries has filed each report or other filing that it was required to file with any federal or state savings and loan, banking, savings and loan holding company, bank -14- holding company or other applicable regulatory authorities having jurisdiction over it (together with all exhibits thereto, the "MFC Regulatory Reports"). As of their respective dates or as subsequently amended prior to the date hereof, each of the MFC Regulatory Reports was true and correct in all material respects and complied in all material respects with applicable laws, rules and regulations. 3.8. Subsidiaries. Schedule 3.8 correctly sets forth the jurisdiction of incorporation of each Subsidiary. All of the issued and outstanding shares of capital stock of each Subsidiary are owned by MFC free and clear of any lien, pledge, security interest, encumbrance or charge of any kind, other than encumbrances arising as a result of requisite regulatory approvals for transfer. Except for the stock of the Subsidiaries owned by MFC and as otherwise disclosed on Schedule 3.8, neither MFC nor any of the Subsidiaries owns any stock, partnership interest, joint venture interest or any other security issued by any other corporation, organization or entity, except securities owned by the Bank in the ordinary course of its business. 3.9. Absence of Undisclosed Liabilities. All of the obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due, and regardless of when asserted) arising out of transactions or events heretofore entered into, or any action or inaction, including Taxes (as defined in Section 3.13) with respect to or based upon transactions or events heretofore occurring ("Liabilities"), required to be reflected on the Latest Balance Sheets in accordance with generally accepted accounting principles have been so reflected. MFC and the Subsidiaries have no Liabilities except (a) as reflected on the Latest Balance Sheets, (b) Liabilities which have arisen after the date of the Latest Balance Sheets in the ordinary course of business and (c) as otherwise disclosed on Schedule 3.9. As of June 30, 1994, there are no agreements or commitments binding the Bank to extend credit, in the amount per "one borrower" (as defined in 12 C.F.R. (S) 563.93), of $1,000,000 or more, except as set forth on Schedule 3.9. 3.10. No Material Adverse Changes. Since the date of the Latest Balance Sheets, there has been no material adverse change in, and no event, occurrence or development in the business of MFC or the Subsidiaries that, taken together with other events, occurrences and developments with respect to such business, has had or would reasonably be expected to have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, or the ability of MFC to consummate the transactions contemplated hereby. 3.11. Absence of Certain Developments. Except as set forth in the Latest Balance Sheets and the Related Statements or on Schedule 3.11, unless otherwise expressly contemplated or permitted by this Agreement, since May 31, 1994, neither MFC nor any of the Subsidiaries has: (a) issued or sold any of its equity securities, securities convertible into or exchangeable for its equity securities, warrants, options or other rights to acquire its equity securities, or any bonds or other securities, except (i) deposit and other bank obligations in the ordinary course of business and (ii) pursuant to the exercise of -15- stock options and warrants issued under, or otherwise pursuant to, the agreements, arrangements or commitments identified on Schedule 3.3; (b) redeemed, purchased, acquired or offered to acquire, directly or indirectly, any shares of capital stock of MFC or any of the Subsidiaries or other securities of MFC or any of the Subsidiaries, except pursuant to the exercise of stock options and warrants issued under, or otherwise pursuant to, the agreements, arrangements or commitments identified on Schedule 3.3; (c) split, combined or reclassified any outstanding shares of capital stock of MFC or any of the Subsidiaries, or declared, set aside or paid any dividends or other distribution payable in cash, property or otherwise with respect to any shares of capital stock of MFC or any of the Subsidiaries or other securities, except (i) dividends paid in cash by the Subsidiaries which are wholly owned by MFC to MFC, or to another wholly owned Subsidiary of MFC, (ii) the regular quarterly cash dividends paid on the MFC Common Stock in an amount not to exceed $.20 per share and (iii) the regular dividends paid in accordance with the terms of the MFC Preferred Stock; (d) borrowed any amount or incurred or become subject to any material liability, except liabilities incurred in the ordinary course of business, but in no event has MFC or any of the Subsidiaries entered into any long-term borrowings with terms of greater than one year, other than (i) as set forth in Schedule 3.27 and (ii) borrowings for the purpose of interest rate risk management with maturities of less than three years in an aggregate amount not exceeding $150,000,000 and any related derivative transactions, without prior consultation with FBS; (e) discharged or satisfied any material lien or encumbrance on the properties or assets of MFC or any of the Subsidiaries or paid any material liability other than in the ordinary course of business, other than reverse repurchase agreements or Federal Home Loan Bank borrowings; (f) sold, assigned, transferred, mortgaged, pledged or subjected to any lien or other encumbrance any of its assets with an aggregate market value in excess of $50,000 except (A) in the ordinary course of business, including real estate acquired through foreclosure or deed in lieu of foreclosure ("REO"), (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 of, or interfere with the past or future use or ability to convey, the property subject thereto or affected thereby; (g) canceled any material debts or claims or waived any rights of material value, except in the ordinary course of business or upon payment in full; (h) suffered any theft, damage, destruction or loss of or to any property or properties owned or used by it, whether or not covered by insurance, which would, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole; -16- (i) made or granted any bonus or any wage, salary or compensation increase or severance or termination payment to, or promoted, any director, officer, employee, group of employees or consultant, entered into any employment contract or hired any employee with an employee classification above grade "G" (as such classifications have been described by MFC to FBS) other than (A) bonuses, compensation increases, promotions or new hires in the ordinary course and in a manner consistent with past practices as previously disclosed to FBS and (B) bonuses payable on the Effective Date as a result of the Merger under the Change in Control Plans (as defined in Section 5.12(d)); (j) made or granted any increase in the benefits payable under any employee benefit plan or arrangement, amended or terminated any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement (except as required by law and, with respect to any such action taken prior to the date hereof, disclosed on Schedule 3.11); (k) made any single or group of related capital expenditures or commitment therefor in excess of $50,000 or entered into any lease or group of related leases with the same party which involves aggregate lease payments payable of more than $100,000 for any individual lease or involves more than $100,000 for any group of related leases in the aggregate; (l) acquired (by merger, exchange, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership, joint venture or other business organization or division or material assets thereof, or assets or deposits that are material to MFC, except in exchange for debt previously contracted, including REO; (m) taken any other action or entered into any other transaction other than in the ordinary course of business; or (n) agreed to do any of the foregoing. 3.12. Properties. ---------- (a) Each of MFC and the Subsidiaries owns good and marketable title to all of the real property and all of the personal property, fixtures, furniture and equipment reflected on the Latest Balance Sheets or acquired since the date thereof (other than real property reflected on the Latest Balance Sheets as REO), free and clear of all liens and encumbrances, except for (i) mortgages on real property set forth on Schedule 3.12(a), (ii) encumbrances which do not materially affect the value of, or interfere with the past or future use or ability to convey, the property subject thereto or affected thereby, (iii) liens for current taxes and special assessments not yet due and payable, (iv) leasehold estates with respect to multi-tenant buildings owned by MFC or any of the Subsidiaries, which leases are identified on Schedule 3.12(a), and (v) property disposed of since the date of the Latest Balance Sheets in the ordinary course of business. -17- (b) Schedule 3.12(b) correctly sets forth a brief description, including the term, of each lease for real or personal property to which MFC or any of the Subsidiaries is a party as lessee with respect to (i) each individual lease which involves a remaining aggregate balance of lease payments payable of more than $100,000 or any group of related leases which involves a remaining aggregate balance of lease payments payable of more than $100,000, (ii) each lease which is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K promulgated by the SEC or (iii) each lease which was not entered into in the ordinary course of business. MFC has delivered or made available to FBS complete and accurate copies of each of the leases described on Schedules 3.12(a) and 3.12(b), and none of such leases has been modified in any material respect, except to the extent that such modifications are disclosed by the copies delivered to FBS. The leases described on Schedules 3.12(a) and 3.12(b) are in full force and effect. MFC or one of the Subsidiaries (if lessee under such lease) has a valid and existing leasehold interest under each lease described on Schedule 3.12(b) for the term set forth therein. With respect to the leases described on Schedule 3.12(b), neither MFC nor any of the Subsidiaries is in default, nor, to the best knowledge of MFC and the Subsidiaries, are any of the other parties to any of such leases in default, and, to the best knowledge of MFC and the Subsidiaries, no circumstances (not in the control of MFC and the Subsidiaries) exist which could result in such a default under any of such leases. To the best knowledge of MFC and the Subsidiaries, there has been no cancellation, breach or anticipated breach by any other party to any lease described on Schedule 3.12(a) or 3.12(b). The rent rolls set forth on Schedules 3.12(a) and 3.12(b) are true and complete in all material respects and describe all occupancies and the material terms of each occupancy. (c) Except as set forth in Schedule 3.12(c), all of the buildings, fixtures, furniture and equipment necessary for the conduct of the business of MFC and each of the Subsidiaries are in good condition and repair, ordinary wear and tear excepted, and are usable in the ordinary course of business. Each of MFC and the Subsidiaries owns, or leases under valid leases, all buildings, fixtures, furniture, personal property, land improvements and equipment necessary for the conduct of its business as it is presently being conducted. (d) Except as set forth in Schedules 3.12(d) and 3.12(e), neither MFC nor any of the Subsidiaries nor any of the buildings owned or leased by MFC or any of the Subsidiaries is in violation of any applicable zoning ordinance or other law, regulation or requirement relating to the operation of any properties used in the operation of its business, including, without limitation, applicable environmental protection laws and regulations, which violations would, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries taken as a whole; and neither MFC nor any of the Subsidiaries has received any notice of any such violation, or of the existence of any condemnation proceeding with respect to any properties owned or leased by MFC or any of the Subsidiaries. Except as set forth in Schedule 3.12(d), no hazardous substances, hazardous wastes, pollutants or contaminants have been deposited or -18- disposed of in, on or under MFC's or any of the Subsidiaries' owned or leased properties (including properties owned, managed or controlled by the Bank in connection with its lending or fiduciary operations) during the period in which MFC or any of the Subsidiaries has owned, occupied, managed, controlled or operated such properties, except to the extent not material to the business, operations or financial conditions of MFC and the Subsidiaries, taken as a whole. To the best knowledge of MFC and the Subsidiaries, no prior owners, occupants or operators of all or any part of MFC's or any of the Subsidiaries' owned or leased properties (including properties owned, managed or controlled by the Bank in connection with its lending or fiduciary operations) ever used such properties as a dump or gasoline service station, or deposited, disposed of or allowed to be deposited or disposed of in, on or under such properties any hazardous substances, hazardous wastes, pollutants or contaminants, except to the extent not material to the business, operations or financial conditions of MFC and the Subsidiaries, taken as a whole. No asbestos or any material amount of ureaformaldehyde materials exists in or on any of MFC's or the Subsidiaries' owned or leased properties (including properties owned, managed or controlled by the Bank in connection with its lending or fiduciary operations), and no electrical transformers or capacitors, other than those owned by public utility companies, on such properties contain any PCBs. The representations contained in this Section 3.12(d) are not applicable to properties securing loans made by the Bank where the loans were made in the ordinary course of business and are fully performing in accordance with their terms. (e) Except as set forth in Schedule 3.12(e), there are no aboveground or underground tanks (excluding hot water storage or propane tanks) located under, in or about, nor, to the best knowledge of MFC and the Subsidiaries, have there ever been any such tanks located under, in or about, any of MFC's or any of the Subsidiaries' owned or leased properties (including properties owned, managed or controlled by the Bank in connection with its lending or fiduciary operations). 3.13. Tax Matters. Each of MFC, the Subsidiaries and all members of any consolidated, affiliated, combined or unitary group of which MFC or any of the Subsidiaries is a member have filed or will file all Tax (as hereinafter defined) and Tax information returns or reports required to be filed (taking into account permissible extensions) by them on or prior to the Effective Date, and have paid (or have accrued or will accrue, prior to the Effective Date, amounts for the payment of) all Taxes relating to the time periods covered by such returns and reports. The accrued taxes payable accounts for Taxes and provision for deferred income taxes, specifically identified as such, on the Latest Balance Sheets are sufficient for the payment of all unpaid Taxes of MFC and the Subsidiaries accrued for or applicable to all periods ended on or prior to the date of the Latest Balance Sheet or which may subsequently be determined to be owing with respect to any such period. Except as disclosed on Schedule 3.13, neither MFC nor any of the Subsidiaries has waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to an assessment or deficiency for Taxes. Each of MFC and the Subsidiaries has paid or will pay in a timely manner and as required by law all Taxes due and payable by it or which it is obligated to withhold from amounts owing to any -19- employee or third party. All Taxes which will be due and payable, whether now or hereafter, for any period ending on, prior to or including the Effective Date shall have been paid by or on behalf of MFC and the Subsidiaries or shall be reflected on the books of MFC and the Subsidiaries as an accrued Tax liability determined in a manner which is consistent with past practices and the Latest Balance Sheets. No Tax returns of MFC or the Subsidiaries have been audited by any governmental authority other than as disclosed on Schedule 3.13; and, except as set forth on Schedule 3.13, there are no unresolved questions, claims or disputes asserted by any relevant taxing authority concerning the liability for Taxes of MFC or any of the Subsidiaries. Neither MFC nor any of the Subsidiaries has made an election under Section 341(f) of the Code for any taxable years not yet closed for statute of limitations purposes. No demand or claim has been made against MFC or any of the Subsidiaries with respect to any Taxes arising out of membership or participation in any consolidated, affiliated, combined or unitary group of which MFC or any of its Subsidiaries was at any time a member. For purposes of this Agreement, the term "Tax" shall mean any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits tax, environmental tax, customs duty, capital stock, franchise, employees' income withholding, foreign or domestic withholding, social security, unemployment, disability, workers' compensation, employment-related insurance, real property, personal property, sales, use, transfer, value added, alternative or add-on minimum or other tax, fee, assessment or charge of any kind whatsoever, including any interest, penalties or additions to, or additional amounts in respect of the foregoing, for each of MFC, the Subsidiaries and all members of any consolidated, affiliated, combined or unitary group of which MFC or any of the Subsidiaries is a member. 3.14. Contracts and Commitments. ------------------------- (a) Except as set forth on Schedule 3.14, neither MFC nor any of the Subsidiaries (i) is a party to any collective bargaining agreement or contract with any labor union, (ii) is a party to any written or oral contract for the employment of any officer, individual employee or other person on a full-time or consulting basis, or relating to severance pay for any such person, (iii) is a party to any written or oral agreement or understanding to repurchase assets previously sold (or to indemnify or otherwise compensate the purchaser in respect of such assets), except for securities sold under a repurchase agreement providing for a repurchase date 30 days or less after the purchase date, (iv) is a party to any (A) contract or group of related contracts with the same party for the purchase or sale of products or services, under which the undelivered balance of such products and services has a purchase price in excess of $100,000 for any individual contract or $100,000 for any group of related contracts in the aggregate, (B) other contract which is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K promulgated by the SEC, or (C) other agreement which is not entered into in the ordinary course of business and which is not disclosed on Schedules 3.12(a) or 3.12(b), or (v) has any commitments for capital expenditures in excess of $50,000. -20- (b) Except as disclosed on Schedule 3.14, (i) to the best knowledge of MFC and the Subsidiaries, since the date of the Latest Balance Sheets, no customer has indicated that it will stop or decrease the rate of business done with MFC or any of the Subsidiaries (except for changes in the ordinary course of such business) that would, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole; (ii) each of MFC and the Subsidiaries have performed all obligations required to be performed by it prior to the date hereof in connection with the contracts or commitments set forth on Schedule 3.14, and none of MFC or any of the Subsidiaries is in receipt of any claim of default under any contract or commitment set forth on Schedule 3.14, except for any failures to perform, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries taken as a whole; (iii) none of MFC or any of the Subsidiaries has any present expectation or intention of not fully performing any material obligation pursuant to any contract or commitment set forth on Schedule 3.14; and (iv) to the best knowledge of MFC and the Subsidiaries, there has been no cancellation, breach or anticipated breach by any other party to any contract or commitment set forth on Schedule 3.14, except for any cancellation, breach or anticipated breach which would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole. 3.15. Litigation. Except as set forth on Schedule 3.15, there are no actions, suits, proceedings, orders or investigations pending or, to the best knowledge of MFC and the Subsidiaries, threatened against MFC or any of the Subsidiaries, at law or in equity, or before or by any federal, state or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, except for such actions, suits, proceedings, orders or investigations which are not reasonably likely to result in losses or expenses in excess of $50,000. Except as set forth on Schedule 3.15, none of the matters set forth on such Schedule, individually or in the aggregate, will have or could reasonably be expected to have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole. 3.16. No Brokers or Finders. Except as disclosed on Schedule 3.16, there are no claims for brokerage commissions, finders' fees, investment advisory fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement, understanding, commitment or agreement made by or on behalf of MFC or any of the Subsidiaries. 3.17. Employees. Except as set forth on Schedule 3.17, none of MFC's Chairman, Chief Administrative Officer, Chief Financial Officer or Senior Vice President, Human Resources, has any knowledge (without inquiry) of the announced or anticipated resignation of (i) any officer of MFC or any of the Subsidiaries or (ii) other employees at a rate substantially higher than the historical resignation rate for such employees of MFC or the Subsidiaries. Except as set forth on Schedule 3.17, MFC and each of the Subsidiaries has complied with all laws -21- relating to the employment of labor, including provisions thereof relating to wages, hours, equal opportunity, collective bargaining, non-discrimination and the payment of social security and other taxes, except where failure to so comply would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole. 3.18. Employee Benefit Plans. ---------------------- (a) Definitions. For the purposes of this Section 3.18, unless the context clearly requires otherwise, the term "Plan" or "Plans" includes all employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other benefit arrangements (including, without limitation, any employment agreement or any program, agreement, policy or commitment providing for insurance coverage of employees, workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accidental benefits) applicable to the employees of MFC or any of the Subsidiaries, to which MFC or any of the Subsidiaries contribute, or which MFC or any of the Subsidiaries have committed to implement for their employees prior to the date of this Agreement. Unless the context clearly requires otherwise, "Plan" or "Plans" shall also include any similar program or arrangement maintained by any organization affiliated by ownership with MFC or any of the Subsidiaries for which MFC or any of the Subsidiaries are or could be completely or partially liable for the funding or the administration either as a matter of law or by agreement but excluding customers of the trust departments of affiliates of MFC where there is no ownership affiliation between such customers and MFC. (b) Except as disclosed on Schedule 3.18: (i) Full Disclosure of All Plans. With respect to all employees and former employees of MFC and the Subsidiaries (and all dependents and beneficiaries of such employees and former employees): (A) Neither MFC nor any of the Subsidiaries maintain or contribute to any nonqualified deferred compensation or retirement plans, contracts or arrangements; (B) Neither MFC nor any of the Subsidiaries maintain or contribute to any qualified defined contribution plans (as defined in Section 3(34) of ERISA or Section 414(i) of the Code); (C) Neither MFC nor any of the Subsidiaries maintain or contribute to any qualified defined benefit plans (as defined in Section 3(35) of ERISA or Section 414(j) of the Code) ("Defined Benefit Plans"); and -22- (D) Neither MFC nor any of the Subsidiaries maintain or contribute to any employee welfare benefit plans (as defined in Section 3(1) of ERISA). (ii) Funding. With respect to the Plans, (A) all required contributions which are due have either been made or properly accrued and (B) neither MFC nor any of the Subsidiaries is liable for any "accumulated funding deficiency" as that term is defined in Section 412 of the Code or any penalty or excise tax in connection therewith. (iii) Plan Documents. With respect to all Plans sponsored or administered by MFC or any Subsidiary and with respect to any other Plan if available to MFC or any Subsidiary, MFC has furnished FBS with true and complete copies of (A) the most recent determination letter, if any, received by MFC or any of the Subsidiaries from the Internal Revenue Service regarding each qualified Plan, (B) the Form 5500 and all Schedules and accompanying financial statements, if any, for each Plan for which such form is required to be filed for the three most recent fiscal Plan years, (C) the most recently prepared actuarial valuation report, if any, for each Plan, and (D) copies of the current Plan documents, trust agreements, insurance contracts and all related contracts and documents (including any material employee communications) with respect to each Plan. (iv) Defined Benefit Plans. Neither MFC nor any of the Subsidiaries nor any affiliate of MFC or any of the Subsidiaries maintains or has maintained any Defined Benefit Plans for which MFC, any of the Subsidiaries or FBS have or will have any liability or, which if terminated, could result in any liability to MFC, the Subsidiaries or FBS under Title IV of ERISA. There are no unfunded vested liabilities (determined using the assumptions used by the Plan for funding and without regard to future salary increases) with respect to Defined Benefit Plans sponsored by MFC or any Subsidiary. There have been no reportable events under Section 4043 of ERISA (with respect to which the 30-day notice requirement has not been waived by regulation) with respect to any Defined Benefit Plan maintained by MFC or any of the Subsidiaries. No Defined Benefit Plan has been terminated that will result in a material liability by MFC or any of the Subsidiaries to the Pension Benefit Guaranty Corporation. (v) Multiemployer Plans. Neither MFC nor any of the Subsidiaries has any actual or potential liabilities under Sections 4201 or 4205 of ERISA for any complete or partial withdrawal from any multiemployer plan. (vi) Fiduciary Breach; Claims. Neither MFC nor any of the Subsidiaries nor any of its directors, officers, employees or other "fiduciaries" (as such term is defined in Section 3(21) of ERISA) has committed any breach of fiduciary duty imposed by ERISA or any other applicable law with respect to the Plans which would subject MFC or any of the Subsidiaries, directly or -23- indirectly, to any liability under ERISA or any applicable law. There are no actions, suits or claims pending against MFC or any Subsidiary relating to benefits other than routine, uncontested claims for benefits. (vii) Prohibited Transaction. Neither MFC nor any of the Subsidiaries nor any officer, director, employee, agent or fiduciary of any Plan has incurred any liability for any civil penalty imposed by Section 4975 of the Code or Section 502(i) of ERISA. (viii) Material Compliance With Law. All Plans have been consistently administered in accordance with their terms in all material respects. To the extent required either as a matter of law or to obtain the intended tax treatment and tax benefits, all Plans comply in all material respects with the requirements of ERISA and the Code. All Tax information returns or reports and all other required filings, disclosures and contributions have been made with respect to all Plans. No condition exists that limits the right of MFC or any of the Subsidiaries to amend or terminate any such Plan (except as provided in such Plans or limited under ERISA or the Code). (ix) VEBA Funding. No Plan is funded in whole or in part through a voluntary employees' beneficiary association exempt from tax under Section 501(c)(9) of the Code. The limitations under Sections 419 and 419A of the Code have been computed, all unrelated business income tax returns have been filed and appropriate adjustments have been made on all other Tax returns. (x) Retirement and COBRA Benefits. Neither MFC nor any of the Subsidiaries have actual or potential liability under current law for benefits after separation from employment other than (i) benefits under Plans described in clauses (A), (B) or (C) of Section 3.18(b)(i)(ii) health care continuation benefits described in Section 4980B of the Code or Part G of Subtitle B of Title I of ERISA or any comparable provisions under the laws of any state. (xi) Collective Bargaining. No Plan is maintained in whole or in part pursuant to collective bargaining. (xii) Employee Status. No employee of MFC or any of the Subsidiaries is absent due to (A) a disability that currently entitles the employee to benefits under any long-term disability plan sponsored by MFC or any of the Subsidiaries or (B) military service leave of absence. All employees of MFC or any of the Subsidiaries are "at will" employees. (xiii) Parachute Payments. No Plan requires or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code, and the consummation of the transactions contemplated by this Agreement will not -24- be a factor in causing payments to be made by FBS, MFC or any of the Subsidiaries that are not deductible (in whole or in part) under Section 280G of the Code. 3.19. Insurance. Schedule 3.19 hereto lists each insurance policy maintained by MFC or any of the Subsidiaries with respect to its properties and assets. Prior to the date hereof, MFC has delivered to FBS complete and accurate copies of each of the insurance policies described on Schedule 3.19. All such insurance policies are in full force and effect, and neither MFC nor any of the Subsidiaries is in default with respect to its obligations under any of such insurance policies. 3.20. Affiliate Transactions. Except as set forth on Schedule 3.20, neither MFC nor any of the Subsidiaries, nor any executive officer or director of MFC or any of the Subsidiaries, nor any member of the immediate family of any such officer or director (which for the purposes hereof shall mean a spouse, minor child or adult child living at the home of any such officer or director), nor any entity which any of such persons "controls" (within the meaning of Regulation O of the FRB), has any loan agreement, note or borrowing arrangement or any other agreement with MFC or any of the Subsidiaries (other than normal employment arrangements) or any interest in any property, real, personal or mixed, tangible or intangible, used in or pertaining to the business of MFC or any of the Subsidiaries. 3.21. Compliance with Laws; Permits. Each of MFC and the Subsidiaries has complied in all respects with all applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof which affect the business or any owned or leased properties of MFC or any of the Subsidiaries and to which MFC or any of the Subsidiaries may be subject (including, without limitation, the Occupational Safety and Health Act of 1970, the HOLA, the FDIA, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act of 1975, the Fair Housing Act, the Equal Credit Opportunity Act and the Federal Reserve Act, each as amended, and any other state or federal acts (including rules and regulations thereunder) regulating or otherwise affecting employee health and safety or the environment), except where failure to so comply would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, or MFC's ability to consummate the transactions contemplated hereby; and no claims have been filed by any such governments or agencies against MFC or any of the Subsidiaries alleging such a violation of any such law or regulation which have not been resolved to the satisfaction of such governments or agencies. Each of MFC and the Subsidiaries holds all of the permits, licenses, certificates and other authorizations of foreign, federal, state and local governmental agencies required for the conduct of its business, except where failure to obtain such authorizations would not, individually or in the aggregate, have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as whole, or the ability of MFC to consummate the transactions contemplated hereby. Except as disclosed in Schedule 3.21, neither MFC nor any of the Subsidiaries is subject to any cease and desist order, written agreement or memorandum of understanding with, or is a -25- party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory agreement letter from, or has adopted any board resolutions at the request of, federal or state governmental authorities charged with the supervision or regulation of savings banks, banks, savings and loan holding companies or bank holding companies or engaged in the insurance of bank deposits (collectively, the "Bank Regulators"), nor have any of MFC or any of the Subsidiaries been advised by any Bank Regulator 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, board resolutions or similar undertaking. Neither MFC nor any Subsidiary is subject to Section 32 of the Federal Deposit Insurance Act. 3.22. Administration of Fiduciary Accounts. Each Subsidiary has properly administered, in all respects material and which could reasonably be expected to be material to the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, all accounts for which it acts as a fiduciary, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable state and federal law and regulation and common law. Neither MFC, any Subsidiary, nor any director, officer or employee of MFC or any Subsidiary has committed any breach of trust with respect to any such fiduciary account which is material to or could reasonably be expected to be material to the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account in all material respects. 3.23. Disclosure. The representations and warranties of MFC contained in this Agreement are true and correct in all material respects, and such representations and warranties do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact known to MFC and the Subsidiaries which has not been disclosed to FBS pursuant to this Agreement, the Schedules hereto and the MFC 10-K Reports and the MFC 10-Q Report, all taken together as a whole, which would have or would reasonably be expected to have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole, or the ability of MFC to consummate the transactions contemplated hereby. 3.24. Prospectus/Proxy Statement. At the time the Prospectus/Proxy Statement is mailed to the shareholders of FBS and MFC in order to obtain approvals referred to in Section 5.9(a) and at all times subsequent to such mailing up to and including the times of such approvals, such Prospectus/Proxy Statement (including any supplements thereto), with respect to all information set forth therein relating to MFC (including the Subsidiaries) and its shareholders, MFC Common Stock, this Agreement, the Merger and all other transactions -26- contemplated hereby, will (a) comply in all material respects with applicable provisions of the 1933 Act and the 1934 Act, and (b) 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 contained therein, in light of the circumstances under which they are made, not misleading. 3.25. Pooling of Interests. Neither MFC nor any of the Subsidiaries has taken or agreed to take any action which would disqualify the Merger as a "pooling of interests" for accounting purposes. 3.26. Regulatory Approvals. As of the date hereof, MFC is not aware of any reason that the regulatory approvals specified in Section 5.1 would not be obtained. 3.27. Interest Rate Risk Management Instruments. ----------------------------------------- (a) Schedule 3.27 sets forth a true, correct and complete list of all interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements to which MFC or any of the Subsidiaries is a party or by which any of their properties or assets may be bound. MFC has delivered or made available to FBS true, correct and complete copies of all such interest rate risk management agreements and arrangements. (b) All interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements to which MFC or any of the Subsidiaries is a party or by which any of their properties or assets may be bound were entered into in the ordinary course of business and, to MFC's knowledge, in accordance with prudent banking practice and applicable rules, regulations and policies of the Bank Regulators and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. MFC and each of the Subsidiaries has duly performed in all material respects all of its obligations thereunder to the extent that such obligations to perform have accrued; and to MFC's knowledge, there are no breaches, violations or defaults or allegations or assertions of such by any party thereunder. ARTICLE 4 CONDUCT OF BUSINESS PENDING THE MERGER 4.1. Conduct of Business. From the date of this Agreement to the Effective Date, unless FBS shall otherwise agree in writing or as otherwise expressly contemplated or permitted by other provisions of this Agreement, including this Section 4.1: -27- (a) the business of MFC and each of the Subsidiaries shall be conducted only in, and neither MFC nor any of the Subsidiaries shall take any action except in, the ordinary course, on an arms-length basis and in accordance, in all material respects, with all applicable laws, rules and regulations and past practices; (b) neither MFC nor any of the Subsidiaries shall, directly or indirectly, (i) amend or propose to amend its Charter or Bylaws; (ii) issue or sell any of its equity securities, securities convertible into or exchangeable for its equity securities, warrants, options or other rights to acquire its equity securities, or any bonds or other securities, except (A) deposit and other bank obligations in the ordinary course of business and (B) pursuant to the exercise of the options, warrants, conversion privileges and other rights set forth on Schedule 3.3 on the date of this Agreement; (iii) redeem, purchase, acquire or offer to acquire, directly or indirectly, any shares of capital stock of MFC or any of the Subsidiaries or other securities of MFC or of any of the Subsidiaries, except pursuant to the agreements, arrangements or commitments identified on Schedule 3.3; (iv) split, combine or reclassify any outstanding shares of capital stock of MFC or any of the Subsidiaries, or declare, set aside or pay any dividend or other distribution payable in cash, property or otherwise with respect to shares of capital stock of MFC or any of the Subsidiaries except (A) dividends paid in cash by the Subsidiaries which are wholly owned by MFC to MFC, or another wholly owned Subsidiary of MFC, (B) the regular quarterly cash dividends paid on the MFC Common Stock in an amount not to exceed $.20 per share, and (C) the regular dividends paid in accordance with the terms of the MFC Preferred Stock; (v) borrow any amount or incur or become subject to any material liability, except liabilities incurred in the ordinary course of business, but in no event will MFC or any of the Subsidiaries enter into any long-term borrowings with a term of greater than one year, other than (i) as set forth on Schedule 3.27 and (ii) borrowings for the purpose of interest rate risk management with maturities of less than three years in an aggregate amount not exceeding $150,000,000 and any related derivative transactions, without prior consultation with FBS; (vi) discharge or satisfy any material lien or encumbrance on the properties or assets of MFC or any of the Subsidiaries or pay any material liability, except in the ordinary course of business, other than reverse repurchase agreements or Federal Home Loan Bank borrowings; (vii) sell, assign, transfer, mortgage, pledge or subject to any lien or other encumberance any of its assets with an aggregate market value in excess of $50,000, except (x) in the ordinary course of business, including REO, (y) liens and encumbrances for current property taxes not yet due and payable and (z) liens and encumbrances which do not materially affect the value of, or interfere with the past or future use or ability to convey, the property subject thereto or affected thereby; (viii) cancel any material debt or claims or waive any rights of material value, except in the ordinary course of business; (ix) acquire (by merger, exchange, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership, joint venture or other business organization or division or material assets thereof, or assets or deposits that are material to MFC, except in exchange for debt previously contracted, including REO; (x) other than as set forth on Schedule 3.11 on the date of this Agreement, make any single or group of related capital expenditures or commitments therefor in excess of $50,000 or enter into any lease or group of related -28- leases with the same party which involves aggregate lease payments payable of more than $100,000 for any individual lease or involves more than $100,000 for any group of related leases in the aggregate; or (xi) enter into or propose to enter into, or modify or propose to modify, any agreement, arrangement or understanding with respect to any of the matters set forth in this Section 4.l(b); (c) neither MFC nor any of the Subsidiaries shall, directly or indirectly, enter into or modify any employment, severance or similar agreements or arrangements with, or grant any bonuses, wage, salary or compensation increases, or severance or termination pay to, or promote, any director, officer, employee, group of employees or consultant or hire any employee with an employee classification above grade "G" (as such classifications have been described by MFC to FBS), other than (i) bonuses, increases, promotions or new hires in the ordinary course and in a manner consistent with past practices as previously disclosed to FBS, (ii) bonuses payable on the Effective Date as a result of the Merger under the Change in Control Plans and (iii) retention bonuses in an aggregate amount not to exceed $300,000 and as to which the identity of the recipient and amount of each such bonus will be previously agreed upon by FBS and MFC; (d) neither MFC nor any of the Subsidiaries shall adopt or amend any bonus, profit sharing, stock option, pension, retirement, deferred compensation, or other employee benefit plan, trust, fund, contract or arrangement for the benefit or welfare of any employees, except as required by law; (e) each of MFC and the Subsidiaries shall use reasonable efforts to cause its current insurance policies not to be canceled or terminated or any of the coverage thereunder to lapse, unless simultaneously with such termination, cancellation or lapse, replacement policies providing coverage substantially equal to the coverage under the canceled, terminated or lapsed policies are in full force and effect; (f) neither MFC nor any of the Subsidiaries shall enter into any settlement or similar agreement with respect to, or take any other significant action with respect to the conduct of, any action, suit, proceeding, order or investigation which is set forth on Schedule 3.15 or to which MFC or any of the Subsidiaries becomes a party after the date of this Agreement, without prior consultation with FBS, provided that neither MFC nor any of the Subsidiaries shall take any such action with respect to the litigation matters identified as "Edina Realty Litigation Matters" on Schedule 3.15 (the "Edina Realty Litigation Matters"), without the prior written consent of FBS; (g) each of MFC and the Subsidiaries shall use commercially reasonable efforts to preserve intact in all material respects the business organization and the goodwill of each of MFC and the Subsidiaries and to keep available the services of its officers and employees as a group and preserve intact material agreements, and MFC shall confer on a regular and frequent basis with representatives of FBS, as reasonably requested by FBS, to report on operational matters and the general status of ongoing operations; -29- (h) neither MFC nor any of the Subsidiaries shall take any action with respect to investment securities held or controlled by any of them inconsistent with past practices, alter its investment portfolio duration policy as heretofore in effect or, without prior consultation with FBS, take any action that would have or could reasonably be expected to have a material effect on the Bank's asset/liability position; (i) the Bank shall not make any agreements or commitments binding it to extend credit in the amount per "one borrower" (as previously defined) in excess of $1,000,000 nor will it purchase any portfolio of loans with an aggregate principal balance in excess of $100,000,000 without prior consultation with FBS; (j) with respect to properties leased by MFC or any of the Subsidiaries, neither MFC nor any of the Subsidiaries shall renew, exercise an option to extend, cancel or surrender any lease of real property nor allow any such lease to lapse, without prior consultation with FBS (other than leases with remaining terms of six months or less); and (k) neither MFC nor any of the Subsidiaries shall agree to do any of the foregoing; provided, however, that in the event MFC and the Subsidiaries would be prohibited from taking any action by reason of this Section 4.1 without the prior written consent of FBS, such action may nevertheless be taken if MFC or any of the Subsidiaries is expressly required to do so by law or by the OTS and MFC informs FBS of such prohibition or restriction. For purposes of this Agreement, the words "prior consultation" with respect to any action means advance notice of such proposed action and a reasonable opportunity to discuss such action in good faith prior to taking such action. ARTICLE 5 ADDITIONAL COVENANTS AND AGREEMENTS 5.1. Filings and Approvals. Each party will use all reasonable efforts and will cooperate with the other party in the preparation and filing, as soon as practicable, of all applications or other documents required to obtain regulatory approvals and consents from the FRB and the OTS, filings under the HSR Act and any other applicable regulatory authorities (including any applications with the OTS or the Office of the Comptroller of the Currency deemed by FBS to be necessary to allow it to consolidate the operations of the Bank with the operations of FBS) and provide copies of such applications, filings and related correspondence to the other party. Prior to filing each application, registration statement or other document with the applicable regulatory authority, each party will provide the other party with an opportunity to review and comment on the nonconfidential portions of each such application, registration statement or other document. Each party will use all -30- reasonable efforts and will cooperate with the other parties in taking any other actions necessary to obtain such regulatory or other approvals and consents, including participating in any required hearings or proceedings. Subject to the terms and conditions herein provided, each party will use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement. 5.2. Certain Loans and Related Matters. MFC will furnish to FBS a complete and accurate list as of the end of each calendar month after May 1994, within 15 business days after the end of each such calendar month, of (a) all of the Bank's periodic internal credit quality reports prepared during such calendar month (which reports will be prepared in a manner consistent with past practices), (b) all loans of the Bank classified as non-accrual, as restructured, as 90 days past due, as still accruing and doubtful of collection or any comparable classification, (c) all REO, including in-substance foreclosures and real estate in judgment, (d) any current repurchase obligations of the Bank with respect to any loans, loan participations or state or municipal obligations or revenue bonds and (e) any standby letters of credit issued by the Bank. 5.3. Monthly Financial Statements. MFC shall furnish FBS with MFC's and each of the Subsidiaries' balance sheets as of the end of each calendar month after June 1994 and the related statements of income, within 15 business days after the end of each such calendar month. Such financial statements shall be prepared on a basis consistent with the Latest Balance Sheets and the Related Statements and on a consistent basis during the periods involved and shall fairly present the financial positions of MFC and each of the Subsidiaries as of the dates thereof and the results of operations of MFC and each of the Subsidiaries for the periods then ended. 5.4. Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. 5.5. No Negotiations, etc. MFC will not, and will cause the Subsidiaries and MFC's and the Subsidiaries' respective officers, directors, employees, agents and affiliates, not to, directly or indirectly, solicit, authorize, initiate or encourage submission of, any proposal, offer, tender offer or exchange offer from any person or entity (including any of its or their officers or employees) relating to any liquidation, dissolution, recapitalization, merger, consolidation or acquisition or purchase of all or a material portion of the assets or deposits of, or any equity interest in, MFC or any of the Subsidiaries or other similar transaction or business combination involving MFC or any of the Subsidiaries, or, unless MFC shall have determined, after receipt of a written opinion of counsel to MFC (a copy of which opinion shall be delivered to FBS), that the Board of Directors of MFC has a fiduciary duty to do so, (a) participate in any negotiations in connection with or in furtherance of any of the foregoing or (b) permit any person other than FBS and its representatives to have any access to the facilities of, or furnish to any person other than FBS and its -31- representatives any non-public information with respect to, MFC or any of the Subsidiaries in connection with or in furtherance of any of the foregoing. MFC shall promptly notify FBS if any such proposal or offer, or any inquiry from or contact with any person with respect thereto, is made, and shall promptly provide FBS with such information regarding such proposal, offer, inquiry or contact as FBS may request. 5.6. Notification of Certain Matters. Each party shall give prompt notice to the other party of (a) the occurrence or failure to occur of any event or the discovery of any information, which occurrence, failure or discovery would be likely to cause any representation or warranty on its part contained in this Agreement to be materially untrue or inaccurate when made at the Effective Date or at any time prior to the Effective Date and (b) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. 5.7. Access to Information; Confidentiality. -------------------------------------- (a) MFC shall permit and shall cause each of the Subsidiaries to permit FBS full access on reasonable notice and at reasonable hours to its properties and shall disclose and make available (together with the right to copy) to FBS and to the internal auditors, loan review officers, employees, attorneys, accountants and other representatives of FBS all books, papers and records relating to the assets, stock, properties, operations, obligations and liabilities of MFC and the Subsidiaries, including, without limitation, all books of account (including, without limitation, the general ledger), tax records, minute books of directors' and shareholders' meetings, organizational documents, bylaws, contracts and agreements, filings with any regulatory authority, accountants' work papers, litigation files (including, without limitation, legal research memoranda), documents relating to assets and title thereto (including, without limitation, abstracts, title insurance policies, surveys, environmental reports, opinions of title and other information relating to the real and personal property), plans affecting employees, securities transfer records and shareholder lists, and any books, papers and records relating to other assets, business activities or prospects in which FBS may have a reasonable interest, including, without limitation, its interest in planning for integration and transition with respect to the business of MFC and the Subsidiaries; provided, however, that the foregoing rights granted to FBS shall, whether or not and regardless of the extent to which the same are exercised, in no way affect the nature or scope of the representations, warranties and covenants of MFC set forth herein. In addition, MFC shall cause each of the Subsidiaries to instruct its officers, employees, counsel and accountants to be available for, and respond to any questions of, such FBS representatives at reasonable hours and with reasonable notice by FBS to such individuals, and to cooperate fully with FBS in planning for the integration of the business of MFC and the Subsidiaries with the business of FBS and its subsidiaries. (b) FBS shall permit reasonable access to its properties and shall disclose and make available (together with the right to copy) to MFC and to its -32- representatives FBS's financial books and records, minute books of directors' and shareholders' meetings, organizational documents, bylaws, and filings with any regulatory authority; provided, however, that the foregoing rights granted to MFC shall, whether or not and regardless of the extent to which the same are exercised, in no way affect the nature or scope of the representations, warranties and covenants of FBS set forth herein. In addition, FBS shall instruct its officers, employees, counsel and accountants to be available for, and respond to reasonable questions of, representatives of MFC at reasonable hours and with reasonable notice by MFC to such individuals. (c) All information furnished by MFC or FBS pursuant hereto shall be treated as the sole property of the party furnishing the information until the Effective Date, and, if the Effective Date shall not occur, the receiving party shall return to the party which furnished such information, or destroy, all documents or other materials (including copies thereof) containing, reflecting or referring to such information. In addition, the receiving party shall keep confidential all such information and shall not directly or indirectly use such information for any competitive or other commercial purpose. In the event that this Agreement shall terminate, neither party shall disclose, except as required by law or pursuant to the request of an administrative agency or other regulatory body, the basis or reason for such termination, without the consent of the other party. The obligation to keep such information confidential shall not apply to (i) any information which (A) was already in the receiving party's possession prior to the disclosure thereof to the receiving party by the party furnishing the information, (B) was then generally known to the public, (C) became known to the public through no fault of the receiving party or its representatives or (D) was disclosed to the receiving party by a third party not bound by an obligation of confidentiality or (ii) disclosures required by law, governmental or regulatory authority. 5.8. Filing of Tax Returns and Adjustments. ------------------------------------- (a) MFC, on behalf of MFC and each of the Subsidiaries, shall file (or cause to be filed) at their own expense, on or prior to the due date, all Tax returns, including all Plan returns and reports, for all Tax periods ending on or before the Effective Date where the due date for such returns or reports (taking into account valid extensions of the respective due dates) falls on or before the Effective Date; provided, however, that neither MFC nor any of the Subsidiaries shall file any such Tax returns, or other returns, elections or information statements with respect to any liabilities for Taxes (other than federal, state or local sales, use, withholding or employment tax returns or statements), or consent to any adjustment or otherwise compromise or settle any matters with respect to Taxes, without prior consultation with FBS; provided, further, that neither MFC nor any of the Subsidiaries shall make any election or take any other discretionary position with respect to Taxes, in a manner inconsistent with past practices, without the prior written approval of FBS, which approval shall not be unreasonably withheld. In the event the granting or withholding of such approval by FBS results in additional Taxes owing for any Tax period ending on or before the Effective Date, liability for such additional Taxes shall -33- not cause any representation of MFC relating to Taxes to be untrue. MFC shall provide FBS with a copy of appropriate workpapers, schedules, drafts and final copies of each federal and state income Tax return or election of MFC and each of the Subsidiaries (including returns of all Plans) at least seven days before filing such return or election and shall reasonably cooperate with any request by FBS in connection therewith. (b) FBS, in its sole and absolute discretion, will file (or cause to be filed) all Tax returns of MFC and each of the Subsidiaries due after the Effective Date. After the Effective Date, FBS, in its sole and absolute discretion and to the extent permitted by law, shall have the right to amend, modify or otherwise change all Tax returns of MFC and each of the Subsidiaries for all Tax periods. 5.9. Registration Statement. ---------------------- (a) For the purposes (i) of holding meetings of the shareholders of FBS and MFC to approve this Agreement and the Merger and (ii) of registering the FBS Common Stock to be issued to holders of MFC Common Stock and of options under the MFC Stock Option Plans (as defined in Section 5.14(a)) in connection with the Merger with the SEC and with applicable state securities authorities, the parties hereto shall cooperate in the preparation of an appropriate registration statement (such registration statement, together with all and any amendments and supplements thereto, being herein referred to as the "Registration Statement"), which shall include a prospectus/joint proxy statement satisfying all applicable requirements of the 1933 Act, the 1934 Act, applicable state securities laws and the rules and regulations thereunder (such prospectus/joint proxy statement, together with any and all amendments or supplements thereto, being herein referred to as the "Prospectus/Proxy Statement"). (b) FBS shall furnish such information concerning FBS as is necessary in order to cause the Prospectus/Proxy Statement, insofar as it relates to FBS, to be prepared in accordance with Section 5.9(a). FBS agrees promptly to advise MFC if at any time prior to the FBS or MFC shareholders' meetings any information provided by FBS in the Prospectus/Proxy Statement becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy or omission. (c) MFC shall furnish FBS with such information concerning MFC and the Subsidiaries as is necessary in order to cause the Prospectus/Proxy Statement, insofar as it relates to MFC and the Subsidiaries, to be prepared in accordance with Section 5.9(a). MFC agrees promptly to advise FBS if at any time prior to the FBS or MFC shareholders' meetings any information provided by MFC in the Prospectus/Proxy Statement becomes incorrect or incomplete in any material respect, and to provide FBS with the information needed to correct such inaccuracy or omission. -34- (d) FBS shall promptly file the Registration Statement with the SEC and applicable state securities agencies. FBS shall use reasonable efforts to cause the Registration Statement to become effective under the 1933 Act and applicable state securities laws at the earliest practicable date. MFC authorizes FBS to utilize in the Registration Statement the information concerning MFC and the Subsidiaries provided to FBS for the purpose of inclusion in the Prospectus/Proxy Statement. MFC shall have the right to review and comment on the form of proxy statement included in the Registration Statement. FBS shall advise MFC promptly when the Registration Statement has become effective and of any supplements or amendments thereto, and FBS shall furnish MFC with copies of all such documents. Prior to the Effective Date or the termination of this Agreement, each party shall consult with the other with respect to any material (other than the Prospectus/Proxy Statement) that might constitute a "prospectus" relating to the Merger within the meaning of the 1933 Act. (e) FBS shall use reasonable efforts to cause to be delivered to MFC a letter relating to the Registration Statement from Ernst & Young, FBS's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to MFC, in form and substance reasonably satisfactory to MFC and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. (f) MFC shall use reasonable efforts to cause to be delivered to FBS a letter relating to the Registration Statement from Ernst & Young, MFC's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to FBS, in form and substance reasonably satisfactory to FBS and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. (g) FBS shall bear (i) the costs of all SEC filing fees with respect to the Registration Statement and the costs of qualifying the shares of FBS Common Stock under state blue sky laws to the extent necessary and (ii) all printing and mailing costs in connection with the preparation and mailing of the Prospectus/Proxy Statement to FBS shareholders. MFC shall bear all printing and mailing costs in connection with the preparation and mailing of the Prospectus/Proxy Statement to MFC shareholders. FBS and MFC shall each bear their own legal and accounting expenses in connection with the Registration Statement. 5.10. Affiliate Letters. MFC shall use its best efforts to obtain and deliver to FBS at least 31 days prior to the Effective Date a signed representation letter substantially in the form of Exhibit A hereto from each shareholder of MFC who may reasonably be deemed an "affiliate" of MFC within the meaning of such term as used in Rule 145 under the 1933 Act and for purposes of qualifying for pooling of interests accounting treatment for the Merger. FBS may place appropriate legends on the stock certificates of affiliates of MFC. -35- 5.11. Establishment of Accruals. If requested by FBS prior to March 1, 1995, prior to the public release of financial results for MFC's 1994 fiscal year (or, if earlier, the business day immediately prior to the Effective Date), MFC shall, consistent with generally accepted accounting principles, establish for such fiscal year such additional accruals and reserves as may be necessary to conform MFC's accounting and credit loss reserve practices and methods to those of FBS (as such practices and methods are to be applied to MFC from and after the Effective Date) and reflect FBS's plans with respect to the conduct of MFC's business following the Merger and to provide for the costs and expenses relating to the consummation by MFC of the transactions contemplated by this Agreement; provided, however, that MFC shall not be required to take such action unless (A) FBS certifies in writing that it has no reason to believe that all conditions to FBS's obligation to consummate the transactions contemplated by this Agreement set forth in Article 6 hereof will not be satisfied or waived; and (B) MFC shall have no reasonable basis for believing that all the conditions to MFC's obligation to consummate the transactions contemplated by this Agreement will not be satisfied. In the event that MFC shall not be obligated to establish the additional accruals and reserves referred to in the preceding sentence prior to March 1, 1995, and thereafter FBS shall request that MFC establish such accruals and reserves and the conditions set forth in clauses (A) and (B) of the preceding sentence are satisfied, MFC shall establish such accruals and reserves for a period subsequent to the 1994 fiscal year. Notwithstanding anything to the contrary contained in this Agreement, no accrual or reserve made by MFC or the Bank pursuant to this Section 5.11, or any litigation or regulatory proceeding arising out of any such accrual or reserve, or any other effect on MFC or the Bank resulting from MFC's compliance with this Section 5.11, shall constitute or be deemed to be a breach, violation of or failure to satisfy any representation, warranty, covenant, condition or other provisions of this Agreement or otherwise be considered in determining whether any such breach, violation or failure to satisfy shall have occurred. 5.12. Employee Matters. ---------------- (a) General. Subject to the following agreements, FBS shall have the right to continue, amend or terminate any of the Plans (as defined in Section 3.18) in accordance with the terms thereof and subject to any limitation arising under applicable law. Until FBS shall take such action, however, such Plans shall continue in force for the benefit of present and former employees of MFC or the Subsidiaries who have any present or future entitlement to benefits under any of the Plans ("MFC Employees"). (b) MFC Plans. --------- (i) MFC 401(k) Plan. After the Effective Date, FBS will terminate the accrual of benefits under the MFC 401(k) plans listed on Schedule 3.18(b)(i)(B) and sponsored by MFC or any Subsidiary not more than two years after the Effective Date and will take such actions as may be -36- necessary to cause the assets and liabilities of the MFC 401(k) plans to be merged with and into the FBS 401(k) plan. As of the Effective Date, FBS shall take such action as may be necessary to amend the MFC 401(k) plans to provide that with respect to MFC Employees who are participants in the MFC 401(k) plans and who are employees of MFC as of the Effective Date, their accounts under such plans as of the Effective Date shall be fully vested as of the Effective Date. Benefits accruing between the Effective Date and the date on which the accrual of benefits is terminated shall be fully and immediately vested as of that time. Distributions shall not be permitted from the MFC 401(k) plans merely because of the discontinuance of accruals or the transfer of assets and liabilities. (ii) MFC Directors' Retirement Plan. MFC shall calculate and pay in cash on the Effective Date all amounts reasonably estimated to be owing to any MFC director pursuant to the MFC Directors' Retirement Plan, including any estimated "gross up" payment payable as provided therein. To the extent that any such gross up payment remains payable after the Effective Date, FBS hereby acknowledges that it will promptly pay such amounts in full in accordance with the terms of such plan. (iii) Change in Control Plans. Prior to the Effective Date, MFC shall amend the Change in Control Plans as set forth in Exhibit B hereto, and FBS hereby agrees to such amendments. FBS acknowledges that any employment agreement with an executive officer previously disclosed to it does not constitute a "severance plan" for purposes of such plans. (iv) MFC Bonus Plans. On or prior to December 31, 1994, MFC shall pay all bonuses accrued in 1994 by MFC Employees under the MFC bonus plans disclosed to FBS. (v) MFC Defined Benefit Plan. Not more than two (2) years after the Effective Date, FBS will terminate the accrual of benefits under the MFC qualified defined benefit pension plan and will take such actions as may be necessary to cause the assets and liabilities of the MFC qualified defined benefit pension plan to be merged with and into the FBS Personal Retirement Account. As of the Effective Date, FBS shall take such action as may be necessary to amend the MFC qualified defined benefit pension plan to provide that with respect to MFC Employees who are participants in the MFC qualified defined benefit pension plan and who are employees of MFC as of the Effective Date, their accrued benefits under such plan as of the Effective Date shall be fully vested as of the Effective Date. (c) FBS Plans. --------- (i) FBS CAP (401(k)) Plan. After the Effective Date, FBS shall take such actions as may be necessary to cause eligible MFC Employees to become qualified to participate in the FBS Capital Accumulation Plan ("CAP") -37- concurrent with the date that FBS causes accruals to cease under the MFC 401(k) plan. All service with MFC and any of the Subsidiaries (whether before or after the Effective Date) shall be recognized under the CAP for eligibility and vesting purposes but shall not be recognized for contribution and allocation purposes. FBS shall take such actions as may be necessary to cause the CAP to accept transfers of assets and liabilities from the MFC 401(k) plan. (ii) FBS Defined Benefit Plan. Upon the cessation of accruals under any MFC Defined Benefit Plan, FBS shall take such actions as may be necessary to cause eligible MFC Employees to be qualified to participate in any qualified defined benefit plan generally available at the time to similarly situated employees of FBS or an affiliate of FBS. All service with MFC or any of the Subsidiaries and their predecessors, to such extent taken into account for purposes of the MFC Defined Benefit Plan (whether before or after the Effective Date) shall be recognized under the FBS plan for eligibility and vesting purposes but shall not be required to be recognized for any other purpose. (iii) Welfare and Other Benefits. FBS shall use its best efforts to cause any transition by MFC Employees from the welfare and other generally applicable benefit plans and practices of MFC or its affiliates not otherwise expressly dealt with in this Section 5.12 to FBS plans and practices to be effected in a manner that does not result in a significant financial detriment to the MFC Employees other than any such financial detriment as a result of higher premium costs in the FBS plan which are generally applicable to other similarly situated employees of FBS and its affiliates or to the absence of any FBS counterpart for a particular MFC plan or practice. (d) Successor Status; Further Assurances. FBS hereby expressly assumes and agrees to perform or cause to be performed all of the obligations of "successors" under the terms of the MFC Broad-Based Change in Control Severance Pay Plan, as amended, the MFC Senior Management Change in Control Severance Pay Plan, as amended, and the MFC Executive Management Change in Control Severance Pay Plan, as amended (the "Change in Control Plans"), and the MFC Directors' Retirement Plan. (e) Limitation on Enforcement. This Section 5.12 is an agreement solely between MFC and the Subsidiaries and FBS. Nothing in this Section 5.12, whether express or implied, confers upon any employee of MFC, any of the Subsidiaries or FBS or any other person, any rights or remedies, including, but not limited to: (i) any right to employment or recall, (ii) any right to continued employment for any specified period, or (iii) any right to claim any particular compensation, benefit or aggregate of benefits, of any kind or nature whatsoever, as a result of this Section 5.12. 5.13. Pooling of Interests; Tax Treatment. Neither MFC nor any of the Subsidiaries nor FBS shall take any action which would disqualify the Merger as a -38- "pooling of interests" for accounting purposes or as a "reorganization" that would be tax free to the shareholders of MFC pursuant to Section 368(a) of the Code. 5.14. Stock Options and Warrants. -------------------------- (a) Stock Option Plans. In the event that each option outstanding or to be outstanding on the Effective Date under the MFC 1982 Stock Option and Incentive Plan, the MFC 1990 Stock Option Plan, the MFC 1993 Non-Employee Director Stock Option Plan and the MFC 1993 Stock Incentive Plan (collectively, the "MFC Stock Option Plans") is converted into a right to receive in lieu of all other rights under such option (and each such option thereafter is terminated and canceled), shares of FBS Common Stock with a value as of the Effective Date equal to the "fair value" of such option as determined by an independent third party expert to be mutually selected by FBS and MFC, FBS will, as of the Effective Date, issue in respect of such option shares of FBS Common Stock having an Average Price equal to such "fair value." In the event that each such option is not so converted, then, at the Effective Date, such option shall be assumed by FBS and shall thereafter be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such option, the same number of shares of FBS Common Stock as the holder of such option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Date, at a price per share equal to (x) the aggregate exercise price for the shares of MFC Common Stock otherwise purchasable pursuant to such option divided by (y) the number of full shares of FBS Common Stock deemed purchasable pursuant to such option; provided, however, that in the case of any option to which Section 421 of the Code applies by reason of its qualification under Section 422 of the Code ("incentive stock options"), the option price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such options shall be determined in order to comply with Section 424(a) of the Code. In addition, MFC will use its best efforts to cause all of the options outstanding and vested under the MFC Stock Option Plans as of December 31, 1994 to be exercised in full on or prior to such date. (b) Employee Stock Purchase Plans. At the Effective Date, each outstanding option issued pursuant to the MFC Employee Stock Purchase Plan or the Edina Realty Sales Associate Stock Purchase Plan shall be deemed to constitute an option to acquire FBS Common Stock on the same terms and conditions as theretofore applicable, except that the exercise price per share and the number of shares of stock for which such option is exercisable shall be adjusted as appropriate in light of the Merger and the Exchange Ratio in order to prevent any diminution of the value of such options or the rights of the participants. (c) MFC Warrants. On the Effective Date, FBS shall execute a supplemental warrant agreement to the Warrant Agreement dated as of November 20, 1990 (the "MFC Warrant Agreement") between MFC and American Stock Transfer and Trust Company, as Warrant Agent, as provided in Section 10(I) of the Warrant Agreement, and all outstanding warrants of MFC (the "MFC Warrants") issued pursuant to such Warrant Agreement shall be assumed by FBS. Each MFC -39- Warrant shall be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such MFC Warrant, the same number of shares of FBS Common Stock as the holder of such MFC Warrant would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Date, at a price per share equal to (x) the aggregate exercise price for the shares of MFC Common Stock otherwise purchasable pursuant to such MFC Warrant divided by (y) the number of full shares of FBS Common Stock deemed purchasable pursuant to such MFC Warrant. FBS shall take all corporate action necessary to reserve for issuance a sufficient number of shares of FBS Common Stock for delivery upon exercise of MFC Warrants assumed by it in accordance with this Section 5.14. FBS shall use its best efforts to register the MFC Warrants and the underlying FBS Common Stock under the 1933 Act as of the Effective Date and to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such MFC Warrants remain outstanding. 5.15. Indemnification and Insurance. ----------------------------- (a) From and after the Effective Date, FBS shall indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Date, an officer, director or employee of MFC or any of the Subsidiaries (the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including attorney's fees), liabilities or judgments or amounts that are paid in settlement (which settlement shall require the prior written consent of FBS, which consent shall not be unreasonably withheld) of or in connection with any claim, action, suit, proceeding or investigation (a "Claim") in which an Indemnified Party is, or is threatened to be made, a party or a witness based in whole or in part on or arising in whole or in part out of the fact that such person is or was a director, officer or employee of MFC or any of the Subsidiaries if such Claim pertains to any matter or fact arising, existing or occurring prior to the Effective Date (including, without limitation, the Merger and other transactions contemplated by this Agreement), regardless of whether such Claim is asserted or claimed prior to, at or after the Effective Date (the "Indemnified Liabilities") to the full extent permitted under applicable Delaware or federal law as of the date hereof or as amended prior to the Effective Date and under MFC's Charter and Bylaws as in effect on the date hereof (and FBS shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by law and under such Charter or Bylaws, upon receipt of any undertaking required by such Charter, Bylaws or applicable law). Any Indemnified Party wishing to claim indemnification under this Section 5.15(a), upon learning of any Claim, shall notify FBS (but the failure so to notify FBS shall not relieve it from any liability which FBS may have under this Section 5.15(a) except to the extent such failure prejudices FBS) and shall deliver to FBS any undertaking required by such Charter, Bylaws or applicable law. FBS shall use its best efforts to assure, to the extent permitted under applicable law, that all limitations of liability existing in favor of the Indemnified Parties as provided in the MFC Charter and Bylaws, as in -40- effect as of the date hereof, with respect to claims or liabilities arising from facts or events existing or occurring prior to the Effective Date (including, without limitation, the transactions contemplated by this Agreement), shall survive the Merger. The obligations of FBS described in this Section 5.15(a) shall continue in full force and effect, without any amendment thereto, for a period of not less than five years from the Effective Date; provided, however, that all rights to indemnification in respect of any Claim asserted or made within such period shall continue until the final disposition of such Claim; and provided further that nothing in this Section 5.15(a) shall be deemed to modify applicable Delaware law regarding indemnification of former officers and directors. Nothing in this Section 5.15(a) shall affect the obligations to be assumed in the Merger by FBS to indemnify former directors and officers of MFC or the Bank pursuant to the terms of the indemnification agreements in effect as of the date hereof and as disclosed to FBS in Schedule 3.14. (b) From and after the Effective Date, the directors, officers and employees of MFC and the Subsidiaries who become directors, officers or employees of FBS or any of its subsidiaries, except for the indemnification rights set forth in Section 5.15(a), shall have indemnification rights with prospective application only. The prospective indemnification rights shall consist of such rights to which directors, officers and employees of FBS are entitled under the provisions of the Charter or similar governing documents of FBS and its subsidiaries, as in effect from time to time after the Effective Date, as applicable, and provisions of applicable law as in effect from time to time after the Effective Date. (c) The obligations of FBS provided under Sections 5.15(a) and 5.15(b) are intended to benefit, and be enforceable against FBS directly by, the Indemnified Parties, and shall be binding on all respective successors of FBS. (d) For a period of three years after the Effective Date, FBS shall use its best efforts to provide that portion of directors' and officers' liability insurance that serves to reimburse officers and directors of MFC or any of the Subsidiaries (as opposed to FBS or MFC) with respect to claims against such officers and directors arising from facts or events which occurred before the Effective Date of at least the same coverage and amounts, and containing terms and conditions no less advantageous, as that coverage currently provided by MFC; provided, however, that the annual premiums for such coverage will not exceed 200% of the annual premiums currently paid by MFC for such coverage; provided, further, that officers and directors of MFC or any Subsidiary may be required to make application and provide customary representations and warranties to FBS's insurance carrier for the purpose of obtaining such insurance; and provided, further, that such coverage will have a single aggregate for such three-year period in an amount not less than the annual aggregate of such coverage currently provided by MFC. 5.16. Edina Realty Litigation Matters. MFC shall provide FBS regular updates on the status of the Edina Realty Litigation Matters, shall notify FBS of any developments with respect to such matters, and shall allow FBS to attend all -41- settlement negotiations or other meetings relating to the settlement or other disposition of such matters. 5.17. FBS SEC Reports. FBS shall continue to file all reports with the SEC necessary to permit the shareholders of MFC who are "affiliates" of MFC (within the meaning of such term as used in Rule 145 under the 1933 Act) to sell the FBS Common Stock received by them in connection with the Merger pursuant to Rules 144 and 145(d) under the 1933 Act if they would otherwise be so permitted. After the Effective Date, FBS will file with the SEC reports and other materials required by the federal securities laws on a timely basis. 5.18. SEC Reports. Each of FBS and MFC agree to provide to the other party copies of all reports and other documents filed with the SEC by it between the date hereof and the Effective Date within five days after the date such reports or other documents are filed with the SEC. 5.19. Stock Exchange Listing. FBS shall use its best efforts to list on the New York Stock Exchange, subject to official notice of issuance, the shares of FBS Common Stock to be issued to the holders of MFC Common Stock in the Merger. 5.20. Shareholder Approvals. Each of FBS and MFC shall call a meeting of its shareholders for the purpose of voting upon this Agreement and the Merger, and shall schedule such meeting based on consultation with the other party. The Board of Directors of each of FBS and MFC shall recommend approval of this Agreement and the Merger, and use its best efforts (including, without limitation, soliciting proxies for such approvals) to obtain such shareholder approvals, unless the Board of Directors of either party determines, after receipt of a written opinion of counsel to such party (a copy of which shall be delivered to the other party), that recommending such approvals or using its best efforts to obtain such shareholder approvals would be a breach of its fiduciary duties. 5.21. FBS Board of Directors; Consulting Agreement. -------------------------------------------- (a) Following the Effective Date, FBS shall use its best efforts to (i) secure the election of Norman M. Jones to the FBS Board of Directors for a term of at least three years and (ii) appoint Mr. Jones as Chairman of the Board of Directors of the Bank, or its successor following the Merger, for at least three years, subject to any applicable regulatory requirements. (b) Prior to the Effective Date, FBS shall enter into a consulting agreement with Mr. Jones, containing customary terms and conditions, engaging Mr. Jones for a three-year period following the Effective Date as an independent consultant to assist FBS in identifying and contacting, on behalf of FBS, potential financial institution acquisition candidates as requested from time to time by FBS. (c) FBS shall pay Mr. Jones, for all of the services rendered by Mr. Jones pursuant to this Section 5.21, total compensation equal to $200,000 annually. -42- (d) FBS acknowledges that, on the Effective Date, there shall exist a "termination" of Mr. Jones employment with MFC under the terms of the MFC Executive Management Change in Control Severance Pay Plan and FBS shall pay all benefits payable to Mr. Jones pursuant to the terms of such plan upon such termination. ARTICLE 6 CONDITIONS 6.1. Conditions to Obligations of Each Party. The respective obligations of each party to effect the transactions contemplated hereby shall be subject to the fulfillment at or prior to the Effective Date of the following conditions: (a) Regulatory Approval. Regulatory approval for the consummation of the transactions contemplated hereby shall have been obtained from the FRB, the OTS and any other governmental authority from whom approval is required, the applicable waiting periods, if any, under the HSR Act shall have expired or been terminated, and all other statutory or regulatory waiting periods shall have lapsed. None of such approvals shall contain any conditions or restrictions that FBS reasonably believes will materially restrict or limit the business or activities of FBS, MFC or the Subsidiaries or have a material adverse effect on, or would be reasonably likely to have a material adverse effect on, the business, operations or financial condition of FBS and its subsidiaries, taken as a whole, on the one hand, or MFC and the Subsidiaries, taken as a whole, on the other hand. FBS acknowledges that a requirement to divest control of Edina Realty, Inc. following the Merger would not, in and of itself, constitute a failure of the condition in this Section 6.1(a). (b) No Injunction. No injunction or other order entered by a state or federal court of competent jurisdiction shall have been issued and remain in effect which would impair the consummation of the transactions contemplated hereby. (c) No Prohibitive Change of Law. There shall have been no law, statute, rule or regulation, domestic or foreign, enacted or promulgated which would materially impair the consummation of the transactions contemplated hereby. (d) No Termination. No party hereto shall have terminated this Agreement as permitted herein. (e) Registration Statement. The Registration Statement shall have been declared effective and shall not be subject to a stop order of the SEC, and, -43- if the offer and sale of FBS Common Stock in the Merger pursuant to this Agreement is required to be registered under the securities laws of any state, the Registration Statement shall not be subject to a stop order of securities commission in such state. (f) Federal Tax Opinion. An opinion of Oppenheimer Wolff & Donnelly shall have been obtained with respect to the Merger, based on customary reliance and subject to customary qualifications, to the effect that for federal income tax purposes: (i) The Merger will qualify as a "reorganization" under Section 368(a) of the Code; (ii) No gain or loss will be recognized by any MFC shareholder (except in connection with the receipt of cash) upon the exchange of MFC Common Stock for FBS Common Stock in the Merger; (iii) The basis of the FBS Common Stock received by a MFC shareholder who exchanges MFC Common Stock for FBS Common Stock will be the same as the basis of the MFC Common Stock surrendered in exchange therefor (subject to any adjustments required as the result of receipt of cash in lieu of a fractional share of FBS Common Stock); (iv) The holding period of the FBS Common Stock received by a MFC shareholder receiving FBS Common Stock will include the period during which the MFC Common Stock surrendered in exchange therefor was held (provided that the MFC Common Stock of such MFC shareholder was held as a capital asset at the Effective Date); and (v) Cash received by a MFC shareholder in lieu of a fractional share interest of FBS Common Stock will be treated as having been received as a distribution in full payment in exchange for the fractional share interest of FBS Common Stock which he would otherwise be entitled to receive, and will qualify as capital gain or loss (assuming the MFC Common Stock was a capital asset in his hands at the Effective Date). Such opinion shall be delivered on and dated as of the Effective Date and on and as of such earlier date as may be required by the SEC in connection with the Registration Statement. (g) The FBS Common Stock to be issued to holders of MFC Common Stock in the Merger shall have been approved for listing on the NYSE on official notice of issuance. -44- 6.2. Additional Conditions to Obligation of MFC. The obligation of MFC to consummate the transactions contemplated hereby in accordance with the terms of this Agreement is also subject to the following conditions: (a) Representations and Compliance. The representations and warranties of FBS set forth in Article 2 shall have been true and correct as of the date hereof, and shall be true and correct as of the Effective Date as if made at and as of the Effective Date, except where the failure to be true and correct would not have, or would not reasonably be expected to have, a material adverse effect on the business, operations or financial condition of FBS and its subsidiaries, taken as a whole; and FBS shall in all material respects have performed each obligation and agreement and complied with each covenant to be performed and complied with by it hereunder at or prior to the Effective Date. (b) Officer's Certificate. FBS shall have furnished to MFC a certificate of the Vice Chairman and Chief Financial Officer of FBS, dated as of the Effective Date, in which such officer shall certify that he has no reason to believe that the conditions set forth in Section 6.2(a) have not been fulfilled. (c) FBS Secretary's Certificate. FBS shall have furnished to MFC (i) copies of the text of the resolutions by which the corporate action on the part of FBS necessary to approve this Agreement and the transactions contemplated hereby were taken, (ii) a certificate dated as of the Effective Date executed on behalf of FBS by its corporate secretary or one of its assistant corporate secretaries certifying to MFC that such copies are true, correct and complete copies of such resolutions and that such resolutions were duly adopted and have not been amended or rescinded and (iii) an incumbency certificate dated as of the Effective Date executed on behalf of FBS by its corporate secretary or one of its assistant corporate secretaries certifying the signature and office of each officer of FBS executing this Agreement or any other agreement, certificate or other instrument executed pursuant hereto. (d) Opinion of Counsel to FBS. MFC shall have received an opinion letter dated as of the Effective Date addressed to MFC from Michael J. O'Rourke, Esq., Executive Vice President and General Counsel of FBS, based on customary reliance and subject to customary qualifications, to the effect that: (i) FBS is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. FBS is registered as a bank holding company under the Bank Holding Company Act. (ii) FBS has the corporate power to consummate the transactions on its part contemplated by this Agreement. FBS has taken all requisite corporate action to authorize this Agreement, and -45- this Agreement has been duly executed and delivered by FBS and constitutes the valid and binding obligation of FBS enforceable in accordance with its terms, subject as to the enforcement of remedies to applicable bankruptcy, insolvency, moratorium and other laws affecting the rights of creditors generally and to judicial limitations on the enforcement of the remedy of specific performance. (iii) The execution and delivery of this Agreement by FBS and the consummation of the transactions contemplated hereby will not constitute a breach, default or violation under its Charter or Bylaws or, to his knowledge, (A) any agreement, arrangement or understanding to which FBS is a party, (B) any license, franchise or permit or (C) any law, regulation, order, judgment or decree. (iv) No authorization, consent or approval of, or filing with, any public body, court or authority is necessary for the consummation by FBS of the transactions contemplated hereby which has not been obtained or made. (v) The shares of FBS Common Stock to be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued, fully paid and nonassessable. (e) Shareholder Approval. This Agreement and the Merger shall have been approved by the affirmative vote of the holders of the percentage of MFC capital stock required for such approval under the provisions of MFC's Charter and Bylaws, the DGCL and the rules of the NYSE. (f) Material Adverse Change. Since the date of this Agreement, there has been no material adverse change in, and no event, occurrence or development in the business of FBS or its subsidiaries that, taken together with other events, occurrences and developments with respect to such business, would have or would reasonably be expected to have a material adverse effect on, the business, operations or financial condition of FBS and its subsidiaries, taken as a whole. (g) Fairness Opinion. Prior to mailing the Prospectus/Proxy Statement and immediately prior to the Effective Date, MFC shall have received a written opinion in a form reasonably acceptable to MFC from Dain Bosworth Incorporated (or another investment banking firm reasonably acceptable to MFC) to the effect that the consideration to be delivered in the Merger is fair from a financial point of view to the holders of MFC Common Stock. 6.3. Additional Conditions to Obligation of FBS. The obligation of FBS to consummate the transactions contemplated hereby in accordance with the terms of this Agreement is also subject to the following conditions: -46- (a) Representations and Compliance. The representations and warranties of MFC in this Agreement shall have been true and correct as of the date hereof, and such representations and warranties shall be true and correct as of the Effective Date as if made at and as of the Effective Date, except where the failure to be true and correct would not have, or would not reasonably be expected to have, a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries taken as a whole; and MFC shall in all material respects have performed each obligation and agreement and complied with each covenant to be performed and complied with by it hereunder at or prior to the Effective Date. (b) Officers' Certificate of MFC. MFC shall have furnished to FBS a certificate of the Chief Executive Officer and Chief Financial Officer of MFC, dated as of the Effective Date, in which such officers shall certify that they have no reason to believe that the conditions set forth in Section 6.3(a) have not been fulfilled. (c) Secretary's Certificates. MFC shall have furnished to FBS (i) copies of the text of the resolutions by which the corporate action on the part of MFC necessary to approve this Agreement and the transactions contemplated hereby were taken, (ii) certificates dated as of the Effective Date executed on behalf of MFC by its corporate secretary or one of its assistant corporate secretaries certifying to FBS that such copies are true, correct and complete copies of such resolutions and that such resolutions were duly adopted and have not been amended or rescinded and (iii) an incumbency certificate dated as of the Effective Date executed on behalf of MFC by its corporate secretary or one of its assistant corporate secretaries certifying the signature and office of each officer executing this Agreement or any other agreement, certificate or other instrument executed pursuant hereto. (d) Opinion of Counsel to MFC. FBS shall have received an opinion letter dated as of the Effective Date addressed to FBS from Oppenheimer Wolff & Donnelly, counsel to MFC (provided that the opinions contained in subparagraphs (iv), (vi) and (viii) of this Section 6.3(d) may be provided by J. Michael Nilles, Esq., Executive Vice President and General Counsel of MFC), based on customary reliance and subject to customary qualifications, to the effect that: (i) MFC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. MFC is registered as a savings and loan holding company under the Savings and Loan Holding Company Act. (ii) The Bank is a federally chartered savings bank duly organized, validly existing and in good standing under the laws of the United States. -47- (iii) Each of the Principal Nonbanking Subsidiaries (other than the Bank) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. (iv) Each of MFC, the Bank and the Principal Nonbanking Subsidiaries has the requisite corporate and other power and authority (including all licenses, permits and authorizations) to own and operate its properties and to carry on its business as now conducted. Each of MFC, the Bank and the Principal Nonbanking Subsidiaries is licensed or qualified to do business in every jurisdiction in which the nature of its business or its ownership of property requires it to be licensed or qualified, except where the failure to be so licensed or qualified would not have or would not be reasonably expected to have a material adverse effect on the business, operations, financial condition or operating results of MFC, the Bank or any of the Principal Nonbanking Subsidiaries. (v) The execution and delivery of this Agreement by MFC and the consummation of the transactions contemplated hereby and thereby will not constitute a breach, default or violation under the respective Charter or Bylaws of MFC, the Bank or any of the Principal Nonbanking Subsidiaries or, to such counsel's knowledge, (A) any material agreement, arrangement or understanding to which MFC, the Bank or any of the Principal Nonbanking Subsidiaries is a party, (B) any material license, franchise or permit or (C) any material law, regulation, order, judgment or decree. (vi) The authorized capital of MFC consists of 60,000,000 shares of MFC Common Stock and 10,000,000 shares of preferred stock; all of the issued and outstanding shares of the capital stock of MFC are duly authorized, validly issued, fully paid and nonassessable. No holder of the capital stock of MFC is entitled to any preemptive or other similar rights with respect to the capital stock of MFC. (vii) All of the issued and outstanding shares of each of the Bank and the Principal Nonbanking Subsidiaries are duly authorized, validly issued, fully paid and nonassessable. (viii) Except as set forth in Schedule 3.15, to the knowledge of such counsel, there are no actions, suits, proceedings, orders or investigations pending or threatened against MFC, the Bank or any of the Principal Nonbanking Subsidiaries, at law or in equity, or before or by any federal, state or other governmental department, commission, board, bureau, agency or instrumentality. -48- (ix) MFC has the corporate power to consummate the transactions on its part contemplated by this Agreement. MFC has duly taken all requisite corporate action to authorize this Agreement and this Agreement has been duly executed and delivered by MFC and constitutes the valid and binding obligation of MFC enforceable in accordance with its terms, subject as to the enforcement of remedies to applicable bankruptcy, insolvency, moratorium and other laws affecting the rights of creditors generally and to judicial limitations on the enforcement of the remedy of specific performance. (x) No authorization, consent or approval of, or filing with any public body, court or public authority, is necessary for the consummation by MFC of the transactions contemplated hereby which has not been obtained or made. (e) Shareholder Approval. This Agreement and the Merger shall have been approved by the affirmative vote of holders of the percentage of FBS capital stock required for such approval under the Charter and Bylaws of FBS, the DGCL and the rules of the NYSE. (f) Affiliate Letters. MFC shall have delivered to FBS the letters required to be delivered pursuant to Section 5.10. (g) Pooling of Interests Accounting. No event shall have occurred which, in the reasonable opinion of FBS and concurred in by Ernst & Young, would prevent the Merger from being accounted for as a pooling of interests, and FBS shall have received from Ernst & Young an opinion that the Merger shall qualify as a pooling of interests for accounting purposes. (h) Adverse Proceedings. There shall not be threatened, instituted or pending any action or proceeding before any court or governmental authority or agency, domestic or foreign, (i) challenging or seeking to make illegal, or to delay or otherwise directly or indirectly to restrain or prohibit, the consummation of the transactions contemplated hereby or seeking to obtain material damages in connection with the transactions contemplated hereby, (ii) seeking to prohibit direct or indirect ownership or operation by FBS of all or a material portion of the business or assets of MFC or any of the Subsidiaries or of FBS or any of its subsidiaries, or to compel FBS or any of its subsidiaries or MFC or any of the Subsidiaries to dispose of or to hold separately all or a material portion of the business or assets of FBS or any of its subsidiaries or of MFC or any of the Subsidiaries, as a result of the transactions contemplated hereby, or (iii) seeking to require direct or indirect divestiture by FBS of any material portion of its business or assets or of MFC's or the Subsidiaries' business or assets. FBS acknowledges that an action or proceeding seeking to divest control of Edina Realty, Inc. following the Merger would not, in and of itself, constitute a failure of the condition in this Section 6.3(h). -49- (i) Governmental Action. There shall not be any action taken, or any statute, rule, regulation, judgment, order or injunction proposed, enacted, entered, enforced, promulgated, issued or deemed applicable to the transactions contemplated hereby by any federal, state or other court, government or governmental authority or agency, which would reasonably be expected to result, directly or indirectly, in any of the consequences referred to in Section 6.3(h). (j) Failure to Disclose. FBS shall not have discovered any fact or circumstance existing as of the date of this Agreement which has not been disclosed to FBS, as of the date of this Agreement, in this Agreement, any Schedule hereto, or any document specifically required to be furnished to FBS hereunder, regarding MFC or any of the Subsidiaries which would, individually or in the aggregate with other such facts and circumstances, (i) materially impair the consummation of the transactions contemplated by this Agreement, or (ii) have a material adverse effect on the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole. (k) Material Adverse Change. Since the date of this Agreement, there has been no material adverse change in, and no event, occurrence or development in the business of MFC or the Subsidiaries that, taken together with other events, occurrences and developments with respect to such business, would have or would reasonably be expected to have a material adverse effect on, the business, operations or financial condition of MFC and the Subsidiaries, taken as a whole. (l) Stock Option Agreement. Immediately following the execution and delivery of this Agreement, FBS and MFC shall have executed and delivered the Stock Option Agreement. ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER 7.1. Termination. This Agreement may be terminated prior to the Effective Date: (a) by mutual consent of FBS and MFC; (b) by either FBS or MFC, if any of the conditions to such party's obligation to consummate the transactions contemplated in this Agreement shall have become impossible to satisfy; -50- (c) by either FBS or MFC, if this Agreement and the Merger are not duly approved by the shareholders of each of MFC and FBS, in each case at a meeting of shareholders (or any adjournment thereof) duly called and held for such purpose; (d) by FBS or MFC if the Effective Date is not on or before September 30, 1995 (unless the failure to consummate the Merger by such date shall be due to the action or failure to act of the party seeking to terminate this Agreement in breach of such party's obligations under this Agreement); (e) by FBS or MFC if the Average Price is less than $29.50; (f) by MFC if (1) any corporation, partnership, person, other entity or group, as defined in the 1934 Act (other than FBS or any affiliate of FBS) (a "Person"), shall have commenced (as such term is used in Rule 14d-2(b) under the 1934 Act) a bona fide tender offer for all outstanding shares of MFC Common Stock or any Person shall have made a bona fide written offer involving a merger or consolidation of MFC or the acquisition of all or substantially all of its assets, and (2) MFC's Board of Directors shall determine, based on advice of MFC's independent financial advisors that such offer is a material economic improvement to the Company's shareholders when compared to the Merger, and (3) MFC's Board of Directors determines upon the advice of its legal counsel that if they failed to recommend such offer or accept such proposal then such failure would be likely to result in a breach of the directors' fiduciary duties; provided, however, that MFC may not terminate the Agreement pursuant to this Section 7.1(f) until the expiration of five business days after written notice of any such offer or proposal referenced in this Section 7.1(f) has been delivered to FBS, together with a summary of the terms of any such offer or proposal; (g) by FBS if, after the date hereof, any Person shall have commenced (as such term is used in Rule 14d-2(b) under the 1934 Act) a bona fide tender offer or exchange offer to acquire at least 20% of the then outstanding shares of MFC Common Stock, or if the Board of Directors of MFC shall have withdrawn, modified or changed its recommendation of this Agreement or the Merger; or (h) by FBS if after the date hereof, there shall have occurred a "Subsequent Triggering Event" as defined in the Stock Option Agreement. Any party desiring to terminate this Agreement shall give written notice of such termination and the reasons therefor to the other party. 7.2. Effect of Termination. If this Agreement is terminated as permitted by Section 7.1, such termination shall be without liability or obligation of any party (or any shareholder, officer, employee, agent, consultant or representative of such party) to any other party to this Agreement, except (a) that if such termination is (i) by MFC pursuant to (A) Section 7.1(b) as a result of a failure of the condition contained in Section 6.2(g), or (B) Section 7.1(f) or (ii) by FBS pursuant to (A) Section 7.1(g), (B) Section 7.1(h), or (C) Section 7.1(b) as a result of the failure of the condition -51- contained in Section 6.3(a) because of the willful and material breach by MFC of any obligation, agreement or covenant referred to therein (a "willful and material" breach for the purposes of this Section 7.2 shall be deemed to have occurred if MFC has intentionally and knowingly taken, or intentionally and knowingly failed to take, any action which causes such breach), then MFC shall pay to FBS within three business days of such termination, a termination fee of $35,000,000 by wire transfer in immediately available funds to an account designated by FBS, (b) as may be otherwise provided in law or in equity, and (c) except as provided in Section 8.6. 7.3. Amendment. This Agreement may not be amended except by an instrument in writing approved by the parties to this Agreement and signed on behalf of each of the parties hereto. 7.4. Waiver. At any time prior to the Effective Date, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto or (b) waive compliance with any of the agreements of any other party or with any conditions to its own obligations, in each case only to the extent such obligations, agreements and conditions are intended for its benefit. ARTICLE 8 GENERAL PROVISIONS 8.1. Public Statements. Neither MFC nor FBS shall make any public announcement or statement with respect to the Merger, this Agreement or any related transactions without the approval of the other party; provided, however, that either FBS or MFC may, upon reasonable notice to the other party, make any public announcement or statement that it believes is required by federal securities law. To the extent practicable, each of FBS and MFC will consult with the other with respect to any such public announcement or statement. 8.2. Notices. All notices and other communications hereunder shall be in writing and shall be sufficiently given if made by hand delivery, by fax, by telecopier, by overnight delivery service, or by registered or certified mail (postage prepaid and return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by it by like notice): if to FBS: First Bank System, Inc. First Bank Place 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Attention: Richard A. Zona, Vice Chairman and Chief Financial Officer Fax: (612) 973-0410 -52- with a copy to: Dorsey & Whitney 220 South Sixth Street Minneapolis, Minnesota 55402 Attention: Lee R. Mitau, Esq. Fax: (612) 340-8738 if to MFC: Metropolitan Financial Corporation 1000 South Seventh Street Minneapolis, Minnesota 55402 Attention: Norman M. Jones, Chairman Fax: (612) 339-6011 with a copy to: Oppenheimer Wolff & Donnelly 3400 Plaza VII Building 45 South Seventh Street Minneapolis, Minnesota 55402 Attention: Bruce A. Machmeier, Esq. Fax: (612) 344-9376 All such notices and other communications shall be deemed to have been duly given as follows: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if delivered by mail; when receipt acknowledged, if faxed or telecopied; and the next day after being delivered to an overnight delivery service. 8.3. Interpretation. When a reference is made in this Agreement to subsidiaries of FBS, the word "subsidiary" means any "majority-owned subsidiary" (as defined in Rule 12b-2 under the 1934 Act) of FBS, as the context requires; provided, however, that neither MFC nor any of the Subsidiaries shall at any time be considered a subsidiary of FBS for purposes of this Agreement. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. References to Sections and Articles refer to Sections and Articles of this Agreement unless otherwise stated. Words such as "herein," "hereinafter," "hereof," "hereto," "hereby" and "hereunder," and words of like import, unless the context requires otherwise, refer to this Agreement (including the Exhibits and Schedules hereto). As used in this Agreement, the masculine, feminine and neuter genders shall be deemed to include the others if the context requires. -53- 8.4. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties shall negotiate in good faith to modify this Agreement and to preserve each party's anticipated benefits under this Agreement. 8.5. Miscellaneous. This Agreement (together with all other documents and instruments referred to herein): (a) constitutes the entire agreement, and supersedes all other prior agreements and undertakings, both written and oral, among the parties, with respect to the subject matter hereof; (b) is not intended to confer upon any person other than each party hereto any rights or remedies hereunder, except as provided in Section 5.15; (c) shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of Minnesota, without giving effect to the principles of conflict of laws thereof; (d) shall not be assigned by operation of law or otherwise. This Agreement may be executed in two or more counterparts which together shall constitute a single agreement. 8.6. Survival of Representations, Warranties and Covenants. The representations and warranties of the parties set forth herein shall not survive the consummation of the Merger, but covenants that specifically relate to periods, activities or obligations subsequent to the Merger shall survive the Merger. In addition, if this Agreement is terminated pursuant to Section 7.1, the covenants contained in Sections 5.4, 5.7(c) and 7.2 shall survive such termination. 8.7. Schedules. The Schedules referred to in this Agreement shall be delivered as of the date hereof under cover of a letter from the Chief Executive Officer of MFC. -54- IN WITNESS WHEREOF, FBS and MFC have caused this Agreement to be executed on the date first written above by their respective officers. FIRST BANK SYSTEM, INC. By John F. Grundhofer -------------------------------------- Its Chairman, President and Chief --------------------------------- Executive Officer -------------------------------- METROPOLITAN FINANCIAL CORPORATION By Norman M. Jones -------------------------------------- Its Chairman of the Board and Chief --------------------------------- Executive Officer --------------------------------- -55- [Not a part of agreement] EXHIBITS AND SCHEDULES TO AGREEMENT OF MERGER AND CONSOLIDATION, DATED JULY 21, 1994, BY AND BETWEEN FIRST BANK SYSTEM, INC. AND METROPOLITAN FINANCIAL CORPORATION
EXHIBIT OR REFERENCE IN SCHEDULE SUBJECT AGREEMENT - ----------- ------- ------------ Exhibit A Affiliate Letter Section 5.10 Exhibit B Amendment to Change Section in Control Severance 5.12(b) (iii) Pay Plan Schedules A & B Subsidiaries Recitals Schedules 3.1, Disclosure Schedules Article 3 3.2, 3.3, 3.4, 3.5, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, 3.15, 3.16, 3.17,, 3.18, 3.19, 3.20, 3.21 and 3.27
EX-2.2 3 STOCK OPTION AGREEMENT Exhibit 2.2 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated July 21, 1994 between FIRST BANK SYSTEM, INC., a Delaware corporation ("Grantee"), and METROPOLITAN FINANCIAL CORPORATION, a Delaware corporation ("Issuer"). W I T N E S S E T H: ------------------- WHEREAS, Grantee and Issuer have entered into an Agreement of Merger and Consolidation of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto immediately prior to this Agreement; and WHEREAS, as a condition and inducement to Grantee's entering into the Merger Agreement and in consideration therefor, Issuer has agreed to grant Grantee the Option (as hereinafter defined): NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 6,209,304 fully paid and nonassessable shares of the common stock, $.01 par value, of Issuer ("Common Stock") at a price of $24.66 per share; provided, however, that in the event Issuer issues or agrees to issue any shares of Common Stock at a price less than $24.66 per share (as adjusted pursuant to subsection (b) of Section 5) other than in connection with the options, rights or plans disclosed on Schedule 3.3 to the Merger Agreement, such price shall be equal to such lesser price (such price, as adjusted if applicable, the "Option Price"); provided further that in no event shall the number of shares for which this Option is exercisable exceed 19.9% of the issued and outstanding shares of Common Stock. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. (b) In the event that any additional shares of Common Stock are issued or otherwise become outstanding after the date of this Agreement (other than pursuant to this Agreement), the number of shares of Common Stock subject to the Option shall be increased so that, after such issuance, it equals 19.9% of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to breach any provision of the Merger Agreement. 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or part, if, but only if, both an Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined) shall have occurred prior to the occurrence of an Exercise Termination Event (as hereinafter defined), provided that the Holder shall have sent the written notice of such exercise (as provided in subsection (e) of this Section 2) within 12 months following such Subsequent Triggering Event (or such later period as provided in Section 10). Each of the following shall be an Exercise Termination Event: (i) the Effective Date of the Merger; (ii) termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event; (iii) termination of the Merger Agreement either (a) pursuant to Section 7.1(e) thereof, or (b) by Grantee solely as a result of failure of one or more of the conditions set forth in Sections 6.1(a), 6.1(b), 6.1(c), 6.1(g), 6.3(e), 6.3(h), 6.3(i) or 6.3(k) or pursuant to Section 7.1(c) (as a result of failure of Grantee's shareholders to approve the Merger) or Section 7.1(d) (as a result of failure to consummate the Merger on or before the date specified therein) if neither Issuer nor any of its affiliates, officers, directors, employees or agents shall have taken any actions that have contributed in any way, either directly or indirectly, to any such failure; or (iv) the passage of 12 months (or such longer period as provided in Section 10) after termination of the Merger Agreement (other than any termination of the Merger Agreement covered by the immediately preceding clause (iii)) if such termination follows the occurrence of an Initial Triggering Event (provided that if an Initial Triggering Event continues or occurs beyond such termination, the Exercise Termination Event shall be 12 months (or such longer period as provided in Section 10) from the expiration of the Last Triggering Event but in no event more than 18 months (or such longer period as provided in Section 10) after such termination). The "Last Triggering Event" shall mean the last Initial Triggering Event to occur. The term "Holder" shall mean the holder or holders of the Option. (b) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) Issuer or any of its Subsidiaries (as hereinafter defined) (each an "Issuer Subsidiary"), without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as hereinafter defined) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934 (the "1934 Act"), and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the shareholders of Issuer approve or accept any Acquisition Transaction other than as contemplated by the Merger Agreement or this Agreement. For purposes of this Agreement, (a) "Acquisition Transaction" shall mean (x) a merger or consolidation, -2- or any similar transaction, involving Issuer or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer, (y) a purchase, lease or other acquisition of all or substantially all of the assets or deposits of Issuer or any Significant Subsidiary of Issuer, or (z) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing 10% or more of the voting power of Issuer or any Significant Subsidiary of Issuer, and (b) "Subsidiary" shall have the meaning set forth in Rule 12b-2 under the 1934 Act; (ii) Any person other than Grantee or any Grantee Subsidiary shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Common Stock (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and regulations thereunder); (iii) The shareholders of the Issuer shall not have approved the transactions contemplated by the Merger Agreement at the meeting held for that purpose or any adjournment thereof, or such meeting shall not have been held or shall have been cancelled prior to termination of the Merger Agreement, or Issuer's Board of Directors shall have withdrawn or modified (or publicly announced its intention to withdraw or modify or interest in withdrawing or modifying) its recommendation that the shareholders of Issuer approve the transactions contemplated by the Merger Agreement, or Issuer or any Issuer Subsidiary, without having received Grantee's prior written consent, shall have authorized, recommended, proposed (or publicly announced its intention to authorize, recommend or propose or interest in authorizing, recommending or proposing) an agreement to engage in an Acquisition Transaction with any person other than Grantee or a Grantee Subsidiary ; (iv) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its shareholders by public announcement or written communication that is or becomes the subject of public disclosure to engage in an Acquisition Transaction; (v) Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach would entitle Grantee to terminate the Merger Agreement; -3- (vi) Any person other than Grantee or any Grantee Subsidiary, other than in connection with a transaction to which Grantee has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, the Office of Thrift Supervision ("OTS") or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction; or (vii) Issuer shall have terminated the Merger Agreement pursuant to Section 7.1(b) by reason of the failure of Issuer's condition set forth in Section 6.2(g) or pursuant to Section 7.1(f). (c) The term "Subsequent Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) The acquisition by any person of beneficial ownership of 20% or more of the then outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in clause (i) of subsection (b) of this Section 2, except that the percentage referred to in clause (z) shall be 20%. (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event (together, a "Triggering Event"), it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the Option. (e) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 60 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to or approval of the Federal Reserve Board, the OTS or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval, shall promptly notify the Issuer of such filing, and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. -4- (f) At the closing referred to in subsection (e) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer, provided that failure or refusal of Issuer to designate such a bank account shall not preclude the Holder from exercising the Option. (g) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (f) of this Section 2, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder. (h) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Issuer and to resale restrictions arising under the Securities Act of 1933, as amended. A copy of such agreement is on file at the principal office of Issuer and will be provided to the holder hereof without charge upon receipt by Issuer of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933 (the "1933 Act") in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance satisfactory to Issuer, to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the written notice of exercise of the Option provided for under subsection (e) of this Section 2 and the tender of the applicable purchase price in immediately available funds, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any -5- and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock; (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all action as may from time to time be required (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. (S)18a and regulations promulgated thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as amended, or the Home Owners Loan Act, as amended, or any state or other federal banking law, prior approval of or notice to the Federal Reserve Board, the OTS or to any state or other federal regulatory authority is necessary before the Option may be exercised, cooperating fully with the Holder in preparing such applications or notices and providing such information to the Federal Reserve Board, the OTS or such state or other federal regulatory authority as they may require) in order to permit the Holder to exercise the Option and Issuer duly and effectively to issue shares of Common Stock pursuant hereto; and (iv) promptly to take all action provided herein to protect the rights of the Holder against dilution. 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of the Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. -6- 5. In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 1 of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option shall be subject to adjustment from time to time as provided in this Section 5. (a) In the event of any change in Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares or the like, the type and number of shares of Common Stock purchasable upon exercise hereof shall be appropriately adjusted and proper provision shall be made so that, in the event that any additional shares of Common Stock are to be issued or otherwise become outstanding as a result of any such change (other than pursuant to an exercise of the Option), the number of shares of Common Stock that remain subject to the Option shall be increased so that, after such issuance and together with shares of Common Stock previously issued pursuant to the exercise of the Option (as adjusted on account of any of the foregoing changes in the Common Stock), it equals 19.9% of the number of shares of Common Stock then issued and outstanding. (b) Whenever the number of shares of Common Stock purchasable upon exercise hereof is adjusted as provided in this Section 5, the Option Price shall be adjusted by multiplying the Option Price by a fraction, the numerator of which shall be equal to the number of shares of Common Stock purchasable prior to the adjustment and the denominator of which shall be equal to the number of shares of Common Stock purchasable after the adjustment. 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, Issuer shall, at the request of Grantee delivered within 12 months (or such later period as provided in Section 10) of such Subsequent Triggering Event (whether on its own behalf or on behalf of any subsequent holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current a registration statement under the 1933 Act covering any shares issued and issuable pursuant to this Option and shall use its best efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee. Issuer will use its best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand two such registrations. The Issuer shall bear the costs of such registrations (including, but not limited to, attorneys' fees, printing costs and filing fees). The foregoing notwithstanding, if, at the time of any request by Grantee -7- for registration of Option Shares as provided above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Option Shares would interfere with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; provided, however, that after any such required reduction the number of Option Shares to be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be sold by the Holder and Issuer in the aggregate; and provided further, however, that if such reduction occurs, then the Issuer shall file a registration statement for the balance as promptly as practicable thereafter as to which no reduction pursuant to this Section 6 shall be permitted or occur and the Holder shall thereafter be entitled to one additional registration. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements for Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer agrees to send a copy thereof to any other person known to Issuer to be entitled to registration rights under this Section 6, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies. 7. (a) Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, (i) at the request of the Holder, delivered within 12 months of such occurrence (or such later period as provided in Section 10), Issuer shall repurchase the Option from the Holder at a price (the "Option Repurchase Price") equal to (x) the amount by which (A) the market/offer price (as defined below) exceeds (B) the Option Price, multiplied by the number of shares for which this Option may then be exercised plus (y) Grantee's Out-of-Pocket Expenses (as defined below) (to the extent not previously reimbursed), and (ii) at the request of the owner of Option Shares from time to time (the "Owner"), delivered within 12 months of such occurrence (or such later period as provided in Section 10), Issuer shall repurchase such number of the Option Shares from the Owner as the Owner shall designate at a price (the "Option Share Repurchase Price") equal to (x) the market/offer price multiplied by the number of Option Shares so designated plus (y) Grantee's Out- of-Pocket Expenses (to the extent not previously reimbursed). The term "Out-of- Pocket Expenses" shall mean Grantee's reasonable out-of-pocket expenses incurred in connection with the transactions contemplated by the Merger Agreement, including without limitation legal, accounting and consulting fees. The term "market/offer price" shall mean the highest of (i) the price per share of Common Stock at which a tender or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by any third party pursuant to an agreement with Issuer, (iii) the highest closing price for shares of -8- Common Stock within the six-month period immediately preceding the date the Holder gives notice of the required repurchase of this Option or the Owner gives notice of the required repurchase of Option Shares, as the case may be, or (iv) in the event of a sale of all or substantially all of Issuer's assets or deposits, the sum of the price paid in such sale for such assets or deposits and the current market value of the remaining assets of Issuer as determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the market/offer price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm selected by the Holder or Owner, as the case may be. (b) The Holder and the Owner, as the case may be, may exercise its right to require Issuer to repurchase the Option and any Option Shares pursuant to this Section 7 by surrendering for such purpose to Issuer, at its principal office, a copy of this Agreement or certificates for Option Shares, as applicable, accompanied by a written notice or notices stating that the Holder or the Owner, as the case may be, elects to require Issuer to repurchase this Option and/or the Option Shares in accordance with the provisions of this Section 7. As promptly as practicable, and in any event within five business days after the surrender of the Option and/or certificates representing Option Shares and the receipt of such notice or notices relating thereto, Issuer shall deliver or cause to be delivered to the Holder the Option Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor or the portion thereof that Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that Issuer is prohibited under applicable law or regulation, or as a consequence of administrative policy, from repurchasing the Option and/or the Option Shares in full, Issuer shall immediately so notify the Holder and/or the Owner and thereafter deliver or cause to be delivered, from time to time, to the Holder and/or the Owner, as appropriate, the portion of the Option Repurchase Price and the Option Share Repurchase Price, respectively, that it is no longer prohibited from delivering, within five business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer at any time after delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited under applicable law or regulation, or as a consequence of administrative policy, from delivering to the Holder and/or the Owner, as appropriate, the Option Repurchase Price and the Option Share Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its best efforts to obtain all required regulatory and legal approvals and to file any required notices as promptly as practicable in order to accomplish such repurchase), the Holder or Owner may revoke its notice of repurchase of the Option or the Option Shares whether in whole or to the extent of the prohibition, whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder and/or the Owner, as appropriate, that portion of the Option Purchase Price or the Option Share Repurchase Price that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Holder, a new -9- Agreement evidencing the right of the Holder to purchase that number of shares of Common Stock obtained by multiplying the number of shares of Common Stock for which the surrendered Agreement was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Option Repurchase Price less the portion thereof theretofore delivered to the Holder and the denominator of which is the Option Repurchase Price, or (B) to the Owner, a certificate for the Option Shares it is then so prohibited from repurchasing. If an Exercise Termination Event shall have occurred prior to the date of the notice by Issuer described in the first sentence of this subsection (c), or shall be scheduled to occur at any time before the expiration of a period ending on the thirtieth day after such date, the Holder shall nonetheless have the right to exercise the Option until the expiration of such 30-day period. 8. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or a Grantee Subsidiary, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or a Grantee Subsidiary, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding shares and share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its or any Significant Subsidiary's assets or deposits to any person, other than Grantee or a Grantee Subsidiary, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation. (b) The following terms have the meanings indicated: (i) "Acquiring Corporation" shall mean (i) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or surviving person, and (iii) the transferee of all or substantially all of Issuer's assets or deposits (or the assets or deposits of a Significant Subsidiary of Issuer). (ii) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. -10- (iii) "Assigned Value" shall mean the market/offer price, as defined in Section 7. (iv) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company which controls or is controlled by such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or Holders of the Substitute Option in substantially the same form as this Agreement (after giving effect for such purpose to the provisions of Section 9), which agreement shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 19.9% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 19.9% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by the Holder. (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person -11- that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder. 9. (a) At the request of the holder of the Substitute Option (the "Substitute Option Holder"), the issuer of the Substitute Option (the "Substitute Option Issuer") shall repurchase the Substitute Option from the Substitute Option Holder at a price (the "Substitute Option Repurchase Price") equal to (x) the amount by which (i) the Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by the number of shares of Substitute Common Stock for which the Substitute Option may then be exercised plus (y) Grantee's Out-of-Pocket Expenses (to the extent not previously reimbursed), and at the request of the owner (the "Substitute Share Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase the Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to (x) the Highest Closing Price multiplied by the number of Substitute Shares so designated plus (y) Grantee's Out-of-Pocket Expenses (to the extent not previously reimbursed). The term "Highest Closing Price" shall mean the highest closing price for shares of Substitute Common Stock within the six-month period immediately preceding the date the Substitute Option Holder gives notice of the required repurchase of the Substitute Option or the Substitute Share Owner gives notice of the required repurchase of the Substitute Shares, as applicable. (b) The Substitute Option Holder and the Substitute Share Owner, as the case may be, may exercise its respective right to require the Substitute Option Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to this Section 9 by surrendering for such purpose to the Substitute Option Issuer, at its principal office, the agreement for such Substitute Option (or, in the absence of such an agreement, a copy of this Agreement) and certificates for Substitute Shares accompanied by a written notice or notices stating that the Substitute Option Holder or the Substitute Share Owner, as the case may be, elects to require the Substitute Option Issuer to repurchase the Substitute Option and/or the Substitute Shares in accordance with the provisions of this Section 9. As promptly as practicable and in any event within five business days after the surrender of the Substitute Option and/or certificates representing Substitute Shares and the receipt of such notice or notices relating thereto, the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price and/or to the Substitute Share Owner the Substitute Share Repurchase Price therefor or the portion thereof which the Substitute Option Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Substitute Option Issuer is prohibited under applicable law or regulation, or as a consequence of administrative policy, from repurchasing the Substitute Option and/or the Substitute Shares in part or in full, the Substitute Option Issuer shall immediately so notify the Substitute Option Holder and/or the Substitute Share Owner and thereafter deliver or cause to be delivered, from time to time, to the Substitute Option Holder and/or the Substitute -12- Share Owner, as appropriate, the portion of the Substitute Share Repurchase Price, respectively, which it is no longer prohibited from delivering, within five business days after the date on which the Substitute Option Issuer is no longer so prohibited; provided, however, that if the Substitute Option Issuer is at any time after delivery of a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited under applicable law or regulation, or as a consequence of administrative policy, from delivering to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, in full (and the Substitute Option Issuer shall use its best efforts to receive all required regulatory and legal approvals as promptly as practicable in order to accomplish such repurchase), the Substitute Option Holder or Substitute Share Owner may revoke its notice of repurchase of the Substitute Option or the Substitute Shares either in whole or to the extent of prohibition, whereupon, in the latter case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute Option Holder or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price or the Substitute Share Repurchase Price that the Substitute Option Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new Substitute Option evidencing the right of the Substitute Option Holder to purchase that number of shares of the Substitute Common Stock obtained by multiplying the number of shares of the Substitute Common Stock for which the surrendered Substitute Option was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Substitute Option Repurchase Price less the portion thereof theretofore delivered to the Substitute Option Holder and the denominator of which is the Substitute Option Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the Substitute Option Shares it is then so prohibited from repurchasing. If an Exercise Termination Event shall have occurred prior to the date of the notice by the Substitute Option Issuer described in the first sentence of this subsection (c), or shall be scheduled to occur at any time before the expiration of a period ending on the thirtieth day after such date, the Substitute Option Holder shall nevertheless have the right to exercise the Substitute Option until the expiration of such 30-day period. 10. The 30-day, 12-month or 18-month periods for exercise of certain rights under Sections 2, 6, 7, 9 and 12 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights (for so long as the Holder is using commercially reasonable efforts to obtain such regulatory approvals), and for the expiration of all statutory waiting periods; and (ii) to the extent necessary to avoid liability under Section 16(b) of the 1934 Act by reason of such exercise. 11. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the -13- transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Issuer. This Agreement is the valid and legally binding obligation of Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant thereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. 12. Neither of the parties hereto may assign any of its rights or obligations under this Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event, Grantee, subject to the express provisions hereof, may assign in whole or in part its rights and obligations hereunder within 12 months following such Subsequent Triggering Event (or such later period as provided in Section 10); provided, however, that until the date 30 days following the date on which the Federal Reserve Board and OTS have approved applications by Grantee to acquire the shares of Common Stock subject to the Option, Grantee may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single party (e.g., a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board and OTS. 13. If the Grantee has been paid the termination fee provided for in the Merger Agreement (the "Termination Fee") and at any time receives any Net Realized Cash (as defined below) under this Agreement, then Grantee shall be obligated, as provided in this Section 13, to reimburse such Termination Fee, but only up to the amount of Net Realized Cash received by the Grantee. The term "Net Realized Cash" shall mean: (i) any cash proceeds received on sale or other disposition of Option Shares (or on sale or other disposition of other consideration received in exchange for such Option Shares), net of all related commissions, fees, underwriting discounts, costs and expenses; (ii) any Option Repurchase Price paid pursuant to Section 7 hereof; and (iii) any cash proceeds received in exchange for sale or other disposition of the Option (or upon sale or other disposition of other consideration received in exchange for such Option), net of all related commissions, fees, underwriting discounts, costs and expenses. If the Grantee becomes obligated to -14- reimburse all or any part of the Termination Fee under this Section 13, Grantee shall do so as soon as practicable upon receipt of the Net Realized Cash, by wire transfer of immediately available funds to a bank account designated by Issuer. In no event shall the aggregate amount payable by Grantee under this Section 13 exceed the lesser of (x) the amount of Termination Fee previously received by Grantee and (y) the amount of Net Realized Cash received by Grantee under this Agreement. 14. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation applying to the Federal Reserve Board under the Bank Holding Company Act and the OTS under the Home Owners Loan Act for approval to acquire the shares issuable hereunder, but Grantee shall not be obligated to apply to state banking authorities for approval to acquire the shares of Common Stock issuable hereunder until such time, if ever, as it deems appropriate to do so. 15. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 16. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or Issuer is not permitted to repurchase pursuant to Section 7, the full number of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the Holder to acquire or to require Issuer to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. 17. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by fax, telecopy, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 18. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. -15- 19. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 20. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 21. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contain the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assignees. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors except as assignees, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 22. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Merger Agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all of the date first above written. METROPOLITAN FINANCIAL CORPORATION By Norman M. Jones ----------------------------------- Its Chairman of the Board and Chief --------------------------------- Executive Officer -------------------------------- FIRST BANK SYSTEM, INC. By John F. Grundhofer ----------------------------------- Its Chairman, President and Chief ---------------------------------- Executive Officer ---------------------------------- -16- EX-23.1 4 CONSENT OF ERNST & YOUNG Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the following Registration Statements of First Bank System, Inc. of our report dated January 19, 1994, with respect to the consolidated financial statements of Metropolitan Financial Corporation included in First Bank System, Inc.'s Current Report on Form 8-K dated July 21, 1994, filed with the Securities and Exchange Commission. Form S-8, Registration Statement Numbers: 2-89224, 33-16242, 33-42333, 33-55932, 33-42334, 33-52959, 33-52835, 33-53395 Form S-3, Registration Statement Numbers: 33-38268, 33-33508, 33-39303, 33-47785, 33-51407, 33-53373, 33-52495 ERNST & YOUNG LLP Minneapolis, Minnesota August 5, 1994 -----END PRIVACY-ENHANCED MESSAGE-----