-----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, s1v49/7knN2aTr0JjO8ChR+yppKI8l2pxY4aIL3ImtWR0TycbUjczbMTO+w60GbW KNy7NgiSt6dApjrJj0ocWg== 0000891092-95-000005.txt : 19950515 0000891092-95-000005.hdr.sgml : 19950515 ACCESSION NUMBER: 0000891092-95-000005 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950214 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANCORPORATION INC CENTRAL INDEX KEY: 0000064907 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 430951744 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57489 FILM NUMBER: 95510373 BUSINESS ADDRESS: STREET 1: ONE MECANTILE CENTER STREET 2: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P.O. BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 424B1 1 MERCANTILE BANCORPORATION INC. PROSPECTUS ------------------- TCBANKSHARES, INC. INFORMATION STATEMENT ------------------- This Prospectus of Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), relates to 4,750,000 shares of common stock, par value $5.00 per share, and attached preferred share purchase rights (the "Rights"), of MBI (the Common Stock and Rights are collectively referred to herein as the "MBI Common Stock" and, together with the MBI Preferred Stock (as defined below), "MBI Capital Stock"), to be issued to the stockholders of TCBankshares, Inc., an Arkansas corporation ("TCB"), upon consummation of the proposed merger (the "Merger") of TCB with and into Mercantile Bancorporation Inc. of Arkansas, an Arkansas corporation ("Merger Sub") and wholly owned subsidiary of MBI. The Merger will be consummated pursuant to the terms of the Agreement and Plan of Reorganization, dated December 2, 1994 (the "Merger Agreement"), by and between MBI and TCB, upon the terms and subject to the conditions thereof. This Prospectus also serves as the Information Statement of TCB for use in connection with approval of the Merger Agreement by the stockholders of TCB ("Stockholder Approval"). Upon consummation of the Merger, (i) each share of TCB common stock, par value $50.00 per share ("TCB Common Stock"), will be converted into the right to receive 2,228.2299 shares of MBI Common Stock, with cash in lieu of fractional shares, (ii) each issued and outstanding share of TCB preferred stock, series A, par value $10.00 per share ("TCB Series A Preferred Stock; and together with the TCB Series B Preferred Stock described below, the "TCB Preferred Stock"), will be converted into the right to receive one share of preferred stock, no par value, of MBI ("MBI Series B-1 Preferred Stock"), and (iii) each issued and outstanding share of TCB preferred stock, series B, par value $10.00 per share ("TCB Series B Preferred Stock; and together with the TCB Common Stock and the TCB Series A Preferred Stock, the "TCB Capital Stock") will be converted into the right to receive one share of preferred stock, no par value, of MBI ("MBI Series B-2 Preferred Stock" and, together with the MBI Series B-1 Preferred Stock, "MBI Preferred Stock"). See "TERMS OF THE PROPOSED MERGER." MBI Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "MTL." On February 10, 1995, the closing sales price for MBI Common Stock as reported on the NYSE Composite Transactions Tape was $36.50 This Information Statement/Prospectus was first mailed to the stockholders of TCB on or about February 13, 1995. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. 2 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF MBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. ------------------------ The Date Of This Information Statement/Prospectus Is February 13, 1995. 3 AVAILABLE INFORMATION MBI is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, information statements and other information with the Commission. Such reports, information statements and other information filed with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Suite 1300, Seven World Trade Center, New York, New York 10048 and Room 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. The MBI Common Stock is listed on the NYSE, and such reports, information statements and other information concerning MBI are available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Information Statement/Prospectus does not contain all of the information set forth in the Registration Statement on Form S-4 and exhibits thereto (the "Registration Statement") covering the securities offered hereby which has been filed by MBI with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the rules and regulations of the Commission, this Information Statement/Prospectus omits certain information contained or incorporated by reference in the Registration Statement. Statements contained in this Information Statement/Prospectus provide a fair summary of the contents of any contract or other document referenced herein but are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement. For such further information, reference is made to the Registration Statement. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE This Information Statement/Prospectus incorporates documents by reference which are not presented herein or delivered herewith. Documents relating to MBI, excluding exhibits unless specifically incorporated therein, are available, without charge, upon written or oral request to Jon W. Bilstrom, General Counsel and Secretary, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524, telephone (314) 425-2525. In order to ensure timely delivery of the documents, any request should be made by March 7, 1995. 4 The following documents filed with the Commission by MBI under the Exchange Act are incorporated herein by reference: (a) MBI's Report on Form 10-K for the year ended December 31, 1993. (b) MBI's Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1994. (c) MBI's Current Reports on Form 8-K dated February 11, 1994, June 17, 1994, October 3, 1994 and December 21, 1994. (d) The description of MBI's Common Stock set forth in Item 1 of MBI's Registration Statement on Form 8-A, dated March 5, 1993, and any amendment or report filed for the purpose of updating such description. (e) The description of the Rights set forth in Item 1 of MBI's Registration Statement on Form 8-A, dated March 5, 1993, and any amendment or report filed for the purpose of updating such description. All documents filed by MBI pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and until the date the Merger is consummated shall be deemed to be incorporated by reference herein and made a part hereof from the date any such document is filed. The information relating to MBI contained in this Information Statement/Prospectus does not purport to be complete and should be read together with the information in the documents incorporated by reference herein. Any statement contained herein or in a document incorporated herein by reference shall be deemed to be modified or superseded for purposes hereof to the extent that a subsequent statement contained herein or in any other subsequently filed document incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part hereof. Any statements contained in this Information Statement/Prospectus involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT/PROSPECTUS AND, IF 5 GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MBI OR TCB. THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF MBI COMMON STOCK AND MBI PREFERRED STOCK TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT HERETO SHALL IMPLY OR CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MBI OR TCB OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE HEREOF. 6 TABLE OF CONTENTS Page AVAILABLE INFORMATION.............................................. 4 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.................. 4 SUMMARY INFORMATION................................................ 9 Business of MBI................................................ 9 Business of Merger Sub......................................... 11 Business of TCB................................................ 11 The Proposed Merger............................................ 11 Support Agreements............................................. 12 Vote Required.................................................. 13 Reasons for the Merger......................................... 13 Fractional Shares.............................................. 13 Waiver and Amendment........................................... 14 Federal Income Tax Consequences in General..................... 14 Regulatory Approval............................................ 14 Accounting Treatment........................................... 15 Dissenters' Rights............................................. 15 Market and Market Prices....................................... 15 Comparative Unaudited Per Share Data........................... 16 Summary Financial Data......................................... 19 TERMS OF THE PROPOSED MERGER....................................... 22 General Description of the Merger.............................. 22 Support Agreements............................................. 23 Background and Reasons for the Merger; TCB Board Recommendation............................................. 24 Conditions of the Merger....................................... 25 Termination of the Merger Agreement............................ 27 Effective Time................................................. 28 Surrender of TCB Stock Certificates and Receipt of MBI Capital Stock....................................... 28 Bank Minority Shares........................................... 30 Fractional Shares.............................................. 30 Regulatory Approval............................................ 30 Business Pending the Merger.................................... 32 Waiver and Amendment........................................... 35 Accounting Treatment........................................... 35 Management and Operations After the Merger..................... 36 Employee Benefits.............................................. 36 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.............. 37 DISSENTERS' RIGHTS OF STOCKHOLDERS OF TCB.......................... 39 7 PRO FORMA FINANCIAL INFORMATION.................................... 39 Comparative Unaudited Per Share Data........................... 39 Pro Forma Combined Consolidated Financial Statements (Unaudited)..................................... 42 INFORMATION CONCERNING TCB......................................... 57 Business of TCB................................................ 57 Subsidiaries................................................... 57 Management..................................................... 58 Regulation..................................................... 59 Management Discussion and Analysis of Financial Condition and Results............................ 59 Ownership of TCB Common Stock.................................. 76 INFORMATION REGARDING MBI STOCK.................................... 78 Description of MBI Common Stock and Attached Preferred Share Purchase Rights............................ 78 Restrictions on Resale of MBI Capital Stock by Affiliates; Affiliate Agreements........................ 81 Comparison of the Rights of Stockholders of MBI and TCB................................................ 82 SUPERVISION AND REGULATION......................................... 86 General........................................................ 86 Certain Transactions with Affiliates........................... 86 Payment of Dividends........................................... 87 Capital Adequacy............................................... 87 Support of Subsidiary Banks.................................... 88 Recent Legislation............................................. 89 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS.......................... 93 LEGAL MATTERS...................................................... 94 EXPERTS STOCKHOLDER PROPOSALS.............................................. 94 INDEX TO TCBANKSHARES, INC. CONSOLIDATED FINANCIAL STATEMENTS........................................... 96 8 SUMMARY INFORMATION The following is a summary of certain terms of the Merger and related information discussed elsewhere in this Information Statement/Prospectus, is not intended to be complete and is qualified in all respects by the more detailed information included in this Information Statement/ Prospectus and the documents incorporated herein by reference. As used in this Information Statement/Prospectus, the terms "MBI" and "TCB" refer to such corporations, respectively, and where the context requires, such corporations and their respective subsidiaries on a consolidated basis. All information concerning MBI included in this Information Statement/Prospectus has been furnished by MBI and all information concerning TCB included in this Information Statement/Prospectus has been furnished by TCB. Neither MBI nor TCB warrants the accuracy or completeness of information relating to the other. Business of MBI MBI, a Missouri corporation, was organized in 1970 and is a registered bank holding company under the federal Bank Holding Company Act of 1956, as amended (the "BHCA"). As of December 31, 1994, MBI owned, directly or indirectly, all of the capital stock of Mercantile Bank of St. Louis National Association ("Mercantile Bank") and 39 other commercial banks which operated from 250 banking offices and 241 Fingertip Banking automated teller machines, including 26 off-premises machines, located throughout Missouri, southern Illinois, northern Iowa and eastern Kansas. MBI's services concentrate in three major lines of business -- consumer, corporate, and trust services. MBI also operates non-banking subsidiaries which provide related financial services, including investment management, brokerage services and asset-based lending. As of September 30, 1994, MBI reported, on a consolidated basis, total assets of $12.2 billion, total deposits of $8.9 billion, total loans of $7.9 billion and shareholders' equity of $1.0 billion. As of November 30, 1994, MBI had 43,290,784 shares of MBI Common Stock issued and outstanding and no shares of MBI Preferred Stock issued and outstanding. In the first quarter of 1994, MBI completed the acquisition of United Postal Bancorp, Inc. ("UPB"), a Missouri-based holding company for United Postal Savings Association, which as of December 31, 1993 reported total assets of $1.3 billion and total deposits of $1.0 billion. Also during the first quarter of 1994, MBI acquired Metro Bancorporation, which as of December 31, 1993 reported total assets of $370 million and total deposits of $333 million. The acquisition of these entities was accounted for under the pooling-of-interests method of 9 accounting and, accordingly, MBI has restated its consolidated financial statements for all periods reported herein. MBI has filed supplemental financial statements as of and for the periods ended December 31, 1993, 1992 and 1991 in a Current Report on Form 8-K, dated June 17, 1994, which has been incorporated by reference into this Information Statement/Prospectus. In the first quarter of 1995, MBI completed the acquisition of Wedge Bank ("Wedge"), located in Alton, Illinois. Wedge is an Illinois state-chartered bank which, as of September 30, 1994, reported total assets of $205 million, total deposits of $153 million, total loans of $113 million and shareholders' equity of $19 million. Also during the first quarter of 1995, MBI completed the acquisition of UNSL Financial Corp. ("UNSL"), located in Lebanon, Missouri. UNSL, a Delaware corporation, was a savings and loan holding company under the Home Owners Loan Act ("HOLA") for United Savings Bank. As of September 30, 1994, UNSL reported total assets of $488 million, total deposits of $378 million, total loans of $444 million and shareholders' equity of $39 million. On September 21, 1994, MBI entered into an agreement to acquire Central Mortgage Bancshares, Inc., a Missouri corporation ("Central Mortgage"). Central Mortgage is a multi-bank holding company based in Kansas City, Missouri which owns all of the outstanding capital stock of four state banks with 17 offices in western Missouri, and a mortgage banking unit based in Springfield, Missouri. As of September 30, 1994, Central Mortgage reported total assets of $626 million, total deposits of $538 million, total loans of $386 million and shareholders' equity of $53 million. On December 23, 1994, MBI entered into an agreement to acquire Plains Spirit Financial Corporation ("Plains Spirit"), located in Davenport, Iowa. Plains Spirit, a Delaware corporation, is a savings and loan holding company under HOLA which owns First Federal Savings Bank of Iowa. As of September 30, 1994, Plains Spirit reported total assets of $428 million, total deposits of $254 million, total loans of $237 million and shareholders' equity of $53 million. MBI's principal executive offices are located at One Mercantile Center, St. Louis, Missouri 63101 and its telephone number is (314) 425-2525. For additional information, see "TERMS OF THE PROPOSED MERGER," "SUPERVISION AND REGULATION," "PRO FORMA FINANCIAL INFORMATION" and "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE." 10 Business of Merger Sub Merger Sub, an Arkansas corporation, was organized in 1995 as a wholly owned subsidiary of MBI. Merger Sub has no operations and owns no assets. Merger Sub will be the surviving corporation upon consummation of the Merger. The principal executive office of Merger Sub is located at One Mercantile Center, St. Louis, Missouri 63101 and its telephone number is (314) 425-2525. Business of TCB TCB, an Arkansas corporation and registered bank holding company under the BHCA, was organized in 1985 by the Lyon family of Little Rock, Arkansas. As of September 30, 1994, TCB owned, directly or indirectly, 99% of its lead bank, The Twin City Bank, and over 97% of each of its five other bank subsidiaries. TCB's banking strategy is to provide an array of lending, deposit and other financial services to its target market of retail, commercial and municipal customers in Little Rock and other select markets in Arkansas. As of September 30, 1994, TCB had 2,131.737 shares of TCB Common Stock issued and outstanding, 5,306 shares of TCB Series A Preferred Stock issued and outstanding and 9,500 shares of TCB Series B Preferred Stock issued and outstanding. As of September 30, 1994, TCB reported, on a consolidated basis, total assets of $1.4 billion, total deposits of $1.1 billion, total loans of $659 million and stockholders' equity of $89 million. TCB's principal executive offices are located at One Riverfront Place, North Little Rock, Arkansas 72119 and its telephone number is (501) 688-1000. For additional information, see "TERMS OF THE PROPOSED MERGER," "SUPERVISION AND REGULATION," "PRO FORMA FINANCIAL INFORMATION," "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "INFORMATION CONCERNING TCB." The Proposed Merger Subject to the satisfaction of the terms and conditions set forth in the Merger Agreement described below, TCB will merge with and into Merger Sub. Upon consummation of the Merger, TCB's corporate existence will terminate, with Merger Sub continuing as the surviving corporation, and each share of TCB Common Stock will be converted into the right to receive 2,228.2299 (the "Exchange Ratio") shares of MBI Common Stock, plus cash in lieu of fractional shares, each 11 share of TCB Series A Preferred Stock will be converted into the right to receive one share of MBI Series B-1 Preferred Stock, and each share of TCB Series B Preferred Stock will be converted into the right to receive one share of MBI Series B-2 Preferred Stock (collectively, the "Merger Consideration"). Consummation of the Merger is subject to certain terms and conditions, including the approval of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of TCB Common Stock and TCB Preferred Stock and receipt of all requisite regulatory approvals. See "TERMS OF THE PROPOSED MERGER -- Conditions of the Merger" and "-- Regulatory Approval." Unless the parties otherwise agree, the closing (the "Closing") of the Merger shall take place at 10:00 A.M., local time, on the date (the "Closing Date") on which the effective time of the Merger (the "Effective Time") occurs, which shall be such date as MBI shall notify TCB in writing but (i) not earlier than the approval by TCB stockholders of the Merger Agreement and the receipt of all requisite regulatory approvals (the "Approval Date"), and (ii) not later than the first business day of the first full calendar month commencing at least five business days after the Approval Date. See "TERMS OF THE PROPOSED MERGER -- Effective Time." The Merger Agreement may be terminated at any time prior to the Closing Date by the mutual consent of the parties or by either party upon the occurrence of certain events or if the Merger is not consummated by October 2, 1995. See "TERMS OF THE PROPOSED MERGER -- Termination of the Merger Agreement." Support Agreements Concurrently with the execution of the Merger Agreement, MBI and each of Mr. Frank Lyon, Jr. and Mr. T.E. Renaud (each, a "Stockholder" and together, the "Stockholders") executed separate Support Agreements pursuant to which each Stockholder agreed that he will vote all shares of TCB Capital Stock owned to approve the Merger Agreement. Each Stockholder also thereby agreed, among other things, to not, and to not permit any company, trust or other entity controlled by such stockholder to, (i) sell, or otherwise transfer or dispose of, or agree to sell or otherwise transfer or dispose of, any shares of TCB Capital Stock owned by such Stockholder except as provided therein or (ii) initiate, solicit or encourage any discussions, inquiries or proposals with any third party in respect of the disposition of any significant portion of the assets of TCB or the TCB Capital Stock or the equity securities of any subsidiary of TCB or to 12 provide any information to or assist or negotiate with any third party with respect to any such disposition. See "TERMS OF THE PROPOSED MERGER -- Support Agreements." Vote Required Approval by the TCB stockholders of the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of TCB Common Stock and TCB Preferred Stock (the "Stockholder Approval"). Certain directors and executive officers of TCB and their affiliates own beneficially 100% of the shares entitled to vote in respect of the Stockholder Approval. Each of those directors and officers has agreed pursuant to a support agreement entered into by each such director or officer (each, a "Support Agreement") to vote the shares of TCB Capital Stock owned by him for approval of the Merger Agreement. See "TERMS OF THE PROPOSED MERGER -- Support Agreements." Reasons for the Merger The Board of Directors of TCB has carefully considered and unanimously approved the terms of the Merger Agreement as being in the best interest of TCB and its stockholders. The recommendation of TCB's Board of Directors is based upon a number of factors, including the Exchange Ratio and other terms of the Merger Agreement, the benefits expected to result from the combination of MBI and TCB, information concerning the financial condition, results of operations and prospects of MBI and TCB on a combined basis, the prices of and dividend policies in respect of MBI Common Stock and MBI Preferred Stock ("MBI Capital Stock") and TCB Capital Stock, and recent developments in the depository institutions industry. See "TERMS OF THE PROPOSED MERGER -- Background and Reasons for the Merger; TCB Board Recommendation." Fractional Shares No fractional shares of MBI Common Stock will be issued to the former stockholders of TCB in connection with the Merger. Each former holder of TCB Common Stock who otherwise would have been entitled to receive a fraction of a share of MBI Common stock shall receive in lieu thereof cash, without interest, in an amount equal to the holder's fractional share interest multiplied by the closing stock price of MBI Common Stock on the last business day preceding the Effective Time. Cash received by TCB stockholders in lieu of fractional shares 13 may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." Waiver and Amendment Any term, condition or provision of the Merger Agreement may be waived in writing at any time by the party which is, or whose stockholders are, entitled to the benefits thereof. The Merger Agreement and the schedules thereto may be amended by the Boards of Directors of MBI and TCB, by an instrument in writing signed on behalf of each of MBI and TCB, at any time before or after approval of the Merger Agreement by the Stockholders of TCB; provided that after any such approval by the Stockholders no such modification may alter or change the amount or kind of consideration to be received by holders of TCB Common Stock in the Merger. Federal Income Tax Consequences in General Wachtell, Lipton, Rosen & Katz, special counsel to MBI, and the Rose Law Firm, special counsel to TCB, have delivered their opinions to the effect that, assuming the Merger occurs in accordance with the Merger Agreement and conditioned on the accuracy of certain representations made by MBI and TCB, the Merger will constitute a "reorganization" for federal income tax purposes and that, accordingly, no gain or loss will be recognized by TCB stockholders who exchange their shares of TCB Common Stock solely for shares of MBI Common Stock, shares of TCB Series A Preferred Stock solely for shares of MBI Series B-1 Preferred Stock, and shares of TCB Series B Preferred Stock solely for shares of MBI Series B-2 Preferred Stock in the Merger. However, cash received in lieu of fractional shares may give rise to taxable income. Each TCB stockholder is urged to consult his or her own tax advisor to determine the specific tax consequences of the Merger to such stockholder. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." Regulatory Approval The Merger is subject to the prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In addition, the Merger is subject to the prior approval of the Arkansas Bank Commissioner (the "State Bank Regulator") and any other necessary regulatory authority. Applications for such approvals have been or will be filed. There can be no assurance that the necessary regulatory approvals will be received or as to the timing of such approvals. See "TERMS OF THE PROPOSED MERGER -- Regulatory Approval." 14 Accounting Treatment It is intended that the Merger will be accounted for under the pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED MERGER -- Accounting Treatment." Dissenters' Rights Under Arkansas law, a holder of TCB Capital Stock may dissent from the Merger and receive payment of the "fair value" of such share if the Merger is consummated by following certain procedures set forth in Section 4-27-1320 of the Arkansas Business Corporation Act of 1987 (the "Arkansas Act"). However, as set forth in "THE PROPOSED MERGER -- Other Agreements," each of the Stockholders of TCB Capital Stock executed a Support Agreement pursuant to which such Stockholder has agreed to vote all shares owned by such Stockholder for approval of the Merger Agreement. See "DISSENTERS' RIGHTS OF STOCKHOLDERS OF TCB." Market and Market Prices MBI Common Stock is currently traded on the NYSE under the symbol "MTL." Prior to March 25, 1993 MBI's Common Stock was quoted on NASDAQ/NMS, under the symbol "MTRC." On December 2, 1994, the last trading date preceding public announcement of the Merger, the last sales price reported for MBI Common Stock was $30.25. The last sales price reported for MBI Common Stock on February 10, 1995, was $36.50. No shares of MBI Preferred Stock are issued and outstanding. There is no active market for shares of TCB Capital Stock, none of which is listed on a national securities exchange or quoted on NASDAQ/NMS or any other national securities quotation system. There are no published bid and asked quotations on any shares of TCB Capital Stock. There have been no market trades in TCB Capital Stock, during the three-year period ended December 31, 1994. Stockholders are advised to obtain current market quotations for MBI Common Stock. There can be no assurance as to the market price of MBI Common Stock or TCB Common Stock before, at, or, in the case of MBI Common Stock, after, the Effective Time. The following table sets forth for the periods indicated the high and low sales price and cash dividend declared with respect to MBI Common Stock and the cash dividend declared with respect to TCB Common Stock. 15 MBI (1) TCB (2) ---------------------------- -------- Sales Price Cash Cash ----------- Dividend Dividend High Low Declared Declared ------ ------ -------- -------- 1992 1992 - ---- ---- First Quarter $ 27.375 $ 23.125 $ .2325 First Semi-Annual $ 60.00 Second Quarter 29.500 25.625 .2325 Third Quarter 29.375 25.375 .2325 Second Semi-Annual $ 60.00 Fourth Quarter 32.125 25.875 .2325 1993 1993 - ---- ---- First Quarter $ 35.625 $ 30.625 $ .2475 First Semi-Annual $ 60.00 Second Quarter 37.625 29.375 .2475 Third Quarter 34.375 31.625 .2475 Second Semi-Annual $ 60.00 Fourth Quarter 34.625 29.125 .2475 1994 1994 - ---- ---- First Quarter $ 34.125 $ 29.875 $ .28 First Semi-Annual $ 60.00 Second Quarter 38.125 31.125 .28 Third Quarter 39.250 34.875 .28 Second Semi-Annual $ 60.00 Fourth Quarter 36.875 29.500 .28 - ------------ (1) For a recent sales price of MBI Common Stock, see the cover of this Information Statement/Prospectus. (2) There have been no market trades of TCB Common Stock during the three-year period ended December 31, 1994. Comparative Unaudited Per Share Data The following table sets forth for the periods indicated selected historical common stock per share data of MBI and TCB and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the Merger and the acquisitions of UNSL, Wedge, and Ameribanc, Inc. ("ABNK") and the proposed acquisitions of Central Mortgage and Plains Spirit. MBI acquired ABNK on April 30, 1992, which acquisition was accounted for under the purchase method of accounting. Accordingly, the historical results of operations of MBI include the results of operations of ABNK from May 1, 1992 forward. The following pro forma combined consolidated income statements for the years ended December 31, 1992 and 1991 include the results of operations of ABNK from January 1, 1991 through the date of acquisition. MBI acquired UNSL and 16 Wedge on January 3, 1995, which acquisitions were accounted for as poolings of interests. The following data set forth the results of operations of MBI combined with the results of operations of UNSL, Wedge, Plains Spirit and Central Mortgage as if such acquisitions and the Merger had occurred as of the first day of the period presented. The data presented are based upon, and should be read in conjunction with, the consolidated financial statements and related notes of MBI and TCB included in documents incorporated herein by reference or included in this Information Statement/Prospectus, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing herein. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," "PRO FORMA FINANCIAL INFORMATION" and "INFORMATION CONCERNING TCB." These data are not necessarily indicative of the results of the future operations of the combined organization or the actual results that would have occurred if the Merger, the completed acquisitions of ABNK, UNSL and Wedge and the proposed acquisitions of Central Mortgage and Plains Spirit, had been consummated prior to the periods indicated. The pro forma combined consolidated amounts included in the table below are based upon the pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED MERGER --Accounting Treatment." 17
MBI/All MBI/TCB MBI/TCB Entities MBI/ALL Entities MBI TCB Pro Forma Pro Forma Pro Forma Pro Forma Reported Reported Combined(1) Equivalent(2) Combined(3) Equivalent(2) -------- ----------- -------- ----------- -------- ---------- Book Value per Common Share: September 30, 1994 ............................. $ 24.12 $ 36,255.39 $ 23.55 $ 52,474.81 $ 23.44 $ 52,229.71 December 31, 1993 .............................. 22.40 35,765.69 22.02 49,065.62 21.92 48,842.80 Cash Dividends Declared per Common Share: Nine months ended September 30, 1994 ........................... $ .84 $ 120.00 $ .84 $ 1,871.71 $ .84 $ 1,871.71 Year ended December 31, 1993 ................... .99 120.00 .99 2,205.95 .99 2,205.95 Year ended December 31, 1992 ................... .93 120.00 .93 2,072.25 .93 2,072.25 Year ended December 31, 1991 ................... .93 120.00 .93 2,072.25 .93 2,072.25 Earnings per Common Share: Nine months ended September 30, 1994 ..................................... $ 2.79 $ 5,493.64 $ 2.71 $ 6,038.50 $ 2.73 $ 6,083.07 Year ended December 31, 1993 ................... 2.80 7,125.18 2.85 6,350.46 2.89 6,439.58 Year ended December 31, 1992 ................... 2.36 6,285.02 2.41 5,370.03 2.45 5,459.16 Year ended December 31, 1991 ................... 2.37 4,357.01 2.18 4,857.54 2.20 4,902.11 Market Price per Common Share: December 2, 1994(4) ............................ $ 30.25 -- -- -- -- -- February 10, 1995(5)............................ 36.50 -- -- -- -- -- - --------------------- (1) Includes the effect of pro forma adjustments for UNSL, Wedge, ABNK and TCB as appropriate (see "PRO FORMA FINANCIAL INFORMATION"). (2) Based upon the pro forma combined per share amounts multiplied times 2,228.2299, the Exchange Ratio applicable to one share of TCB Common Stock. See "PRO FORMA FINANCIAL INFORMATION." (3) Includes the effect of pro forma adjustments for UNSL, Wedge, ABNK, TCB, Central Mortgage, and Plains Spirit as appropriate (see "PRO FORMA FINANCIAL INFORMATION"). (4) The market value of MBI Common Stock was determined as of the last trading day preceding the public announcement of the Merger based on the last sales price as reported on the NYSE. (5) There have been no market trades of TCB Common Stock during the three-year period ended December 31, 1994.
18 Summary Financial Data The following tables set forth for the periods indicated certain summary historical consolidated financial information for MBI and TCB. The historical balance sheet data and income statement data included in the summary financial data for the periods indicated are derived from financial statements of MBI and TCB as of and for such periods. These data include all adjustments which are, in the opinion of the respective managements of MBI and TCB, necessary to a fair statement of the results of these periods and all such adjustments are of a normal recurring nature. Results for interim periods are not necessarily indicative of results for the entire year. The following information should be read in conjunction with the consolidated financial statements of MBI and TCB, and the related notes thereto, included herein or in documents incorporated herein by reference and in conjunction with the unaudited pro forma combined consolidated financial information, including notes thereto, appearing elsewhere in this Information Statement/Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," "PRO FORMA FINANCIAL INFORMATION" and "INFORMATION CONCERNING TCB." 19 MERCANTILE BANCORPORATION INC. Summary Financial Data
Nine months ended September 30 Year Ended December 31 ------------------- -------------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 ------- ------- -------- -------- ------- ------ -------- Per Share Data Net income(1) .............................. $ 2.79 $ 2.42 $ 2.80 $ 2.36 $ 2.37 $ 2.18 $ .29 Dividends declared ......................... .84 .7425 .99 .93 .93 .93 .93 Book value at period end ................... 24.12 22.19 22.40 20.25 18.86 17.14 15.86 Average common shares outstanding (thousands) ............................. 43,034 42,339 42,439 39,492 31,791 30,144 29,092 Earnings (Thousands) Interest income ............................ $613,521 $626,939 $ 829,930 $ 873,447 $ 879,471 $882,148 $ 836,446 Interest expense ........................... 231,785 251,542 328,734 417,358 506,916 552,231 528,008 -------- -------- --------- --------- --------- -------- --------- Net interest income ........................ 381,736 375,397 501,196 456,089 372,555 329,917 308,438 Provision for possible loan losses ......... 24,909 41,440 61,013 74,579 58,076 50,886 104,708 Other income ............................... 142,789 148,935 199,158 183,944 155,696 137,356 150,038 Other expense .............................. 310,003 321,433 444,909 418,068 383,348 318,887 335,266 Income taxes (benefit) ..................... 69,512 58,986 75,568 52,346 18,673 27,658 (1,804) ------- -------- --------- --------- --------- -------- --------- Net income .............................. $120,101 $102,473 $ 118,864 $ 95,040 $ 68,154 $ 69,842 $ 20,306 ======== ======== ========= ========= ========= ======== ========= Ending Balance Sheet (Millions) Total assets ............................... $ 12,238 $ 11,896 $ 12,141 $ 12,273 $ 10,765 $ 10,137 $ 9,536 Earning assets ............................. 11,247 10,937 11,114 11,186 9,827 9,106 8,447 Investment securities ...................... 3,148 3,376 3,401 3,401 2,475 1,886 1,904 Loans and leases, net of unearned income .................. 7,873 7,370 7,382 7,499 6,946 6,884 6,358 Deposits ................................... 8,946 9,360 9,602 9,928 8,776 8,278 7,601 Long-term debt ............................. 288 274 273 299 203 233 308 Shareholders' equity ....................... 1,043 947 959 851 690 581 536 Reserve for possible loan losses ........... 172 160 169 166 146 149 149 Selected Ratios Return on average assets.................... 1.32% 1.12% .97% .80% .67% .73% .23% Return on average equity.................... 15.95 15.18 13.00 11.95 10.52 12.51 3.81 Net interest rate margin.................... 4.68 4.58 4.59 4.33 4.12 3.97 4.09 Equity to assets (average).................. 8.52 7.96 7.90 6.94 6.41 5.73 5.62 Reserve for possible loan losses to: Outstanding loans........................ 2.18 2.17 2.28 2.21 2.10 2.16 2.35 Non-performing loans..................... 585.44 286.22 293.39 156.85 113.14 119.68 121.55 (1) Based on weighted average common shares outstanding.
20 TCBANKSHARES, INC. Summary Financial Data
Nine Months Ended September 30 Year Ended December 31 ---------------------- ------------------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 ---------- ---------- ---------- ----------- ----------- ----------- --------- (Unaudited) (Audited) (Unaudited) Per Common Share Data Net income(1) ....................... $5,493.64 $5,368.86 $7,125.18 $6,285.02 $4,357.01 $3,315.61 $3,618.65 Dividends declared .................. 120 120 120 120 120 120 120 Book value at period end ............ 36,255 34,129 35,766 29,239 23,552 19,793 17,196 Average common shares outstanding (thousands) ....................... 2.13 2.13 2.13 2.13 2.13 2.13 2.13 Earnings (Thousands) Interest income ..................... $63,502 $58,401 $79,266 $77,188 $74,320 $72,404 $66,256 Interest expense .................... 28,024 25,025 33,912 35,761 42,400 45,551 42,224 ------- ------- ------- ------- ------- ------- ------- Net interest income ................. 35,478 33,376 45,354 41,427 31,920 26,853 24,032 Provision for possible loan losses ........................... 456 1,025 1,224 2,086 2,151 1,675 299 Other income ........................ 9,718 8,321 11,535 10,238 7,923 6,360 7,339 Other expenses ...................... 28,495 25,090 35,038 31,240 25,740 23,137 21,539 Income taxes ........................ 4,534 4,137 5,438 4,941 2,664 1,333 1,819 ------- ------- ------- ------- ------- ------- ------- Net income .................... $11,711 $11,445 $15,189 $13,398 $ 9,288 $ 7,068 $ 7,714 ======= ======= ======= ======= ======= ======= ======= Ending Balance Sheet (Millions) Total assets ........................ $ 1,358 $ 1,173 $ 1,225 $ 1,096 $ 890 $ 832 $ 757 Earnings assets ..................... 1,264 1,100 1,149 1,020 824 732 658 Investment securities ............... 605 559 577 544 392 323 267 Loan and leases, net of unearned income .................. 659 536 562 463 410 409 391 Deposits ............................ 1,149 1,037 1,085 981 779 739 685 Shareholders' equity ................ 89 85 88 74 62 55 49 Reserve for possible loan losses .... 8 8 8 7 6 5 5 Selected Ratios Return on average assets ............ 1.20% 1.35% 1.31% 1.35% 1.08% 0.89% 1.07% Return on average equity ............ 16.66 19.15 8.65 19.58 16.06 13.81 17.30 Net interest rate margin ............ 3.95 4.19 4.46 4.78 4.35 4.05 4.14 Equity to assets (average) .......... 7.23 7.03 7.02 6.89 6.73 6.80 6.20 Reserve for possible loan losses to: Outstanding loans .............. 1.24 1.50 1.41 1.53 1.51 1.23 1.38 Non-performing loans ........... 170.26 178.93 170.20 131.23 75.32 48.79 103.62 (1) Based on weighted average common shares outstanding.
21 TERMS OF THE PROPOSED MERGER The following is a summary of the material terms and conditions of the Merger Agreement, which document is incorporated by reference herein. This summary is qualified in its entirety by the full text of the Merger Agreement. General Description of the Merger Pursuant to the Merger Agreement, TCB will merge at the Effective Time with and into Merger Sub. Upon consummation of the Merger, TCB's corporate existence will terminate, with Merger Sub continuing as the surviving corporation, and (i) each share of TCB Common Stock will be converted into the right to receive 2,228.2299 shares of MBI Common Stock, with cash in lieu of fractional shares, (ii) each share of TCB Series A Preferred Stock will be converted into the right to receive one share of MBI Series B-1 Preferred Stock, and (iii) each share of TCB Series B Preferred Stock will be converted into the right to receive one share of MBI Series B-2 Preferred Stock. The value of stock to be issued pursuant to the Merger may fluctuate prior to and following the Effective Time. The amount and nature of the consideration was established through arm's-length negotiations between MBI and TCB, and reflects the balancing of a number of countervailing factors. The total amount of the consideration reflects a price both parties concluded was appropriate. See "-- Background of and Reasons for the Merger; Board Recommendations." The fact that the consideration is payable in shares of MBI Common Stock reflects the potential for change in the value of the MBI Common Stock and the desire to have the favorable tax attributes of a "reorganization" for federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." NO ASSURANCE CAN BE GIVEN THAT THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF MBI COMMON STOCK ON THE DATE SUCH STOCK IS RECEIVED BY A TCB STOCKHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI COMMON STOCK RECEIVED BY A TCB STOCKHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK DUE TO NUMEROUS MARKET FACTORS. Following the Effective Time, each stockholder of TCB will be required to submit to MBI a properly executed letter of transmittal and surrender to MBI the stock certificate(s) formerly representing the shares of TCB Common Stock or TCB Preferred Stock in order to obtain issuance of a new stock certificate evidencing the shares of MBI Common Stock or MBI Preferred Stock, as the case 22 may be, to which such stockholder is entitled. No dividends or other distributions will be paid to a former TCB stockholder with respect to shares of MBI Common Stock or MBI Preferred Stock until such person surrenders the certificates formerly representing shares of TCB Common Stock and TCB Preferred Stock representing the right to receive such MBI Common Stock or MBI Preferred Stock, at which time such dividends will be remitted to such person without interest and less any taxes that may have been imposed thereon. See "TERMS OF THE PROPOSED MERGER -- Surrender of TCB Stock Certificates and Receipt of MBI Capital Stock." No fractional shares of MBI Common Stock will be issued in the Merger, but cash will be paid in lieu of such fractional shares, such cash being calculated by multiplying the holder's fractional share interest by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the last business day preceding the Effective Time. See "-- Fractional Shares." Support Agreements Concurrently with the execution of the Merger Agreement, MBI and each Stockholder executed separate Support Agreements pursuant to which each Stockholder agreed that: (i) Stockholder will not, and will not permit any company, trust or other entity controlled by Stockholder to, contract to sell, sell or otherwise transfer or dispose of any shares of TCB stock or MBI stock or any interest therein or securities convertible thereinto or any voting rights with respect thereto, other than (a) pursuant to the Merger or (b) with Buyer's prior written consent or (c) in the case of Mr. Renaud, to a grantor trust in which stockholder is trustee; (ii) all of the shares of TCB stock beneficially owned by Stockholder, or over which Stockholder has voting power or control, directly or indirectly, in each case at the record date for any meeting of stockholders of TCB called to consider and vote to approve the Merger Agreement and/or the transactions contemplated thereby will be voted by the undersigned in favor thereof; (iii) Stockholder will, and will cause any company, trust or other entity controlled by Stockholder to, cooperate with MBI in connection with the Merger Agreement and the transactions contemplated thereby; Stockholder will not, and will not permit any such company, trust or other entity, directly or indirectly (including through its officers, directors, employees or other representatives) to initiate, solicit or encourage any discussions, inquiries or proposals with any third party relating to the disposition of any significant portion of the business or assets of TCB or any TCB subsidiary or the acquisition of Equity Securities of TCB or any TCB subsidiary or the merger of TCB or any TCB Subsidiary with any person (other than MBI) or any similar 23 transaction (each such transaction being referred to herein as an "Acquisition Transaction"), or provide any such person with information or assistance or negotiate with any such person with respect to an Acquisition Transaction or agree to or otherwise assist in the effectuation of any Acquisition Transaction; and (iv) Stockholder will execute and deliver a certificate containing such representations as are reasonably necessary and customary for tax counsel to each of MBI and TCB to render an opinion to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986 and that no gain or loss will be recognized by the stockholders of TCB to the extent they receive MBI Common Stock or MBI Preferred Stock solely in exchange for shares of TCB Common Stock TCB Preferred stock, as the case may be. Background and Reasons for the Merger; TCB Board Recommendation Reasons and Board Recommendation. TCB, recognizing the current trends in banking and the acquisitions of banking organizations within TCB's service area, began exploring options for combining with a large organization which had the ability to issue publicly-traded common stock to fund future acquisitions. Contact was made with a number of regional holding companies, including, among others, MBI. Several made proposals expressing serious interest in a potential combination and preliminary discussions were held with them. MBI's proposal appeared to TCB to offer the most attractive possible combination and further discussions were held with MBI, resulting in the Merger Agreement being negotiated by representatives of TCB and MBI. In determining whether to approve the Merger Agreement, the Board of Directors of TCB ("Board") reviewed MBI's respective businesses, the results of operations and financial condition (including the assets, quality and capital levels), growth prospects, products available to customers, historical dividend and market price performance, and the fact that MBI's Common Stock was traded on the New York Stock Exchange. The Board also considered the management strength and depth of MBI, and the significant market penetration that the combined organization would have within the regional banking market. The Board also considered MBI's commitment to serving the banking and other needs of TCB's depositors, employees, customers, and community, as well as MBI's policy emphasizing the local character of community banks and continuing the involvement of members of the Board, as well as members of management of such banks. Based on these considerations, the Board unanimously approved the Merger Agreement on December 2, 1994. 24 MBI's Reasons. MBI has considered a number of factors, including, among other things, the financial condition of TCB, the projected synergies between MBI and TCB which are anticipated to result from the Merger, and the opportunity for MBI to expand into a new market area with the potential for increased revenues from marketing its existing products and services. MBI has concluded that the Merger presents a unique opportunity for MBI to enter the banking market in the state of Arkansas through the acquisition of an established banking organization with expertise and a major market presence in the state. MBI's decision to pursue discussions with TCB was primarily a result of MBI's assessment of the value of TCB's franchise within the targeted market, its substantial asset base within that area and the compatibility of the businesses of the two organizations. Conditions of the Merger The respective obligations of MBI and TCB to consummate the Merger are subject to the fulfillment or waiver at or prior to the Effective Time of the following conditions: (i) The Merger Agreement shall have received the requisite approval of stockholders of TCB. (ii) All requisite approvals of the Merger Agreement and the transactions contemplated thereby shall have been received from the Federal Reserve Board, the State Bank Regulator and any other necessary governmental or regulatory authority or agency (the "Regulatory Authorities"). (iii) The Registration Statement shall have been declared effective and shall not be subject to a stop order or any threatened stop order. (iv) Neither MBI nor TCB shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger. (v) Each of MBI and TCB shall have received, from counsel reasonably satisfactory to it, an opinion reasonably satisfactory in form and substance to it to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") and that no gain or loss will be recognized by the stockholders of TCB to the extent they receive MBI Common Stock solely in exchange for shares of TCB Common Stock. 25 (vi) The receipt of an opinion addressed to MBI from KPMG Peat Marwick LLP by MBI and TCB stating that the Merger will qualify for pooling-of-interests accounting treatment (the "Pooling Letter") and such opinion shall not have been withdrawn (see "-- Accounting Treatment"). TCB's obligation to effect the Merger is subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (i) The representations and warranties of MBI set forth in the Merger Agreement shall be true and correct in all material respects as of December 2, 1994 and as of the Effective Time (as though made on and as of the Effective Time except (A) to the extent such representations and warranties are by their express provisions made as of a specified date and (B) for the effect of transactions contemplated by the Merger Agreement). (ii) MBI shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement prior to the Effective Time. (iii) TCB shall have received a certificate of the chairman or vice chairman of MBI as to the satisfaction of the conditions set forth in clauses (i) and (ii). MBI's obligation to effect the Merger is subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (i) The representations and warranties of TCB set forth in the Merger Agreement shall be true and correct in all material respects as of December 2, 1994 and as of the Effective Time (as though made on and as of the Effective Time except (A) to the extent such representations and warranties are by their express provisions made as of a specified date and (B) for the effect of transactions contemplated by the Merger Agreement). (ii) TCB shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement prior to the Effective Time. (iii) MBI shall have received certificates of the chairman and the president and chief executive officer of TCB as to the satisfaction of the conditions set forth in clauses (i) and (ii). 26 Termination of the Merger Agreement The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after any requisite stockholder approval: (i) by mutual consent of the Executive Committee of the Board of Directors of MBI and the Board of Directors of TCB; (ii) by the Executive Committee of the Board of Directors of MBI or the Board of Directors of TCB (A) at any time after October 2, 1995 if the Merger shall not theretofore have been consummated (provided that the terminating party is not then in material breach of the Merger Agreement) or (B) if the Federal Reserve Board has denied approval of the Merger and such denial has become final and nonappealable; (iii) by the Executive Committee of the Board of Directors of MBI in the event (A) of a material breach by TCB of the Merger Agreement, which breach is not cured within 30 days after written notice thereof to TCB by MBI or (B) that (x) MBI's due diligence review of TCB and its subsidiaries discloses matters the impact of which affects TCB and its subsidiaries, taken as a whole, except as may have resulted from changes in laws and regulations or changes in economic conditions applicable to banking institutions generally, or in general interest rates that affect TCB and its subsidiaries, taken as a whole consistent with the manner in which changes in the general levels of interest rates since December 31, 1993 has affected TCB and its subsidiaries, which the Executive Committee of the Board of Directors of MBI in the good faith exercise of its reasonable judgment believes either (1) to be inconsistent in any material and adverse respect with any of the representations or warranties of TCB, or (2) (a) to be of such significance as to materially and adversely affect the condition of TCB and its subsidiaries, taken as a whole or (b) to deviate materially and adversely from the financial statements for the year ended December 31, 1993 of TCB, (y) MBI notifies TCB of such matters within 30 days of the date of the Merger Agreement, and (z) such matters (1) are not capable of being cured or (2) have not been cured within 30 days after written notice thereof to TCB by MBI; or (iv) by the Board of Directors of TCB in the event (A) of a material breach by MBI of the Merger Agreement, which breach is not cured within 30 days after written notice thereof is given to MBI by TCB or (B) that (x) TCB's due diligence review of MBI and its subsidiaries discloses matters the impact of which affects MBI and its subsidiaries, taken as a whole, except as may have resulted from changes to laws and regulations or changes in economic conditions applicable to banking institutions generally, or in general levels of interest rates that affect MBI and its subsidiaries, taken as whole, consistent with the manner in which changes in the general levels of interest rates since December 31, 1993 has affected MBI, which the Board of Directors of TCB in the good faith exercise of 27 its reasonable judgment believes either (1) to be inconsistent in any material and adverse respect with any of the representations or warranties of MBI or (2) (a) to be of such significance as to materially and adversely affect the condition of MBI and its subsidiaries, taken as a whole, or (b) to deviate materially and adversely from the financial statement for the year ended December 31, 1993 of MBI, (y) TCB notifies MBI of such matters within 30 days of the date of the Merger Agreement, and (z) such matters (1) are not capable of being cured or (2) have not been cured within 30 days after written notice thereof to MBI. No assurance can be given that the Merger will be consummated, that MBI and TCB will not mutually agree to terminate the Merger Agreement or that MBI or TCB will not elect to terminate the Merger Agreement if the Merger has not been consummated on or before October 2, 1995. Effective Time Unless the parties otherwise agree, the Closing of the Merger will take place at 10:00 A.M., local time, on the date on which the Effective Time occurs, which shall be such date as MBI notifies TCB in writing but not earlier than the Approval Date, and not later than the first business day of the first full calendar month commencing at least five business days after the Approval Date. The Effective Time will occur when a certificate of merger is filed with the Secretary of State of the State of Arkansas in the form and manner required by the Arkansas Act. Surrender of TCB Stock Certificates and Receipt of MBI Capital Stock At the Effective Time, holders of record of certificates formerly representing shares of TCB Common Stock and TCB Preferred Stock (the "Certificates") will be instructed to tender such Certificates to MBI pursuant to a letter of transmittal that MBI will deliver or cause to be delivered to such holders. Such letters of transmittal will specify that risk of loss and title to Certificates will pass only upon delivery of such Certificates to MBI. After the Effective Time, each previous holder of a Certificate that surrenders such Certificate to MBI will, upon acceptance thereof by MBI, be entitled to a certificate or certificates representing the number of full shares of MBI Common Stock or MBI Preferred Stock, as the case may be, into which the Certificate so surrendered will have been converted pursuant to the Merger 28 Agreement and any distribution theretofore declared and not yet paid with respect to such shares of MBI Common Stock or MBI Preferred Stock, as the case may be, without interest. MBI will accept Certificates upon compliance with such reasonable terms and conditions as MBI may impose to effect an orderly exchange thereof in accordance with customary exchange practices. Certificates must be appropriately endorsed or accompanied by such instruments of transfer as MBI may require. Each outstanding Certificate will, until duly surrendered to MBI, be deemed to evidence ownership of the Merger Consideration into which the stock previously represented by such Certificate will have been converted in the Merger. After the Effective Time, holders of Certificates will cease to have rights with respect to the stock previously represented by such Certificates, and their sole right will be to exchange such Certificates for such Merger Consideration. After the Effective Time, there will be no further transfer on the records of TCB of Certificates, and if such Certificates are presented to TCB for transfer, they will be cancelled against delivery of such Merger Consideration. MBI will not be obligated to deliver the Merger Consideration to which any former holder of TCB Common Stock or TCB Preferred Stock is entitled until such holder surrenders the Certificates as provided herein. No dividends declared will be remitted to any person entitled to receive MBI Common Stock or MBI Preferred Stock in the Merger until such person surrenders the Certificate representing the right to receive such MBI Common Stock or MBI Preferred Stock, at which time such dividends will be remitted to such person, without interest and less any taxes that may have been imposed thereon. Certificates surrendered for exchange by any person will not be exchanged for certificates representing MBI Common Stock or MBI Preferred Stock, as the case may be, until MBI has received a written agreement from such person not to sell or otherwise dispose of any shares of MBI Common Stock or MBI Preferred Stock, as the case may be, received by such person until financial results covering at least 30 days of combined operations have been published. See "INFORMATION REGARDING MBI STOCK -- Restrictions on Resale of MBI Capital Stock by Affiliates; Affiliate Agreement." Neither TCB nor MBI, nor any affiliate thereof, will be liable to any holder of stock represented by any Certificate for any Merger Consideration paid to a public official pursuant to applicable abandoned property, escheat or similar laws. MBI will be entitled to rely upon the stock transfer books of TCB 29 to establish the identity of those persons entitled to receive Merger Consideration, which books will be conclusive with respect thereto. In the event of a dispute with respect to ownership of stock represented by any Certificate, MBI will be entitled to deposit any Merger Consideration represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto. Bank Minority Shares TCB agreed to use its best efforts to cause all agreements pursuant to which any stockholders of each of the banks owned by TCB (other than MBI or its subsidiaries) hold shares of capital stock of such banks, whether as qualifying shares or otherwise, to be amended and/or restated, in a manner and on terms reasonably acceptable to MBI, so as to provide TCB and its successors an unqualified right to repurchase such shares at any time and/or from time to time, subject only to payment by TCB or its successors of the amounts specified in such agreements for the repurchase thereof. Fractional Shares No fractional shares of MBI Common Stock will be issued to the former stockholders of TCB in connection with the Merger. Each former holder of TCB Common Stock who otherwise would have been entitled to receive a fraction of a share of MBI Common Stock will receive cash in lieu thereof, without interest, in an amount equal to the holder's fractional share interest multiplied by the closing stock price of MBI Common Stock on the last business day preceding the Effective Time. No stockholder of TCB entitled to receive cash in lieu of fractional shares will be entitled to dividends, voting rights or any other rights in respect of such fractional shares. Cash received by TCB stockholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." Regulatory Approval The obligations of the parties to effect the Merger are subject to prior approval of the Federal Reserve Board and the State Bank Regulator and any other necessary regulatory authority. The Merger is subject to approval by the Federal Reserve Board under the BHCA. Under the BHCA, the Federal Reserve Board is required, in approving transactions such as the Merger, to take into consideration the financial and managerial resources and future prospects of the existing and proposed 30 institutions and the convenience and needs of the communities to be served. In considering financial resources and future prospects, the Federal Reserve Board will, among other things, evaluate the adequacy of the capital levels of MBI and its bank subsidiaries following the Merger. The BHCA prohibits the Federal Reserve Board from approving the Merger if the Merger would result in a monopoly or be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States, or if their effect in any section of the country may be substantially to lessen competition or to tend to create a monopoly, or if it would in any other manner result in a restraint of trade, unless the Federal Reserve Board finds that the anticompetitive effects of the Merger are clearly outweighed in the public interest by the probable effect of transactions in meeting the convenience and needs of the communities to be served. In addition, under the Community Reinvestment Act of 1977, as amended, the Federal Reserve Board must take into account the record of performance of the existing institutions in meeting the credit needs of the entire community, including low- and moderate-income neighborhoods, served by such institutions. Under the BHCA, the Merger may not be consummated until the 30th day following the date of Federal Reserve Board approval (or, if the Department of Justice has not submitted adverse comments with respect to competitive factors, the 15th day), during which time the United States Department of Justice may challenge the Merger on antitrust grounds. The commencement of an antitrust action would stay the effectiveness of the Federal Reserve Board's approval unless a court specifically orders otherwise. The BHCA provides for the publication of notice and public comment on the applications and authorizes the Federal Reserve Board to permit interested parties to intervene in the proceedings. If an interested party is permitted to intervene, such intervention could delay the regulatory approvals required for consummation of the Merger. The Merger is also subject to the approval of the State Bank Regulator, who is required to approve the transfer of TCB Capital Stock to MBI if he determines that the application meets the requirements contained in the Arkansas Regional Reciprocal Interstate Banking Act. Applications for such approvals have been or will be filed. There can be no assurance that any necessary regulatory approval or action will be received or taken, as to the timing of such approval or action, that no action 31 will be brought challenging such approval or action, or if such a challenge is brought, the result thereof, or that any such approval or action will not be conditioned in a manner that would cause the parties to abandon the Merger. MBI and TCB are not aware of any governmental approvals or actions that may be required for consummation of the Merger other than as described above. Should any other approval or action be required, it is presently contemplated that such approval or action would be sought. There can be no assurance, however, that any such approval or action, if needed, could be obtained or would not be conditioned in a manner that would cause the parties to abandon the Merger. See "-- Effective Time," "-- Conditions of the Merger," "-- Waiver and Amendment," "-- Termination of the Merger Agreement" and "SUPERVISION AND REGULATION." Business Pending the Merger From December 2, 1994 to the Effective Time, each of MBI and TCB agreed to, and to cause each of their respective subsidiaries to, conduct its business according to the ordinary and usual course consistent with past practices and to cause each such subsidiary to use its best efforts to maintain and preserve its business organization, employees and advantageous business relationships and retain the services of its officers and key employees. Furthermore, from December 2, 1994 to the Effective Time, the Merger Agreement provides that, except as provided in the Merger Agreement, TCB has agreed not to, and to cause each of its subsidiaries not to, without the prior written consent of MBI: (i) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock (other than dividends from a subsidiary of TCB to TCB or another subsidiary of TCB), except that TCB may declare and pay (A) (x) for dividends payable in 1994, regular semi-annual cash dividends of not more than $60.00 per share on the TCB Common Stock, and (y) for dividends payable in 1995, quarterly cash dividends of not more than the greater of (1) $30.00 per share and (2) an amount per share equal to the product of the Exchange Ratio and the most recent quarterly dividend paid by MBI on the MBI Common Stock, (B) quarterly cash dividends on the TCB Series A Preferred Stock of not more than $10.00 per share and (c) quarterly cash dividends on the TCB Series B Preferred Stock of not more than $21.25 per share; provided, that 32 Seller shall not declare or pay any dividends on TCB Common Stock or TCB Preferred Stock for any period in which its stockholders will be entitled to receive any regular quarterly dividend on the shares of MBI Common Stock or MBI Preferred Stock to be issued in the Merger; (ii) except as provided for in the Merger Agreement, enter into or amend any employment, severance or similar agreement or arrangement with any director or officer or employee, or materially modify any of TCB's employee benefit plans specified in the Merger Agreement or grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except normal individual increases in compensation to employees consistent with past practice, or as required by law or contract; (iii) authorize, recommend (subject to the fiduciary duties of TCB's Board of Directors, upon written advice of counsel to TCB, which counsel is reasonably acceptable to MBI), propose or announce an intention to authorize, recommend or propose, or enter into an agreement in principle with respect to, any merger, consolidation or business combination (other than the Merger), any acquisition of a material amount of assets or securities, any disposition of a material amount of assets or securities or any release or relinquishment of any material contract rights; (iv) propose or adopt any amendments to its articles of incorporation, or other charter document or by-laws; (v) issue, sell, grant, confer or award any of its Equity Securities (as defined in the Merger Agreement) or effect any stock split or adjust, combine, reclassify or otherwise change its capitalization as it existed on December 2, 1994; (vi) purchase, redeem, retire, repurchase, or exchange, or otherwise acquire or dispose of, directly or indirectly, any of its Equity Securities, whether pursuant to the terms of such Equity Securities or otherwise; (vii) (A) without first consulting with MBI, enter into or increase any loan or credit commitment (including stand-by letters of credit) to, or invest or agree to invest in any person or entity or modify any of the material provisions or renew or otherwise extend the maturity 33 date of any existing loan or credit commitment (collectively, "Lend to") in an amount in excess of $1,500,000, or in such amount which, or when aggregated with any and all loans or credit commitments to such person or entity, would be in excess of $1,500,000; (B) without first obtaining the written consent of MBI, lend to any person or entity in an amount in excess of $3,000,000 or in an amount which, when aggregated with any and all loans or credit commitments to such person or entity, would be in excess of $3,000,000; (C) Lend to any person other than in accordance with lending policies as in effect on December 2, 1994; provided that in the case of clauses (B) and (C) TCB or any TCB subsidiary may make any such loan in the event (1) TCB has delivered to MBI or its designated representative a notice of its intention to make such loan and such information as MBI or its designated representative may reasonably require in respect thereof and (2) MBI or its designated representative shall not have reasonably objected to such loan by giving written or facsimile notice of such objection within two business days following the delivery to MBI of the notice of intention and information as aforesaid; or (D) Lend to any person or entity any of the loans or other extensions of credit to which or investments in which are on a "watch list" or similar internal report of TCB or any TCB subsidiary (except those denoted "pass" thereon), in an amount in excess of $250,000; provided, however, that nothing described in this paragraph will prohibit TCB or any TCB subsidiary from honoring any contractual obligation in existence on December 2, 1994 or, with respect to loans described in clause (A) above, making such loans after consulting with MBI; (viii) directly or indirectly (including through its officers, directors, employees or other representatives) initiate, solicit or encourage any discussions, inquiries or proposals with any third party relating to the disposition of any significant portion of the business or assets of TCB or any TCB subsidiary or the acquisition of Equity Securities of TCB or any TCB subsidiary or the merger of TCB or any TCB subsidiary with any person (other than MBI) or any similar transaction (each such transaction being referred to as an "Acquisition Transaction"), or provide any such person with information or assistance or negotiate with any such person with respect to an Acquisition Transaction, and TCB shall promptly notify MBI orally of all the relevant details relating to all inquiries, indications of interest and proposals which it may receive with respect to any Acquisition Transaction; 34 (ix) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity; (x) restructure or materially change its investment securities portfolio, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported; or (xi) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or take or omit to take any other act which would make any of the representations and warranties of TCB in the Merger Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other act. Waiver and Amendment Any term, condition or provision of the Merger Agreement may be waived in writing at any time by the party which is, or whose stockholders are, entitled to the benefits thereof. The Merger Agreement may be amended by or on behalf of the Boards of Directors of MBI and TCB at any time before or after approval of the Merger Agreement by the stockholders of TCB; provided that after any such approval by the stockholders of TCB no such modification may alter or change the amount or kind of consideration to be received by holders of TCB Common Stock in the Merger. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." Accounting Treatment It is intended that the Merger be accounted for under the pooling-of-interests method of accounting. It is a condition to the Merger that the Pooling Letter shall have been received and shall not have been withdrawn. See "--Conditions of the Merger." MBI and TCB have agreed to use their best efforts to cause the Merger to qualify for pooling-of-interest accounting treatment. Under the pooling-of-interests method of accounting, the historical basis of the assets and liabilities of MBI and TCB will be combined at the Effective Time and carried forward at their previously recorded amounts, and the stockholders' equity accounts of MBI and TCB will be combined on MBI's 35 consolidated balance sheet and no goodwill or other intangible assets will be created. Financial statements of MBI issued after the Effective Time will be restated retroactively to reflect the consolidated operations of MBI and TCB as if the Merger had taken place prior to the periods covered by such financial statements. See "SUMMARY INFORMATION -- Comparative Unaudited Per Share Data," "SUMMARY INFORMATION -- Summary Financial Data," "-- Conditions of the Merger," and "PRO FORMA FINANCIAL INFORMATION." Management and Operations After the Merger Merger Sub, a wholly owned subsidiary of MBI, will be the surviving corporation resulting from the Merger. Merger Sub will be governed by the laws of the state of Arkansas and will operate in accordance with the articles of incorporation and bylaws of Merger Sub as in effect immediately prior to the Merger, until otherwise amended or repealed after the Effective Time. MBI has agreed to propose Mr. Frank Lyon, Jr., Chairman of TCB, for election to the Board of Directors of MBI. MBI has also agreed to employ Mr. T.E. Renaud for a period of two years following the Effective Time in the following capacity: for the first such year, as Chairman and Chief Executive Officer of The Twin City Bank, and, for the second such year, as Chairman of The Twin City Bank. Employee Benefits Employee Agreements and Benefits. Following the Effective Time, TCB's employees will receive employee benefits that are substantially the same as benefits from time to time provided to MBI's similarly situated employees under its employee plans and policies. The service with TCB or TCB's subsidiaries of the employees of TCB or TCB's subsidiaries will be recognized for purposes of vesting and eligibility for participation in MBI's employee benefit plans generally made available to the other employees of MBI and MBI's subsidiaries, except such service will not be recognized for purposes of benefit accrued under any defined benefit plan of MBI. Indemnification. In the Merger Agreement, MBI agreed that the Merger will not affect or diminish any of TCB's duties and obligations of indemnification existing as of the Effective Time in favor of employees, agents, directors or officers of TCB or its subsidiaries arising by virtue of its articles of incorporation or bylaws in the form in effect on December 2, 1994, 36 or arising by law or by virtue of any contract, resolution or other agreement or document existing on December 2, 1994, and such duties and obligations will continue in full force and effect for so long as they would (but for the Merger) otherwise survive. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The following discussion summarizes the material federal income tax consequences of the Merger. The discussion does not address all aspects of federal taxation that may be relevant to particular TCB stockholders, and it may not be applicable to stockholders who are not citizens or residents of the United States, or who acquired their TCB Capital Stock pursuant to the exercise of employee stock options or otherwise as compensation. The discussion does not address the effect of any applicable state, local or foreign tax laws or any federal tax laws other than those pertaining to the income tax. Each TCB stockholder should consult his or her own tax advisor as to the particular tax consequences to him or her of the Merger. This discussion is based on the Code, regulations and rulings now in effect or proposed thereunder, current administrative rulings and practice, and judicial precedent, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to TCB stockholders discussed herein. This discussion is also based on certain assumptions regarding the factual circumstances that will exist at the Effective Time, including certain representations to be made by TCB and MBI. This discussion assumes that TCB stockholders hold their TCB Common Stock as a capital asset within the meaning of Section 1221 of the Code. MBI has received an opinion from Wachtell, Lipton, Rosen & Katz, special counsel to MBI, and TCB has received an opinion from the Rose Law Firm, special counsel to TCB, that, assuming the Merger occurs in accordance with the Merger Agreement, and conditioned on the accuracy of certain representations made by MBI and TCB, the material federal income tax consequences expected to result from the Merger, under currently applicable law, are as follows: (i) The Merger will constitute a "reorganization" for federal income tax purposes under Section 368(a) of the Code. (ii) No gain or loss will be recognized by TCB or MBI as a result of the Merger. 37 (iii) TCB stockholders will recognize no gain or loss as a result of the exchange of their TCB Capital Stock solely for shares of MBI Capital Stock pursuant to the Merger, except with respect to cash received in lieu of fractional shares, if any, as discussed below. (iv) A holder of shares of TCB Common Stock who receives cash in the Merger in lieu of a fractional share interest of MBI Common Stock will be treated as if the fractional shares were received in the exchange and then redeemed by MBI. A holder of shares of TCB Common Stock will be treated as if the stockholder sold his or her fractional share of MBI Common Stock for the amount of cash received and will therefore recognize gain (or loss) to the extent that the amount of cash received exceeds (or is less than) the tax basis of the fractional share. Such gain or loss will be capital gain or loss if the shares of TCB Common Stock were held as capital assets and will be long-term capital gain or loss if the holding period of the shares of TCB Common Stock so exchanged was more than one year. (v) The aggregate adjusted tax basis of the MBI Capital Stock received by a stockholder of TCB in the Merger, including for the purpose of (iv) above the tax basis of any fractional share interest, will be equal to the aggregate adjusted tax basis of the respective shares of TCB Capital Stock surrendered. (vi) The holding period of the shares of MBI Capital Stock received by a stockholder of TCB in the Merger, including for purposes of (iv) above the holding period of any fractional share interest, will include the holding period of the respective shares of TCB Capital Stock exchanged therefor. An opinion of counsel, unlike a private letter ruling from the Internal Revenue Service (the "Service"), has no binding effect on the Service. The Service could take a position contrary to counsel's opinion and, if the matter is litigated, a court may reach a decision contrary to the opinion. The Service is not expected to issue a ruling on the tax effects of the Merger, and no such ruling has been requested. THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH STOCKHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT 38 APPLY TO EACH STOCKHOLDER. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS. DISSENTERS' RIGHTS OF STOCKHOLDERS OF TCB Under Arkansas law, a holder of TCB Capital Stock may dissent from the Merger and receive payment of the "fair value" of such shares if the Merger is consummated by following certain procedures set forth in Section 4-27-1320 of the Arkansas Act. However, as set forth in "THE MERGER -- Support Agreements," Stockholders who own 100% of the TCB Capital Stock have each executed Support Agreements pursuant to which each Stockholder agreed to vote all shares owned by such Stockholder for approval of the Merger Agreement. Accordingly, no Stockholder will be entitled to appraisal or dissenters' rights in connection with the Merger. PRO FORMA FINANCIAL INFORMATION Comparative Unaudited Per Share Data The following table sets forth for the periods indicated selected historical data of MBI and TCB and corresponding pro forma and pro forma equivalent data giving effect to the Merger and the acquisitions of UNSL, Wedge and ABNK and the proposed acquisitions of Central Mortgage and Plains Spirit. MBI acquired ABNK on April 30, 1992, which acquisition was accounted for under the purchase method of accounting. Accordingly, the historical results of operations of MBI include the results of operations of ABNK from May 1, 1992 forward. The following pro forma combined consolidated income statements for the years ended December 31, 1992 and 1991 include the results of operations of ABNK from January 1, 1991 through the date of acquisition. MBI acquired UNSL and Wedge on January 3, 1995, which acquisitions were accounted for as poolings of interests. The following data set forth the results of operations of MBI combined with the results of operations of UNSL, Wedge, Plains Spirit and Central Mortgage as if such acquisitions and the Merger had occurred as of the first day of the period presented. 39 The data presented are based upon, and should be read in conjunction with, the consolidated financial statements and related notes of MBI and TCB included in documents incorporated herein by reference or included in this Information Statement/Prospectus, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing herein. These data are not necessarily indicative of the results of the future operations of the combined organization or the actual results that would have occurred if the Merger, the acquisitions of UNSL and Wedge or the proposed acquisitions of Plains Spirit or Central Mortgage had been consummated prior to the periods indicated. The pro forma combined consolidated amounts included in the table below are based upon the pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED MERGER --Accounting Treatment."
MBI/All MBI/TCB MBI/TCB Entities MBI/ALL Entities MBI TCB Pro Forma Pro Forma Pro Forma Pro Forma Reported Reported Combined(1) Equivalent(2) Combined(3) Equivalent(2) -------- -------- ---------- ------------- ----------- ------------- Book Value per Common Share: September 30, 1994 ..................... $ 24.12 $ 36,255.39 $ 23.55 $ 52,474.81 $ 23.44 $ 52,229.71 December 31, 1993 ...................... 22.40 35,765.69 22.02 49,065.62 21.92 48,842.80 Cash Dividends Declared per Common Share: Nine months ended September 30, 1994 ................... $ .84 $ 120.00 $ .84 $ 1,871.71 $ .84 $ 1,871.71 Year ended December 31, 1993 ........... .99 120.00 .99 2,205.95 .99 2,205.95 Year ended December 31, 1992 ........... .93 120.00 .93 2,072.25 .93 2,072.25 Year ended December 31, 1991 ........... .93 120.00 .93 2,072.25 .93 2,072.25 Earnings per Common Share: Nine months ended September 30, 1994 ............................. $ 2.79 $ 5,493.64 $ 2.71 $ 6,038.50 $ 2.73 $ 6,083.07 Year ended December 31, 1993 ........... 2.80 7,125.18 2.85 6,350.46 2.89 6,439.58 Year ended December 31, 1992 ........... 2.36 6,285.02 2.41 5,370.03 2.45 5,459.16 Year ended December 31, 1991 ........... 2.37 4,357.01 2.18 4,857.54 2.20 4,902.11 Market Price per Common Share: December 2, 1994(4) .................... $ 30.25 -- -- -- -- -- February 10, 1995(5) ................... 36.50 -- -- -- -- --
40 - ------------ (1) Includes the effect of pro forma adjustments for UNSL, Wedge, ABNK and TCB as appropriate (see "PRO FORMA FINANCIAL INFORMATION"). (2) Based upon the pro forma combined per share amounts multiplied times 2,228.2299, the Exchange Ratio applicable to one share of TCB Common Stock. See "PRO FORMA FINANCIAL INFORMATION." (3) Includes the effect of pro forma adjustments for UNSL, Wedge, ABNK, TCB, Central Mortgage, and Plains Spirit as appropriate (see "PRO FORMA FINANCIAL INFORMATION"). (4) The market value of MBI Common Stock was determined as of the last trading day preceding the public announcement of the Merger based on the last sales price as reported on the NYSE. (5) There have been no market trades of TCB Common Stock during the three-year period ended December 31, 1994. 41 Pro Forma Combined Consolidated Financial Statements (Unaudited) The following unaudited pro forma combined consolidated financial statements give effect to the Merger and the acquisitions of UNSL, Wedge and ABNK and the proposed acquisitions of Central Mortgage and Plains Spirit as if each had been consummated at the beginning of the periods presented for income statement information and as of the date presented for balance sheet information. MBI acquired ABNK on April 30, 1992, which acquisition was accounted for under the purchase method of accounting. Accordingly, the historical results of operations of MBI include the results of operations of ABNK from May 1, 1992 forward. The following pro forma combined consolidated income statements for the years ended December 31, 1992 and 1991 include the results of operations of ABNK from January 1, 1991 through the date of acquisition. MBI acquired UNSL and Wedge on January 4, 1995, which acquisitions were accounted for as poolings of interests. The following data set forth the results of operations of MBI combined with the results of operations of UNSL, Wedge, Plains Spirit and Control Mortgage as if such acquisitions and the Merger had occurred as of the first day of the period presented. The data presented are based upon, and should be read in conjunction with, the consolidated financial statements and related notes of MBI and TCB included in documents incorporated herein by reference or included in this Information Statement/Prospectus, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing herein. Pro forma adjustments made to arrive at the pro forma combined consolidated amounts are, as indicated, based on the pooling-of-interests method of accounting. The pro forma combined consolidated financial data is intended for informational purposes and is not necessarily indicative of the future financial position or future results of operations of the combined company or of the financial position or the results of operations of the combined company that would have actually occurred had the Merger, the acquisitions of UNSL and Wedge or the proposed acquisitions of Central Mortgage and Plains Spirit been in effect as of the date or for the periods presented. The following information should be read in conjunction with the consolidated financial statements of MBI and TCB and the related notes thereto, included herein or in documents incorporated herein by reference. See 42 "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "INFORMATION CONCERNING TCB." 43 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET September 30, 1994 (Thousands) (Unaudited)
MBI UNSL, Wedge UNSL, Wedge Pro Forma MBI UNSL Wedge Adjustments(1) Combined TCB ----------- ---------- ----------- -------------- ------------- ------------ ASSETS Cash and due from banks $ 667,577 $ 2,438 $ 7,495 $ $ 677,510 $ 47,174 Due from banks - interest bearing 231 20,577 157 20,965 300 Federal funds sole and repurchase agreements 225,472 0 0 225,472 0 Investments in debt and equity securities Trading 17,290 0 0 17,290 0 Available-for-sale 271,709 0 54,771 326,480 334,523 Held-to-maturity 2,859,335 14,814 24,029 2,898,178 269,966 ------------ ---------- ----------- ----------- ------------- ----------- Total 3,148,334 14,814 78,800 0 3,241,948 604,489 Loans and leases 7,873,054 443,799 113,154 8,430,007 659,050 Reserve for possible loan losses (171,691) (3,665) (1,208) (176,564) (8,203) ------------ ---------- ----------- ----------- ------------- ----------- Net loans and Leases 7,701,363 440,134 111,946 0 8,253,443 650,847 Other assets 494,695 10,453 7,057 39,225 (2) 512,205 55,438 (39,225 (3) 18,607 (4) (18,607)(5) ------------ ---------- ----------- ----------- ------------- ----------- Total Assets $ 12,237,672 $ 488,416 $ 205,455 $ 0 $ 12,931,543 $ 1,358,248 ============ ========== =========== =========== ============= =========== LIABILITIES Deposits Non-interest bearing $ 1,456,287 $ 11,113 $ 21,650 $ $ 1,489,050 $ 126,903 Interest bearing 7,397,091 367,117 131,832 7,896,040 1,022,462 Foreign 92,704 0 0 92,704 0 ------------ --------- ---------- --------- ------------ ----------- Total Deposits 8,946,082 378,230 153,482 0 9,477,794 1,149,365 Federal funds purchased and repurchase agreements 1,455,765 0 17,180 1,472,945 53,005 Other borrowings 626,809 65,000 14,715 706,524 57,520 Other liabilities 166,026 5,961 1,471 173,458 8,918 ------------ --------- --------- --------- ------------ ----------- Total Liabilities 11,194,682 449,191 186,848 0 11,830,721 1,268,808 SHAREHOLDERS' EQUITY Preferred stock -- -- 148 Common Stock 216,175 1,744 1,443 7,892 (2) 228,917 107 (1,744)(3) 4,850 (4) (1,443)(5) Capital surplus 168,974 7,179 5,057 (2,582)(2) 168,042 21,186 (7,179)(3) 1,650 (4) (5,057)(5) Retained earnings 657,841 33,915 12,107 33,915 (2) 703,863 67,999 (33,915)(3) 12,107 (4) (12,107)(5) Treasury stock 0 (3,613) 3,613 (3) 0 --------- --------- -------- ------------ ------------ ----------- Total Shareholders 1,042,990 39,225 18,607 0 1,100,822 89,440 --------- --------- -------- ------------ ------------ ----------- Total Liabilities and Shareholders' Equity $12,237,672 $ 488,416 $ 205,455 $ 0 $ 12,931,543 $ 1,358,248 =========== ========= ======== ============ ============ ===========
See notes to pro forma combined consolidated financial statements. 44 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET September 30, 1994 (Thousands) (Unaudited)
MBI, UNSL, Wedge, TCB Central All Entities Pro Forma Mortgage, Pro Forma TCB Combined Central Plains Plains Spirit Combined Adjustments(1) Consolidated Mortgage Spirit Adjustments(1,8) Consolidated ----------- ------------ -------- ------ ----------- ------------ ASSETS Cash and due from banks $ $ 724,684 $ 28,502 $ 2,314 (19,725) (9) $ 704,150 (31,625)(12) Due from banks - interest bearing 21,265 200 0 21,465 Federal funds sole and repurchase agreements 225,472 2,400 1,400 229,272 Investments in debt and equity securities Trading 17,290 0 0 17,290 Available-for-sale 661,003 38,028 97,516 796,547 Held-to-maturity 3,168,144 149,163 80,345 3,397,652 --------- ---------- -------- ------- -------- --------- Total 0 3,846,437 187,191 177,861 0 4,211,489 Loans and leases 9,089,057 386,352 236,577 9,711,986 Reserve for possible loan losses (184,767) (6,396) (1,903) (193,066) --------- ---------- ------- ------- -------- --------- Net loans and Leases 0 8,904,290 379,956 234,674 0 9,518,920 Other assets 89,440 (6) 567,643 28,227 12,217 53,177 (9) 618,910 (89,440)(7) 10,823 (10) (53,177)(11) 52,504 (13) (52,504)(14) -------- ---------- --------- ------- ------ --------- Total Assets $ 0 $14,289,791 $626,476 $428,466 ($40,527) $15,304,206 ========== =========== ======== ======= ========= =========== LIABILITIES Deposits Non-interest bearing $ $ 1,615,953 $ 80,347 $ 4,326 $ $ 1,700,626 Interest bearing 8,918,502 457,276 249,300 9,625,078 Foreign 92,704 0 0 92,704 -------- ----------- --------- -------- ---------- ----------- Total Deposits 0 10,627,159 537,623 253,626 0 11,418,408 Federal funds purchased and repurchase agreements 1,525,950 23,574 0 1,549,524 Other borrowings 764,044 4,500 112,750 881,294 Other liabilities 182,376 8,275 8,913 199,564 --------- --------- -------- -------- --------- ----------- Total Liabilities 0 13,099,529 573,972 375,289 0 14,048,790 SHAREHOLDERS' EQUITY (Cont'd) Preferred stock 12,153 (6) 12,513 430 (430) (14) 12,153 (148)(7) Common Stock 23,750 (6) 252,667 3,735 20 7,000 (9) 272,357 (107)(7) (20) (11) 12,690 (13) (3,735) (14) Capital surplus (14,462)(6) 153,580 24,376 22,698 37,275 (9) 206,530 (21,186)(7) (22,698) (11) 15,675 (13) (24,376) (14) Retained earnings 67,999 (6) 771,862 24,139 30,459 (30,459) (11) 796,001 (67,999)(7) 24,139 (13) (24,139) (14) Treasury stock 0 (176) (31,625) (12) (31,625) 176 (14) -------- --------- ------ ------- ------- --------- Total Shareholders' Equity 0 1,190,262 52,504 53,177 (40,527) 1,255,416 -------- --------- ------ ------ ------- --------- Total Liabilities and Shareholders' Equity $ 0 $14,289,791 $626,476 $428,466 ($40,527) $15,304,206 ======== =========== ======== ======== ======= ===========
See notes to pro forma combined consolidated financial statements. 45 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Nine Months Ended September 30, 1994 (Thousands except per share data) (Unaudited)
MBI UNSL,Wedge Pro Forma Combined MBI UNSL Wedge Consolidated TCB ----------- ----------- ---------- ---------- -------- Interest Income $ 613,521 $ 21,684 $ 10,501 $ 645,706 $ 63,502 Interest Expense 231,785 11,564 4,142 247,491 28,024 ----------- ----------- ---------- ---------- -------- Net Interest Income 381,736 10,120 6,359 398,215 35,478 Provision for Possible Loan Losses 24,909 90 115 25,114 456 ----------- ----------- ---------- ---------- -------- Net Interest Income after Provision for Possible Loan Losses 356,827 10,030 6,244 373,101 35,022 Other Income Trust 45,844 0 337 46,181 684 Service charges 43,810 706 720 45,236 4,476 Credit card fees 17,918 0 0 17,918 0 Securities gains 380 20 171 571 1,348 Other 34,837 1,585 737 37,159 3,210 ----------- ----------- ---------- ---------- -------- Total Other Income 142,789 2,311 1,965 147,065 9,718 Other Expense Salaries and employee benefits 165,832 3,759 3,176 172,767 13,303 Net occupancy and equipment 44,330 824 919 46,073 4,292 Other 99,841 2,968 1,801 104,610 10,900 ----------- ----------- ---------- ---------- -------- Total Other Expense 310,003 7,551 5,896 323,450 28,495 ----------- ----------- ---------- ---------- -------- Income Before Income Taxes 189,613 4,790 2,313 196,716 16,245 Income Taxes 69,512 1,727 635 71,874 4,534 ----------- ----------- ---------- ---------- -------- Net Income $ 120,101 $ 3,063 $ 1,678 $ 124,842 $ 11,711 =========== =========== ========== ========== ======== Per Share Data Average Common Shares Outstanding 43,034,158 45,582,201 Net Income $ 2.79 $ 2.74
46 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Nine Months Ended September 30, 1994 (Thousands except per share data) (Unaudited)
MBI, UNSL, Wedge, TCB All Entities Pro Forma Pro Forma Combined Central Plains Combined Consolidated Mortgage Spirit Consolidated ---------- ----------- ------- --------- Interest Income $ 709,208 $ 32,483 $17,519 $ 759,210 Interest Expense 275,515 13,570 8,410 297,495 ---------- ----------- ------- --------- Net Interest Income 433,693 18,913 9,109 461,715 Provision for Possible Loan Losses 25,570 919 140 26,629 ---------- ----------- ------- --------- Net Interest Income after Provision for Possible Loan Losses 408,123 17,994 8,969 435,086 Other Income Trust 46,865 0 0 46,865 Service charges 49,712 2,318 1,749 53,779 Credit card fees 17,918 0 0 17,918 Securities gains 1,919 450 718 3,087 Other 40,369 3,006 288 43,663 ---------- ----------- ------- --------- Total Other Income 156,783 5,774 2,755 165,312 Other Expense Salaries and employee benefits 186,070 8,185 3,614 197,869 Net occupancy and equipment 50,365 2,029 1,009 53,403 Other 115,510 5,899 1,927 123,336 ---------- ----------- ------- --------- Total Other Expense 351,945 16,113 6,550 374,608 ---------- ----------- ------- --------- Income Before Income Taxes 212,961 7,655 5,174 225,790 Income Taxes 76,408 2,266 1,795 80,469 ---------- ----------- ------- --------- Net Income $ 136,553 $ 5,389 $ 3,379 $ 145,321 ========== =========== ======= ========= Per Share Data Average Common Shares Outstanding 50,332,201 53,323,415 Net Income $ 2.71 $ 2.73
47 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Nine Months Ended September 30, 1993 (Thousands except per share data) (Unaudited)
MBI UNSL, Wedge Pro Forma Combined MBI UNSL Wedge Consolidated TCB ---------- ------------ ------- -------- ------- Interest Income $ 626,939 $ 20,946 $11,214 $659,099 $58,401 Interest Expense 251,542 10,530 4,229 266,301 25,025 ---------- ------------ ------- -------- ------- Net Interest Income 375,397 10,416 6,985 392,798 33,376 Provision for Possible Loan Losses 41,440 290 202 41,932 1,025 ---------- ------------ ------- -------- ------- Net Interest Income after Provision for Possible Loan Losses 333,957 10,126 6,783 350,866 32,351 Other Income Trust 45,723 0 306 46,029 565 Service charges 43,367 655 833 44,855 3,990 Credit card fees 17,550 0 0 17,550 0 Securities gains 3,589 0 187 3,776 1,380 Other 38,706 1,570 1,508 41,784 2,386 ---------- ------------ ------- -------- ------- Total Other Income 148,935 2,225 2,834 153,994 8,321 Other Expense Salaries and employee benefits 159,807 3,686 3,148 166,641 11,360 Net occupancy and equipment 45,613 754 821 47,188 3,540 Other 116,013 2,596 1,932 120,541 10,190 ---------- ------------ ------- -------- ------- Total Other Expense 321,433 7,036 5,901 334,370 25,090 ---------- ------------ ------- -------- ------- Income Before Income Taxes 161,459 5,315 3,716 170,490 15,582 Income Taxes 58,986 1,958 967 61,911 4,137 ---------- ------------ ------- -------- ------- Net Income Before Change in Accounting Principle $ 102,473 $ 3,357 $ 2,749 $108,579 $11,445 ========== ============ ======= ======== ======= Per Share Data Average Common Shares Outstanding 42,338,859 44,901,716 Net Income Before Change in Accounting Principle $ 2.42 $ 2.42
48 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Nine Months Ended September 30, 1993 (Thousands except per share data) (Unaudited)
MBI, UNSL, Wedge, TCB All Entities Pro Forma Pro Forma Combined Central Plains Combined Consolidated Mortgage Spirit Consolidated ------------- ----------- ------- --------- Interest Income $ 717,500 $ 23,739 $18,261 $ 759,500 Interest Expense 291,326 9,951 8,840 310,117 ------------- ----------- ------- --------- Net Interest Income 426,174 13,788 9,421 449,383 Provision for Possible Loan Losses 42,957 668 674 44,299 ------------- ----------- ------- --------- Net Interest Income after Provision for Possible Loan Losses 383,217 13,120 8,747 405,084 Other Income Trust 46,594 0 0 46,594 Service charges 48,845 1,485 1,349 51,679 Credit card fees 17,550 0 0 17,550 Securities gains 5,156 0 989 6,145 Other 44,170 2,503 310 46,983 ------------- ----------- ------- --------- Total Other Income 162,315 3,988 2,648 168,951 Other Expense Salaries and employee benefits 178,001 6,442 3,369 187,812 Net occupancy and equipment 50,728 1,354 877 52,959 Other 130,731 4,335 1,935 137,001 ------------- ----------- ------- --------- Total Other Expense 359,460 12,131 6,181 377,772 ------------- ----------- ------- --------- Income Before Income Taxes 186,072 4,977 5,214 196,263 Income Taxes 66,048 1,364 1,928 69,340 ------------- ----------- ------- --------- Net Income Before Change in Accounting Principle $ 120,024 $ 3,613 $ 3,286 $ 126,923 ============= =========== ======= ========= Per Share Data Average Common Shares Outstanding 49,651,716 52,188,321 Net Income Before Change in Accounting Principle $ 2.42 $ 2.43
49 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Year Ended December 31, 1993 (Thousands except per share data) (Unaudited)
MBI UNSL, Wedge Pro Forma Combined MBI UNSL Wedge Consolidated TCB ----------- ------------ ------- --------- ------- Interest Income $ 829,930 $ 27,834 $15,258 $ 873,022 $79,266 Interest Expense 328,734 14,071 5,505 348,310 33,912 ----------- ------------ ------- --------- ------- Net Interest Income 501,196 13,763 9,753 524,712 45,354 Provision for Possible Loan Losses 61,013 320 240 61,573 1,224 ----------- ------------ ------- --------- ------- Net Interest Income after Provision for Possible Loan Losses 440,183 13,443 9,513 463,139 44,130 Other Income Trust 61,138 0 409 61,547 793 Service charges 58,511 908 1,300 60,719 5,471 Credit card fees 24,060 0 0 24,060 0 Securities gains 3,742 0 195 3,937 1,379 Other 51,707 2,261 948 54,916 3,892 ----------- ------------ ------- --------- ------- Total Other Income 199,158 3,169 2,852 205,179 11,535 Other Expense Salaries and employee benefits 215,333 4,995 5,286 225,614 15,730 Net occupancy and equipment 62,638 1,037 822 64,497 5,075 Other 166,938 3,714 1,810 172,462 14,233 ----------- ------------ ------- --------- ------- Total Other Expense 444,909 9,746 7,918 462,573 35,038 ----------- ------------ ------- --------- ------- Income Before Income Taxes 194,432 6,866 4,447 205,745 20,627 Income Taxes 75,568 2,549 964 79,081 5,438 ----------- ------------ ------- --------- ------- Net Income Before Change in Accounting Principle $ 118,864 $ 4,317 $ 3,483 $ 126,664 $15,189 =========== ============ ======= ========= ======= Per Share Data Average Common Shares Outstanding 42,439,298 44,997,436 Net Income Before Change in Accounting Principle $ 2.80 $ 2.81
50 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Year Ended December 31, 1993 (Thousands except per share data) (Unaudited)
MBI, UNSL, Wedge, TCB All Entities Pro Forma Pro Forma Combined Central Plains Combined Consolidated Mortgage Spirit Consolidated ------------ ------------ -------------- ------------ Interest Income $ 952,288 $ 34,452 $ 23,774 $ 1,010,514 Interest Expense 382,222 14,194 11,569 407,985 ----------- ----------- ----------- ----------- Net Interest Income 570,066 20,258 12,205 602,529 Provision for Possible Loan Losses 62,797 956 706 64,459 ----------- ----------- ----------- ----------- Net Interest Income after Provision for Possible Loan Losses 507,269 19,302 11,499 538,070 Other Income Trust 62,340 0 0 62,340 Service charges 66,190 2,254 1,921 70,365 Credit card fees 24,060 0 0 24,060 Securities gains 5,316 0 1,477 6,793 Other 58,808 3,615 360 62,783 ----------- ----------- ----------- ----------- Total Other Income 216,714 5,869 3,758 226,341 Other Expense Salaries and employee benefits 241,344 9,161 4,656 255,161 Net occupancy and equipment 69,572 2,162 1,248 72,982 Other 186,695 6,805 2,626 196,126 ----------- ----------- ----------- ----------- Total Other Expense 497,611 18,128 8,530 524,269 ----------- ----------- ----------- ----------- Income Before Income Taxes 226,372 7,043 6,727 240,142 Income Taxes 84,519 1,913 2,459 88,891 ----------- ----------- ----------- ----------- Net Income Before Change in Accounting Principle $ 141,853 $ 5,130 $ 4,268 $ 151,251 =========== =========== =========== =========== Per Share Data Average Common Shares Outstanding 49,747,436 52,398,436 Net Income Before Change in Accounting Principle $ 2.85 $ 2.89
51 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Year Ended December 31, 1992 (Thousands except per share data) (Unaudited)
MBI,UNSL, Wedge, ABNK ABNK Pro Forma 1/1/92- ABNK Combined MBI UNSL Wedge 4/30/92 (15) Adjustments(15) Condolidated ----------- ----------- ----------- ----------- ----------- ----------- Interest Income $ 873,447 $ 32,332 $ 15,931 $ 30,729 ($ 1,692)(16) $ 950,658 (89)(17) Interest Expense 417,358 18,517 6,875 16,549 459,299 ----------- ----------- ----------- ----------- ----------- ----------- Net Interest Income 456,089 13,815 9,056 14,180 (1,781) 491,359 Provision for Possible Loan Losses 74,579 296 191 1,913 76,979 ----------- ----------- ----------- ----------- ----------- ----------- Net Interest Income after Provision for Possible Loan Losses 381,510 13,519 8,865 12,267 (1,781) 414,380 Other Income Trust 57,501 0 444 613 58,558 Service charges 55,399 908 1,228 2,143 59,678 Credit card fees 21,487 0 0 87 21,574 Securities gains 5,518 0 439 0 5,957 Other 44,039 2,221 574 1,266 48,100 ----------- ----------- ----------- ----------- ----------- ----------- Total Other Income 183,944 3,129 2,685 4,109 0 193,867 Other Expense Salaries and employee benefits 192,015 4,521 5,123 7,199 208,858 Net occupancy and equipment 55,588 944 771 2,027 (31)(18) 59,299 Other 170,465 3,415 2,218 5,339 (93)(19) 181,344 ----------- ----------- ----------- ----------- ----------- ----------- Total Other Expense 418,068 8,880 8,112 14,565 (124) 449,501 ----------- ----------- ----------- ----------- ----------- ----------- Income Before Income Taxes 147,386 7,768 3,438 1,811 (1,657) 158,746 Income Taxes 52,346 2,540 1,025 513 (595)(20) 55,829 ----------- ----------- ----------- ----------- ----------- ----------- Net Income $ 95,040 $ 5,228 $ 2,413 $ 1,298 ($ 1,062) 102,917 =========== =========== =========== =========== =========== =========== Per Share Data Average Common Shares Outstanding 39,492,237 42,774,654 Net Income $ 2.36 $ 2.36
52 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Year Ended December 31, 1992 (Thousands except per share data) (Unaudited)
MBI, UNSL, Wedge, TCB All Entities Pro Forma Pro Forma Combined Central Plains Combined TCB Consolidated Mortgage Spirit Consolidated ---------- ---------- ---------- ---------- ------------ Interest Income $ 77,188 $ 1,027,846 $ 28,577 $ 26,962 $ 1,083,385 Interest Expense 35,761 495,060 13,616 16,385 525,061 ----------- ----------- ----------- ----------- ----------- Net Interest Income 41,427 532,786 14,961 10,577 558,324 Provision for Possible Loan Losses 2,086 79,065 913 583 80,561 ----------- ----------- ----------- ----------- ----------- Net Interest Income after Provision for Possible Loan Losses 39,341 453,721 14,048 9,994 477,763 Other Income Trust 686 59,244 0 0 59,244 Service charges 4,804 64,482 1,559 1,280 67,321 Credit card fees 0 21,574 0 0 21,574 Securities gains 2,634 8,591 0 477 9,068 Other 2,114 50,214 3,233 139 53,586 ----------- ----------- ----------- ----------- ----------- Total Other Income 10,238 204,105 4,792 1,896 210,793 Other Expense Salaries and employee benefits 13,596 222,454 7,617 3,880 233,951 Net occupancy and equipment 4,308 63,607 1,630 927 66,164 Other 13,336 194,680 4,607 2,604 201,891 ----------- ----------- ----------- ----------- ----------- Total Other Expense 31,240 480,741 13,854 7,411 502,006 ----------- ----------- ----------- ----------- ----------- Income Before Income Taxes 18,339 177,085 4,986 4,479 186,550 Income Taxes 4,941 60,770 1,245 1,718 63,733 ----------- ----------- ----------- ----------- ----------- Net Income $ 13,398 $ 116,315 $ 3,741 $ 2,761 $ 122,817 =========== =========== =========== =========== =========== Per Share Data Average Common Shares Outstanding 47,524,654 49,405,654 Net Income $ 2.41 $ 2.45
53 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Year Ended December 31, 1991 (Thousands except per share data) (Unaudited)
MBI,UNSL, Wedge, ABNK ABNK Pro Forma Adjust- Combined MBI UNSL Wedge ABNK (15) ments(15) Condolidated -------- -------- -------- ---------- ------- ----------- Interest Income $879,471 $ 39,191 $ 16,461 $103,630 ($ 5,075)(16) $1,033,412 (266)(17) Interest Expense 506,916 26,417 8,882 63,042 605,257 -------- -------- -------- ---------- -------- -------- Net Interest Income after Provision 372,555 12,774 7,579 40,588 (5,341) 428,155 for Possible Loan Loses 58,076 1,263 1,132 2,477 62,948 -------- -------- -------- ---------- ------- -------- Net Interest Income after Provision for Possible Loan Loses 314,479 11,511 6,447 38,111 (5,341) 365,207 Other Income Trust 49,400 0 442 1,860 51,702 Service charges 47,504 952 1,051 6,008 55,515 Credit card fees 20,636 0 0 0 20,636 Securities gains 4,334 244 493 4 5,075 Other 33,822 1,705 393 3,389 39,309 -------- -------- -------- ---------- -------- -------- Total Other Income 155,696 2,901 2,379 11,261 0 172,237 Other Expense Salaries and employee benefits 172,155 3,895 3,846 21,245 201,141 Net occupancy and equipment 50,098 973 754 6,102 (92)(18) 57,835 Other 161,095 5,263 2,347 16,150 (280)(19) 184,575 -------- -------- -------- ---------- -------- -------- Total Other Expense 383,348 10,131 6,947 43,497 (372) 443,551 -------- -------- -------- ---------- -------- -------- Income Before Income Taxes 86,827 4,281 1,879 5,875 (4,969) 93,893 Income Taxes 18,673 1,767 679 1,466 (1,785)(20) 20,800 -------- -------- -------- ---------- -------- -------- Net Income $ 68,154 $ 2,514 $ 1,200 $ 4,409 ($ 3,184) $ 73,093 ======== ======== ======== ========== ======== ======== Per Share Data Average Common Shares Outstanding 31,790,914 36,436,653 Net Income $2.37 $ 2.21
54 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT For the Year Ended December 31, 1991 (Thousands except per share data) (Unaudited)
MBI, UNSL, Wedge, TCB All Entities Pro Forma Pro Forma Combined Central Plains Combined TCB Consolidated Mortgage Spirit Consolidated ----------- ----------- ----------- ----------- ----------- Interest Income $ 74,320 $ 1,107,732 $ 25,706 $ 28,837 $ 1,162,275 Interest Expense 42,400 647,657 13,260 20,405 681,322 ----------- ----------- ----------- ----------- ----------- Net Interest Income 31,920 460,075 12,446 8,432 480,953 Provision for Possible Loan Losses 2,151 65,099 870 71 66,040 ----------- ----------- ----------- ----------- ----------- Net Interest Income after Provision for Possible Loan Losses 29,769 394,976 11,576 8,361 414,913 Other Income Trust 604 52,306 0 0 52,306 Service charges 4,469 59,984 1,458 500 61,942 Credit card fees 0 20,636 0 0 20,636 Securities gains 567 5,642 0 54 5,696 Other 2,283 41,592 2,794 120 44,506 ----------- ----------- ----------- ----------- ----------- Total Other Income 7,923 180,160 4,252 674 185,086 Other Expense Salaries and employee benefits 11,050 212,191 6,494 3,722 222,407 Net occupancy and equipment 3,748 61,583 1,549 708 63,840 Other 10,942 195,517 3,896 1,878 201,291 ----------- ----------- ----------- ----------- ----------- Total Other Expense 25,740 469,291 11,939 6,308 487,538 ----------- ----------- ----------- ----------- ----------- Income Before Income Taxes 11,953 105,846 3,889 2,727 112,462 Income Taxes 2,664 23,464 924 973 25,361 ----------- ----------- ----------- ----------- ----------- Net Income $ 9,288 $ 82,381 $ 2,965 $ 1,754 $ 87,100 =========== =========== =========== =========== =========== Per Share Data Average Common Shares Outstanding 41,186,653 42,898,653 Net Income $ 2.18 $ 2.20
55 MERCANTILE BANCORPORATION INC. Notes to Pro Forma Combined Consolidated Financial Statements (Unaudited) (1) The acquisitions of TCB, UNSL, Wedge and Central Mortgage will be accounted for as poolings-of-interests. (2) Acquisition of UNSL with 1,578,445 shares of MBI Common Stock, based on the exchange ratio of 1.0604 of a share of MBI Common Stock per share of UNSL Common Stock. The acquisition of UNSL closed on January 3, 1995. (3) Elimination of MBI's investment in UNSL. (4) Acquisition of Wedge with 970,000 shares of MBI Common Stock. The acquisition of Wedge closed on January 3, 1995. (5) Elimination of MBI's investment in Wedge. (6) Acquisition of TCB with 4,750,000 shares of MBI Common Stock. In addition, MBI will assume, through an exchange, the outstanding, non-convertible preferred stock of TCB, amounting to $12,153,000. (7) Elimination of MBI's investment in TCB. (8) The proposed Merger with Plains Spirit will be accounted for as a purchase transaction. Purchase accounting adjustments are considered immaterial to the pro forma combined entity. (9) Purchase entry with consideration of $64 million consisting of cash and 1,400,000 shares of MBI Common Stock at $31.625 per share, which was the closing price on December 22, 1994, the last day preceding the public announcement of the Merger. (10) The pro forma excess of cost over fair value of net assets acquired ("goodwill") is $10,823,000 as of September 30, 1994. This amount may vary to the extent the market value of MBI stock varies from the assumed price in (9) above. (11) Elimination of MBI's investment in Plains Spirit. (12) MBI will repurchase 1,000,000 shares of its own common stock in the open market. Assumed price of $31.625 per share. (13) Acquisition of Central Mortgage with 2,537,952 shares of MBI Common Stock, based on exchange ratio of .5970 of a share of MBI Common Stock per share of Central Mortgage Common Stock. As of December 16, 1994, all issued and outstanding shares of Central Mortgage Preferred Stock had been converted to a total of 549,328 shares of Central Mortgage Common Stock. (14) Elimination of MBI's investment in Central Mortgage. (15) The acquisition of ANBK by MBI, on April 30, 1992, was accounted for as a purchase transaction. The MBI historical financial data includes ABNK from the date of acquisition. The results of operations of ABNK were included in the MBI pro forma combined income statement from January 1, 1991. (16) Amortization of purchase price adjustment of $7,690,000 on investment securities portfolio. (17) Interest income, at an estimated short-term interest rate of 3%, lost on cash of $8,851,000 paid to ABNK's shareholders. (18) Reduced depreciation and amortization of bank premises and equipment as a result of the valuation adjustment of $1,102,000. (19) Goodwill of $2,285,000 amortized under the straight line method over a period of 15 years, net of the elimination of ABNKs annual goodwill amortization of $432,000. (20) Tax effect of pro forma adjustments. 56 INFORMATION CONCERNING TCB Business of TCB TCB, an Arkansas corporation and registered bank-holding company under the BHCA, is headquartered in North Little Rock, Arkansas. Its lead bank, The Twin City Bank, was acquired by Lyon family interests in 1968. In 1985, the Lyon family formed TCB to facilitate the purchase of the First National Bank of Cleburne County. As of September 30, 1994, TCB owned 99% of The Twin City Bank and over 97% of each of its five other bank subsidiaries. Subsidiaries The Twin City Bank. The Twin City Bank is an Arkansas state chartered bank. It has 22 branch locations in six cities in Arkansas. As of September 30, 1994, The Twin City Bank had total deposits of approximately $825 million, total loans of approximately $473 million and a leverage ratio of 7.31%. The Twin City Bank is comprised of three operating units (business, consumer and professional), each with its own President, Advisory Board of Directors, operating strategy and marketing focus. The Twin City Bank owns Twin City Mortgage Company, an inactive corporation, and The Twin City Capital Corporation, a fully disclosed, clearing brokerage business. The business bank unit of The Twin City Bank, which provides commercial customers with loan and deposit products and cash management services, comprised, as of September 30, 1994, 79% of loans and 20% of deposits of The Twin City Bank. The consumer bank unit, which provides retail customers with loan and deposit products and provides administration services for The Twin City Bank's 20 branches, comprised, as of September 30, 1994, 14% of loans and 61% of deposits of The Twin City Bank. The professional bank unit, which provides investment management, trust and lending services to professionals and is responsible for administering public funds, comprised, as of September 30, 1994, 7% of loans and 19% of deposits of The Twin City Bank. First National Bank of Crawford County. The First National Bank of Crawford County has four branch locations in two cities in Crawford County. As of September 30, 1994, the bank had total deposits of approximately $116 million, total loans of approximately $80 million and a leverage ratio of 7.60%. 57 First National Bank of Conway County. The First National Bank of Conway County has four branch locations in two cities in Conway County. As of September 30, 1994, the bank had total deposits of approximately $73 million, total loans of approximately $37 million and a leverage ratio of 8.26%. First National Bank of Cleburne County. The First National Bank of Cleburne County has three branches in three cities in Cleburne County. As of September 30, 1994, the bank had total deposits of approximately $60 million, total loans of approximately $30 million and a leverage ratio of 8.02%. First Ozark National Bank. The First Ozark National Bank has six branch locations in six cities in the counties of Marion, Izard and Baxter. As of September 30, 1994, the bank had total deposits of approximately $42 million, total loans of approximately $27 million and a leverage ratio of 7.77%. TCB The Community Bank of Arkansas, N.A. TCB The Community Bank of Arkansas, N.A. has one branch in Independence County. As of September 30, 1994, the bank had total deposits of approximately $38 million, total loans of approximately $11 million and a leverage ratio of 6.99%. Management Frank Lyon, Jr. (age 53) is the Chairman of the Board of TCB, a position he has held since 1992. Two trusts of which Mr. Lyon is the sole trustee own 95.9% of the common stock and 100% of the preferred stock of TCB. Mr. Lyon's prior business experience includes President of the Frank Lyon Company and Chairman of the Board and Chief Executive Officer of the Coca-Cola Bottling Company of Arkansas. Mr. Lyon holds a Bachelor's degree in Business Administration from the University of Arkansas and a Masters in Business Administration from Harvard University. Terence E. Renaud (age 65) is the President and CEO of TCB, and Chairman and CEO of The Twin City Bank. Mr. Renaud owns 4.1% of TCB's common stock. Mr. Renaud has been employed as President of The Twin City Bank since 1968. Mr. Renaud holds a Masters of Business Administration from Indiana Northern University as well as degrees from the Harvard University Senior Bank Officer's School, the University of Colorado's Bank Marketing School, the Harvard Business School Advanced Management Program, and the Commercial Bank Management at Columbia University. Mr. Renaud and the Arkansas Partnership Corporation, a corporation controlled by Mr. Lyon, are the general partners of The Lyon-Renaud Partnership, 58 a real estate partnership that leases certain branch locations to two of TCB's bank subsidiaries. Mr. Lyon also controls FL Building Corp., which leases a major banking center to The Twin City Bank. TCB also reimburses FLJ, Inc., a corporation controlled by Mr. Lyon, for expenses associated with the use of private aircraft for corporate-related purposes. Additionally, from year to year, certain bank subsidiaries of TCB have purchased time at Crockett's Bluff Hunting Lodge in order to utilize such facilities for business development purposes. Crockett's Bluff Hunting Lodge is operated by Wingmead, Inc., a corporation controlled by Mr. Lyon. Regulation TCB is subject to the supervision of, and to inspection by, the Board of Governors of the Federal Reserve System. The Twin City Bank, which is organized as an Arkansas state bank, is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation and the Arkansas State Banking Department. TCB's other bank subsidiaries, which are organized as national banks, are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. For a discussion of regulations concerning the banking industry in general, see "SUPERVISION AND REGULATION." Management Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion and analysis of TCB's financial condition and results of operations. Selected data from TCB's consolidated financial statements and the notes thereto are contained elsewhere in this Information Statement/Prospectus (see "TCBankshares, Inc. Consolidated Financial Statements"). The following discussion and analysis should be read in conjunction with such financial statements and notes thereto. Nine Months Ended September 30, 1994 and September 30, 1993 Results of Operations. Net income for the nine months ended September 30, 1994 was $11,711,000 compared to $11,446,000 for the same period in 1993. The 2.31% increase is attributable to an increase in net interest income resulting from continued growth in loans and deposits and a reduction in the provision for loan losses as the level of nonperforming loans continues to decline. The following commentary presents a more thorough analysis of the results of operations and financial position for the first nine months of 1994. 59 Liquidity and Capital Resources. Liquidity management, which involves the need to fund loan growth or declines in deposits, is an important aspect of TCB's operations. The principal sources of funds which provide liquidity for TCB are customer deposits, principal and interest payments on loans, maturities and sales of investment securities, and earnings. Other sources of liquidity include federal funds purchased and short-term borrowings. A substantial portion of the interest-bearing and non interest-bearing liabilities is stable core deposits attributable to customer relationships developed over the operating history of TCB. Net cash provided by operating activities for the nine months ended September 30, 1994 was $17,475,000. Net income of $11,711,000 primarily contributed to the net cash provided by operating activities. Net cash used for investing activities was $145,937,000. Loans increased by $105,088,000 and investment securities totaling $296,708,000 were purchased. This use of funds was largely offset by $255,198,000 in proceeds from the maturities and sales of securities. Net cash provided by financing activities was $130,395,000. Net increases in deposits of $63,889,000 and other borrowings of $50,771,000 accounted for the cash provided by financing activities. TCB's capital level remains high when compared to regulatory minimums as illustrated in the table below (in thousands). September 30 -------------------- 1994 1993 ------- ------- Tier I capital $95,266 $88,899 Tier II capital 7,917 7,863 Total risk-based capital 103,183 96,762 Risk-adjusted assets 823,807 660,309 Tier I capital to risk-adjusted assets: Capital ratio 11.56% 13.46% Minimum ratio 4.00 4.00 Total capital to risk-adjusted assets: Capital ratio 12.53 14.65 Minimum ratio 8.00 8.00 60 The following sets forth, by time remaining to maturity, certificates and other time deposits over $100,000 at September 30, 1994 (in thousands). Amount Remaining term to maturity --------- Three months or less $ 101,912 Three to twelve months 62,887 One to five years 18,097 Over five years 100 --------- Total $ 182,996 ========= The composition of average deposits and the average rates paid on those deposits is presented in the table of average balances, interest and rates included on the following page. TCB does not have any significant deposits from foreign depositors. In January 1995 TCB borrowed $1.33 million on its revolving line of credit to pay common stock dividends. It is anticipated that this additional borrowing will be repaid by mid-1995 through the payment of dividends by subsidiary banks to TCB. 61 TCBankshares, Inc. and Subsidiaries
As of and for the nine months ended September 30 ------------------------------------------------------------------- 1994 1993 ------------------------------- ------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ---------- --------- ------ ----------- -------- ------ Average balances, interest and rates (dollar amounts in thousands) Assets Loans $ 590,948 $ 35,596 8.03% $ 483,031 $ 30,333 8.37% Investment securities 598,908 27,650 6.16 572,453 27,736 6.46 Other interest earning assets 8,555 256 3.99 7,171 333 6.20 ---------- --------- ----- ----------- -------- ------ Total earning assets 1,198,411 63,502 7.07 1,062,655 58,402 7.33 Noninterest earning assets 86,327 76,814 ---------- ----------- Total assets $1,284,738 $1,139,469 ========== ========== Liabilities and shareholders' equity NOW accounts $ 176,246 3,343 2.53 $ 152,468 2,805 2.45 Time, money market, and savings deposits 807,432 22,701 3.75 742,518 21,141 3.80 ---------- --------- ----- ----------- -------- ------ Total interest-bearing deposits 983,678 26,044 3.53 894,986 23,946 3.57 Other 72,400 1,979 3.65 45,432 1,079 3.17 ---------- --------- ----- ----------- -------- ------ Total interest-bearing liabilities 1,056,078 28,023 3.54 940,418 25,025 3.55 --------- ----- ----------- -------- ------ Demand deposits 125,089 109,021 Other liabilities 9,830 10,335 ---------- ----------- Total liabilities 1,190,997 1,059,774 Shareholders' equity 93,741 79,695 ---------- ----------- Total liabilities and shareholders' equity $1,284,738 $1,139,469 ========== ========== Net interest income $ 35,479 $ 33,377 ========== ========== Interest rate spread 3.53 3.78 Net interest margin 3.95 4.19
Note: No adjustment for tax-exempt income has been made because the amounts are not material. 62 Net Interest Income. Net interest income for first nine months of 1994 increased primarily as a result of a 16.26% increase in earning assets. For the first nine months of 1994, interest income increased $5,100,000 or 8.73% and interest expense increased $2,998,000 or 11.98% from the same period in 1993, resulting in a net interest income increase of $2,102,000 or 6.30%. The following table presents the increase (decrease) in levels of interest income and interest expense resulting from variances in volume and interest rates. For the nine months ended September 30, 1994 compared to 1993 ----------------------------------- (Dollars expressed in thousands) Volume(1) Rate(2) Net Change -------- ------- ------- Interest earned on: Loans (3) ................................. $ 6,500 $(1,237) $ 5,263 Investment securities (4) ................. 1,222 (1,308) (86) Other interest earning assets ............. 41 (118) (77) ------- ------- ------- Total interest income .......................... 7,763 (2,663) 5,100 Interest paid on: NOW accounts .............................. 451 87 538 Time, money market and savings deposits ... 1,826 (266) 1,560 Other ..................................... 738 162 900 ------- ------- ------- Total interest expense ......................... 3,015 (17) 2,998 ------- ------- ------- Net interest income ............................ $ 4,748 $(2,646) $ 2,102 ======= ======= ======= (1) Based on change in volume applied to current year rate. (2) Based on change in rate applied to prior year volume; effect of change in rate on change in volume has therefore been attributed to change in volume. (3) Income from loans on nonaccrual status is included in loan income on a cash basis while nonaccrual loan balances are included in average volume. Loan fees are included in loan income. (4) No adjustment for tax exempt income has been made because the amounts are not material. Provision and Allowance for Loan Losses. Management evaluates the loan portfolio and reserves of the subsidiary banks at least quarterly to ensure the accurate and timely accounting for problem loans and to ensure the adequacy of the banks' reserve for possible loan losses. Management believes the reserve for possible loan losses as of September 30, 1994 was adequate based on the risks 63 identified at that date and has been computed in accordance with generally accepted accounting principles. The reserve balance at September 30, 1994 represents 1.24% of the total loans outstanding compared to 1.50% at September 30, 1993. This reduction is primarily due to the decline in the level of nonperforming assets. The table below illustrates the level of nonperforming assets and reserves as a percentage of ending assets at September 30 (dollars in thousands). 1994 1993 ------------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- Nonperforming loans $4,436 0.33% $4,484 0.38% Other real estate owned $ 382 0.03% $2,524 0.22% Total nonperforming assets $4,818 0.36% $7,008 0.60% Reserves for possible loan losses $8,203 0.60% $8,023 .68% Reserves/nonperforming assets 170.26% 114.48% Nonaccrual loans were $1,884,000 at September 30, 1994. Loans past due over 89 days and still accruing interest were $2,552,000 at September 30, 1994. All such loans are domestic. It is TCB's policy to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan in which payment of principal or interest in a timely manner in the normal course of business is doubtful. Interest on nonaccrual loans at September 30, 1994, which would have been recorded under the original terms of the loans or the amounts subsequently received is not readily available; however, the amounts are not material. Changes in the allowance for loan losses are as follows (dollars in thousands): Nine Months ended September 30 ----------------------- 1994 1993 ---- ---- Balance at beginning of period $ 7,922 $ 7,135 Charge-offs (363) (383) Recoveries 188 246 ------- ------- Net charge-offs (175) (137) Provision charged to expense 456 1,025 ------- ------- Balance at end of period $ 8,203 $ 8,023 ======= ======= Ratio of net charge-offs to average loans outstanding during the period 0.03% 0.03% Period-end allowance to loans outstanding 1.24 1.50 64 At September 30, 1994, management of TCB concluded that the allowance for possible loan losses was adequate. At December 31, 1994, given the significant growth in loans in 1994 and other factors, TCB made a provision to the reserve for loan losses of approximately $2.9 million, increasing the reserve to approximately 1.5% of total loans. Loan Portfolio. Components of loans are as follows (in thousands): September 30 1994 1993 ---- ---- Commercial, financial and agricultural $156,504 $140,032 Real estate construction 120,426 96,827 Real estate mortgage 182,078 172,332 Installment and consumer, net of earned discount 200,042 126,958 -------- -------- Total loans $659,050 $536,149 ======== ======== TCB does not have any foreign loans. Also, TCB does not have a concentration of loans exceeding 10% of total loans which are not otherwise disclosed in the portfolio composition table. Commercial loans are both fixed and variable rate, made to established business concerns in the local business area and supported by satisfactory financial statements. Commercial loans are generally well secured or guaranteed by principals of substantial worth and experience. Each of the subsidiary banks' credit policy limits commercial loans secured by real estate to 80% of the value of the related collateral. These loans are either owner occupied or there is an assignment of the lease or rent agreement. Each of the subsidiary banks requires evidence of insurance, and escrows for taxes for such loans. All loans in excess of certain amounts are required to have an approved appraisal that is consistent with regulatory guidelines. Real estate mortgage loans are balanced between fixed and adjustable rate first mortgage loans and variable rate home equity loans with an 80% maximum loan to appraised value ratio and proper lien or mortgage filings. TCB also requires current appraisals and evidence of insurance. TCB's consumer loan portfolio has increased significantly in the last two years. This increase is primarily a result of TCB targeting the indirect automobile lending area and significantly increasing the number of automobile 65 dealers through which TCB is offering loans. TCB requires dealer reserves and at least a 90% loan to value ratio in originating indirect consumer loans. The following sets forth, by time remaining to maturity, the TCB loan portfolio at September 30, 1994 (in thousands): Amount Fixed Rate Floating Rate ---------- ------------- Remaining term to maturity Three months or less $ 41,692 $102,204 Three to twelve months 130,579 7,033 One to five years 347,197 83 Over five years 30,240 22 -------- -------- Total $549,708 $109,342 ======== ======== Investment Portfolio. Investment securities represent 45.51% and 47.68% of the total assets of TCB at September 30, 1994 and 1993, respectively. The investment portfolio is a source of interest income and is used to meet liquidity needs and to collateralize public funds. The amortized cost of the investment portfolio by category of securities is as follows (in thousands): Held to Maturity September 30 1994 1993 ---- ---- U.S. Treasury obligations and obligations of U.S. Government agencies $ 48,503 $153,480 Obligations of states and political subdivisions 100,866 91,227 Mortgage-backed securities 120,294 313,690 Other investment securities 303 669 -------- -------- $269,966 $559,066 ======== ======== Available for Sale September 30 1994 1993 ---- ---- U.S. Treasury obligations and obligations of U.S. Government agencies $ 72,233 -- Obligations of states and political subdivisions -- -- Mortgage-backed securities 258,512 -- Other investment securities 3,778 -- -------- -------- $334,523 -- ======== ======== Effective October 1, 1994, TCB transferred securities with a net book value of approximately $236,636,000 from its available-for-sale to held-to-maturity 66 portfolio. Unrealized depreciation of approximately $8,766,000 is included in equity related to the decline in market value of these securities and will be amortized over the remaining life of the securities as a yield adjustment. After this transfer, TCB continues to maintain over $108,000,000 in available-for-sale securities for possible liquidity needs. The following sets forth, by time remaining to maturity, investments at September 30, 1994 (in thousands): Amount Fixed Rate Floating Rate ---------- ----------- Remaining term to maturity Three months or less $ 770 $ 5,566 Three to twelve months 6,181 26,450 One to five years 116,221 -- Over five years 449,301 -- -------- -------- Total $572,473 $ 32,016 ======== ======== There was no single issuer of securities in the investment portfolio at September 30, 1994, other than the U.S. Government, its agencies and corporations, for which the aggregate amortized cost exceeded ten percent of total stockholders' equity. Noninterest Income. Noninterest income increased to $9,718,000 for the nine months ended September 30, 1994 compared to $8,321,000 for the nine months ended September 30, 1993. The increase was primarily due to the 12.17% increase in service charges on deposits accounts resulting from the growth of deposits, and a $461,000 increase in gains on the sale of other real estate resulting primarily from the sale of one property in the first quarter of 1994. Noninterest Expense. Noninterest expense increased to $28,495,000 for the nine months ended September 30, 1994 compared to $25,090,000 for the same period in 1993. The 13.57% increase is attributable to the continued growth of TCB. Additions to bank premises of $3.5 million during the first nine months of 1994 and $8.2 million during all of 1993 have resulted in a $752,000 increase in net occupancy and equipment expense. Salaries and benefits increased $1,943,000 to $13,303,000 for the first nine months of 1994 compared to the first nine months of 1993 due to normal salary adjustments and an increase in the number of employees due to the internal growth of TCB. During the fourth quarter of 1994, TCB recorded noninterest expense of approximately $4,200,000 relating to merger-related expense accruals and entries 67 to conform TCB's accounting policies to those of Mercantile. Return on Equity and Assets. The percent of net income to average assets and average stockholders' equity and other data for the nine months ended September 30, 1994 and 1993: 1994 1993 ---- ---- Return on average total assets 1.20% 1.35% Return on average total stockholders' equity 16.66 19.15 Ratio of average total stockholders' equity to average total assets 7.23 7.03 Ratio of total dividends declared to net income 8.72 8.91 Years Ended December 31, 1993, 1992, and 1991 Results of Operations. For each of the last three years TCB has reported consolidated net income from operations; $15,189,000 in 1993, $13,398,000 in 1992, and $9,288,000 in 1991. The increase in net income is attributable to TCB's growth in loans and deposits, improving asset quality, and a favorable interest rate environment. The following commentary presents a more thorough analysis of the results of operations and financial position for the previous three years. Liquidity and Capital Resources. TCB has focused on its liquidity position in 1993 and 1992 by increasing core deposits, establishing correspondent banking relationships, and maintaining significant levels of short-term investment securities. The ratio of net loans to deposits at December 31, 1993 was 51.77% and 47.23% at December 31, 1992. Net cash provided by operating activities in 1993 was $15,482,000 primarily resulting from TCB's net income of $15,189,000. Net cash used in investing activities was $130,446,000 in 1993. Loans increased by $93,832,000 and investment securities totaling $240,032,000 were purchased in 1993. These uses of funds were largely offset by $207,358,000 in proceeds from the maturities and sales of securities. Net cash provided by financing activities was $113,977,000 which resulted from the net increase in deposits of $104,798,000 in 1993. Net cash provided by operating activities in 1992 was $5,888,000 composed primarily of TCB's net income of $13,398,000 offset by decreases in liabilities and origination of mortgage loans held for sale. Net cash used in investing activities was $186,533,000 in 1992. During 1992, loans increased by $51,746,000 and investment securities totaling $150,838,000 (net of sales and 68 maturities) were purchased. Net cash provided by financing activities in 1992 of $198,398,000 primarily resulted from a $201,563,000 increase in deposits. TCB's capital level remains strong when compared to regulatory minimums as illustrated in the table below (dollars in thousands): December 31 1993 1992 ---- ---- Tier I capital $ 84,009 $ 69,757 Tier II capital 7,558 7,072 Total risk-based capital 91,657 76,829 Risk-adjusted assets 698,414 587,887 Tier I capital to risk-adjusted assets: Capital ratio 12.04% 11.87% Minimum ratio 4.00 4.00 Total capital to risk-adjusted assets: Capital ratio 13.12 13.07 Minimum ratio 8.00 8.00 The following sets forth, by time remaining to maturity, certificates and other time deposits over $ 100,000 at December 31, 1993 (in thousands). Amount -------- Remaining term to maturity Three months or less $ 92,353 Three to twelve months 75,786 One to five years 11,507 Over five years -- -------- Total $179,646 ======= The composition of average deposits and the average rates paid on those deposits is presented in the table of average balances, interest and rates included in the following table (which is presented on a fully-taxable equivalent (FTE) basis). TCB does not have any significant deposits from foreign depositors. 69 TCBankshares, Inc. and Subsidiaries
As of and for the year ended December 31 ------------------------------------------------------------------------------------------------- 1993 1992 1991 ------------------------------- --------------------------- --------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ------ Average balances, interest and rates (dollar amounts in thousands) Assets Loans $ 512,593 $ 42,067 8.20% $ 436,691 $ 40,306 9.23% $ 415,170 $ 43,754 10.54% Investment securities 560,524 39,884 7.12 467,898 38,790 8.29 345,192 31,269 9.06 Other interest earning assets 11,550 384 3.32 17,279 687 3.97 31,985 1,834 5.73 ---------- ---------- ---------- ---------- ------- ---- ---------- ------- ---- Total earning assets 1,084,667 82,335 7.59 921,868 79,783 8.65 792,347 76,857 9.70 Noninterest earning assets 75,852 70,897 67,608 ---------- ---------- ---------- Total assets $1,160,519 $ 992,765 $ 859,955 ========== ========== ========== Liabilities and shareholders' equity NOW accounts $ 167,083 3,879 2.32 $ 131,524 4,006 3.05 $ 123,910 4,913 3.96 Time, money market, and savings deposits 753,251 28,475 3.78 642,668 30,224 4.70 556,687 35,617 6.40 ---------- ---------- ---------- ---------- ------- ---- ---------- ------- ---- Total interest-bearing deposits 920,334 32,354 3.52 774,192 34,230 4.42 680,597 40,530 5.96 Other 37,772 1,558 4.12 33,591 1,531 4.56 27,857 1,870 6.71 ---------- ---------- ---------- ---------- ------- ---- ---------- ------- ---- Total interest-bearing liabilities 958,106 33,912 3.54 807,783 35,761 4.43 708,454 42,400 5.98 ---------- -------- ------- Demand deposits 112,742 105,676 85,178 Other liabilities 8,232 10,885 8,487 ---------- ---------- ---------- Total liabilities 1,079,080 924,344 802,119 Shareholders' equity 81,439 68,421 57,836 ========== ---------- ---------- Total liabilities and shareholders' equity $1,160,519 $ 992,765 $ 859,955 ========== ========== ========== Net interest income $ 48,423 $ 44,022 $ 34,457 ========== ======== ======== Interest rate spread 4.05 4.23 3.72 Net interest margin 4.46 4.78 4.35
70 Net Interest Income. Net interest income (FTE) is the difference between interest income generated on earning assets and interest expense paid on deposits and borrowings. The net interest income for TCB increased by $4,401,000 from 1992 to 1993 and by $9,565,000 from 1991 to 1992. The increases in net interest income occurred in a generally falling interest rate environment which benefited TCB due to its liability sensitive position. In addition, the loan portfolio grew by $98,810,000 in 1993 contributing to the increase. The net interest margin (FTE) decreased to 4.46% for 1993 as compared to 4.78% for 1992 and 4.35% in 1991. The decline in 1993 is primarily attributable to a decline in the yield on TCB's mortgage-backed investment securities, due to an accelerated level of prepayments. The following table portrays the increase (decrease) in levels of interest income and interest expense resulting from variances in volume and interest rates.
For the year ended December 31, For the year ended December 31, 1993 compared to 1992 1992 compared to 1991 (Dollars expressed in thousands) (Dollars expressed in thousands) Volume(1) Rate(2) Net Change Volume(1) Rate(2) Net Change --------- --------- --------- --------- --------- ----------- Interest earned on: Loans (3) $ 6,231 $ (4,470) $ 1,761 $ 1,986 $ (5,434) $ (3,448) Investment securities (4) 6,595 (5,501) 1,094 10,172 (2,651) 7,521 Other interest earning assets (190) (113) (303) (583) (564) (1,147) --------- --------- --------- --------- --------- --------- Total interest income 12,636 (10,084) 2,552 11,575 (8,649) 2,926 Interest paid on: NOW accounts 825 (952) (127) 232 (1,139) (907) Time, money market and savings deposits 4,180 (5,929) (1,749) 3,447 (9,505) (6,058) Other 172 (145) 27 838 (512) 326 --------- --------- --------- --------- --------- --------- Total interest expense 5,177 (7,026) (1,849) 4,517 (11,156) (6,639) --------- --------- --------- --------- --------- --------- Net interest income $ 7,459 $ (3,058) $ 4,401 $ 7,058 $ 2,507 $ 9,565 ========= ========== ========= ========= ========= =========
(1) Based on change in volume applied to current year rate. (2) Based on change in rate applied to prior year volume; effect of change in rate on change in volume has therefore been attributed to change in volume. 71 (3) Income from loans on nonaccrual status is included in loan income on a cash basis while nonaccrual loan balances are included in average volume. Loan fees are included in loan income. Provision and Allowance for Loan Losses. Management evaluates the loan portfolio and reserves of the banks at least quarterly to ensure the timely accounting for problem loans and to ensure the adequacy of the subsidiary banks' reserves for possible loan losses. The consolidated reserve balance at December 31, 1993 represents 1.41% of the total loans outstanding compared to 1.53% and 1.51% at December 31, 1992, and 1991, respectively. TCB's reserve to nonperforming assets has increased over the last three years due to the improvement in TCB's asset quality. The table below illustrates the level of nonperforming assets and reserves as a percentage of ending assets for the last five years (dollars in thousands).
1993 1992 1991 1990 1989 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ---- ------- ---- ------- ---- ------- ------ ------- ----- Nonperforming loans $ 4,655 0.38% $ 5,437 0.50% $ 8,279 0.93% $10,327 1.16% $ 5,207 0.63% Other real estate owned 2,464 0.20 3,442 0.31 5,463 0.61 2,602 0.29 3,289 0.40 ------- ---- ------- ---- ------- ---- ------- ------ ------- ---- Total nonperforming assets $ 7,119 0.58% $ 8,879 0.81% $13,742 1.54% $12,929 1.45% $ 8,496 1.03% ======= ====== ======= ====== ====== ====== ======= ====== ======= ===== Reserves for possible loan losses $ 7,923 0.65% $ 7,135 0.65% $ 6,236 0.70% $ 5,038 0.56% $ 5,396 0.65% ======= ====== ======= ====== ====== ====== ======= ====== ======= ===== Reserves/nonperforming assets 111.29% 80.36% 45.38% 38.97% 63.51% ====== ====== ======= ====== ======
Nonaccrual loans were $2.2 million, $4.8 million, and $7.1 million at December 31, 1993, 1992, and 1991, respectively. Loans past due over 89 days and still accruing interest were $2.4 million, $0.6 million, and $1.2 million at December 31, 1993, 1992, and 1991, respectively. It is TCB's policy to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan in which payment of principal or interest in a timely manner in the normal course of business is doubtful. Subsequently, interest income is recognized as received. Interest on nonaccrual loans which would have been recorded under the original terms of the loans less interest actually recorded was $118,000 in 1993, $367,000 in 1992, and $359,000 in 1991. 72 Changes in the reserve for loan losses are as follows (in thousands):
Year ended December 31 1993 1992 1991 1990 1989 --------- --------- -------- -------- -------- Balance at beginning of year $ 7,135 $ 6,236 $ 5,038 $ 5,396 $ 5,926 Charge-offs (812) (1,763) (1,569) (2,398) (1,521) Recoveries 376 576 388 365 692 ------- ------- ------- ------- ------- Net charge-offs (436) (1,187) (1,181) 2,033 829 Allowance for loan losses on loans purchased -- -- 228 -- -- Provision charged to expense 1,224 2,086 2,151 1,675 299 ------- ------- ------- ------- ------- Balance at end of year $ 7,923 $ 7,135 $ 6,236 $ 5,038 $ 5,396 ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans outstanding during the period 0.09% 0.27% 0.29% 0.51% 0.22% ======= ======= ======= ======= ======= Year-end reserve to loans outstanding 1.41% 1.53% 1.51% 1.21% 1.35% ======= ======= ======= ======= =======
Management of TCB concluded the reserve for possible loan losses was adequate at the end of each of the three years summarized above. Loan Portfolio. Components of loans are as follows (in thousands):
Year ended December 31 1993 1992 1991 1990 1989 ------- ------- ------- ------- ------ Commercial, financial and agricultural $152,432 $133,074 $115,829 $125,586 $136,897 Real estate construction 101,207 83,593 80,758 85,391 63,017 Real estate mortgage $178,204 159,814 142,359 125,053 120,029 Installment and consumer, net of unearned discount 130,154 86,707 71,129 72,827 71,465 ======== ======== ======== ======== ======== Total loans $561,997 $463,188 $410,075 $408,857 $391,408 ======== ======== ======== ======== ========
TCB does not have any foreign loans or concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the portfolio composition table. Also TCB does not have any material amount of interest-earning assets which would have been included in nonaccrual, past-due, or restructured loans, if such assets were loans. Letters of credit outstanding were $5.1 million, $3.2 million, and $2.3 million and unfunded loan commitments were $89.7 million, $66.3 million, and $56.5 million at December 31, 1993, 1992, and 1991, respectively. The credit 73 risk involved in issuing letters of credit and loan commitments is essentially the same as that involved in making loans. The following sets forth, by time remaining to maturity, TCB's loan portfolio at December 31, 1993 (in thousands): Amount Fixed Rate Floating Rate ---------- ------------ Remaining term to maturity Three months or less $ 53,383 $ 107,029 Three to twelve months 110,756 4,895 One to five years 257,000 1,175 Over five years 27,734 25 --------- --------- Total $ 448,873 $ 113,124 ========= ========= Investment Portfolio. Investment securities represent 47.1% of the total assets of the TCB at December 31, 1993 as compared to 49.7% in 1992, and 44.0% in 1991. The investment portfolio is a source of interest income and is used to meet liquidity needs and to collateralize public funds. The amortized cost of the investment portfolio by category of securities is as follows (in thousands): December 31 1993 1992 1991 ------ ------ ------ U.S. Treasury obligations and obligations of U.S. Government agencies $153,713 $139,863 $105,385 Obligations of states and political subdivisions 99,496 80,547 71,684 Mortgage-backed securities 323,007 323,185 213,679 Other investment securities 669 567 887 -------- -------- -------- $576,885 $544,162 $391,635 ======== ======== ======== Investment securities with a carrying value of $240.2 million, $223.2 million and $139.6 million were pledged at December 31, 1993, 1992, and 1991, respectively, to secure public deposits, trust deposits, and for other purposes as required by law. The following sets forth, by time remaining to maturity, investments at December 31, 1993 (in thousands): 74 Amount Fixed Rate Floating Rate --------- --------- Remaining term to maturity Three months or less $ 2,377 $ 5,018 Three to twelve months 17,525 46,321 One to five years 109,471 -- Over five years 396,173 -- --------- --------- Total $ 525,546 $ 51,339 ========= ========= There was no single issuer of securities in the investment portfolio at December 31, 1993, other than the U.S. Government, its agencies and corporations, for which the aggregate amortized cost exceeded ten percent of total stockholders' equity. Noninterest Income. Noninterest income increased to $11,534,000 for the year ended December 31, 1993 compared to $10,238,000 for the year ended December 31, 1992. The increase was primarily due to a $667,000 increase in service charges on deposit accounts as deposits continued to grow and a $562,000 increase in gains on the sale of mortgage loans on the secondary market. Noninterest income increased to $10,238,000 for the year ended December 31, 1992 compared to $7,923,000 for the year ended December 31, 1991. The increase was attributable to a $2,066,000 increase in investment security gains. Service charges on deposit accounts also increased by $335,000 due to higher levels of deposits. Noninterest Expense. Noninterest expense increased to $35,038,000 for the year ended December 31, 1993 compared to $31,240,000 for the year ended December 31, 1992. The increase was the result of increases of $2,134,000, $766,000, and $273,000 in compensation expense, occupancy expense, and FDIC assessments, respectively. All these amounts increased due to the growth experienced by TCB. Merchandising expense also increased $451,000 as TCB continued to market itself aggressively in its primary markets, contributing to its growth and success. Noninterest expense increased to $31,240,000 for the year ended December 31, 1992 compared to $25,740,000 for the year ended December 31, 1991. The increase resulted from increases of $2,546,000, $560,000, and $397,000 in compensation expense, occupancy expense, and FDIC assessments, respectively, due to the growth of TCB in size, locations, and employees. Extensive marketing, which contributed to this growth, resulted in a $452,000 increase in merchandising expense. 75 Return on Equity and Assets. The percent of net income to average assets and average stockholders' equity and other data for the years ended December 31, 1993, 1992 and 1991 is presented below: 397 00 in compensation expense, occupancy expense, and FDIC assessments, respectively, due to the growth of TCB in size, locations, and employees. Extensive marketing, which contributed to this growth, resulted in a $452,000 increase in merchandising expense. 75 Return on Equity and Assets. The percent of net income to average asseto of total dividends declared to net income 8.40 9.52 13.72 Ownership Of TCB Common Stock The following table sets forth certain information as of September 30, 1994 regarding the beneficial ownership of TCB Common Stock by each person known to the Board of Directors of TCB to own beneficially 5% or more of TCB Common Stock, by each director of TCB, and by all directors and officers of TCB as a group. Name and Address of Amount and Nature and Percent of Beneficial Owner Beneficial Ownership (1) Class (1) - ---------------- ------------------------ --------- Dr. John Griffith -- -- Frank Lyon, Jr. - Boca Raton, Florida 2043.4436(2) 95.9% Paul Moore -- -- T.E. Renaud - North Little Rock, Arkansas 88.2934 4.1 All officers and directors as a group (5 persons) 2,131.737 100.0% (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Percentage ownership calculations are based on 2,131.737 shares of TCB Common Stock outstanding. 76 (2) Of the shares shown as beneficially owned by Frank Lyon, Jr., all shares are held by him as sole trustee of two trusts established for his benefit. 77 INFORMATION REGARDING MBI STOCK Description of MBI Common Stock and Attached Preferred Share Purchase Rights General. MBI has authorized 5,000,000 shares of preferred stock, no par value ("Preferred Stock"), and 100,000,000 shares of common stock, par value $5.00 per share. At November 30, 1994, MBI had no issued or outstanding shares of Preferred Stock and 43,290,784 shares of MBI Common Stock issued and outstanding. Under Missouri law, MBI's Board of Directors may generally approve the issuance of authorized shares of Preferred Stock and MBI Common Stock without stockholder approval. MBI's Board of Directors is also authorized to fix the number of shares and determine the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any series of Prefrred Stock. MBI's Board of Directors has designated and reserved Series A Junior Participating Preferred Stock pursuant to MBI's Preferred Share Purchase Rights Plan described below. In connection with the Merger, it is contemplated that MBI's Board of Directors will designate the MBI Series B-1 Preferred Stock and the MBI Series B-2 Preferred Stock. The existence of a substantial number of unissued and unreserved shares of MBI Common Stock and undesignated shares of Preferred Stock may enable the MBI Board of Directors to issue shares to such persons and in such manner as may be deemed to have an antitakeover effect. Dividends. The holders of the MBI Common Stock are entitled to share ratably in dividends when, as and if declared by the MBI Board of Directors from funds legally available therefor, after full cumulative dividends have been paid or declared, and funds sufficient for the payment thereof set apart, on all series of Preferred Stock ranking superior as to dividends to the MBI Common Stock. The Board of Directors of MBI intends to maintain its present policy of paying quarterly cash dividends on the MBI Common Stock, when justified by the financial condition of MBI and its subsidiaries. The declaration and amount of future dividends will depend on circumstances existing at the time, including MBI's earnings, financial condition and capital requirements as well as regulatory limitations, note and indenture provisions and such other factors as the Board of Directors may deem relevant. The payment of dividends to MBI by -78- subsidiary banks is subject to extensive regulation by various state and federal regulatory agencies. See "SUPERVISION AND REGULATION." Voting Rights. Each holder of MBI Common Stock has one vote for each share held on matters presented for consideration by the shareholders, except that, in the election of directors, such shareholders presently have cumulative voting rights which entitle each such shareholder to the number of votes which equals the number of shares held by the shareholder multiplied by the number of directors to be elected. All such cumulative votes may be cast for one candidate for election as a director or may be distributed among two or more candidates. Preemptive Rights. The holders of MBI Common Stock have no preemptive right to acquire any additional unissued shares or treasury shares of MBI. Liquidation Rights. In the event of liquidation, dissolution or winding-up of MBI, whether voluntary or involuntary, the holders of MBI Common Stock will be entitled to share ratably in any of its assets or funds that are available for distribution to its stockholders after the satisfaction of its liabilities (or after adequate provision is made therefor) and after preferences on any outstanding Preferred Stock. Assessment and Redemption. Shares of MBI Common Stock issuable in the Merger will be, when issued, fully paid and nonassessable. Such shares do not have any redemption provisions. Preferred Share Purchase Rights Plan. One preferred share purchase right (a "Right") is attached to each share of MBI Common Stock. The Rights trade automatically with shares of MBI Common Stock, and become exercisable and will trade separately from the MBI Common Stock on the 10th day after public announcement, or notice to MBI, that a person or group has acquired, or has the right to acquire, beneficial ownership of 20% or more of the outstanding shares of MBI Common Stock, or upon commencement or announcement, or notice to MBI, of intent to make a tender offer for 20% or more of the outstanding shares of MBI Common Stock, in either case without prior written consent of the Board of Directors. When exercisable, each Right will entitle the holder to buy 1/100 of a share of Series A Junior Participating Preferred Stock at an exercise price of $100 per Right. In the event a person or group acquires beneficial ownership of 20% or more of MBI Common Stock, holders of Rights (other than the acquiring person or group) may purchase MBI Common Stock having a market value of twice the then current exercise price of each Right. If MBI is acquired by any person -79- or group after the Rights become exercisable, each Right will entitle its holder to purchase stock of the acquiring company having a market value of twice the current exercise price of each Right. The Rights are designed to protect the interests of MBI and its stockholders against coercive takeover tactics. The purpose of the Rights is to encourage potential acquirors to negotiate with MBI's Board of Directors prior to attempting a takeover and to give the Board leverage in negotiating on behalf of all stockholders the terms of any proposed takeover. The Rights may deter certain takeover proposals. The Rights, which can be redeemed by MBI's Board of Directors in certain circumstances, expire by their terms on June 3, 1998. Classification of Board of Directors. The Board of Directors of MBI is divided into three classes, and the directors are elected by classes to three-year terms, so that one of the three classes of the directors of MBI will be elected at each annual meeting of the stockholders. While this provision promotes stability and continuity of the Board of Directors, classification of the Board of Directors may also have the effect of decreasing the number of directors that could otherwise be elected at each annual meeting of stockholders by a person who obtains a controlling interest in the MBI Common Stock and thereby could impede a change in control of MBI. Because fewer directors will be elected at each annual meeting, such classification also will reduce the effectiveness of cumulative voting as a means of establishing or increasing minority representation on the Board of Directors. Other Matters. MBI's Restated Articles of Incorporation and By-Laws also contain provisions which: (i) require the affirmative vote of holders of at least 75% of the voting power of all of the outstanding shares of MBI entitled to vote in the election of directors to remove a director or directors without cause; (ii) require the affirmative vote of the holders of at least 75% of the voting power of all shares of the outstanding capital stock of MBI to approve certain "business combinations" with "interested parties" unless at least two-thirds of the Board of Directors first approve such business combinations; and (iii) require an affirmative vote of at least 75% of the voting power of all shares of the outstanding capital stock of MBI for the amendment, alteration, change or repeal of any of the above provisions unless at least two-thirds of the Board of Directors first approve such an amendment, alteration, change or repeal. MBI's Articles of Incorporation also requires the Board of Directors, in considering any business combination, to give due consideration to all factors that the Board of Directors may consider relevant, including the effects of -80- the proposed transaction on the depositors and customers of MBI and its subsidiaries, on their communities and geographic areas and on any of their businesses and properties; and the adequacy of the consideration offered in the proposed transaction in relation to the current market price of MBI's outstanding securities and to the value of MBI in a freely negotiated transaction and the Board's estimate of the future value of MBI. Such provisions may be deemed to have an antitakeover effect. Restrictions on Resale of MBI Capital Stock by Affiliates; Affiliate Agreements MBI Common Stock. Under Rule 145 of the Securities Act, all Stockholders, by virtue of being "affiliates" of TCB, will be limited in their right to resell the stock so received in the Merger. Stockholders who desire to resell the MBI Common Stock so received must sell such stock either pursuant to an effective registration statement under the Securities Act or in accordance with an applicable exemption. In addition, Stockholders who become "affiliates" of MBI following the Merger will be limited in their right to resell the MBI Common Stock received in the Merger. Rule 145(d) provides that persons deemed to be affiliates of a company such as MBI solely by virtue of having been affiliates of a company such as TCB prior to a transaction such as the Merger may resell their stock pursuant to certain of the requirements of Rule 144 under the Securities Act if such stock is sold within the first two years after the receipt thereof. After two years if such person is not an affiliate of MBI and if MBI is current with respect to its required public filings, a former affiliate of TCB may freely resell the stock received in the Merger without limitation. After three years from the issuance of the stock, if such person is not an affiliate of MBI at the time of sale and for at least three months prior to such sale, such person may freely resell such stock, without limitation, regardless of the status of MBI's required public filings. The shares of MBI Common Stock to be received by affiliates of TCB in the Merger will be legended as to the restrictions imposed upon resale of such stock. MBI Preferred Stock. The MBI Preferred Stock received by Mr. Lyon pursuant to the Merger is being issued by MBI pursuant to "transactions by an issuer not involving any public offering" within the meaning of Section 4(2) of -81- the Securities Act. As such, the MBI Preferred Stock is unregistered stock and may only be sold, unless subsequently registered pursuant to an effective registration statement under the Securities Act, pursuant to an applicable exemption, such as Section 4(2), under the Securities Act. The shares of MBI Preferred Stock to be received by Mr. Lyon in the Merger will be legended as to the restrictions imposed upon resale of such stock. Comparison of the Rights of Stockholders of MBI and TCB MBI is incorporated under the laws of the State of Missouri. TCB is organized under the laws of the State of Arkansas. The rights of MBI's stockholders are governed by MBI's Restated Articles of Incorporation and By-Laws and The General and Business Corporation Law of the State of Missouri (the "Missouri Act"). The rights of TCB's stockholders are governed by TCB's Articles of Incorporation and By-Laws and by the Arkansas Act. The rights of TCB stockholders who receive shares of MBI Capital Stock in the Merger will thereafter be governed by MBI's Restated Articles of Incorporation and By-Laws and by the Missouri Act. The material rights of such stockholders, and, where applicable, material differences between the rights of MBI stockholders and TCB stockholders, are summarized below. Preferred Share Purchase Rights Plan. As described above under "-- Description of MBI Common Stock and Attached Preferred Share Purchase Rights," MBI Common Stock has attached Rights, which may deter certain takeover proposals. TCB does not have a rights plan. Supermajority Provisions. MBI's Restated Articles of Incorporation and MBI's By-Laws contain provisions requiring a supermajority vote of the stockholders of MBI to approve certain proposals. Under both MBI's Restated Articles and By-Laws, removal by the stockholders of the entire Board of Directors or any individual director from office without cause requires the affirmative vote of not less than 75% of the total votes entitled to be voted at a meeting of stockholders called for the election of directors. Amendment by the stockholders of MBI's Restated Articles or By-Laws relating to (i) the number or qualification of directors; (ii) the classification of the Board of Directors; (iii) the filling of vacancies on the Board of Directors; or (iv) the removal of directors, requires the affirmative vote of not less than 75% of the total votes of MBI's then outstanding capital stock entitled to vote, voting together as a single class, unless such amendment has previously been expressly approved by at least 66-2/3% of the Board of Directors. The MBI Restated Articles of -82- Incorporation also provides that, in addition to any stockholder vote required under Missouri law, the affirmative vote of the holders of not less than 75% of the total votes to which all of the then outstanding shares of capital stock of MBI are entitled, voting together as a single class (the "Voting Stock"), shall be required for the approval of any Business Combination. A "Business Combination" is defined generally to include sales, exchanges, leases, transfers or other dispositions of assets, mergers or consolidations, issuances of securities, liquidations or dissolutions of MBI, reclassifications of securities or recapitalizations of MBI, involving MBI on the one hand, and an Interested Shareholder or an affiliate of an Interested Shareholder on the other hand. An "Interested Shareholder" is defined generally to include any person, firm, corporation or other entity which is the beneficial owner of 5% or more of the voting power of the outstanding Voting Stock. If, however, at least 66-2/3% of the Board of Directors of MBI approve the Business Combination, such Business Combination shall require only the vote of stockholders as provided by Missouri law or otherwise. The amendment of the provisions of MBI's Restated Articles relating to the approval of Business Combinations requires the affirmative vote of the holders of at least 75% of the Voting Stock unless such amendment has previously been approved by at least 66-2/3% of the Board of Directors. TCB's Articles of Incorporation and By-Laws do not require supermajority approval by stockholders of any corporate actions. Classified Board. As described under "-- Description of MBI Common Stock and Attached Preferred Share Purchase Rights -- Classification of Board of Directors," the Board of Directors of MBI is divided into three classes of directors, with each class being elected to a staggered three-year term. By reducing the number of directors to be elected in any given year, the existence of a classified Board of Directors diminishes the benefits of the cumulative voting rights to minority stockholders. TCB's Board of Directors is not divided into classes of directors. Dissenters' Rights. Under both the Missouri Act and the Arkansas Act, a stockholder of any corporation which is party to a merger or consolidation, or which sells all or substantially all of its assets, has the right to dissent from such corporate action and to demand payment of the fair value of such shares. In addition, under the Arkansas Act, but not under the Missouri Act, a stockholder of a corporation, which corporation is a party to a plan of share exchange, has a right to dissent from such plan and demand payment of fair value -83- for such stockholder's shares, if such stockholder is entitled to vote on such plan. Antitakeover Statutes. The Missouri Act contains certain provisions applicable to Missouri corporations such as MBI which may be deemed to have an antitakeover effect. Such provisions include Missouri's Business Combination Statute and the Control Share Acquisition Statute. The Missouri Business Act protects domestic corporations from hostile takeover by prohibiting certain transactions once an acquiror has gained control. The statute restricts certain "Business Combinations" between a corporation and an "Interested Shareholder" or affiliates of the Interested Shareholder for a period of five years unless certain conditions are met. A "Business Combination" includes a merger or consolidation, certain sales, lease exchanges, pledges and similar dispositions of corporate assets or stock and certain reclassifications and recapitalizations. An "Interested Shareholder" includes any person or entity which beneficially owns or controls 20% or more of the outstanding voting shares of the corporation. During the initial five-year restricted period, no Business Combination may occur unless such Business Combination or the transaction in which an Interested Shareholder becomes "interested" is approved by the board of directors of the corporation. Business Combinations may occur during such five-year period if (i) prior to the stock acquisition by the Interested Shareholder, the board of directors approves the transaction in which the Interested Shareholder became such or approves the Business Combination in question; (ii) the holders of a majority of the outstanding voting stock, other than stock owned by the Interested Shareholder, approve the Business Combination; or (iii) the Business Combination satisfies certain detailed fairness and procedural requirements. The Missouri Act exempts from its provisions (i) corporations not having a class of voting stock registered under Section 12 of the Exchange Act; (ii) corporations which adopt provisions in their articles of incorporation or By-Laws expressly electing not to be covered by the statute; and (iii) certain circumstances in which a stockholder inadvertently becomes an Interested Shareholder. MBI's Restated Articles of Incorporation and By-Laws do not "opt out" of the Missouri Business Combination Statute. The Missouri Act also contains a "Control Share Acquisition Statute" which provides that an "Acquiring Person" who after any acquisition of shares of -84- a publicly traded corporation has the voting power, when added to all shares of the same corporation previously owned or controlled by the Acquiring Person, to exercise or direct the exercise of: (i) 20% but less than 33 1/3%, (ii) 33 1/3% or more but less than a majority or (iii) a majority, of the voting power of outstanding stock of such corporation must obtain stockholder approval for the purchase of the "Control Shares." If approval is not given, the Acquiring Person's shares lose the right to vote. The statute prohibits an Acquiring Person from voting its shares unless certain disclosure requirements are met and the retention or restoration of voting rights is approved by both: (i) a majority of the outstanding voting stock, and (ii) a majority of the outstanding voting stock after exclusion of "Interested Shares." Interested Shares are defined as shares owned by the Acquiring Person, by directors who are also employees, and by officers of the corporation. Stockholders are given dissenters' rights with respect to the vote on Control Share Acquisitions and may demand payment of the fair value of their shares. A number of acquisitions of shares are deemed not to constitute Control Share Acquisitions, including good faith gifts, transfers pursuant to wills, purchases pursuant to an issuance by the corporation, mergers involving the corporation which satisfy the other requirements of the Missouri Act, transactions with a person who owned a majority of the voting power of the corporation within the prior year, or purchases from a person who has previously satisfied the provisions of the Control Share Acquisition Statute so long as the transaction does not result in the purchasing party having voting power after the purchase in a percentage range (as set forth in the immediately preceding paragraph) beyond the range for which the selling party previously satisfied the provisions of the statute. Additionally, a corporation may exempt itself from application of the statute by inserting a provision in its articles of incorporation or by-laws expressly electing not to be covered by the statute. MBI's Restated Articles of Incorporation and By-Laws do not "opt out" of the Control Share Acquisition Statute. The Arkansas Act does not include similar antitake-over statutes. Size of Board of Directors. As permitted under the Missouri Act, the number of directors on the Board of Directors of MBI is set forth in MBI's By-Laws, which provide that the number of directors may be fixed from time to time at not less than 12 nor more than 24 by an amendment of the By-Laws or by a resolution of the Board of Directors, in either case, adopted by the vote or -85- consent of at least 66-2/3% of the number of directors then authorized under the By-Laws. Similar to the Missouri Act, the Arkansas Act provides that a corporation may fix the number of directors in its by-laws. TCB's By-Laws provide that the number of directors on the Board of Directors of TCB may be fixed from time to time at not less than 3 nor more than 15 by resolution of the Board of Directors. TCB's By-Laws, including the provision establishing the number of members of TCB's Board of Directors, may be amended by the vote of the holders of a majority of the TCB Common Stock or by the vote of a majority of the members of the TCB Board of Directors. SUPERVISION AND REGULATION General As a bank holding company, MBI is subject to regulation under the BHCA and its examination and reporting requirements. Under the BHCA, a bank holding company may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank or savings and loan association, without the prior approval of (or, in the case of certain non-bank companies, prior notice to) the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. MBI and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of MBI's subsidiaries, and therefore the earnings of MBI, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board and the Comptroller of the Currency (the "Comptroller"). In addition, there are numerous governmental requirements and regulations that affect the activities of MBI and its subsidiaries. Certain Transactions with Affiliates There are various legal restrictions on the extent to which a bank holding company such as MBI and its nonbank subsidiaries can engage in certain transactions, including borrowing or otherwise obtaining credit from its bank subsidiaries. In general, these restrictions require that any such extensions of credit must be on non-preferential terms and secured by designated amounts of specified collateral and be limited, as to any one of the holding company or -86- such nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to the holding company and all such nonbank subsidiaries in the aggregate, to 20% of such bank's capital stock and surplus. See "-- Recent Legislation." Payment of Dividends MBI is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of MBI's revenues is dividends from its national and state banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends the affiliate banks can pay to MBI without regulatory approval. The approval of the appropriate bank regulator is generally required for any dividend by a national bank or state member bank if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits, as defined by regulatory authorities, for such year combined with its retained net profits for the preceding two years. In addition, a national bank or a state member bank generally may not pay a dividend in an amount greater than its net profits then on hand. The payment of dividends by any affiliate bank may also be affected by other factors, such as the maintenance of adequate capital for such affiliate bank. Capital Adequacy The Federal Reserve Board has issued standards for measuring capital adequacy for bank holding companies. These standards are designed to provide risk-responsive capital guidelines and to incorporate a consistent framework for use by financial institutions operating in major international financial markets. The banking regulators have issued standards for banks that are similar but not identical to the standards for bank holding companies. In general, the risk-related standards require banks and bank holding companies to maintain capital based on "risk adjusted" assets so that categories of assets with potentially higher credit risk will require more capital backing than categories with lower credit risk. In addition, banks and bank holding companies are required to maintain capital to support off-balance sheet activities such as loan commitments. The standards classify total capital for this risk-based measure into two tiers referred to as Tier 1 and Tier 2. Tier 1 capital consists of common stockholders' equity, certain noncumulative and cumulative perpetual preferred -87- stock, and minority interests in equity accounts of consolidated subsidiaries; Tier 2 capital consists of the allowance for loan and lease losses (within certain limits), perpetual preferred stock not included in Tier 1, hybrid capital instruments, term subordinated debt, and intermediate-term preferred stock. By December 31, 1992, bank holding companies were required to meet a minimum ratio of 8% of qualifying total capital to risk-adjusted assets, and a minimum ratio of 4% of qualifying Tier 1 capital to risk-adjusted assets. Capital that qualifies as Tier 2 capital is limited in amount to 100% of Tier 1 capital in testing compliance with the total risk-based capital minimum standards. See "-- Recent Legislation." In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to adjusted average total assets (the "leverage ratio") of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. Other bank holding companies generally are required to maintain a leverage ratio of at least 3% plus 100 to 200 basis points. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it may consider other indicia of capital strength in evaluating proposals for expansion or new activities. Support of Subsidiary Banks Under Federal Reserve Board policy, MBI is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each of the subsidiaries in circumstances where it might not choose to do so absent such a policy. In addition, any capital loans by MBI to any of its subsidiaries would also be subordinate in right of payment to deposits and certain other indebtedness of such subsidiary. This support may be required at times when MBI may not find itself able to provide it. Consistent with this policy regarding bank holding companies serving as a source of financial strength for their subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent -88- with the bank holding company's capital needs, asset quality and overall financial condition. Recent Legislation The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which could result in insured depository institutions owned by MBI being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by MBI. Under FIRREA, failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made extensive changes to the federal banking laws, some of which have delayed effective dates or require implementing regulations. FDICIA instituted certain changes to the supervisory process, including provisions that mandate certain regulatory agency actions against undercapitalized institutions within specified time limits, and contain various provisions that may affect the operations of banks and savings institutions. The prompt corrective action provisions of FDICIA require the federal banking regulators to assign each insured institution to one of five capital categories ("well capitalized," "adequately capitalized" or one of three "undercapitalized" categories) and to take progressively more restrictive actions as specified below. Under FDICIA, capital requirements would include a leverage limit, a risk-based capital requirement and any other measure of capital deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any relevant capital measure. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") shall be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days after the institution becomes undercapitalized; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by -89- the institution's holding company (under which the holding company would be liable up to the lesser of 5% of the institution's total assets at the time the institution became undercapitalized or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan) that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters. The bank regulatory agencies have discretionary authority to reclassify a well capitalized institution as adequately capitalized or to impose on an adequately capitalized institution requirements or actions specified for undercapitalized institutions if the agency determines after notice and an opportunity for hearing that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice, which can consist of the receipt of an unsatisfactory examination rating if the deficiencies cited are not corrected. A significantly undercapitalized institution, as well as any undercapitalized institution that did not submit or implement an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, restrictions on asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution could also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and a critically undercapitalized institution is prohibited from making payments of principal or interest on its debt that is subordinated to claims of general creditors. If an institution's ratio of tangible equity to total assets falls below a level established by the appropriate federal banking regulator, which may not be less than 2% of total assets nor more than 65% of the minimum tangible equity level otherwise required (the "critical capital level"), the institution will be subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made to the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. -90- The FDIC, the Comptroller and the Federal Reserve Board have adopted capital-related regulations under FDICIA. Under those regulations, a bank will be deemed well capitalized if it: (a) has a risk-based capital ratio of 10% or greater; (b) has a ratio of Tier 1 capital to risk-adjusted assets of 6% or greater; (c) has a ratio of Tier 1 capital to adjusted total assets of 5% or greater; and (d) is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An association will be deemed adequately capitalized if it was not "well-capitalized" and: (a) has a risk-based capital ratio of 8% or greater; (b) has a ratio of Tier 1 capital to risk-adjusted assets of 4% or greater; and (c) has a ratio of Tier 1 capital to adjusted total assets of 4% or greater (except that certain associations rated "composite 1" under the federal banking agencies' CAMEL rating system may be adequately capitalized if their ratio of Tier 1 capital to adjusted total assets were 3% or greater). An institution that does not meet one or more of the "adequately capitalized" tests is deemed to be "undercapitalized." If the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3%, the institution is deemed to be "significantly undercapitalized." An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the OCC's regulations) to total assets that is equal to or less than 2%. The federal bank regulatory agencies have issued various proposals to amend the risk-based capital guidelines for banks and bank holding companies. Under one proposal, a bank would be required to give explicit consideration to interest rate risk as an element of capital adequacy by maintaining capital to compensate for such risk in an amount measured by such bank's exposure to interest rate risk in excess of a regulatory threshold. Another proposal would revise the treatment given to (i) low-level recourse arrangements to reduce the amount of capital required and (ii) certain direct credit substitutes provided by banking organizations to require that capital be maintained against the value of the assets enhanced or the loans protected. A proposal recently issued by the Federal Reserve Board and expected to be joined in by the other bank regulatory agencies increases the amount of capital required to be carried against certain long-term derivative contracts; in addition, the proposal recognizes the effect of certain bilateral netting arrangements in reducing potential future exposure under these contracts. -91- The FDIC has adopted final regulations under FDICIA governing the receipt of brokered deposits. Under these regulations, a bank cannot accept brokered deposits unless (i) it is "well capitalized" or (ii) it is "adequately capitalized" and receives a waiver from the FDIC. In addition, banks that accept brokered deposits pursuant to such waivers (as well as banks in conservatorship) may not pay interest on such deposits in excess of 75 basis points over prevailing market rates. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. There are no such restrictions on a bank that is "well capitalized." The FDIC, pursuant to the directive of FDICIA, has adopted a risk-based premium schedule. Under this schedule, the annual premiums initially range from $0.23 to $0.31 for every $100 of deposits. Each financial institution is assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and on the basis of other information relevant to the institution's financial conditions and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC. FDICIA also made extensive changes in existing rules regarding audits, examinations and accounting. It generally requires annual on-site, full-scope examinations by each bank's primary federal regulator. It also imposed new responsibilities on management, the independent audit committee and outside accountants to develop or approve reports regarding the effectiveness of internal controls, legal compliance and off-balance sheet liabilities and assets. Legislation enacted in August 1993 provides a preference for deposits and certain claims for administrative expenses and employee compensation against an insured depository institution, such as TCB's and MBI's insured bank subsidiaries, in the "liquidation or other resolution" of such an institution by any receiver. Such obligations would be afforded priority over other general unsecured claims against such an institution, including federal funds and letters of credit, as well as any obligation to stockholders of such an institution in their capacity as such. In September 1994, legislation was enacted that is expected to have a significant effect in restructuring the banking industry in the United States. -92- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates the interstate expansion and consolidation of banking organizations (i) by permitting bank holding companies that are adequately capitalized and managed, one year after enactment of the legislation, to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) by permitting the interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or to "opt out" of this authority before that date, (iii) by permitting banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) by permitting foreign banks to establish, with approval of the regulators in the United States, branches outside their home states to the same extent that national or state banks located in the home state would be authorized to do so, and (v) by permitting, beginning September 29, 1995, banks to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state. One effect of this legislation will be to permit MBI to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Missouri. Overall, this legislation is likely to have the effects of increasing competition and promoting geographic diversification in the banking industry. RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS KPMG Peat Marwick LLP served as MBI's independent accountants for the year ended December 31, 1993 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements, review and consultation regarding filings with the Commission and other regulatory authorities and consultation on financial accounting and reporting matters. Ernst & Young LLP served as TCB's independent accountants for the year ended December 31, 1993 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements and consultation on financial accounting and reporting matters. -93- LEGAL MATTERS The validity of the MBI Common Stock to be issued in the Merger will be passed upon by Jon W. Bilstrom, General Counsel and Secretary of MBI, who, as of the date of this Information Statement/Prospectus, beneficially owned 10,615 shares of MBI Common Stock and held options to acquire 51,749 additional shares of MBI Common Stock. EXPERTS The consolidated financial statements of MBI as of December 31, 1993, 1992 and 1991, and for each of the years in the three-year period ended December 31, 1993, incorporated by reference in MBI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and the supplemental consolidated financial statements of MBI as of December 31, 1993, 1992 and 1991, and for each of the years in the three-year period ended December 31, 1993, contained in MBI's Current Report on Form 8-K dated June 17, 1994, have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of such firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP dated January 13, 1994, except as to Note Q, which is as of February 10, 1994, contains an explanatory paragraph referring to the change in accounting for income taxes. The consolidated financial statements of TCB as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993 appearing in this Information Statement/Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Information Statement and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. STOCKHOLDER PROPOSALS If the Merger is consummated, stockholders of TCB will become stockholders of MBI at the Effective Time. MBI stockholders may submit to MBI proposals for formal consideration at the 1995 annual meeting of MBI's stockholders and inclusion in MBI's proxy statement and proxy for such meeting. All such proposals had to be received in writing by the Corporate Secretary at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by November 22, 1994 in order to be considered for inclusion in MBI's Information -94- Statement and information for the 1995 annual meeting. Proposals to be considered for inclusion in MBI's proxy statement and proxy for the 1996 Annual Meeting must be received in writing by November 21, 1995. -95- INDEX TO TCBANKSHARES, INC. CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1993, 1992 and 1991 Contents Report of Independent Auditors.................................................. Audited Consolidated Financial Statements Consolidated Balance Sheets..................................................... Consolidated Statements of Income............................................... Consolidated Statements of Shareholders' Equity................................. Consolidated Statements of Cash Flows........................................... Notes to Consolidated Financial Statements...................................... -96- TCBANKSHARES, INC.. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors The Board of Directors and Shareholders TCBankshares, Inc. We have audited the accompanying consolidated balance sheets of TCBankshares, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, 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 TCBankshares, Inc. 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. March 7, 1994 ERNST & YOUNG LLP -97-
TCBankshares, Inc. Consolidated Balance Sheets December 31 1993 1992 ------------ ------------- Assets Cash and due from banks (Note 15) .......... $36,014,642 $38,402,264 Federal funds sold ......................... 9,225,000 7,825,000 ------------ ------------- Total cash and cash equivalents ............ 45,239,642 46,227,264 Interest bearing deposits with other banks .................................... 1,292,524 4,758,262 Investment securities (estimated market value: 1993--$590,576,558; 1992--$554,677,360) (Notes 3 and 16) ..... 576,885,431 544,162,081 Loans (Notes 4, 9, 10, 11, and 16): Commercial, financial and agri- cultural ............................... 152,431,890 133,073,546 Real estate--construction ................ 101,207,379 83,593,120 Real estate--mortgage .................... 178,204,206 159,813,884 Installment .............................. 131,739,175 88,926,602 ------------ ------------- Total loans ................................ 563,582,650 465,407,152 Less: Unearned income .......................... (1,585,040) (2,219,361) Allowance for loan losses (Note 4) ....... (7,922,797) (7,134,801) ------------ ------------- Net loans .................................. 554,074,813 456,052,990 Premises and equipment, net (Note 5) ....... 26,472,758 20,825,702 Accrued interest receivable ................ 9,189,356 9,630,415 Intangible assets, less accumulated amortization (1993--$3,373,498; 1992--$3,041,860)......................... 4,428,366 4,760,004 Deferred income taxes (Note 8) ............. 2,412,262 2,726,022 Other real estate owned .................... 2,464,485 3,441,695 Other assets ............................... 2,827,074 3,167,244 -------------- -------------- Total assets ............................... $1,225,286,711 $1,095,751,679 ============== ==============
-98- December 31 1993 1992 -------------- -------------- Liabilities and shareholders' equity Noninterest bearing deposits ............. $ 118,641,794 $ 106,841,560 Interest bearing deposits ................ 966,833,570 873,835,485 -------------- -------------- Total deposits (Notes 6 and 16) .......... 1,085,475,364 980,677,045 Federal funds purchased and securities sold under agreements to repurchase ...... 35,346,432 24,130,052 Notes payable (Note 7) ................... 7,494,500 8,240,000 Accrued interest payable ................. 4,703,895 4,250,820 Other liabilities (Notes 14 and 16) ...... 3,712,970 3,796,694 Capital notes (Note 7) ................... 157,500 175,000 -------------- -------------- Total liabilities ........................ 1,136,890,661 1,021,269,611 Commitments (Note 9) Shareholders' equity (Notes 2, 7 and 12): Preferred stock, Series A, non-cumulative, non-voting, $10 par value; liquidation value--$500 per share: Authorized shares--5,500; Issued and outstanding shares--5,306....................... 53,060 53,060 Preferred stock, Series B, 8.5%, cumulative, non-voting, $10 par value; liquidation value--$1,000 per share: Authorized shares--9,500; Issued and outstanding shares--9,500....................... 95,000 95,000 Common stock, $50 par value: Authorized shares--5,500 Issued and outstanding shares--2,131.74 ..................... 106,587 106,587 Capital surplus: Common stock ........................... 9,181,762 9,181,762 Preferred stock ........................ 12,004,940 12,004,940 Retained earnings ........................ 66,954,701 53,040,719 -------------- -------------- Total shareholders' equity ................. 88,396,050 74,482,068 -------------- -------------- Total liabilities and shareholders' equity $1,225,286,711 $1,095,751,679 =============== ============== See accompanying notes. -99- TCBankshares, Inc. Consolidated Statements of Income Year ended December 31 1993 1992 1991 ------------ ------------ ------------ Interest income: Loans, including fees ........... $ 42,067,313 $ 40,305,830 $ 43,754,310 Investment securities: Taxable ....................... 31,074,144 30,959,869 23,609,326 Tax-exempt .................... 5,741,381 5,234,755 5,123,004 Other ........................... 383,430 687,277 1,833,095 ------------ ------------ ------------ Total interest income ............. 79,266,268 77,187,731 74,319,735 Interest expense (Note 13): Deposits ........................ 32,353,747 34,229,856 40,529,750 Other ........................... 1,558,317 1,531,542 1,870,429 ------------ ------------ ------------ Total interest expense ............ 33,912,064 35,761,398 42,400,179 ------------ ------------ ------------ Net interest income ............... 45,354,204 41,426,333 31,919,556 Provision for loan losses (Note 4) 1,224,309 2,085,784 2,150,834 ------------ ------------ ------------ Net interest income after provision for loan losses ................. 44,129,895 39,340,549 29,768,722 Other income: Service charges on deposit accounts ..................... 5,470,535 4,803,668 4,469,073 Investment securities gains, net (Note 3) .................. 1,379,402 2,633,851 567,551 Trust fees ...................... 792,896 686,351 603,637 Gain on sale of loans ........... 880,546 318,858 118,057 Other ........................... 3,011,073 1,795,383 2,165,100 ------------ ------------ ------------ 11,534,452 10,238,111 7,923,418 Other expenses: Salaries and employee benefits (Note 14) ........................ 15,729,918 13,595,998 11,049,837 Net occupancy and equipment expense (Notes 5 and 9) .......... 5,074,615 4,308,398 3,748,469 Amortization of intangible assets .. 331,638 390,013 329,138 Merchandising expense .............. 2,923,013 2,472,070 2,020,049 Data processing expense ............ 1,994,927 1,789,013 1,533,115 FDIC assessment .................... 2,216,412 1,943,119 1,545,651 Other .............................. 6,767,122 6,740,951 5,513,416 ----------- ----------- ----------- 35,037,645 31,239,562 25,739,675 Income before income taxes ........... 20,626,702 18,339,098 11,952,465 Income taxes (Note 8) ................ 5,437,576 4,940,997 2,664,614 ----------- ----------- ----------- Net income ........................... 15,189,126 $13,398,101 $ 9,287,851 =========== =========== =========== See accompanying notes. -100-
TCBankshares, Inc. Consolidated Statements of Shareholders' Equity Capital Surplus --------------- Preferred Stock Common Common Preferred Retained --------------- Series A Series B Stock Stock Stock Earnings Total -------- -------- ----- ----- ----- -------- ----- Balance at January 1, 1991 $ 53,060 $ 95,000 $ 106,587 $ 9,181,762 $ 12,004,940 $ 32,904,651 $ 54,346,000 Net income -- -- -- -- -- 9,287,851 9,287,851 Cash dividends: Preferred stock, Series A -- -- -- -- -- (212,240) (212,240) Preferred stock, Series B -- -- -- -- -- (807,500) (807,500) Common stock -- -- -- -- -- (255,000) (255,000) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1991 53,060 95,000 106,587 9,181,762 12,004,940 40,917,762 62,359,111 Net income -- -- -- -- -- 13,398,101 13,398,101 Cash dividends: Preferred stock, Series A -- -- -- -- -- (212,240) (212,240) Preferred stock, Series B -- -- -- -- -- (807,500) (807,500) Common stock -- -- -- -- -- (255,404) (255,404) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1992 53,060 95,000 106,587 9,181,762 12,004,940 53,040,719 74,482,068 Net income -- -- -- -- -- 15,189,126 15,189,126 Cash dividends: Preferred stock, Series A -- -- -- -- -- (212,240) (212,240) Preferred stock, Series B -- -- -- -- -- (807,500) (807,500) Common stock -- -- -- -- -- (255,404) (255,404) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1993 $ 53,060 $ 95,000 $ 106,587 $ 9,181,762 $ 12,004,940 $ 66,954,701 $ 88,396,050 ============ ============ ============ ============ ============ ============ ============ See accompanying notes.
-101-
TCBankshares, Inc. Consolidated Statements of Cash Flows Year ended December 31 1993 1992 1991 ---- ---- ---- Operating activities Net income $ 15,189,126 $ 13,398,101 $ 9,287,851 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,224,309 2,085,784 2,150,834 Provision for depreciation and losses on other real estate 174,174 205,376 407,898 Depreciation and amortization 2,484,515 2,272,770 1,560,763 Amortization of intangible assets 331,638 390,013 329,138 Amortization of investment security premiums, net of accretion of discounts 1,330,419 944,884 368,731 Deferred income tax benefit (365,100) (387,650) (294,709) Gain on sale of loans (880,546) (318,858) (118,057) (Gain) loss on sales of other real estate 8,282 (129,001) (309,809) (Gain) loss on disposal of premises and equipment (27,737) 325,717 (97,420) First mortgage loans held for resale: Proceeds collected on loans sold 87,684,358 41,754,326 25,109,464 Loans made to customers (92,033,789) (45,039,094) (25,083,725) Realized investment security gains (1,379,402) (2,633,851) (567,551) (Increase) decrease in accrued interest receivable, deferred taxes, and other assets 1,371,973 (1,781,846) 324,968 Increase (decrease) in accrued interest payable and other liabilities 369,351 (5,198,918) 969,150 --------------- --------------- --------------- Net cash provided by operating activities 15,481,571 5,887,753 14,037,526 Investing activities Net increase in loans (93,831,937) (51,745,980) (6,139,674) Purchases of premises and equipment (8,242,515) (4,349,200) (4,067,987) Proceeds from sales of premises and equipment 226,797 901,057 133,916 Purchases of investment securities (240,031,967) (402,172,272) (281,295,752) Proceeds from maturities of investment securities and principal payments on mortgage-backed securities 202,578,198 145,804,117 105,223,082 Proceeds from sales of investment securities 4,779,402 105,529,913 107,786,441 Net (increase) decrease in interest bearing deposits with other banks 3,465,738 17,217,051 (6,652,689) Proceeds from sales of other real estate 610,536 2,281,929 2,021,367 --------------- --------------- --------------- Net cash used in investing activities (130,445,748) (186,533,385) (82,991,296) Financing activities Net increase in deposits 104,798,319 201,563,407 42,816,204 Net increase (decrease) in short-term borrowings 11,216,380 (1,639,196) 10,264,469 Cash dividends paid (1,275,144) (1,073,269) (1,274,740) Principal payments on notes payable (745,500) (2,980,000) (1,275,000) Proceeds from notes payable -- 2,545,000 -- Principal payment on capital note (17,500) (17,500) (17,500) --------------- --------------- --------------- Net cash provided by financing activities 113,976,555 198,398,442 50,513,433 --------------- --------------- --------------- Increase (decrease) in cash and cash equivalents (987,622) 17,752,810 (18,440,337) Cash and cash equivalents at beginning of year 46,227,264 28,474,454 46,914,791 --------------- --------------- --------------- Cash and cash equivalents at end of year $ 45,239,642 $ 46,227,264 $ 28,474,454 =============== =============== =============== See accompanying notes.
-102- TCBankshares, Inc. Notes to Consolidated Financial Statements December 31, 1993 1. Accounting Policies Consolidation The consolidated financial statements include the accounts of TCBankshares, Inc. and its six majority-owned banking subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Investment Securities Investment securities are stated at cost adjusted for amortization of premiums and accretion of discounts. The adjusted cost of the specific security sold is used to compute gain or loss on the sale of investment securities. Management determines the appropriate classification of investment securities at the time of purchase. Management has the intent and the Company has the ability to hold investment securities to maturity or on a long-term basis. As such, these securities are carried at amortized historical costs. If securities are acquired with the intent of holding for an indefinite period or for sale prior to maturity, the securities would be carried at the lower of cost or market. (See "Future Application of Accounting Standards" later in Note 1.) Revenue Recognition Interest on loans is accrued and credited to operations generally based upon the principal amount outstanding. Interest on loans is not accrued when amounts are considered doubtful of collection. If the ultimate collectibility of principal is in doubt, any payment received on a loan, on which the accrual of interest has been suspended, is applied to reduce principal to the extent necessary to eliminate such doubt. When interest accruals are discontinued, interest credited to income on the loan in the current year is reversed, and interest accrued in the prior year is charged to the allowance for loan losses. Allowance for Loan Losses The allowance for loan losses is maintained at a level management believes is adequate to absorb potential losses in the loan portfolio. Management's -103- determination of the adequacy of the allowance is based on an evaluation of potential losses in the loan portfolio considering current economic conditions, past loan loss experience, volume, growth and composition of the loan portfolio, nonperforming loans, and other relevant factors. The allowance is increased by provisions for loan losses charged against income and reduced by charge-offs, net of recoveries. Premises and Equipment The Company's premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed generally by the straight-line method based upon the estimated useful lives of the assets. The carrying amount of assets sold, retired or disposed of and the related accumulated depreciation and amortization are eliminated from the accounts and the resulting gain or loss is recorded in operating results. First Mortgage Real Estate Loans Held for Resale First mortgage real estate loans held for resale ($10,741,693 at December 31, 1993 and $5,511,716 at December 31, 1992) are classified with real estate mortgage loans in the accompanying consolidated balance sheet and are carried at the lower of cost or fair market value on a net aggregate basis. These loans are generally presold or subject to firm purchase commitments. Other Real Estate Other real estate consists of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at the lower of cost or estimated fair market value based on appraised value at the date acquired or transferred from loans less estimated selling expenses. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Subsequent valuation adjustments, if any, and gains or losses resulting from sales are recorded in operating results. The Company's state banking subsidiary is required to amortize other real estate over sixty months, in accordance with state banking regulations. The regulators may grant deferrals of this required amortization, if requested by the Company. Net expenses relating to other real estate (included in other expenses) were $101,000, $211,000, and $249,000 during the years ended December 31, 1993, 1992, and 1991, respectively. These amounts include the state regulators mandated amortization expense. Loans aggregating approximately $(184,000), $643,000, and -104- $5,131,000 were transferred to (from) other real estate during 1993, 1992, and 1991, respectively. Intangible Assets Intangible assets consist of the unamortized excess cost of purchased banking subsidiaries and premiums paid for the acquisition of deposits from failed financial institutions. Unamortized costs of purchased subsidiaries in excess of the fair value of underlying net tangible assets acquired are being amortized over 25 years using the straight-line method. Premiums associated with the future earnings potential of acquired deposits are being amortized, using the straight-line method, over the estimated five to ten year life of the deposits. The net costs associated with acquired deposits were $763,000 at December 31, 1993, $856,000 at December 31, 1992 and $81,500 at December 31, 1991. Income Taxes The Company and its subsidiaries file consolidated income tax returns. It is the Company's practice to have its subsidiaries pay to or receive from the Company and other affiliates amounts based on the taxable income (or loss) of the subsidiary. Certain items, primarily additions to the allowance for loan losses, are recognized as income or expense in different periods for financial and for income tax reporting purposes. Deferred taxes are provided for such timing differences. In February 1992, the Financial Accounting Standards Board issued Statement No. 109, "Accounting for Income Taxes." The Company adopted the provisions of the new standard in its consolidated financial statements as of January 1, 1993. As permitted by the Statement, prior year financial statements have not been restated to reflect the change in accounting method. The effect as of January 1, 1993 of adopting Statement 109 increased consolidated net income by approximately $126,000. This amount is included as a reduction of the provision for income taxes in the 1993 consolidated statement of income. Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method. -105- Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. Statement of Cash Flows Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one day periods. Future Application of Accounting Standards In May 1993 the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Statement 115 will be adopted by the Company on January 1, 1994 and requires that investments in debt and equity securities be classified as held to maturity, trading, or available for sale. Investments in debt securities classified as held to maturity are to be reported at amortized cost. Investments in debt and equity securities classified as trading are to be reported at fair value with related unrealized gains and losses included in net income. Investments in debt and equity securities classified as available for sale are to be reported at fair value with related unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. Management plans to classify its municipal securities as investments held to maturity and the majority of the remainder of its investment securities as available for sale. At December 31, 1993, adoption of Statement 115 would have increased shareholders' equity by approximately $5,666,000 and have no impact on the Company's net income for 1993. Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits" requires employers to recognize the obligation to provide postemployment benefits if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable, and the amount of benefits can be reasonably estimated. The Company will be required to adopt Statement 112 in 1994. The Company's initial assessment is that the adoption of this new standard will not have a material impact on its financial position or results of operations. Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" requires that impaired loans that are within the scope of the Statement be measured based on the present value of expected future cash flows discounted at the loan's effective rate, or, as a practical expedient, at -106- the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company will be required to adopt Statement 114 in 1995. Management does not believe the adoption of this new standard will have a material impact on the Company's financial position or results of operations. Reclassifications Certain amounts in the 1991 and 1992 consolidated financial statements have been reclassified to conform to the reporting format used for the 1993 consolidated financial statements. 2. Mergers and Acquisitions On January 30, 1992, the Board of Directors of the Company approved a plan of exchange with Twin City Bank whereby the Company issued common and preferred stock in exchange for 267,395 shares of common stock and all of the preferred stock of Twin City Bank based on an exchange ratio which valued the common stock of the Company at 1.1 times book value per share and which valued Twin City Bank's common stock at 1.09 times book value per share on the date of exchange. As a result, Twin City Bank became a 99%-owned subsidiary of TCBankshares, Inc. The plan of exchange provided that Twin City Bank's outstanding perpetual, nonvoting, 8.5% cumulative preferred stock be exchanged for shares of perpetual, nonvoting, 8.5% cumulative preferred stock of TCBankshares, Inc., with dividends and terms of preference similar to the Twin City Bank's preferred stock previously held. The plan of exchange was approved by the Federal Reserve Bank of St. Louis and other appropriate regulatory agencies and was accounted for as a pooling-of-interests. Twin City Bank's financial statements are included in the consolidated financial statements for all periods presented. In March 1992, the Company was the successful bidder on approximately $142 million of deposit accounts, previously held by Home Federal Savings and Loan, in a liquidation sale conducted by the Resolution Trust Corporation. The Company paid a deposit premium of approximately $925,000, which will be amortized over 5 to 10 years. In conjunction with the purchase of the deposit accounts, Twin City Bank paid a $2,500,000 special dividend of which $2,475,880 was paid to the -107- Company to enable the Company to make an initial capital contribution to a newly chartered national bank, The Community Bank of Batesville, Arkansas (Batesville). Batesville was formed to purchase certain assets and assume certain liabilities from the Resolution Trust Corporation in connection with the Company's successful bid to acquire the Batesville Branch of the former Home Federal Savings and Loan. 3. Investment Securities The amortized cost and estimated market value of investment securities at December 31, 1993 are as follows:
1993 -------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ------------- -------------- --------------- -------------- United States Treasury securities and obligations of United States Govern- ment agencies and corporations $ 153,713,471 $ 6,706,738 $ (72,395) $ 160,347,814 Obligations of states and political subdivisions 99,496,415 5,367,324 (260,385) 104,603,354 Mortgage-backed securities 323,006,834 4,209,144 (2,259,299) 324,956,679 ------------- ------------- ------------- ------------- Total debt securities 576,216,720 16,283,206 (2,592,079) 589,907,847 SLMA stock 365,000 -- -- 365,000 Federal Reserve Bank stock 303,711 -- -- 303,711 ------------- ------------- ------------- ------------- Total investment securities $ 576,885,431 $ 16,283,206 $ (2,592,079) $ 590,576,558 ============= ============= ============= =============
The amortized cost and estimated market value of investment securities at December 31, 1992 are as follows:
1992 -------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ------------- -------------- --------------- -------------- United States Treasury securities and obligations of United States Govern- ment agencies and corporations $139,862,977 $ 3,529,224 $ (845,618) $142,546,583 Obligations of states and political subdivisions 80,546,757 3,675,941 (157,626) 84,065,072 Mortgage-backed securities 323,184,980 4,865,747 (552,389) 327,498,338 Other debt securities 267 -- -- 267 ------------ ------------ ------------ ------------ Total debt securities 543,594,981 12,070,912 (1,555,633) 554,110,260 SLMA stock 365,000 -- -- 365,000 Federal Reserve Bank stock 202,100 -- -- 202,100 ------------ ------------ ------------ ------------ Total investment securities $544,162,081 $ 12,070,912 $ (1,555,633) $554,677,360 ============= ============ ============ ============
The amortized cost and estimated market value of investment securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to -108- call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value ------------- ------------- Due in one year or less $ 19,402,216 $ 19,677,137 Due in one year through five years 108,109,310 112,949,554 Due after five years through ten years 57,392,780 60,156,770 Due after ten years 68,305,580 72,167,707 ------------- ------------- 253,209,886 264,951,168 Mortgage-backed securities 323,006,834 324,956,679 ------------- ------------- Total debt securities 576,216,720 589,907,847 SLMA stock 365,000 365,000 Federal Reserve Bank stock 303,711 303,711 ------------- ------------- Total investment securities $ 576,885,431 $ 590,576,558 ============= ============= The Company maintains an allowance for permanent declines in value on obligations of state and political subdivisions and the SLMA preferred stock. The allowance was $90,000 and $2,240,000 at December 31, 1993 and 1992, respectively. During 1992 and 1991, provisions for permanent declines in value of $567,643 and $955,837, respectively, were recorded and included in net securities gains and losses. No such provisions were made in 1993. Proceeds from sales of investments in debt securities during 1993, 1992 and 1991 were $4,779,402, $105,529,913 and $107,786,441, respectively. Gross gains of $1,382,963, $3,178,678 and $1,640,375 and gross losses of $(3,561), $(544,827) and $(1,072,824) in 1993, 1992 and 1991, respectively, were realized on those sales. Investment securities with a book value of approximately $240,235,000 and $223,241,000 were pledged to secure public deposits and for other purposes as required by law, at December 31, 1993 and 1992, respectively. 4. Allowance for Loan Losses and Nonperforming Loans Summarized below are the transactions in the allowance for loan losses: -109- 1993 1992 1991 ---- ---- ---- Balance at January 1 $ 7,134,801 $ 6,236,160 $ 5,038,168 Provision for loan losses 1,224,309 2,085,784 2,150,834 Allowance for loan losses on loans purchased -- -- 228,289 Charge-offs (deduction) (812,381) (1,763,083) (1,568,680) Recoveries 376,068 575,940 387,549 Net charge-offs (436,313) (1,187,143) (1,181,131) ------------ ------------ ------------ Balance at December 31 $ 7,922,797 $ 7,134,801 $ 6,236,160 ============ ============ ============ The following table presents information concerning the aggregate amount of nonperforming loans: 1993 1992 1991 ---- ---- ---- Nonaccrual loans $2,210,327 $4,810,139 $7,117,974 Accruing loans past due ninety days or more as to interest or principal payments 2,444,667 626,881 1,160,913 Interest income that would have been recorded under original terms for nonaccrual loans 180,134 445,401 625,430 Interest income recorded during the period for nonaccrual loans 61,954 78,688 266,806 Interest is not accrued on loans when principal or interest is in default for 90 days or more unless the loans are well secured and in the process of collection. The Company's state banking subsidiary is required by state bank regulations to place on nonaccrual status loans 105 days or more past due. There were no significant commitments to lend additional funds to borrowers included in the nonperforming loan categories. 5. Premises and Equipment A summary of premises and equipment is as follows: 1993 1992 ---- ---- Land and land improvements $ 2,867,676 $ 2,499,296 Buildings and building improvements 18,171,774 15,923,501 Leasehold improvements 4,830,727 2,534,156 Furniture, fixtures and equipment 11,844,234 9,162,434 Construction in progress 1,352,787 1,089,149 Less accumulated depreciation and amortization (12,594,440) (10,382,834) ------------ ------------- $ 26,472,758 $ 20,825,702 ============ ============ Depreciation and amortization of bank premises and equipment was $2,159,403, $1,832,593, and $1,411,276 in 1993, 1992, and 1991, respectively. -110- 6. Deposits The following summarizes information on deposits as of December 31: 1993 1992 -------------- -------------- Demand, noninterest bearing $ 118,641,794 $ 106,841,560 Demand, interest bearing: NOW accounts 171,886,904 162,279,947 Money market accounts 99,803,557 90,129,469 Savings 65,920,899 53,937,162 Certificates of deposit 629,222,210 567,488,907 -------------- -------------- $1,085,475,364 $ 980,677,045 ============== ============== Certificates of deposit of $100,000 or more $ 179,646,000 $ 157,156,141 ============== ============== 7. Notes Payable and Capital Notes Notes payable consists of the following: 1993 1992 ---------- ---------- Notepayable at prime (6% at December 31, 1993), payable $ 185,000 plus interest quarterly through November 1, 1994; collateralized by the common stock of subsidiary banks owned by the Company $5,205,000 $5,760,000 Amortizing revolving line of credit at LIBOR plus 2.25% (5.5625% at December 31, 1993), payable $63,625 plus interest quarterly through November 1, 1995; collateralized by the common stock of subsidiary banks owned by the Company 2,289,500 2,480,000 ---------- ---------- $7,494,500 $8,240,000 ========== ========== Maturities of long-term debt are $5,459,500 in 1994 and $2,035,000 in 1995. The loan agreements for both notes include, among other things, provisions relative to additional borrowings, maintenance of capital, and restrictions on the payment of cash dividends, which are no more restrictive than those required by the bank regulators (see Note 12). The amortizing revolving line of credit increased to $8 million effective January 1, 1993 making $5,710,500 available to the Company at December 31, 1993. Capital Notes are unsecured obligations which bear interest at 9.5% and are payable serially through June 30, 1995. Principal payments are $17,500 in 1994 -111- with the remaining balance of $140,000 payable in 1995. 8. Income Taxes Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method as required by FASB Statement No. 109 (See Note 1). Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax liabilities and assets as of December 31, 1993 are as follows: Deferred tax liabilities: Purchase accounting-basis differences $ 596,576 Prepaid assets 278,668 Prepaid pension 278,930 Other 10,577 ---------- Total deferred tax liabilities 1,164,751 Deferred tax assets: Loan loss reserve 2,574,318 Other real estate owned 479,655 Other 523,040 ---------- Total deferred tax assets 3,577,013 ---------- Net deferred tax assets $2,412,262 ========== The income tax provision (benefit) consists of the following: Liability Method Deferred Method 1993 1992 1991 ----------- ----------- ----------- Current: Federal $ 5,329,915 $ 4,854,262 $ 2,785,443 State 472,761 474,385 173,880 ------------ ------------ ------------ Total current provision 5,802,676 5,328,647 2,959,323 Deferred: Federal (329,227) (314,805) (227,940) State (35,873) (72,845) (66,769) ------------ ------------ ------------ Total deferred benefit (365,100) (387,650) (294,709) ------------ ------------ ------------ Provision for income taxes $ 5,437,576 $ 4,940,997 $ 2,664,614 ============ ============ ============ The sources of timing differences resulting in deferred income taxes and the approximate income tax effect of each under the deferred method of accounting for income taxes are as follows: -112- Deferred Method --------------------------- 1992 1991 --------- --------- Deferred compensation $ 425,192 $ 40,670 Depreciation (252,415) 8,564 Provision for possible loan losses (324,709) (361,640) Net employee benefit accruals 16,962 76,552 Discounts on investment securities (144,394) (89) Other (108,286) (58,766) --------- --------- $(387,650) $(294,709) ========= ========= The reasons for the difference between the effective income tax rates and the statutory Federal income tax rate are as follows: 1993 1992 1991 ---- ---- ---- Federal income tax rate 35.0% 34.0% 34.0% Nontaxable interest income (9.5) (9.1) (13.6) Other, net .9 2.0 1.9 ----- ----- ----- Effective income tax rate 26.4% 26.9% 22.3% ====== ====== ====== The provision for income taxes includes income taxes applicable to investment securities gains of $541,139 in 1993, $1,008,502 in 1992, and $210,696 in 1991. The Company made income tax payments of approximately $5,208,000, $4,474,000, and $1,921,000 during 1993, 1992, and 1991, respectively. 9. Commitments At December 31, 1993 future minimum payments under noncancelable operating leases for branch or office locations with initial or remaining terms of one year or more are $978,551, $954,941, $904,859, $707,990, and $398,276 for 1994 through 1998, respectively, $1,454,661 thereafter. Net rental expense for all operating leases amounted to $1,031,538 in 1993, $735,780 in 1992 and $652,577 in 1991. The lease agreements contain options to renew at various dates for periods ranging from five to twenty-one years. Eight of the locations, with future minimum lease payments totaling approximately $2,537,000, are leased from officers and/or directors of the Company. At December 31, 1993, future minimum payments due under noncancelable data processing agreements are approximately $1,392,000, $1,479,000, $1,553,000, $1,630,000, and $1,712,000 for 1994 through 1998, respectively. Additional amounts may be due based on the number of transactions processed by the servicer -113- and annual payments may increase by up to 5% based on the Consumer Price Index. In the normal course of business there are various commitments outstanding, such as guarantees and commitments to extend credit, including standby letters of credit to assure performance or to support debt obligations, and loans sold subject to repurchase agreements, which are not reflected in the accompanying consolidated financial statements. These arrangements have credit risk essentially the same as that involved in extending loans to customers. The Company's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit, standby letters of credit, and loans sold subject to repurchase agreements is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent credit risk were as follows: December 31 1993 1992 ----------- ----------- Commitments to extend credit $89,714,114 $66,278,842 Standby letters of credit 5,064,195 3,204,951 Loans sold subject to repurchase agreement 21,721,000 15,201,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counter-party. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are -114- primarily issued to support public and private borrowing arrangements and similar transactions. In 1993, the Company sold approximately $30,000,000 of loans to third parties subject to repurchase agreements. These agreements generally require the Company to repurchase loans that do not meet the standards of the related sale agreements or that become 90 days delinquent within a stated period of time (90 to 365 days) after being sold to the permanent investor. At December 31, 1993, the Company did not hold any loans which it had been required to repurchase. 10. Concentration of Credit Risk Most of the Company's lending activity is with customers located within the state of Arkansas. The loan portfolio is diversified with no industry comprising greater than 10% of total loans. The Company's subsidiary banks require collateral on most loans and generally maintains loan to value ratios of no greater than 80%. 11. Transactions with Related Parties The Company's bank subsidiaries have had, and expect to have in the future, banking transactions in the ordinary course of business with officers and directors of the Company and its subsidiaries. Such transactions have been on similar terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with others, and have involved no more than normal risk or other potential unfavorable aspects. Loans made to such borrowers (including companies in which they are principal owners) amounted to approximately $15,171,000 at December 31, 1993 and $18,455,000 at December 31, 1992. 12. Dividend Restrictions The Company has five national bank subsidiaries and one state bank subsidiary. National and state banking regulations place certain restrictions on the ability of banks to pay dividends without regulatory approvals. The approval of the Comptroller of the Currency is required for national banks to pay dividends in excess of earnings retained in the current year plus retained net profits for the preceding two years. State-chartered banks may pay dividends up to 50% of current year net income without obtaining regulatory approval. -115- 13. Supplemental Cash Flow Information The Company paid $33,458,989, $36,825,378, and $43,561,498 in interest on deposits and other borrowings during 1993, 1992, and 1991, respectively. 14. Pension Plan The Company provides a defined benefit pension plan which covers substantially all employees of the Company meeting certain age and length of service requirements. The benefits are based on years of service and the employee's average compensation during the last five years of employment. The Company's funding policy is to contribute annually the maximum that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the plan's funded status:
December 31 1993 1992 1991 ----------- ----------- ----------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $3,912,867 in 1993, $3,715,016 in 1992, and $3,325,998 in 1991 $(4,336,497) $(4,447,529) $(4,077,148) =========== =========== =========== Projected benefit obligation for service rendered to date $(5,974,079) $(5,728,043) $(4,447,384) Plan assets at fair value, primarily listed stocks and U.S. bonds 5,140,385 4,521,834 4,099,032 ----------- ----------- ----------- Projected benefit obligation in excess of plan assets (833,694) (1,206,209) (348,352) Unrecognized net loss 1,542,079 379,745 215,882 Unrecognized net asset at January 1 (51,841) (57,601) (63,361) Unrecognized prior service cost (364,493) 897,121 134,592 ----------- ----------- ----------- Prepaid (accrued) pension cost $ 292,051 $ 13,056 $ (61,239) =========== =========== ===========
-116- Net pension cost included the following components: Year ended December 31 1993 1992 1991 ---- ---- ---- Service cost--benefits earned during the year $ 326,636 $ 308,531 $ 278,025 Interest cost on projected benefit obligations 450,652 426,139 357,076 Actual return on plan assets (277,771) (165,314) (532,130) Net amortization and deferral (173,255) (173,494) 149,104 ---------- ---------- ---------- Net periodic pension cost $ 326,262 $ 395,862 $ 252,075 ========== ========== ========== Assumptions used in determining net periodic pension cost for the defined benefit plan were: Year ended December 31 1993 1992 1991 ---- ---- ---- Weighted-average discount rate 7.50% 8.25% 8.25% Annual compensation increases 5.00 5.00 5.00 Expected long-term rate of return on plan assets 10.00 10.00 10.00 In 1993, the Company approved a defined contribution 401(k) plan which covers all eligible employees who attain the age of eighteen and are employed by the Company. The Company's policy is to match employee contributions up to three percent of each participant's annual compensation. Plan contribution expense for the year ended December 31, 1993 was approximately $138,000. 15. Restrictions on Cash and Due from Banks The Company is required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances was approximately $10,764,000 in 1993 and $9,443,500 in 1992. 16. Fair Values of Financial Instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to -117- estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value, discounted cash flows, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value to the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate the fair values of these assets. Investment securities (including mortgage-backed securities): Fair values of investment securities are primarily based on quoted market prices (see Note 3). Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values approximate carrying amounts. The fair values for construction and mortgage real estate, installment and commercial, financial and agricultural loans, with fixed rates, are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount and estimated fair value of loans net of the allowance for loan losses consisted of the following: Carrying Estimated Fair Amount Value -------------- --------------- December 31, 1993 ................ $554,074,813 $553,575,000 December 31, 1992 ................ 456,052,990 458,414,000 Deposit liabilities: The fair values for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts), are, by definition, equal to the amount -118- payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed term money market accounts approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities of certificates of deposit. For deposits with no defined maturities, fair value is the amount payable on demand. The carrying amounts reported in the balance sheet for demand deposits, money market and passbook savings accounts approximate their fair values. The carrying amount and estimated fair value of certificates of deposit consisted of the following: Carrying Estimated Fair Amount Value ------------- ------------- December 31, 1993 .......... $ 629,222,210 $ 630,984,000 December 31, 1992 .......... 567,488,907 568,723,000 Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. Off-balance sheet financial instruments: The Company has two types of off-balance sheet financial instruments --commitments to extend credit and standby letters of credit. These types of credit are made at market rates; therefore, there would be no market risk associated with these credits which would create a significant fair value liability for the Company. -119- -----END PRIVACY-ENHANCED MESSAGE-----