-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QoxR1BQNRtszUvzst0p1UegW5OI6UlHpbqqnv8BTMsTOMBRrNhPdDwhkdSZRnST+ 40J8gE2Ay/gty+w4rH8I3Q== 0000950114-95-000190.txt : 19951031 0000950114-95-000190.hdr.sgml : 19951031 ACCESSION NUMBER: 0000950114-95-000190 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19951030 SROS: NYSE 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: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-63813 FILM NUMBER: 95585615 BUSINESS ADDRESS: STREET 1: P O BOX 524 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 S-4 1 MERCANTILE BANCORPORATION INC. FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1995 Registration No. 33- =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ----------------------------------- MERCANTILE BANCORPORATION INC. (Exact name of registrant as specified in its charter) MISSOURI 6712 43-0951744 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification incorporation or Number) organization) P.O. Box 524 St. Louis, Missouri 63166-0524 (314) 425-2525 (Address, including ZIP code, and telephone number, including area code, of registrant's principal executive offices) ----------------------------------- JOHN Q. ARNOLD Chief Financial Officer Mercantile Bancorporation Inc. P.O. Box 524 St. Louis, Missouri 63166-0524 (314) 425-2525 (Name, address, including ZIP code, and telephone number, including area code, of agent for service) ----------------------------------- Copy to: JON W. BILSTROM, ESQ. ROBERT M. LaROSE, ESQ. CHARLES W. MULANEY, JR. General Counsel and Thompson & Mitchell Skadden, Arps, Slate, Secretary One Mercantile Center Meagher & Flom Mercantile Bancorporation St. Louis, Missouri 63101 333 West Wacker Drive P.O. Box 524 (314) 231-7676 Chicago, Illinois 60606 St. Louis, Missouri (312) 407-0700 63166-0524 (314) 425-2525 ------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / ----------------------------------- CALCULATION OF REGISTRATION FEE ===================================================================================================================================
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of securities to be registered registered offering price per unit aggregate offering price registration fee - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, $5.00 par value 521,424 shares N/A $18,269,000 $6,300 =================================================================================================================================== Includes one attached Preferred Share Purchase Right per share. Estimated solely for purposes of computing the Registration Fee pursuant to the provisions of Rule 457(f), and based upon the $18,269,000 aggregate book value of 3,685,061 shares of Common Stock, $1.00 par value, of First Sterling Bancorp, Inc. as of September 30, 1995.
----------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. =============================================================================== 2 MERCANTILE BANCORPORATION INC. CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING HEADING OR LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-4 -----------------------------------------------------------
Form S-4 Item Number and Caption Heading or Location in Prospectus - -------------------------------- --------------------------------- A. Information about the Transaction 1. Forepart of Registration Statement and Facing Page; Cross Reference Sheet; Outside Outside Front Cover Page of Prospectus Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages Available Information; Incorporation of of Prospectus Certain Information by Reference; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Summary Information; Pro Forma Financial Charges and Other Information Information 4. Terms of the Transaction Summary Information; Incorporation of Certain Information by Reference; Terms of the Proposed Merger; Certain Federal Income Tax Consequences of the Merger; Information Regarding MBI Common Stock 5. Pro Forma Financial Pro Forma Financial Information 6. Material Contacts with the Company Being Summary Information; Terms of the Acquired Proposed Merger 7. Additional Information Required for Not Applicable Reoffering by Persons and Parties Deemed to be Underwriters 8. Interests of Named Experts and Counsel Legal Matters 9. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities - i - 3 Form S-4 Item Number and Caption Heading or Location in Prospectus - -------------------------------- --------------------------------- B. Information About the Registrant 10. Information with Respect to S-3 Registrants Incorporation of Certain Information by Reference; Summary Information; Information Regarding MBI Common Stock 11. Incorporation of Certain Information by Incorporation of Certain Information by Reference Reference 12. Information with Respect to S-2 or S-3 Not Applicable Registrants 13. Incorporation of Certain Information by Not Applicable Reference 14. Information with Respect to Registrants Other Not Applicable Than S-2 or S-3 Registrants C. Information About the Company Being Acquired 15. Information with Respect to S-3 Companies Not Applicable 16. Information with Respect to S-2 or S-3 Not Applicable Companies 17. Information with Respect to Companies Other Summary Information; Information Than S-2 or S-3 Companies Regarding First Sterling D. Voting and Management Information 18. Information if Proxies, Consents or Information Regarding Special Meeting; Authorizations are to be Solicited Incorporation of Certain Information by Reference; Rights of dissenting Shareholders of First Sterling; Information Regarding First Sterling 19. Information if Proxies, Consents or Not Applicable Authorizations are not to be Solicited in an Exchange Offer
- ii - 4 [FIRST STERLING BANCORP, INC.] ----------, 1995 Dear Fellow Shareholder: The Board of Directors cordially invites you to attend a Special Meeting of Shareholders of First Sterling Bancorp, Inc. ("First Sterling") to be held at ------.m. Central Time, on --------, December --, 1995, at the offices of First Sterling, 305 4th Avenue, Sterling, Illinois (the "Special Meeting"). At the Special Meeting, you will be asked to consider and vote upon a proposal to approve the Agreement and Plan of Merger dated July 24, 1995 (the "Merger Agreement"), pursuant to which First Sterling will be merged with and into a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"). I have enclosed the following items relating to the Special Meeting and the merger: 1. Proxy Statement/Prospectus; 2. Proxy card; and 3. A pre-addressed return envelope to First Sterling for the proxy card. The Proxy Statement/Prospectus and related proxy materials set forth, or incorporate by reference, financial data and other important information relating to First Sterling and MBI and describe the terms and conditions of the proposed merger. The Board of Directors requests that you carefully review these materials before completing the enclosed proxy card or attending the Special Meeting. THE BOARD OF DIRECTORS OF FIRST STERLING CAREFULLY CONSIDERED AND APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST INTEREST OF FIRST STERLING AND ITS SHAREHOLDERS. THE FIRST STERLING BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE MERGER --- AGREEMENT. APPROVAL OF THE MERGER AGREEMENT BY THE FIRST STERLING SHAREHOLDERS IS A CONDITION TO THE CONSUMMATION OF THE MERGER. Accordingly, it is important that your shares be represented at the Special Meeting, whether or not you plan to attend the Special Meeting in person. Please complete, date and sign the enclosed proxy card and return it to First Sterling in the enclosed pre-addressed envelope, which requires no postage if mailed within the United States. If you later decide to attend the Special Meeting and vote in person, or if you wish to revoke your proxy for any reason prior to the vote at the Special Meeting, you may do so and your proxy will have no further effect. You may revoke your proxy by delivering to the Secretary of First Sterling a written notice of revocation or another proxy relating to the same shares bearing a later date than the proxy being revoked or by attending the Special Meeting and voting in person. Attendance at the Special Meeting will not in itself constitute a revocation of an earlier dated proxy. If you need assistance in completing your proxy card or if you have any questions about the Proxy Statement/Prospectus, please feel free to contact me at (815) 626-0045. Sincerely, President 5 FIRST STERLING BANCORP, INC. 305 4th Avenue Sterling, Illinois 61081 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held December ---, 1995 TO THE SHAREHOLDERS OF FIRST STERLING BANCORP, INC.: Notice is hereby given that a special meeting (the "Special Meeting") of Shareholders of FIRST STERLING BANCORP, INC., an Illinois corporation ("First Sterling"), will be held at the offices of First Sterling, 305 4th Avenue, Sterling, Illinois on December ---, 1995, at ----- .m. Central Time, for the following purposes: (1) To consider and vote upon a proposal to adopt and approve the Agreement and Plan of Merger dated July 24, 1995, by and among Mercantile Bancorporation Inc. ("MBI"), Mercantile Bancorporation Incorporated of Illinois, a wholly owned subsidiary of MBI ("Merger Sub") and First Sterling (the "Merger Agreement"), pursuant to which First Sterling will be merged (the "Merger") with and into Merger Sub, in a transaction which would result in the business and operations of First Sterling being continued through such wholly owned subsidiary, and whereby, upon the consummation of the Merger, each share of First Sterling common stock will be converted into the right to receive 0.1415 of a share of MBI common stock (together with the associated share purchase right), as set forth in detail in the attached Proxy Statement/Prospectus. (2) To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. The record date for determining the shareholders entitled to receive notice of, and to vote at, the Special Meeting or any adjournments or postponements thereof has been fixed as of the close of business on November - ---, 1995. On the record date, First Sterling had 3,685,061 shares of Common Stock issued, outstanding and entitled to vote. Such shares were held by approximately --- holders. Each share will be entitled one vote on each matter submitted to a vote at the Special Meeting. THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF THE OUTSTANDING SHARES OF FIRST STERLING COMMON STOCK IS REQUIRED FOR APPROVAL OF THE MERGER AGREEMENT. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT THE SPECIAL MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. FAILURE TO RETURN THE ENCLOSED PROXY CARD OR TO VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. If the Merger Agreement is approved, you will be sent instructions regarding the mechanics of exchanging your existing First Sterling Common Stock certificates for new certificates representing shares of MBI. BY ORDER OF THE BOARD OF DIRECTORS Sterling, Illinois --------------------, Secretary November ---, 1995 6 MERCANTILE BANCORPORATION INC. PROSPECTUS ------------------ FIRST STERLING BANCORP, INC. PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER ---, 1995 This Prospectus of Mercantile Bancorporation Inc. ("MBI") relates to up to 521,424 shares of Common Stock, $5.00 par value, 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"), to be issued to the shareholders of First Sterling Bancorp, Inc., an Illinois corporation ("First Sterling"), upon consummation of the proposed merger (the "Merger") of First Sterling with and into Mercantile Bancorporation Incorporated of Illinois, a Missouri corporation ("Merger Sub"), which is a wholly owned subsidiary of MBI. Upon receipt of the requisite shareholder and regulatory approvals, and the satisfaction or waiver of certain conditions precedent, the Merger will be consummated pursuant to the terms of the Agreement and Plan of Merger dated July 24, 1995 (the "Merger Agreement"), by and among MBI, Merger Sub and First Sterling. This Prospectus also serves as the Proxy Statement of First Sterling for use in connection with the Special Meeting of Shareholders of First Sterling (the "Special Meeting"), which will be held on December---, 1995, at the time and place and for the purposes stated in the Notice of Special Meeting of Shareholders accompanying this Proxy Statement/Prospectus. Pursuant to the Merger, MBI will issue up to an aggregate of 521,424 shares of MBI Common Stock. Upon consummation of the Merger, the business and operations of First Sterling will be continued through Merger Sub and each share of First Sterling common stock, $1.00 par value ("First Sterling Common Stock"), will be converted into the right to receive 0.1415 of a share of MBI Common Stock. The fair market value of MBI Common Stock to be received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. See "TERMS OF THE PROPOSED MERGER - General Description of the Merger." No fractional shares of MBI Common Stock will be issued in the Merger, but cash will be paid in lieu of such fractional shares. See "TERMS OF THE PROPOSED MERGER - Fractional Shares." The transaction is intended to qualify as a reorganization under the Internal Revenue Code of 1986, as amended (the "Code"). The Merger generally is intended to achieve certain tax-deferral benefits for federal income tax purposes for First Sterling shareholders. See "SUMMARY INFORMATION - Federal Income Tax Consequences in General" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." MBI Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "MTL." On October 27, 1995 the closing sale price for MBI Common Stock as reported on the NYSE Composite Tape was $41.75. This Proxy Statement/Prospectus, the Notice of Special Meeting and the form of proxy were first mailed to the shareholders of First Sterling on or about November ---, 1995. 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 PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Proxy Statement/Prospectus is November ---, 1995. 7 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, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by MBI 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. MBI Common Stock is listed on the NYSE, and such reports, proxy statements and other information concerning MBI also are available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Proxy 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. As permitted by the rules and regulations of the Commission, this Proxy Statement/Prospectus omits certain information contained or incorporated by reference in the Registration Statement. Statements contained in this Proxy Statement/Prospectus provide a summary of the contents of certain contracts or other documents referenced herein but are not necessarily complete and in each instance reference is made to the copy of each 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 PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS 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 [5 BUSINESS ----------- DAYS BEFORE MEETING], 1995. - -------------------- 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, 1994, as amended by Form 10-K/A. (b) MBI's Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995. (c) MBI's Current Reports on Form 8-K dated May 12, 1995, May 31, 1995 and August 17, 1995. (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. - 2 - 8 (e) The description of MBI's Preferred Share Purchase 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. The consolidated financial statements of Hawkeye Bancorporation ("Hawkeye") as of December 31, 1994, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1994, contained in Hawkeye's Annual Report on Form 10-K for the year ended December 31, 1994, and Hawkeye's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 are incorporated herein by reference. All documents filed by MBI pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and until the date of the Special Meeting 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 Proxy 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 Proxy 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 PROXY STATEMENT/ PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MBI OR FIRST STERLING. THIS PROXY 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 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 PROXY 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 FIRST STERLING OR ANY OF THEIR SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE HEREOF. - 3 - 9 TABLE OF CONTENTS -----------------
Page ---- AVAILABLE INFORMATION 2 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 2 SUMMARY INFORMATION 7 Business of MBI 7 Business of Merger Sub 8 Business of First Sterling 8 The Proposed Merger 9 Other Agreements 10 Interests of Certain Persons in the Merger 10 Special Meeting of First Sterling Shareholders 10 Reasons for the Merger 11 Opinion of Financial Advisor to First Sterling 11 Fractional Shares 11 Waiver and Amendment 12 Federal Income Tax Consequences in General 12 Regulatory Approval 12 Accounting Treatment 13 Dissenters' Rights 13 Markets and Market Prices 13 Comparative Unaudited Per Share Data 14 Summary Financial Data 15 Summary Financial Data 16 INFORMATION REGARDING SPECIAL MEETING 18 General 18 Date, Time and Place 18 Record Date; Vote Required 18 Voting and Revocation of Proxies 18 Solicitation of Proxies 19 TERMS OF THE PROPOSED MERGER 19 General Description of the Merger 20 Other Agreements 21 Interests of Certain Persons in the Merger 21 Background of and Reasons for the Merger; Board Recommendations 21 Opinion of Financial Advisor to First Sterling 24 Conditions of the Merger 27 Representations and Warranties 29 Termination, Waiver and Amendment of the Merger Agreement 29 Indemnification 30 Closing Date 30 Surrender of First Sterling Stock Certificates and Receipt of MBI Common Stock 30 Fractional Shares 31 Regulatory Approval 31 - 4 - 10 Business Pending the Merger 32 Accounting Treatment 35 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 35 RIGHTS OF DISSENTING SHAREHOLDERS OF FIRST STERLING 38 PRO FORMA FINANCIAL INFORMATION 39 Comparative Unaudited Per Share Data 39 Pro Forma Combined Consolidated Financial Statements (Unaudited) 40 INFORMATION REGARDING FIRST STERLING 50 Business 50 Management's Discussion and Analysis of Financial Condition and Results of Operations as of and for the Years Ended December 31, 1994, 1993 and 1992 51 Overview 51 Average Balances 51 Net Interest Income 53 Loans 55 Credit Quality and the Allowance for Loan Losses 56 Provision for Loan Losses 59 Securities 59 Deposits 61 Securities Sold Under Agreements to Repurchase 62 Capital Resources 62 Noninterest Income 63 Noninterest Expense 63 Income Taxes 64 Net Income 64 Liquidity and Interest Rate Sensitivity Analysis 64 Cash Flows 66 Recent Accounting Pronouncements 67 Management's Discussion and Analysis of Financial Condition and Results of Operations as of and for the Nine Months Ended September 30, 1995 and 1994 67 Financial Condition 68 Net interest income 68 Provision for loan losses 69 Noninterest income 69 Noninterest expense 69 Net income 70 Security Ownership of Certain Beneficial Owners and Management 71 INFORMATION REGARDING MBI STOCK 73 Description of MBI Common Stock and Attached Preferred Share Purchase Rights 73 Restrictions on Resale of MBI Stock by Affiliates 75 Comparison of the Rights of Shareholders of MBI and First Sterling 75 - 5 - 11 SUPERVISION AND REGULATION 79 General 79 Certain Transactions with Affiliates 79 Payment of Dividends 79 Capital Adequacy 79 FDIC Insurance Assessments 80 Proposals to Overhaul the Savings Association Industry 81 Support of Subsidiary Banks 81 FIRREA and FDICIA 82 Depositor Preference Statute 83 The Interstate Banking and Community Development Legislation 83 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS 84 LEGAL MATTERS 84 EXPERTS 84 OTHER MATTERS 84 SHAREHOLDER PROPOSALS 85 CONSOLIDATED FINANCIAL STATEMENTS 86 ANNEXES Annex A -- Opinion of The Chicago Corporation A-1 Annex B -- Dissenters' Rights Provisions of the Illinois Business Corporation Act of 1983, as amended B-1
- 6 - 12 SUMMARY INFORMATION ------------------- The following is a summary of the important terms of the proposed Merger and related information discussed elsewhere in this Proxy Statement/ Prospectus but does not purport to be complete and is qualified in its entirety by reference to the more detailed information which appears elsewhere in this Proxy Statement/Prospectus and the documents incorporated by reference herein. Shareholders of First Sterling are urged to read this Proxy Statement/Prospectus in its entirety. All MBI per share data reflect a three-for-two stock split distributed in the form of a dividend on April 11, 1994. 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"). MBI is also registered as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended (the "HOLA"). At September 30, 1995, MBI owned, directly or indirectly, all of the capital stock (except for a small minority interest in one bank) of Mercantile Bank of St. Louis National Association ("Mercantile Bank"), 51 other commercial banks and one federally chartered thrift which operate from 322 banking offices and 316 Fingertip Banking automated teller machines, including 37 off-premises machines, located throughout Missouri, southern Illinois, eastern Kansas, northern Arkansas and northern Iowa. 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, 1995, MBI had 55,333,878 shares of its Common Stock outstanding. As of September 30, 1995, MBI reported, on a consolidated basis, total assets of $16.0 billion, total deposits of $11.8 billion, total loans of $10.6 billion and shareholders' equity of $1.4 billion. On January 3, 1995, MBI completed the acquisitions of (i) UNSL Financial Corp. ("UNSL"), a Delaware corporation and a savings and loan holding company under the HOLA, located in Lebanon, Missouri, and (ii) Wedge Bank ("Wedge"), an Illinois state-chartered bank located in Alton, Illinois. These acquisitions were accounted for under the pooling-of-interests method of accounting. As of January 3, 1995, UNSL and Wedge reported total assets of $508 million and $196 million, respectively. On May 1, 1995, MBI completed the acquisitions of (i) Central Mortgage Bancshares, Inc. ("CMB"), a Missouri corporation and registered bank holding company under the BHCA, located in Kansas City, Missouri, and (ii) TCBankshares, Inc. ("TCB"), an Arkansas corporation and a registered bank holding company under the BHCA, located in North Little Rock, Arkansas. These acquisitions were accounted for under the pooling-of-interests method of accounting. As of May 1, 1995, CMB and TCB reported total assets of $655 million and $1.4 billion, respectively. In connection with the acquisitions of UNSL, CMB and TCB, MBI has restated its consolidated financial statements as of and for the years ended December 31, 1994, 1993 and 1992. MBI has filed supplemental financial statements as of and for the years ended December 31, 1994, 1993 and 1992 in a Current Report on Form 8-K, dated May 31, 1995, which has been incorporated by reference into this Proxy Statement/Prospectus. Due to the immateriality of the financial condition and results of operation of Wedge to that of MBI, the supplemental consolidated financial statements of MBI do not reflect the Wedge transaction. On July 7, 1995, MBI completed the acquisition of Plains Spirit Financial Corporation ("Plains Spirit"), located in Davenport, Iowa. Plains Spirit, a Delaware corporation, was a registered - 7 - 13 savings and loan holding company under the HOLA. This acquisition was accounted for as a purchase. As of July 7, 1995, Plains Spirit reported total assets of $400.8 million. On August 1, 1995, MBI completed the acquisitions of (i) Southwest Bancshares, Inc., ("Southwest") a Missouri corporation and registered bank holding company under the BHCA, located in Bolivar, Missouri, and (ii) AmeriFirst Bancorporation, Inc. ("AmeriFirst"), a Missouri corporation and registered bank holding company under the BHCA, located in Sikeston, Missouri. These acquisitions were accounted for under the pooling-of-interests method of accounting. As of August 1, 1995, Southwest and AmeriFirst reported total assets of $187.7 and $155.5 million, respectively. On July 7, 1995, MBI entered into an agreement to acquire Security Bank of Conway, F.S.B. ("Conway"), located in Conway, Arkansas. Conway is a federal stock savings bank. As of September 30, 1995, Conway reported total assets of $100.3 million, total deposits of $87.9 million, total loans of $75.8 million and shareholders' equity of $8.6 million. On August 4, 1995, MBI entered into an agreement to acquire Hawkeye, located in Des Moines, Iowa. Hawkeye, an Iowa corporation, is a registered bank holding company under the BHCA which owns twenty-three commercial banks located throughout the state of Iowa. As of September 30, 1995, Hawkeye reported total assets of $2.0 billion, total deposits of $1.7 billion, total loans of $1.3 billion, and shareholders' equity of $192.8 million. On September 15, 1995, MBI entered into an agreement to acquire Metro Savings Bank, FSB ("Metro"), located in Wood River, Illinois. Metro is chartered as a federal stock savings bank under the HOLA. As of September 30, 1995, Metro reported total assets of $83.3 million, total deposits of $76.7 million, total loans of $54.7 million and shareholders' equity of $5.9 million. MBI's principal executive offices are located at One Mercantile Center, St. Louis, Missouri 63101 and its telephone number is (314) 425-2525. Additional information concerning MBI is included in the documents incorporated by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." BUSINESS OF MERGER SUB Merger Sub, a Missouri corporation, is a wholly owned subsidiary of MBI which was organized in 1986. Merger Sub is a registered bank holding company under the BHCA. Merger Sub currently owns all of the capital stock of five banks which operate from 33 locations in Illinois. Merger Sub, which will continue to be a subsidiary of MBI, will be the surviving corporation upon consummation of the Merger. BUSINESS OF FIRST STERLING First Sterling, an Illinois corporation formed in November 1982, commenced operations in March 1983 as a registered bank holding company under the BHCA. First Sterling currently owns all of the issued and outstanding shares of capital stock of First National Bank of Sterling - Rock Falls, a national banking association chartered under the laws of the United States, predecessors of which have been operating since 1934 and which currently operates from its main office in Sterling, Illinois and a branch in Rock Falls, Illinois. As of September 30, 1995, 3,685,061 shares of First Sterling Common - 8 - 14 Stock were issued and outstanding. As of September 30, 1995, First Sterling reported, on a consolidated basis, total assets of $170.0 million, total deposits of $132.5 million, total loans of $85.7 million and shareholders' equity of $18.3 million. See "INFORMATION REGARDING FIRST STERLING." First Sterling's principal executive offices are located at 305 4th Avenue, Sterling, Illinois and its telephone number is (815) 626-0045. THE PROPOSED MERGER Subject to the satisfaction of the terms and conditions set forth in the Merger Agreement described below, First Sterling will be merged with and into Merger Sub. Upon consummation of the Merger, First Sterling's corporate existence will terminate and Merger Sub will continue as the surviving entity. Simultaneously with the effectiveness of the Merger, each share of First Sterling Common Stock will be converted into the right to receive 0.1415 of a share of MBI Common Stock. Such consideration is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI or First Sterling prior to the consummation of the Merger. The fair market value of MBI Common Stock to be received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. KeyCorp Shareholder Services, Inc., the transfer agent for MBI Common Stock, has been selected as the Exchange Agent (the "Exchange Agent") for purposes of effecting the conversion of First Sterling Common Stock into MBI Common Stock upon consummation of the Merger. As soon as practicable after consummation of the Merger, a letter of transmittal (including instructions setting forth the procedures for exchanging certificates representing shares of First Sterling Common Stock for the MBI Common Stock payable to each holder thereof pursuant to the Merger Agreement) will be sent to each record holder as of the Effective Time. Upon surrender to the Exchange Agent of such certificate(s), together with a duly completed and executed letter of transmittal, such holder will receive the shares of MBI Common Stock to which such holder is entitled under the Merger Agreement. See "TERMS OF THE PROPOSED MERGER - Surrender of First Sterling Stock Certificates and Receipt of MBI Common Stock." The Merger Agreement provides that the 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 at least two-thirds of the outstanding shares of First Sterling Common Stock and receipt of the requisite regulatory approval and an opinion of counsel for MBI regarding certain federal income tax aspects of the transaction. For a discussion of each of the conditions to the Merger, see "TERMS OF THE PROPOSED MERGER - Conditions of the Merger." The Merger will be consummated and become effective on the date and at the time (the "Effective Time") that the certificate of merger is issued by the Missouri Secretary of State. Unless the parties otherwise agree, the date of the closing of the Merger (the "Closing Date") shall occur on such date as MBI shall notify First Sterling in writing, which date shall be the last to occur of (i) January 2, 1996 or (ii) the first business day of the first full calendar month commencing at least five days after all conditions to closing as set forth in the Merger Agreement are satisfied. The Merger Agreement may be terminated at any time prior to the Closing Date by the mutual consent of the parties or, unilaterally, by either party upon the occurrence of certain events or if the Merger is not - 9 - 15 consummated by April 30, 1996. See "TERMS OF THE PROPOSED MERGER - Conditions of the Merger" and "- Termination of the Merger Agreement." OTHER AGREEMENTS Concurrent with the execution of the Merger Agreement, MBI and certain shareholders, including each of the directors of First Sterling, executed separate Voting Agreements (the "Voting Agreements") by which each such shareholder agreed that he or she will vote all of the shares of First Sterling Common Stock then owned or subsequently acquired in favor of the approval of the Merger Agreement at the Special Meeting. In addition, until the earliest to occur of the Effective Time, the termination of the Voting Agreement or the termination of the Merger Agreement, each such shareholder further agreed he or she will not vote any such shares in favor of the approval of any other competing acquisition proposal involving First Sterling and a third party. Each such shareholder also agreed that he or she will not transfer shares of First Sterling Common Stock unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement. As of the Record Date (as defined below), the shareholders of First Sterling who signed Voting Agreements owned beneficially an aggregate of ---------- shares of First Sterling Common Stock, or approximately -----% of the issued and outstanding shares. INTERESTS OF CERTAIN PERSONS IN THE MERGER From and after the Effective Time for a period of not less than five years, MBI will provide for the indemnification of employees, agents, directors or officers of First Sterling or any of First Sterling's subsidiaries, in an amount and of a type not less than that provided by First Sterling's Articles of Incorporation or bylaws in the form in effect as of July 24, 1995 or arising by operation of law or arising by virtue of any contract, resolution or other agreement or document existing as of July 24, 1995. Further, MBI will assume all duties and obligations of indemnification of First Sterling or any of First Sterling's subsidiaries existing as of the Effective Time with respect to any act or omission of any of their respective employees, agents, directors or officers occurring prior to the Effective Time; provided, however, that to the extent that First Sterling's directors' and officers' liability insurance would provide coverage for any such act or omission, First Sterling agrees to give proper notice to the insurance carrier and to MBI of a potential claim thereunder so as to preserve the rights to such insurance coverage. See "TERMS OF THE PROPOSED MERGER - Interests of Certain Persons in the Merger." SPECIAL MEETING OF FIRST STERLING SHAREHOLDERS The Special Meeting will be held on December----, 1995, at----- .m. Central Time, at the offices of First Sterling, 305 4th Avenue, Sterling, Illinois. Approval by the First Sterling shareholders of the Merger Agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of First Sterling Common Stock. Only holders of record of First Sterling Common Stock at the close of business on November - ---, 1995 (the "Record Date") will be entitled to notice of, and to vote at, the Special Meeting. At such date, there were 3,685,061 shares of First Sterling Common Stock outstanding. Each share of First Sterling Common Stock is entitled to one vote on each matter submitted to a vote at the Special Meeting. As of the Record Date, directors and executive officers of First Sterling and their affiliates owned beneficially, or controlled the voting of, an aggregate of------- shares of First Sterling Common Stock, or approximately------% of the shares entitled to vote at the Special Meeting. All of First Sterling's - 10 - 16 directors and executive officers have indicated their intention to vote their shares for the approval of the Merger Agreement. Additionally, each of the directors and certain other shareholders of First Sterling, pursuant to the terms of his or her respective Voting Agreement, has committed to vote his or her shares of First Sterling Common Stock for the approval of the Merger Agreement. As of the Record Date, such persons who had executed Voting Agreements or otherwise indicated they would vote for approval of the Merger Agreement owned beneficially an aggregate of ------- shares of First Sterling Common Stock, or approximately -----% of the issued and outstanding shares. THE BOARD OF DIRECTORS OF FIRST STERLING CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AS BEING IN THE BEST INTEREST OF FIRST STERLING AND ITS SHAREHOLDERS. THE FIRST STERLING BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE MERGER --- AGREEMENT. REASONS FOR THE MERGER FIRST STERLING. The Board of Directors of First Sterling believes that the Merger is in the best interests of First Sterling and its shareholders. In reaching the decision to recommend the approval of the Merger Agreement to the shareholders, the Board of Directors, without assigning any relative or specific weights, considered a number of factors. For a discussion of such factors, see "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations." MBI. MBI's Board of Directors believes that the Merger will enable MBI to (i) increase its presence in northwestern Illinois through the acquisition of an established banking organization and (ii) enhance MBI's ability to compete in the increasingly competitive banking and financial services industry. See "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations." OPINION OF FINANCIAL ADVISOR TO FIRST STERLING On July 24, 1995, The Chicago Corporation ("Chicago Corp."), First Sterling's financial advisor, rendered to the First Sterling Board of Directors its oral opinion, which was subsequently confirmed by a written opinion dated as of the date of this Proxy Statement/Prospectus, to the effect that, as of the dates of such opinions, the consideration to be received by the holders of First Sterling Common Stock in the Merger was fair to the shareholders of First Sterling from a financial point of view. Attached to this Proxy Statement/Prospectus as Annex A is a copy of the opinion of Chicago Corp., dated -------------, 1995, setting forth the procedures followed, assumptions made, matters considered and qualifications and limitations of the review undertaken by Chicago Corp. in connection with rendering its opinion. Holders of First Sterling Common Stock are urged to read Chicago Corp.'s opinion in its entirety. See "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations" and "- Opinion of Financial Advisor to First Sterling." FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the shareholders of First Sterling in connection with the Merger. Each holder of First Sterling 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 - 11 - 17 the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date of the Merger. Cash received by First Sterling shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." WAIVER AND AMENDMENT Any provision of the Merger Agreement, including, without limitation, the conditions to the consummation of the Merger and the restrictions described under the caption "TERMS OF THE PROPOSED MERGER - Business Pending the Merger," may be (i) waived in writing at any time by the party that is, or whose shareholders are, entitled to the benefits thereof or (ii) amended at any time by written agreement of the parties approved by or on behalf of their respective Boards of Directors, whether before or after the Special Meeting; provided, however, that after approval of the Merger Agreement by the shareholders of First Sterling at the Special Meeting no such modification may (i) alter or change the amount or kind of the consideration to be received by the First Sterling shareholders in the Merger, (ii) adversely affect any representation, warranty or covenant of MBI contained in the Merger Agreement, (iii) adversely affect the tax treatment to the First Sterling shareholders as a result of receiving shares of MBI Common Stock in the Merger, (iv) otherwise adversely affect the rights of First Sterling or any shareholders of First Sterling under the Merger Agreement or (v) impede or delay receipt of any approvals required for consummation of the Merger or the consummation of the transactions consummated by the Merger Agreement. FEDERAL INCOME TAX CONSEQUENCES IN GENERAL Thompson & Mitchell, MBI's legal counsel, has delivered its opinion 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, First Sterling and certain shareholders of First Sterling, the Merger will constitute a "reorganization" for federal income tax purposes and that, accordingly, no gain or loss will be recognized by First Sterling shareholders who exchange their shares of First Sterling Common Stock solely for shares of MBI Common Stock in the Merger. However, cash received in lieu of fractional shares may give rise to taxable income. First Sterling shareholders who dissent and receive cash in exchange for all of their First Sterling Common Stock may recognize taxable income, but not in excess of the amount of cash received. EACH FIRST STERLING SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER, INCLUDING THE APPLICABILITY OF VARIOUS STATE, LOCAL AND FOREIGN TAX LAWS. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." REGULATORY APPROVAL The Merger is subject to prior approval of the Federal Reserve Board and the Illinois Commissioner of Banks and Trust Companies (the "Illinois Commissioner"). On September 29, 1995, MBI filed two applications regarding the Merger with the Federal Reserve Board. On October 25, 1995, MBI filed an application with the Illinois Commissioner seeking such approval. In reviewing the applications and the proposed Merger, the Federal Reserve Board considers various factors, including possible anticompetitive effects of the Merger, and examines the financial and managerial resources and future prospects of the combined organization. No assurance can be given that the required regulatory approvals will be obtained. See "TERMS OF THE PROPOSED MERGER - Regulatory Approval" and "SUPERVISION AND REGULATION." - 12 - 18 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 Illinois law, a holder of First Sterling Common Stock may dissent from the Merger and receive payment of the "fair value" of such shares in cash if the Merger is consummated by following certain procedures set forth in Sections 11.65 and 11.70 of the Illinois Business Corporation Act of 1983, as amended (the "Illinois Statute"), the text of which are attached hereto as Annex B. Failure to follow such procedures may result in a loss of - ------- dissenters' rights. Any First Sterling shareholder returning a blank executed proxy card will be deemed to have approved the Merger Agreement, thereby waiving any such dissenters' rights. See "RIGHTS OF DISSENTING SHAREHOLDERS OF STERLING." MARKETS AND MARKET PRICES MBI Common Stock is currently traded on the NYSE under the symbol "MTL." Prior to March 25, 1993, MBI Common Stock was quoted on Nasdaq under the symbol "MTRC." The closing per share sale price reported for MBI Common Stock on July 21, 1995, the last trading date preceding the public announcement of the Merger, was $45.125. There is no established public trading market for First Sterling Common Stock. To the best knowledge of management of First Sterling, there were no sales of First Sterling Common Stock in 1993 or 1994 or in 1995 prior to the date of this Proxy Statement/Prospectus.
MBI First Sterling -------------------------------------------- -------------------------------------- Sales Price Cash Sales Price Cash ------------------------- Dividend ----------------------- Dividend High Low Declared High Low Declared ---- --- -------- ---- --- -------- 1993 - ---- First Quarter $35.625 $30.625 $ .2475 $ -- Second Quarter 37.625 29.375 .2475 -- Third Quarter 34.375 31.625 .2475 -- Fourth Quarter 34.625 29.125 .2475 .04 1994 - ---- First Quarter $34.125 $29.875 $ .28 $.04 Second Quarter 38.125 31.125 .28 .04 Third Quarter 39.250 34.875 .28 .04 Fourth Quarter 36.875 29.500 .28 .04 1995 - ---- First Quarter $37.250 $31.250 $ .33 $.04 Second Quarter 44.875 36.000 .33 .04 Third Quarter 47.000 41.625 .33 .04 Fourth Quarter .33 -- (through October 27, 1995) 45.250 41.500 - ------------------ For a recent sale price of MBI Common Stock, see the cover of this Proxy Statement/Prospectus. No trades known to management of First Sterling.
- 13 - 19 COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and First Sterling and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Merger, the proposed acquisitions of Conway, Hawkeye and Metro and the acquisition of Ameribanc, Inc. ("Ameribanc") which was completed on April 30, 1992. The data presented is based upon the supplemental consolidated financial statements and related notes of MBI and the consolidated financial statements and related notes of First Sterling, Conway, Hawkeye and Metro included in this Proxy Statement/Prospectus or in documents incorporated herein by reference, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing elsewhere herein. This information should be read in conjunction with such historical and pro forma financial statements and related notes thereto. The assumptions used in the preparation of this table appear in the notes to the pro forma financial information appearing elsewhere in this Proxy Statement/Prospectus. See "PRO FORMA FINANCIAL INFORMATION." This data is 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 Ameribanc merger or the proposed acquisitions of Conway, Hawkeye and Metro had been consummated prior to the periods indicated.
First MBI/ First Sterling/ First Sterling MBI/ All Entities First Sterling Pro Forma All Entities Pro Forma MBI Sterling Pro Forma Equivalent Pro Forma Equivalent Reported Reported Combined Combined -------- -------- ------------- ---------- ------------- ---------- Book Value per Share: September 30, 1995 $ 25.43 $ 4.96 $ 25.50 $ 3.61 $ 25.16 $ 3.56 December 31, 1994 23.47 4.53 23.53 3.33 23.09 3.27 Cash Dividends Declared per Share: Nine months ended September 30, 1995 $ 0.99 $ 0.12 $ 0.99 $ 0.14 $ 0.99 $ 0.14 Year ended December 31, 1994 1.12 0.16 1.12 0.16 1.12 0.16 Year ended December 31, 1993 0.99 0.04 0.99 0.14 0.99 0.14 Year ended December 31, 1992 0.93 -- 0.93 0.13 0.93 0.13 Earnings per Share Before Change in Accounting Principle: Nine months ended September 30, 1995 $ 2.95 $ 0.36 $ 2.94 $ 0.42 $ 2.88 $ 0.41 Year ended December 31, 1994 3.22 0.50 3.22 0.46 3.22 0.46 Year ended December 31, 1993 2.79 0.35 2.79 0.39 2.80 0.40 Year ended December 31, 1992 2.42 0.42 2.44 0.35 2.44 0.35 Market Price per Share: At July 21, 1995 $ 45.13 $ 4.87 n/a n/a n/a n/a At October 27, 1995 41.75 4.96 n/a n/a n/a n/a - ---------------------- Includes the effect of pro forma adjustments for First Sterling and Ameribanc, as appropriate. See "PRO FORMA FINANCIAL INFORMATION." Based on the pro forma combined per share amounts multiplied by 0.1415, the conversion ratio applicable to one share of First Sterling Common Stock in the Merger. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to pro forma financial statements. See "PRO FORMA FINANCIAL INFORMATION." Includes the effect of pro forma adjustments for First Sterling, Ameribanc, Conway, Hawkeye and Metro as appropriate. See "PRO FORMA FINANCIAL INFORMATION." The market value of MBI Common Stock disclosed as of July 21, 1995, the last trading day preceding the public announcement of the Merger, and as of October 27, 1995, the latest available date prior to the filing of the Proxy Statement/Prospectus, is based on the last sale price as reported on the NYSE Composite Tape. There are no publicly available quotations of First Sterling Common Stock. The market price per share of First Sterling Common Stock disclosed as of July 21, 1995 and October 27, 1995, respectively, is the book value per share as of June 30, 1995 and September 30, 1995, respectively, the most recent date prior to July 21, 1995 and October 27, 1995, respectively, for which information is available.
- 14 - 20 SUMMARY FINANCIAL DATA The following table sets forth for the periods indicated certain summary historical consolidated financial information for MBI and First Sterling. The balance sheet data and income statement data of MBI included in the summary financial data for the five years ended December 31, 1994 are taken from MBI's audited supplemental consolidated financial statements. The balance sheet data and income statement data of First Sterling included in the summary financial data for the year ended December 31, 1994 are taken from First Sterling's audited consolidated financial statements. The balance sheet data and income statement data for each of the four years ended December 31, 1993 are taken from First Sterling's unaudited consolidated financial statements. The balance sheet data and income statement data included in the summary financial data as of and for the nine months ended September 30, 1995 and 1994 are taken from the respective unaudited consolidated financial statements of MBI and First Sterling. These data include all adjustments which are, in the opinion of the respective managements of MBI and First Sterling, necessary to present a fair statement of these periods and are of a normal recurring nature. Results for the nine months ended September 30, 1995 are not necessarily indicative of results for the entire year. The following information should be read in conjunction with the supplemental consolidated financial statements of MBI and the consolidated financial statements of First Sterling, 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 the notes thereto, appearing elsewhere in this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "PRO FORMA FINANCIAL INFORMATION." - 15 - 21 MERCANTILE BANCORPORATION INC. SUMMARY FINANCIAL DATA
As of or for the Nine Months Ended As of or for the September 30 Year Ended December 31 ------------ ---------------------- 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- PER SHARE DATA Net income $ 2.95 $ 2.68 $ 3.22 $ 2.79 $ 2.42 $ 2.25 $ 1.99 Dividends declared .99 .84 1.12 .99 .93 .93 .93 Book value at period end 25.43 23.26 23.47 21.69 19.52 19.19 17.72 Average common shares outstanding (thousands) 53,630 51,900 51,957 50,965 47,276 39,391 37,847 EARNINGS (THOUSANDS) Interest income $854,404 $730,270 $994,896 $971,482 $1,011,544 $1,018,688 $1,022,441 Interest expense 410,097 284,939 399,349 390,911 485,253 588,993 642,365 -------- -------- -------- -------- ---------- ---------- ---------- Net interest income 444,307 445,331 595,547 580,571 526,291 429,695 380,076 Provision for possible loan losses 28,928 26,374 43,201 63,513 77,874 62,360 56,196 Other income 181,480 159,425 209,758 219,703 201,965 170,770 150,508 Other expense 356,944 360,140 492,070 508,043 471,903 431,155 361,992 Income taxes 81,156 78,033 101,705 85,467 61,072 24,029 31,759 -------- -------- -------- -------- ---------- ---------- ---------- Net income $158,759 $140,209 $168,329 $143,251 $ 117,407 $ 82,921 $ 80,637 ======== ======== ======== ======== ========== ========== ========== ENDING BALANCE SHEET (MILLIONS) Total assets $ 16,019 $ 14,723 $ 14,806 $ 14,423 $ 14,190 $ 12,377 $ 11,674 Earning assets 14,773 13,571 13,671 13,259 12,989 11,331 10,447 Investment securities 3,847 3,956 3,844 4,180 4,106 2,949 2,286 Loans and leases, net of unearned income 10,648 9,360 9,670 8,702 8,525 7,881 7,827 Deposits 11,835 11,025 11,189 11,599 11,629 10,211 9,660 Long-term debt 304 300 299 288 310 216 247 Shareholders' equity 1,419 1,224 1,234 1,133 996 805 683 Reserve for possible loan losses 188 190 195 185 179 158 159 SELECTED RATIOS Return on average assets 1.37% 1.29% 1.16% 1.00% 0.86% 0.70% 0.73% Return on average equity 16.01 15.80 14.07 13.37 12.71 10.96 12.30 Net interest rate margin 4.26 4.57 4.55 4.55 4.34 4.12 3.95 Equity to assets 8.86 8.31 8.34 7.85 7.02 6.50 5.85 Reserve for possible loan losses to: Outstanding loans 1.76 2.03 2.01 2.12 2.10 2.00 2.04 Non-performing loans 352.34 469.36 579.62 278.62 147.60 105.33 108.49 Based on weighted average common shares outstanding.
- 16 - 22 FIRST STERLING BANCORP, INC. SUMMARY FINANCIAL DATA
As of or for the Nine Months Ended As of or for the September 30 Year Ended December 31 ------------ ---------------------- 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- PER SHARE DATA Net income $ .36 $ .35 $ .50 $ .40 $ .42 $ .31 $ .31 Dividends declared .12 .12 .16 .04 -- -- -- Book value at period end 4.96 4.53 4.53 4.38 4.02 3.57 3.22 Average common shares outstanding (thousands) 3,685 3,685 3,685 3,685 3,686 3,717 3,743 EARNINGS (THOUSANDS) Interest income $ 9,069 $ 8,289 $ 11,165 $ 11,219 $ 12,453 $ 14,597 $ 15,267 Interest expense 4,247 3,257 4,453 4,538 6,025 8,238 9,086 -------- -------- -------- -------- -------- -------- -------- Net interest income 4,822 5,032 6,712 6,681 6,428 6,359 6,181 Provision for possible loan losses 162 66 66 258 375 676 676 Other income 656 669 916 847 960 811 778 Other expense 3,621 3,907 5,116 5,627 5,005 5,043 4,907 Income before income taxes and cumulative effect of an accounting change 1,695 1,728 2,446 1,643 2,008 1,451 1,376 Income taxes 386 441 592 366 457 283 225 Cumulative effect of a change in accounting for income taxes -- -- -- 202 -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income $ 1,309 $ 1,287 $ 1,854 $ 1,479 $ 1,551 $ 1,168 $ 1,151 ======== ======== ======== ======== ======== ======== ======== ENDING BALANCE SHEET (THOUSANDS) Total assets $170,002 $163,472 $163,295 $167,513 $166,347 $162,351 $164,073 Earning assets 158,042 151,282 150,069 156,248 152,003 150,404 151,835 Investments 73,741 76,536 73,358 82,183 81,207 70,730 57,510 Loans and leases, net of unearned income 85,681 76,224 78,157 75,541 72,718 81,012 95,651 Deposits 132,513 128,133 127,254 133,400 133,508 135,802 145,784 Long-term debt -- -- -- -- -- 850 1,600 Shareholders' equity 18,269 16,684 16,684 16,139 14,827 13,175 12,073 Allowance for possible loan losses 1,380 1,478 1,446 1,476 1,330 1,338 1,326 SELECTED RATIOS Return on average assets 1.05% 1.04% 1.12% .90% .95% .72% .71% Return on average equity 9.99 10.46 11.09 9.37 11.08 9.25 10.14 Net interest rate margin 4.43 4.61 4.63 4.60 4.50 4.50 4.50 Dividend payout ratio 33.33 34.29 32.00 10.00 -- -- -- Average equity to average assets 10.56 9.92 10.13 9.59 8.59 7.73 7.03 Allowance for possible loan losses to: Outstanding loans 1.61 1.94 1.85 1.95 1.83 1.65 1.39 Non-performing loans 416.92 518.60 406.18 204.15 107.00 106.11 314.42 Includes interest-bearing deposits in other financial institutions, federal funds sold, money market fund investments, bankers acceptances, securities available-for-sale, securities held-to-maturity and mutual fund investments. Fully tax equivalent net interest income divided by average earning assets. Dividends declared per share divided by net income per share.
- 17 - 23 INFORMATION REGARDING SPECIAL MEETING ------------------------------------- GENERAL This Proxy Statement/Prospectus is being furnished to holders of First Sterling Common Stock in connection with the solicitation of proxies by the Board of Directors of First Sterling for use at the Special Meeting and any adjournments or postponements thereof at which the shareholders of First Sterling will consider and vote upon a proposal to approve the Merger Agreement and consider and vote upon any other business which may properly be brought before the Special Meeting or any adjournments or postponements thereof. Each copy of this Proxy Statement/Prospectus is accompanied by the Notice of Special Meeting of Shareholders of First Sterling, a proxy card and related instructions and a return envelope to First Sterling, for the proxy card. This Proxy Statement/Prospectus is also furnished by MBI to each holder of First Sterling Common Stock as a prospectus in connection with the issuance by MBI of shares of MBI Common Stock upon the consummation of the Merger. This Proxy Statement/Prospectus and the Notice of Special Meeting, proxy card and related materials are being first mailed to shareholders of First Sterling on November ---, 1995. DATE, TIME AND PLACE The Special Meeting will be held at the offices of First Sterling, 305 4th Avenue, Sterling, Illinois, on December ---, 1995, at ----- -.m. Central Time. RECORD DATE; VOTE REQUIRED On the Record Date, there were 3,685,061 shares of First Sterling Common Stock outstanding and entitled to vote at the Special Meeting. Each such share is entitled to one vote on each matter properly brought before the Special Meeting. The affirmative vote of the holders of at least two- thirds of the outstanding shares of First Sterling Common Stock is required to approve the Merger Agreement. As of the Record Date, directors and executive officers of First Sterling and their affiliates owned beneficially, or controlled the voting of, an aggregate of ---------- shares of First Sterling Common Stock, or approximately -----% of the outstanding shares of First Sterling Common Stock entitled to vote at the Special Meeting. All directors and executive officers of First Sterling have indicated their intention to vote their shares for the approval of the Merger Agreement at the Special Meeting. Additionally, the directors and certain shareholders of First Sterling each, pursuant to the terms of his or her respective Voting Agreement, has committed to vote his or her shares of First Sterling Common Stock for approval of the Merger Agreement. As of the Record Date, such persons who had executed Voting Agreements or otherwise indicated they would vote for approval of the Merger Agreement owned beneficially an aggregate of ----- shares of First Sterling Common Stock, or approximately -----% of the issued and outstanding shares. See "TERMS OF THE PROPOSED MERGER - Other Agreements." VOTING AND REVOCATION OF PROXIES Shares of First Sterling Common Stock which are represented by a properly executed proxy received prior to the vote at the Special Meeting will be voted at such Special Meeting in the manner directed on the proxy card, unless such proxy is revoked in the manner set forth herein in advance - 18 - 24 of such vote. ANY FIRST STERLING SHAREHOLDER RETURNING AN EXECUTED PROXY CARD WHICH DOES NOT PROVIDE INSTRUCTIONS TO VOTE AGAINST THE APPROVAL OF THE MERGER AGREEMENT WILL BE DEEMED TO HAVE APPROVED THE MERGER AGREEMENT. Failure to return a properly executed proxy card or to vote in person at the Special Meeting will have the practical effect of a vote against the approval of the Merger Agreement. Shares subject to abstentions will be treated as shares that are present and voting at the Special Meeting for purposes of determining the presence of a quorum. Such votes will have the effect of votes against the approval of the Merger Agreement. Broker "non-votes" (i.e., proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owners or other persons entitled to vote shares with respect to which the brokers or nominees do not have discretionary power to vote without such instructions) will be considered as present for the purposes of determining the presence of a quorum but will not be considered as voting at the Special Meeting. Broker non-votes will have the effect of votes against the approval of the Merger Agreement. Any shareholder of First Sterling giving a proxy may revoke it at any time prior to the vote at the Special Meeting. Shareholders of First Sterling wishing to revoke a proxy prior to the vote may do so by delivering to the Secretary of First Sterling at 305 4th Avenue, Sterling, Illinois 61081 a written notice of revocation bearing a later date than the proxy or a later dated proxy relating to the same shares, or by attending the Special Meeting and voting such shares in person. Attendance at the Special Meeting will not in itself constitute the revocation of a proxy. The Board of Directors of First Sterling is not currently aware of any business to be brought before the Special Meeting other than that described herein. If, however, other matters are properly brought before such Special Meeting, or any adjournments or postponements thereof, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment as to the best interest of First Sterling. SOLICITATION OF PROXIES First Sterling will bear its own costs of soliciting proxies, except that MBI will pay printing and mailing expenses and registration fees incurred in connection with preparing this Proxy Statement/Prospectus. Proxies will initially be solicited by mail, but directors, officers and selected other employees of First Sterling may also solicit proxies in person or by telephone. Directors, executive officers and any other employees of First Sterling who solicit proxies will not be specially compensated for such services. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward proxy materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners. HOLDERS OF FIRST STERLING COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. 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. MBI, upon written or oral request, will furnish a copy of the Merger Agreement, without charge, to any person who receives a copy of this Proxy Statement/Prospectus. Such - 19 - 25 requests should be directed to Jon W. Bilstrom, General Counsel and Secretary, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524, telephone (314) 425-2525. GENERAL DESCRIPTION OF THE MERGER Pursuant to the Merger Agreement, subject to satisfaction or waiver of certain conditions precedent, including receipt of all applicable regulatory approvals, First Sterling, an Illinois corporation, will be merged on the Closing Date with and into Merger Sub, a Missouri corporation which is a wholly owned subsidiary of MBI. Upon consummation of the Merger, First Sterling's corporate existence will terminate and Merger Sub will continue as the surviving entity. Simultaneously with the effectiveness of the Merger, each share of First Sterling Common Stock will be converted into the right to receive 0.1415 of a share of MBI Common Stock. Such consideration is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI or First Sterling prior to the consummation of the Merger. The fair market value of MBI Common Stock received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. The amount and nature of the consideration was established through arm's-length negotiations between MBI and First Sterling and their respective advisors, 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 of the parties to the Merger 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 FIRST STERLING SHAREHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI COMMON STOCK RECEIVED BY A FIRST STERLING SHAREHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK DUE TO NUMEROUS MARKET FACTORS. Following the Closing Date, each shareholder of First Sterling will be required to submit to the Exchange Agent a properly executed letter of transmittal and surrender to the Exchange Agent the stock certificate(s) formerly representing the shares of First Sterling Common Stock in order to receive a new stock certificate(s) evidencing the shares of MBI Common Stock to which such shareholder is entitled. Following the Closing Date, the Exchange Agent will mail to each First Sterling shareholder a notice of consummation of the Merger and a form of letter of transmittal, together with instructions and a return envelope to facilitate the exchange of such holder's certificate(s) formerly representing First Sterling Common Stock for certificate(s) evidencing MBI Common Stock. No dividends or other distributions will be paid to a former First Sterling shareholder with respect to shares of MBI Common Stock until such shareholder's letter of transmittal and stock certificate(s) formerly representing First Sterling Common Stock, or documentation reasonably acceptable to the Exchange Agent in lieu of lost or destroyed certificates, is delivered to the Exchange Agent. See "TERMS OF THE PROPOSED MERGER - Surrender of First Sterling Stock Certificates and Receipt of MBI Common 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 - 20 - 26 Journal on the Closing Date of the Merger. See "- Fractional Shares." The shares of MBI Common Stock to be issued pursuant to the Merger will be freely transferable except by certain shareholders of First Sterling who are deemed to be "affiliates" of First Sterling. The shares of MBI Common Stock issued to such affiliates will be restricted in their transferability in accordance with the rules and regulations promulgated by the Commission. See "INFORMATION REGARDING MBI STOCK - Restrictions on Resale of MBI Stock by Affiliates." OTHER AGREEMENTS Concurrent with the execution of the Merger Agreement, MBI and each of the directors of First Sterling and certain other shareholders of First Sterling (each of whom is either affiliated with a member of the Board of Directors or a principal shareholder of First Sterling) executed a separate Voting Agreement by which each such person agreed that he or she will vote all of the shares of First Sterling Common Stock that he or she then owned or subsequently acquires in favor of the approval of the Merger Agreement at the Special Meeting. In addition, until the earliest to occur of the Effective Time of the Merger, the termination of the Voting Agreements or the abandonment of the Merger, each such person further agreed that he or she will not vote any such shares in favor of the approval of any other competing acquisition proposal involving First Sterling and a third party. Each such person also agreed that he or she will not transfer shares of First Sterling Common Stock owned by him or her unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement. As of the Record Date, persons who had executed Voting Agreements owned beneficially an aggregate of ----- shares of First Sterling Common Stock, or approximately -----% of the issued and outstanding shares. INTERESTS OF CERTAIN PERSONS IN THE MERGER From and after the Effective Time for a period of not less than five years, MBI will provide for the indemnification of employees, agents, directors or officers of First Sterling or any of First Sterling's subsidiaries, in an amount and of a type not less than that provided by First Sterling's Articles of Incorporation or bylaws in the form in effect as of July 24, 1995 or arising by operation of law or arising by virtue of any contract, resolution or other agreement or document existing as of July 24, 1995. Further, MBI will assume all duties and obligations of indemnification of First Sterling or any of First Sterling's subsidiaries existing as of the Effective Time with respect to any act or omission of any of their respective employees, agents, directors or officers occurring prior to the Effective Time; provided, however, that to the extent that First Sterling's directors' and officers' liability insurance would provide coverage for any such act or omission, First Sterling agrees to give proper notice to the insurance carrier and to MBI of a potential claim thereunder so as to preserve the rights to such insurance coverage. BACKGROUND OF AND REASONS FOR THE MERGER; BOARD RECOMMENDATIONS BACKGROUND OF THE MERGER. The Board of Directors of First Sterling periodically reviews First Sterling's strategy in light of general conditions in the banking industry, local competitive and economic conditions, the results of its operations and its future prospects, legislative changes, and other developments affecting the banking industry generally and First Sterling specifically. In connection with such review, members of the Board of Directors and senior management of First Sterling have met from time to time with representatives of Chicago Corp., First Sterling's financial advisor, to discuss industry trends and to explore alternative means of enhancing shareholder value. In August 1992, the Board of Directors determined that it was in the long-term best interests of First Sterling's shareholders, as well as its depositors, customers, employees and the communities - 21 - 27 in which it operates for First Sterling to pursue the possibility of a business combination between First Sterling and a larger more geographically diverse bank holding company. The Board of Directors of First Sterling authorized Chicago Corp. to solicit bank holding companies with suitable financial strength, stock price performance and prospects, geographical location and other factors. Chicago Corp. prepared written materials with which it solicited expressions of interest from 15 bank holding companies which Chicago Corp. had identified as the most likely merger candidates (the "1992 Solicitation"). In Fall 1993, First Sterling abandoned its merger effort when it was unable to complete a transaction in connection with such solicitation. As a result, management undertook a restructuring of its operations to better enable First Sterling to operate as an independent entity and to position it for such a combination in the future. In May 1995, Chicago Corp. informed management of First Sterling that MBI had expressed an interest in acquiring a bank serving communities in northwestern Illinois. Representatives of Chicago Corp. and First Sterling management met in late May and early June to discuss First Sterling's interest in a combination with MBI, as well as possible values in light of recent bank merger and acquisition trends, the responses from the 1992 Solicitation and First Sterling's operating results and prospects. First Sterling authorized Chicago Corp. to indicate its interest in meeting with MBI as well as to contact the only bank holding company from the 1992 Solicitation which had expressed a continued interest in First Sterling. Such bank indicated that it had no current interest in a transaction with First Sterling. In early June, management of First Sterling and MBI held preliminary discussions relating to a potential combination between the companies which culminated in representatives of MBI visiting the Sterling and Rock Falls facilities and surveying the local community. On June 13, 1995, First Sterling Board members reviewed with management the preliminary discussions that had taken place to date and determined that management should pursue further discussions with MBI. On June 14, 1995, the senior management of First Sterling made a presentation to representatives of MBI concerning its business, operations, financial results and future prospects. Thereafter, MBI made a presentation regarding its history and business philosophy and provided First Sterling management with financial and other due diligence materials. At this meeting, preliminary discussions were held with respect to the terms of the proposed merger. Following these discussions, First Sterling allowed MBI to conduct a due diligence investigation of First Sterling. Upon completion, MBI indicated that it was prepared to proceed with the proposed merger and on July 6, 1995 submitted a proposed form of merger agreement. During mid-June, Chicago Corp. provided the First Sterling Board of Directors with comparative stock data and other financial research and analyses to supplement the earlier materials provided by MBI. During mid- June through early July, members of the Board of Directors held informal discussions concerning the proposed merger, including the prospects for MBI's future performance and the advisability of the proposed merger in light of existing business, economic, competitive and regulatory conditions. On July 11, 1995, the Board of Directors reviewed the proposed terms of the Merger with management. Following discussions between the directors, the Board of Directors authorized Messrs. William J. Hank, Carl A. Kautz and Joseph D. Henderson, members of the Executive Committee of the Board of Directors, with the assistance of Chicago Corp. and its legal advisors, to negotiate a definitive merger agreement based on the proposed terms as described. -22 - 28 During the following two weeks, management of First Sterling, together with its legal and financial advisors, conducted extensive negotiations with MBI and its legal advisors. On July 24, upon completion of the negotiations, Chicago Corp. rendered its oral opinion that the consideration to be received by the shareholders of First Sterling was fair to such shareholders from a financial point of view. See "-Opinion of Financial Advisor to First Sterling." On July 24, 1995, acting by unanimous written consent, the Board of Directors determined that the Merger Agreement was in the best interest of First Sterling shareholders and unanimously recommended approval of the Merger Agreement. FIRST STERLING'S REASONS AND BOARD RECOMMENDATION. The Board of Directors of First Sterling believes that the Merger is in the best interests of First Sterling and its shareholders. In determining to recommend that the holders of First Sterling Common Stock approve the Merger and the Merger Agreement, and in determining the fairness of the terms of the Merger and the terms of the provisions of the Merger Agreement, the First Sterling Board of Directors considered the principal factors described below. (1) The financial condition, assets, results of operations, business and prospects of First Sterling as an independent entity and the risks involved in achieving those prospects. (2) The opinion of Chicago Corp. to the effect that, as of the date of such opinion, the consideration to be received in the Merger by the holders of First Sterling Common Stock, as provided in the Merger Agreement, is fair from a financial point of view. See "- Opinion of Financial Advisor of First Sterling" for a description of the financial analyses undertaken by Chicago Corp. and the assumptions and qualifications made by Chicago Corp. in connection therewith. (3) Economic conditions and prospects for the markets in which First Sterling operates, and the competitive pressures in the financial service industry in general and the banking industry in particular. (4) That the Merger presented the holders of First Sterling Common Stock the opportunity to receive higher dividends, liquidity for their shares and better prospects for future growth than if First Sterling were to remain independent. (5) The trading and dividend history of MBI Common Stock and the prospects for the price of and dividends on the MBI Common Stock. (6) The terms and conditions of the Merger Agreement, including the amount and sufficiency of the consideration to be paid to the holders of First Sterling Common Stock, as well as the intended tax deferred nature of the Merger for First Sterling shareholders. (7) That a business combination with a larger bank holding company such as MBI would provide greater short-term and long-term value to First Sterling shareholders than other available alternatives and would enhance First Sterling's competitiveness and its ability to serve its depositors, customers and the communities in which it operates. The First Sterling Board of Directors based its determination that the terms of the Merger and the terms and conditions of the Merger Agreement were fair to the holders of First Sterling Common Stock on, among other things, the fairness opinion of Chicago Corp. and the other factors described above. - 23 - 29 THE BOARD OF DIRECTORS OF FIRST STERLING UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF FIRST STERLING VOTE FOR THE PROPOSAL TO APPROVE THE MERGER --- AGREEMENT. MBI'S REASONS AND BOARD RECOMMENDATIONS. The Executive Committee of the Board of Directors of MBI considered a number of factors, including, among other things, the financial condition of First Sterling and projected synergies which are anticipated to result from the Merger. The Executive Committee concluded that the Merger presents an unique opportunity for MBI to increase its presence in northwestern Illinois through the acquisition of an established banking organization having operations in the targeted area. MBI's decision to pursue discussions with First Sterling was primarily a result of MBI's assessment of the value of First Sterling's banking franchise, its substantial asset base within that area and the compatibility of the businesses of the two banking organizations. OPINION OF FINANCIAL ADVISOR TO FIRST STERLING Chicago Corp. was retained by the First Sterling Board of Directors, among other things, to advise it as to the fairness from a financial point of view of the consideration to be received by the holders of the First Sterling Common Stock in the Merger and to assist it in its negotiations with MBI. Chicago Corp. is a recognized specialist in the financial services industry in general and in Midwestern banks in particular. Chicago Corp. is regularly engaged in advising financial institutions with respect to mergers and acquisitions as well as raising debt and equity capital for such institutions. The First Sterling Board of Directors selected Chicago Corp. on the basis of its ability to evaluate the fairness of the consideration to be received in the Merger, its qualifications, past experience with and knowledge of First Sterling and its reputation in the banking and investment banking communities. On July 24, 1995, Chicago Corp. rendered its oral opinion, which was subsequently confirmed by a written opinion dated as of the date of this Proxy Statement/Prospectus, to the effect that, as of such dates, the consideration to be received by the holders of First Sterling Common Stock in the Merger is fair to such shareholders from a financial point of view. The full text of Chicago Corp.'s written opinion, which sets forth the procedures followed, assumptions made, matters considered and qualifications and limitations of the review undertaken in connection therewith by Chicago Corp. is attached as Annex A to this Proxy Statement/Prospectus and is ------- incorporated herein by reference in its entirety. In preparing the opinion, Chicago Corp. assumed and relied upon the accuracy and completeness of all financial and other information reviewed by it for purposes of the opinion and did not independently verify such information or undertake an independent evaluation or appraisal of the assets or liabilities of First Sterling or MBI nor was it furnished with any such evaluation or appraisal. Chicago Corp. is not an expert in the evaluation of allowances for loan losses, and it has not made an independent evaluation of the adequacy of the allowance for loan losses of First Sterling or MBI nor has it reviewed any individual credit files, and it assumed that the aggregate allowances for loan losses are adequate to cover such losses. Chicago Corp.'s opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to it as of, the date of such opinion. HOLDERS OF SHARES OF FIRST STERLING COMMON STOCK ARE URGED TO READ CHICAGO CORP.'S OPINION IN ITS ENTIRETY. In performing its analyses and arriving at its opinion, Chicago Corp. considered such financial and other factors as it deemed appropriate and feasible under the circumstances, including, among other things: (i) audited and unaudited financial statements of First Sterling and MBI through September 30, 1995; (ii) certain information, including financial and other material relating to the businesses, earnings, assets and prospects of First Sterling and MBI furnished to Chicago Corp. by First Sterling and MBI; (iii) information gathered during limited discussions with members of the senior managements of - 24 - 30 First Sterling and MBI concerning the businesses and financial prospects of the respective companies; (iv) the historical market prices and trading activity of the First Sterling Common Stock and the MBI Common Stock and other publicly traded stocks Chicago Corp. deemed to be relevant; (v) the financial performance of First Sterling, MBI and other companies Chicago Corp. deemed to be relevant; (vi) the proposed financial terms of the Merger and the financial terms of selected other mergers and acquisitions Chicago Corp. deemed to be relevant; (vii) the Merger Agreement and related agreements; (viii) the pro forma effects of the Merger on First Sterling's earnings, dividends and book value; and (ix) such other financial analyses as Chicago Corp. deemed relevant. Generally, Chicago Corp.'s preparation of the fairness opinion involved various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to particular circumstances. Therefore, such an opinion is not readily susceptible to summary description. Furthermore, in arriving at its opinion, Chicago Corp. did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Chicago Corp. believes that its analyses must be considered as a whole and that considering any portions of such analyses and of the factors considered therein, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Chicago Corp. made assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of First Sterling or MBI. Any estimates contained in such analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses. In addition, Chicago Corp.'s analyses and estimates of value do not purport to be appraisals or necessarily to reflect the prices at which First Sterling or any shares of First Sterling Common Stock may be sold. Accordingly, because such estimates are inherently subject to uncertainty, none of First Sterling, MBI or Chicago Corp. or any other person assumes responsibility for their accuracy. NET PRESENT VALUE ANALYSIS. Chicago Corp. prepared a net present value analysis which indicated theoretical values for First Sterling Common Stock based on return on average assets ranging between 0.8% and 1.3% and asset growth rates ranging between 0.0% and 8.0% over a four-year period. The results of this analysis indicated an implied value reference range for First Sterling Common Stock between $3.02 per share (0.8% return on average assets; 0.0% asset growth rate) and $6.25 per share (1.3% return on average assets; 8.0% asset growth rate). At a return on average assets ratio of 1.1%, which approximates First Sterling's recent historical performance, Chicago Corp. derived an implied value reference range for the First Sterling Common Stock between $4.13 per share (0.0% asset growth rate) and $5.30 per share (8.0% asset growth rate). At an asset growth rate of 0.0%, which approximates First Sterling's recent historical performance, Chicago Corp. derived an implied value reference range for the First Sterling Common Stock between $3.02 per share (0.8% return on average assets) and $4.86 per share (1.3% return on average assets). Based on the market price of MBI Common Stock on July 24, 1995 and the exchange ratio in the Merger of 0.1415, the value of the offer from MBI was $6.40 per share. CONTRIBUTION ANALYSIS. Chicago Corp. prepared a contribution analysis showing the percentages of assets, deposits, tangible equity, 1994 net income and estimated 1995 and 1996 net income contributed to the combined company on a pro forma basis by First Sterling and MBI, and compared these percentages to the pro forma ownership of MBI. This analysis showed that First Sterling, as of March 31, 1995, would have contributed, on a pro forma consolidated basis, 1.23% of total assets, 1.31% of deposits, 1.53% of tangible equity, 1.14% of calendar 1994 net income, 1.07% of calendar 1995 estimated net income and 1.05% of calendar 1996 estimated net income. Based on the exchange ratio in the Merger of 0.1415, holders of First Sterling Common Stock would have owned approximately 1.13% of the MBI Common Stock outstanding as of March 31, 1995 (after giving effect to the Merger as of that date). - 25 - 31 COMPARABLE TRANSACTION ANALYSIS. Chicago Corp. reviewed selected merger and acquisition transactions that it deemed to be comparable. The following merger transactions were reviewed based on publicly available data (the acquiror is named first and underlined, followed by the seller); AMBANC Corp., First Robinson Bancorp; AMCORE Financial, NBM Bancorp; Community - ------------ ---------------- --------- First Banks, Minowa Bancshares; CNB Bancshares, Inc., Harrisburg Bancshares; - ----------- -------------------- Marshall & Ilsley, Bank of Burlington; Mercantile Bancorporation Inc., - ----------------- ------------------------------ Wedge Bank; Lauritzen Corp., Shelby County Bancshares; AMCORE Financial, First --------------- ---------------- State Bancorp; Banc One Corporation, Mid States Bancshares; F&M Bancorporation, -------------------- ------------------ First National Financial. Transactions were selected on the basis of the comparability of absolute transaction value and the comparability of the markets served by the acquired institutions to those of First Sterling. Chicago Corp. calculated the multiples of offer price to last twelve months ("LTM") earnings per share and tangible book value per share of the acquired company in each such transaction. For the comparable transactions, the multiple of offer price to LTM earnings ranged from 9.29 to 17.85 with an average of 13.64. The value to be received by the holders of First Sterling Common Stock under the terms of the Merger Agreement (based on the market price of MBI Common Stock of $45.25 per share on July 24, 1995 and an exchange ratio of 0.1415) represents a multiple of offer price to LTM earnings of 13.49. For the comparable transactions, the multiple of offer price to tangible book value ranged from 1.39 to 2.16 with an average of 1.73. The terms of the Merger represent a multiple of offer price to tangible book value per share (as of March 31, 1995) of 1.42. FINANCIAL IMPLICATIONS TO FIRST STERLING SHAREHOLDERS. Chicago Corp. prepared an analysis of the financial implications of the terms of the Merger to a holder of First Sterling Common Stock. This analysis indicated that on a pro forma equivalent basis a shareholder of First Sterling would achieve increases in earnings per share and per share dividends and a decrease in book value per share as a result of the consummation of the Merger. COMPARATIVE SHAREHOLDER RETURNS. Chicago Corp. analyzed and compared projected shareholder returns under several scenarios, including First Sterling remaining independent, the Merger being effected in 1995 and the Merger being effected in 1998. This comparative analysis, which was based on the net present value of projected dividend streams and projected valuations of the First Sterling Common Stock as of 1998 (using current price-to-earnings multiples), indicated total annual returns for First Sterling shareholders of 19.83% if First Sterling remains independent, 22.32% if the Merger is consummated in 1998 (on terms similar to those set forth in the Merger Agreement) and 23.21% if the Merger is consummated in 1995. COMPARABLE COMPANY ANALYSIS. Chicago Corp. compared the market price, market-to-book value and price-to-earnings multiples of MBI Common Stock with the individual market multiples and averages of the following selected comparable companies which it deemed to be reasonably similar to MBI in size, financial character, operating character, historical performance and/or geographic market: Banc One Corporation; Norwest Corporation; First Bank System, Inc.; Boatmen's Bancshares, Inc.; First of America Bank Corp.; Firstar Corporation; Old Kent Financial Corporation; Commerce Bancshares, Inc.; UMB Financial Corporation; and Magna Group, Inc. (collectively, the "Comparable Companies"). This analysis indicated that MBI Common Stock sold at a price of 1.83 times tangible book value as of March 31, 1995 and the Comparable Companies sold at an average price of 1.88 times tangible book value as of March 31, 1995. As of March 31, 1995, the MBI Common Stock sold at a multiple of price to LTM earnings of 11.32 while the average price-to-earnings multiple for the Comparable Companies was 12.41. Chicago Corp.'s opinion issued as of the date of this Proxy Statement/Prospectus is based on the financial and other information reviewed by Chicago Corp. in rendering its July 24, 1995 oral - 26 - 32 opinion, a review of information set forth in this Proxy Statement/Prospectus and a review of financial results of MBI and First Sterling since July 24, 1995. Other than its engagement by First Sterling in connection with the Merger, the 1992 Solicitation and its engagement by one of First Sterling's principal shareholders in connection with a transaction unrelated to the Merger, for which it received customary compensation, Chicago Corp. has not provided any advisory services to First Sterling or its directors, officers or principal shareholders. For its financial advisory services to First Sterling in connection with the Merger, upon closing of the Merger, Chicago Corp. will be paid a fee of 1.00% of the total consideration to be received by First Sterling. In addition, First Sterling has agreed to pay Chicago Corp.'s out-of-pocket expenses, and to indemnify Chicago Corp. against certain liabilities, including liabilities arising under the Federal securities laws. Chicago Corp. is a member of all principal United States securities exchanges and, in the conduct of its broker-dealer activities, may from time to time purchase securities from, and sell securities to, First Sterling and MBI. CONDITIONS OF THE MERGER The respective obligations of MBI, Merger Sub and First Sterling to consummate the Merger are subject to the satisfaction of certain mutual conditions, including the following: (1) The Merger Agreement shall be approved by the holders of at least two-thirds of the outstanding shares of First Sterling Common Stock at the Special Meeting. (2) The Merger Agreement and the transactions contemplated therein shall have been approved by the Federal Reserve Board and any other federal and/or state regulatory agency whose approval is required for the consummation of the transactions contemplated therein, and all waiting periods after such approvals required by law or regulation shall have been satisfied. (3) The Registration Statement of which this Proxy Statement/Prospectus is a part, registering shares of MBI Common Stock to be issued in the Merger, shall have been declared effective and not be subject to a stop order or any threatened stop order and the MBI Common Stock to be issued in the Merger shall have been approved for listing on the NYSE. (4) Neither First Sterling, MBI nor Merger Sub 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. (5) First Sterling, MBI and Merger Sub each shall have received from Thompson & Mitchell an opinion (which opinion shall not have been withdrawn at or prior to the Effective Time) 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 Code and to the effect that, as a result of the Merger, except with respect to cash received in lieu of fractional share interests, holders of First Sterling Common Stock who receive MBI Common Stock in the Merger will not recognize gain or loss for federal income tax purposes, the basis of such MBI Common Stock will equal the basis of the First Sterling Common Stock for which it is exchanged and the holding period of such MBI Common Stock will include the holding period of the First Sterling Common Stock - 27 - 33 for which it is exchanged, assuming that such First Sterling Common Stock is a capital asset in the hands of the holder thereof as of the Effective Time. The obligation of MBI and Merger Sub to consummate the Merger is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of First Sterling made in the Merger Agreement shall be true and correct in all material respects, as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts which caused the failure of any representations or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the Condition (as defined in the Merger Agreement) of First Sterling and its subsidiaries, taken as a whole, and (iii) for the effect of transactions contemplated by the Merger Agreement, and all obligations required to be performed by First Sterling prior to the Effective Time shall have been performed in all material respects, and MBI shall have received a certificate of the President and Chief Financial Officer of First Sterling to that effect. (2) First Sterling shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of First Sterling for the lawful consummation of the Merger. (3) MBI and Merger Sub shall have received an opinion of KPMG Peat Marwick LLP, satisfactory to MBI, that the Merger will qualify for pooling-of-interests accounting treatment, which opinion shall not have been withdrawn at or prior to the Effective Time. (4) Ward, Murray, Pace & Johnson, P.C., counsel to First Sterling, shall have delivered to MBI an opinion dated as of the Closing Date regarding certain legal matters. First Sterling's obligation to consummate the Merger is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of MBI and Merger Sub made in the Merger Agreement shall be true and correct in all material respects, as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the Condition of MBI and its subsidiaries, taken as a whole, and (iii) for the effect of transactions contemplated by the Merger Agreement, and all obligations required to be performed by MBI and Merger Sub prior to the Effective Time shall have been performed in all material respects, and First Sterling shall have received a certificate from any Executive Vice President of MBI to that effect. (2) MBI and Merger Sub shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of MBI or Merger Sub for the lawful consummation of the Merger. (3) Thompson & Mitchell, counsel to MBI, shall have delivered to First Sterling an opinion dated as of the Closing Date regarding certain legal matters. - 28 - 34 REPRESENTATIONS AND WARRANTIES The Merger Agreement contains extensive representations and warranties by First Sterling, MBI and Merger Sub. These include, among other things, representations and warranties of First Sterling as to (i) the organization and good standing of it and its subsidiaries, (ii) its capital structure, (iii) its authority relative to the execution and delivery of, and performance of its obligations under, the Merger Agreement, (iv) the documents, including financial statements and other reports, filed by First Sterling with the applicable regulatory authorities, (v) title to and condition of assets, (vi) real property, (vii) taxes, (viii) the absence of material adverse changes since June 30, 1995, (ix) loans, commitments and contracts, (x) the absence of material conflicts between its obligations under the Merger Agreement and its charter documents and material contracts to which it is a party or by which it is bound, (xi) litigation, (xii) directors' and officers' insurance, (xiii) compliance with laws, (xiv) labor, (xv) the existence of certain material interests of certain persons, (xvi) allowance for loan and lease losses and non-performing assets, (xvii) employee benefit plans and related matters, (xviii) the absence of undisclosed liabilities, (xix) the accuracy of the information supplied by First Sterling for inclusion in this Proxy Statement/Prospectus and related documents, (xx) the absence of registration obligations with respect to First Sterling Common Stock, (xxi) the absence of actions that would jeopardize the pooling-of-interests treatment, (xxii) obligations to brokers and finders and (xxiii) the absence of interest rate management instruments. MBI's and Merger Sub's representations and warranties include, among other things, those as to (i) their respective organization and good standing, (ii) their respective capital structures, (iii) their authority relative to the execution and delivery of, and performance of their respective obligations under, the Merger Agreement, (iv) the documents, including financial statements and other reports, filed by MBI with applicable regulatory authorities, (v) the absence of material adverse changes since March 31, 1995, (vi) litigation, (vii) the accuracy of the information supplied by MBI or Merger Sub for inclusion in this Proxy Statement/Prospectus and related documents and (viii) the absence of obligations to brokers and finders. TERMINATION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT The Merger Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the shareholders of First Sterling, (i) by mutual consent of the Executive Committee of the Board of Directors of MBI and the respective Boards of Directors of First Sterling and Merger Sub, or (ii) unilaterally by the Executive Committee of the Board of Directors of MBI or the Boards of Directors of First Sterling or Merger Sub: (A) at any time after April 30, 1996, if the Merger has not been consummated by such date (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement); (B) if the Federal Reserve Board or any other federal and/or state regulatory authority whose approval is required for consummation of the Merger shall have issued a final nonappealable denial of such approval; (C) if the shareholders of First Sterling shall not have approved the Merger Agreement at the Special Meeting; or (D) in the event of a breach by the other party of any representation, warranty or agreement contained in the Merger Agreement, which breach is not cured within 30 days after written notice thereof is given to the party committing such breach or is not waived by such other party. The Executive Committee of the Board of Directors of Mercantile may terminate the Agreement in certain circumstances if First Sterling acquires property after July 24, 1995 and if environmental investigations of such acquired property, together with all previously acquired property after such date, indicates that the estimated cost of corrective or remedial action with regard to such properties would exceed $100,000 in the aggregate. No assurance can be given that the Merger will be consummated on or before April 30, 1996 or that MBI, Merger Sub or First Sterling will not elect to terminate the Merger Agreement if the Merger has not been consummated on or before such date. - 29 - 35 In the event of the termination of the Merger Agreement, it shall become void and there shall be no liability on the part of any party except, that (i) confidentiality and indemnification obligations shall survive termination, (ii) MBI shall pay all printing, mailing and filing expenses with respect to the Registration Statement and this Proxy Statement/Prospectus and (iii) in the case of termination due to continued material breach after notice and opportunity to cure, the breaching party shall not be relieved of liability to the nonbreaching party arising from the willful nonperformance of any covenant in the Merger Agreement. Any provision of the Merger Agreement, including, without limitation, the conditions to the consummation of the Merger and the restrictions described under "- Business Pending the Merger," may be (i) waived in writing at any time by the party that is, or whose shareholders are, entitled to the benefits thereof, or (ii) amended at any time by written agreement of the parties approved by or on behalf of their respective Boards of Directors or Executive Committees, whether before or after the Special Meeting; provided, however, that after approval of the Merger Agreement by the shareholders of First Sterling at the Special Meeting no such modification may (i) alter or change the amount or kind of consideration to be received by the First Sterling shareholders in the Merger, (ii) adversely affect the tax treatment to First Sterling shareholders as a result of receiving the shares of MBI Common Stock in the Merger, (iii) adversely affect any representation, warranty, or covenant of MBI or Merger Sub, (iv) otherwise adversely affect the rights of First Sterling under the Merger Agreement or (v) impede or delay receipt of any required regulatory approvals or the consummation of the Merger. INDEMNIFICATION First Sterling, MBI and Merger Sub have agreed to indemnify each other and the officers, directors and controlling persons of each other against any losses, claims, damages or liabilities to which any such party may become subject under federal or state laws or regulations, to the extent that such loss, claim, damage or liability is based primarily upon information furnished to the party subject to such liability by the other party, or out of an omission by such other party to state a necessary or material fact in the Registration Statement of which this Proxy Statement/Prospectus is a part. CLOSING DATE The Merger will be consummated and become effective on the Closing Date upon issuance of a certificate of merger by the Missouri Secretary of State. Under the Merger Agreement, the Closing Date shall be the later to occur of (i) January 2, 1996 and (ii) the first business day of the first full calendar month beginning at least five business days after the month in which the later of the following events occurs: (a) the receipt of the requisite approval of the Merger Agreement by the shareholders of First Sterling; and (b) the approval of the Merger by the Federal Reserve Board and any other federal and/or state regulatory agency whose approval is required, and all waiting periods for such approvals have been satisfied. SURRENDER OF FIRST STERLING STOCK CERTIFICATES AND RECEIPT OF MBI COMMON STOCK At the Effective Time of the Merger, each outstanding share of First Sterling Common Stock will be converted into the right to receive 0.1415 of a share of MBI Common Stock. See "- General Description of the Merger." Each holder of First Sterling Common Stock, upon submission to the Exchange Agent of a properly executed letter of transmittal and surrender to the Exchange Agent of the stock certificate(s) formerly representing shares of First Sterling Common Stock, will be entitled to receive a stock certificate(s) evidencing the shares of MBI Common Stock to which such shareholder is entitled. - 30 - 36 As soon as practicable following the Effective Time, the Exchange Agent will mail to each First Sterling shareholder of record as of the Effective Time notification of the consummation of the Merger. The Exchange Agent will also provide a letter of transmittal and instructions as to the procedure for the surrender of the stock certificates evidencing the First Sterling Common Stock and the receipt of shares of MBI Common Stock. It will be the responsibility of each holder of First Sterling shares to submit all certificates formerly evidencing such holder's shares of First Sterling Common Stock to the Exchange Agent. No dividends or other distribution will be paid to a former First Sterling shareholder with respect to shares of MBI Common Stock until such shareholder's properly completed letter of transmittal and stock certificates formerly representing First Sterling Common Stock, or, in lieu thereof, such evidence of a lost, stolen or destroyed certificate and/or such insurance bond as the Exchange Agent may reasonably require in accordance with customary exchange practices, are delivered to the Exchange Agent. All dividends or other distributions on the MBI Common Stock declared between the Closing Date of the Merger and the date of the surrender of a First Sterling stock certificate will be held for the benefit of the shareholder and will be paid to the shareholder, without interest thereon, upon the surrender of such stock certificate(s) or documentation and/or insurance bond in lieu thereof. FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the former shareholders of First Sterling in connection with the Merger. Each holder of First Sterling 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 NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date. Cash received by First Sterling shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." REGULATORY APPROVAL In addition to the approval of the Merger Agreement by the First Sterling shareholders, the obligations of the parties to effect the Merger are subject to prior approval of the Federal Reserve Board and the Illinois Commissioner. As a bank holding company, MBI is subject to regulation under the BHCA. The Merger is subject to approval by the Federal Reserve Board under Section 3 of the BHCA. Under the BHCA, the Federal Reserve Board may withhold approval of the Merger if, among other things, it determines that the effect of the Merger would be to substantially lessen competition in the relevant market. In addition, the Federal Reserve Board must consider whether the combined organization meets the requirements of the Community Reinvestment Act of 1977, as amended, by assessing the involved entities' respective records of meeting the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions. In its review, the Federal Reserve Board must also examine the financial and managerial resources and future prospects of the combined organization and analyze the capital structure and soundness of the resulting entity. The Federal Reserve Board has the authority to deny an application if it concludes that the combined organization would have inadequate capital. The Illinois Commissioner will review the record of MBI's subsidiary financial institutions in meeting the credit needs of the local communities they serve. MBI has filed applications with the Federal Reserve Board and the Illinois Commissioner for approval to acquire First Sterling. The Merger cannot be consummated prior to receipt of such approvals. There can be no assurance that required regulatory approvals for the Merger will be obtained, and, if the Merger is approved, as to the date of such approvals or whether the approvals will contain any unacceptable conditions. There can likewise be no assurance that the United States Department of Justice - 31 - 37 will not challenge the Merger during the waiting period set aside for such challenges after receipt of approval from the Federal Reserve Board. See "SUPERVISION AND REGULATION." MBI and First Sterling 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 that any necessary regulatory approvals or actions will be timely received or taken, that no action will be brought challenging such approval or action or, if such a challenge is brought, as to 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. See "SUPERVISION AND REGULATION." BUSINESS PENDING THE MERGER The Merger Agreement provides that, during the period from July 24, 1995 to the Effective Time, First Sterling will conduct its business according to the ordinary and usual course consistent with past practices and 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 July 24, 1995 to the Effective Time, except as provided in the Merger Agreement, First Sterling will not, and will not permit any of its subsidiaries to, without the prior written consent of MBI: (1) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock (other than dividends from any of the First Sterling subsidiaries to First Sterling), except that First Sterling may pay regular quarterly cash dividends of not more than $.04 per share for any quarter in which First Sterling shareholders shall not be entitled to dividends on MBI Common Stock issued in the Merger; (2) enter into or amend any employment, severance or similar agreement or arrangement with any director, officer or employee, or materially modify any of the First Sterling employee plans 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, and except for such increases of which First Sterling notifies MBI in writing and which MBI does not disapprove within ten days of the receipt of such notice; (3) authorize, recommend, 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; (4) propose or adopt any amendments to the Articles of Incorporation or Association of First Sterling or any subsidiary of First Sterling, as the case may be, or its respective by-laws or charter; - 32 - 38 (5) issue, sell, grant, confer or award any capital stock options, warrants, conversion rights or other rights or effect any stock split or adjust, combine, reclassify or otherwise change its capitalization as it existed on July 24, 1995; (6) purchase, redeem, retire, repurchase or exchange, or otherwise acquire or dispose of, directly or indirectly, any capital stock, options, warrants, conversion rights or other rights, whether pursuant to the terms of such capital stock, options, warrants, conversion rights or other rights or otherwise; (7) (i) without first consulting with MBI, enter into, renew 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 date of any existing loan or credit commitment (collectively, "Lend to") in an amount in excess of $200,000 with respect to commercial transactions, $300,000 with respect to residential transactions, or in any amount which, when aggregated with any and all loans or credit commitments of First Sterling and its subsidiaries to such person or entity, would be in excess of $350,000; (ii) without first obtaining the written consent of MBI, Lend to any person or entity in an amount in excess of $500,000 or in any amount which, when aggregated with any and all loans or credit commitments of First Sterling and its subsidiaries to such person or entity, would be in excess of $750,000; (iii) Lend to any person other than in accordance with lending policies as in effect on July 24, 1995, except that in the case of clauses (i) and (ii) hereof, First Sterling or any of its subsidiaries may make any such loan in the event (A) First Sterling or any of its subsidiaries has delivered to MBI or Merger Sub or their designated representative a notice of its intention to make such loan and such information as their designated representative may reasonably require in respect thereof and (B) MBI or Merger Sub or their 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 or Merger Sub or their designated representative of the notice of intention and information as aforesaid; or (iv) 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 First Sterling or any subsidiary of First Sterling (except those denoted "pass" thereon), in an amount in excess of $100,000; provided, however, that First Sterling and any First Sterling subsidiary shall not be prohibited from honoring any contractual obligation in existence on July 24, 1995. Notwithstanding clauses (i) and (ii), First Sterling shall be authorized, without first consulting with MBI or obtaining MBI's prior written consent, to increase the aggregate amount of the credit facilities theretofore established in favor of any person or entity (the "Pre-Existing Facilities"), provided that the aggregate amount of any and all such increases shall not be in excess of five percent (5%) of such Pre-Existing Facilities or $25,000, whichever is greater; (8) directly or indirectly, including through its officers, directors, employees or other representatives: (i) initiate, solicit or encourage any discussions, inquiries or proposals with any third party (other than MBI or Merger Sub) relating to the disposition of any significant portion of the business or assets of First Sterling or any of its subsidiaries or the acquisition of the capital stock (or rights or options exercisable for, or securities convertible or exchangeable into, capital stock) of - 33 - 39 First Sterling or any of its subsidiaries or the merger of First Sterling or any of its subsidiaries with any person (other than MBI or Merger Sub) or any similar transaction (each such transaction being referred to herein as an "Acquisition Transaction"), or (ii) provide any third party with information or assistance or negotiate with any third party with respect to an Acquisition Transaction, and First Sterling shall promptly notify MBI orally of all the relevant details relating to all inquiries, indications of interest and proposals which it or any of its subsidiaries may receive with respect to any Acquisition Transaction. (9) knowingly take any action or omit to take any action that would (i) materially impede or delay the consummation of the transactions contemplated by the Merger Agreement or the ability of MBI or First Sterling to obtain any approval of any regulatory authority required for the transactions contemplated by the Merger Agreement or to perform its covenants and agreements under the Merger Agreement, or (ii) prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code; (10) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity in excess of $25,000 in the aggregate; (11) materially restructure or change its investment securities portfolio, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported, or, without first consulting with Mercantile, execute individual investment transactions of greater than $500,000 for U.S. Treasury Securities and $250,000 for all other investment instruments; (12) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or knowingly take or omit to take any other action which would make any of First Sterling's representations and warranties 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; or (13) enter into, increase or renew any loan or credit commitment (including standby letters of credit) to any executive officer or director of First Sterling or any subsidiary of First Sterling, any shareholder of First Sterling, or any entity controlled, directly or indirectly, by any of the foregoing or engage in any transaction with any of the foregoing which is of the type or nature sought to be regulated in 12 U.S.C. Section 371c and 12 U.S.C. Section 371c-1, without first obtaining the prior written consent of MBI, which consent shall not be unreasonably withheld. The Merger Agreement also provides that during the period from July 24, 1995 to the Effective Time, MBI and Merger Sub shall not, and shall not permit any of their subsidiaries to, without the prior written consent of First Sterling, agree in writing or otherwise take any action that is prohibited of First Sterling by subsections (9) and (12) above. - 34 - 40 ACCOUNTING TREATMENT The Merger is intended to be accounted for under the pooling-of-interests method of accounting. It is a condition to MBI's and Merger Sub's consummation of the Merger, unless otherwise waived, that KPMG Peat Marwick LLP, MBI's independent accountants, deliver to MBI and Merger Sub an opinion that the Merger will qualify for pooling-of-interests accounting treatment. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ----------------------------------------------------- The following discussion is based upon an opinion prepared by Thompson & Mitchell, counsel to MBI ("Counsel"), and, except as otherwise indicated, reflects Counsel's opinion. The discussion is a general summary of the material federal income tax consequences of the Merger to certain First Sterling shareholders and does not purport to be a complete analysis or listing of all potential tax effects relevant to a decision whether to vote for the approval of the Merger. The discussion does not address all aspects of federal income taxation that may be applicable to First Sterling shareholders, and does not address the consequences of the Merger to First Sterling shareholders subject to special federal income tax treatment including (without limitation) foreign persons, insurance companies, tax-exempt entities, retirement plans, dealers in securities and persons who acquired their First Sterling Common Stock pursuant to the exercise of employee stock options or otherwise as compensation. The discussion addresses neither the effect of any applicable state, local or foreign tax laws, nor the effect of any federal tax laws other than those pertaining to federal income taxes. IN VIEW OF THE INDIVIDUAL NATURE OF FEDERAL INCOME TAX CONSEQUENCES, EACH FIRST STERLING SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. The discussion is based on the Code, regulations proposed or promulgated 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 discussed herein. The discussion is also based on certain assumptions regarding the factual circumstances that will exist at the Effective Time of the Merger, including certain representations of MBI, First Sterling and certain shareholders of First Sterling. If any of these factual assumptions is inaccurate, the tax consequences of the Merger could differ from those described herein. The discussion assumes that shares of First Sterling Common Stock are held as capital assets (within the meaning of Section 1221 of the Code) at the Effective Time. Assuming the Merger occurs in accordance with the Merger Agreement, the Merger will constitute a "reorganization" for federal income tax purposes under Section 368(a)(1)(A) of the Code, by reason of the application of Section 368(a)(2)(D) of the Code, with the following federal income tax consequences: (1) First Sterling shareholders will recognize no gain or loss as a result of the exchange of their First Sterling Common Stock solely for shares of MBI Common Stock pursuant to the Merger, except with respect to cash received in lieu of fractional shares, if any, as discussed below. (2) The aggregate adjusted tax basis of the shares of MBI Common Stock received by each First Sterling shareholder in the Merger (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph (4) below) will be equal to the aggregate adjusted tax basis of the shares of First Sterling Common Stock surrendered. - 35 - 41 (3) The holding period of the shares of MBI Common Stock received by each First Sterling shareholder in the Merger (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph (4) below) will include the holding period of the shares of First Sterling Common Stock exchanged therefor. (4) A First Sterling shareholder who receives cash in the Merger in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received by the shareholder in the Merger and then redeemed by MBI in return for the cash. The receipt of such cash will cause the recipient to recognize capital gain or loss equal to the difference between the amount of cash received and the portion of such holder's adjusted tax basis in the shares of MBI Common Stock allocable to the fractional share. (5) A First Sterling shareholder who receives only cash as a result of the exercise of dissenters' rights will realize gain or loss for federal income tax purposes (determined separately as to each block of First Sterling Common Stock exchanged) in an amount equal to the difference between (x) the amount of cash received by such shareholder, and (y) such shareholder's tax basis for the shares of First Sterling Common Stock surrendered in exchange therefor, provided that the cash payment does not have the effect of the distribution of a dividend. Any such gain or loss will be recognized for federal income tax purposes and will be treated as capital gain or loss. However, if the cash payment does have the effect of the distribution of a dividend, the amount of taxable income recognized generally will equal the amount of cash received; such income generally will be taxable as a dividend; and no loss (or other recovery of such shareholder's tax basis for the shares of First Sterling Common Stock surrendered in the exchange) generally will be recognized by such shareholder. The determination of whether a cash payment has the effect of the distribution of a dividend will be made pursuant to the provisions and limitations of Section 302 of the Code, taking into account the constructive stock ownership rules of Section 318 of the Code. See "Impact of Section 302 of the Code," below. IMPACT OF SECTION 302 OF THE CODE. With regard to dissenters, the determination of whether a cash payment has the effect of the distribution of a dividend generally will be made pursuant to the provisions of Section 302 of the Code. A cash payment to a First Sterling shareholder will be considered not to have the effect of the distribution of a dividend under Section 302 of the Code and such shareholder will recognize capital gain or loss only if the cash payment (i) results in a "complete redemption" of such shareholder's actual and constructive stock interest, (ii) results in a "substantially disproportionate" reduction in such shareholder's actual and constructive stock interest or (iii) is "not essentially equivalent to a dividend." A cash payment will result in a "complete redemption" of a shareholder's stock interest if such shareholder does not actually or constructively own any stock after the receipt of the cash payment. A reduction in a shareholder's stock interest will be "substantially disproportionate" if (i) the percentage of outstanding shares actually and constructively owned by such shareholder after the receipt of the cash payment is less than four-fifths (i.e., 80%) of the percentage of outstanding shares actually ---- and constructively owned by such shareholder immediately prior to the receipt of the cash payment and (ii) such shareholder actually and constructively owns less than 50% of the number of shares outstanding after the receipt of the cash payment. A cash payment will qualify as "not essentially equivalent to a dividend" if it results in a meaningful reduction in the percentage of outstanding shares actually and constructively owned by such shareholder. No specific tests apply to determine whether a reduction in a shareholder's - 36 - 42 ownership interest is meaningful; rather, such determination will be made based on all the facts and circumstances applicable to such First Sterling shareholder. No general guidelines dictating the appropriate interpretation of facts and circumstances have been announced by the courts or issued by the Internal Revenue Service (the "Service"). However, the Service has indicated in Revenue Ruling 76-385 that a minority shareholder (i.e., a holder who ---- exercises no control over corporate affairs and whose proportionate stock interest is minimal in relation to the number of shares outstanding) generally is treated as having had a "meaningful reduction" in interest if a cash payment reduces such holder's actual and constructive stock ownership by even a small amount. Under the traditional analysis (which apparently continues to be used by the Service), Section 302 of the Code will apply as though the cash payment were made by First Sterling in a hypothetical redemption of First Sterling Common Stock immediately prior to, and in a transaction separate from, the Merger (a "deemed First Sterling redemption"). Thus, under the traditional analysis, the determination of whether a cash payment results in a complete redemption of interest, qualifies as a substantially disproportionate reduction of interest, or is not essentially equivalent to a dividend will be made by comparing (x) the shareholder's actual and constructive stock interest in First Sterling before the deemed First Sterling redemption, with (y) such shareholder's actual and constructive stock interest in First Sterling after the deemed First Sterling redemption (but before the Merger). However, the law is unclear regarding whether the deemed redemption approach of the Service is correct, and Counsel has rendered no opinion on the correctness of the Service's approach. Counsel has noted in its opinion that some tax practitioners believe that the determination of whether a cash payment has the effect of a distribution of a dividend should be made as if the First Sterling Common Stock exchanged for cash in the Merger had instead been exchanged in the Merger for shares of MBI Common Stock followed immediately by a redemption of such shares by MBI for the cash payment (a "deemed MBI redemption"). Under this analysis, the determination of whether a cash payment satisfies any of the foregoing tests would be made by comparing (i) the shareholder's actual and constructive stock interest in MBI before the deemed MBI redemption (determined as if such shareholder had received solely MBI Common Stock in the Merger) with (ii) such shareholder's actual and constructive stock interest in MBI after the deemed MBI redemption. Because this analysis may be more likely to result in capital gain treatment than the traditional analysis, each First Sterling shareholder who receives solely cash in exchange for all of the First Sterling Common Stock he or she actually owns should consult his or her own tax advisor with regard to the proper treatment of such cash. The determination of ownership for purposes of the three foregoing tests will be made by taking into account both shares owned actually by such shareholder and shares owned constructively by such shareholder pursuant to Section 318 of the Code. Under Section 318 of the Code, a shareholder will be deemed to own stock that is actually or constructively owned by certain members of his or her family (spouse, children, grandchildren and parents) and other related parties including, for example, certain entities in which such shareholder has a direct or indirect interest (including partnerships, estates, trusts and corporations), as well as shares of stock that such shareholder (or a related person) has the right to acquire upon exercise of an option or conversion right. Section 302(c)(2) of the Code provides certain exceptions to the family attribution rules for the purpose of determining whether a complete redemption of a shareholder's interest has occurred for purposes of Section 302 of the Code. First Sterling has received from Counsel an opinion to the effect that the Merger will be a "reorganization" for federal income tax purposes under Section 368(a)(1)(A) of the Code, by reason of Section 368(a)(2)(D) of the Code, and that the other federal income tax consequences of the Merger are in all material respects as described in this section. The opinion is available without charge upon written request to Jon W. Bilstrom, General Counsel and Secretary, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524. Such opinion is subject to the conditions and assumptions stated therein - 37 - 43 and relies on various representations made by MBI, First Sterling and certain shareholders of First Sterling. An opinion of counsel, unlike a private letter ruling from 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 FIRST STERLING SHAREHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EACH FIRST STERLING SHAREHOLDER. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, EACH FIRST STERLING SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER, 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. RIGHTS OF DISSENTING SHAREHOLDERS OF FIRST STERLING --------------------------------------------------- Each holder of First Sterling Common Stock has the right to dissent from the Merger and receive the fair value of such shares of First Sterling Common Stock in cash if the shareholder follows the procedures set forth in the Illinois Statute, included as Annex B hereto and the material provisions of ------- which are summarized below. Pursuant to the Illinois Statute, a holder of First Sterling Common Stock may dissent and Merger Sub, as the surviving corporation, will pay to such shareholder the fair value of such shareholder's shares of First Sterling Common Stock, exclusive of any appreciation or depreciation in anticipation of the Merger, as of immediately before the consummation of the Merger if such shareholder (1) files with First Sterling prior to the vote being taken a written demand for payment for their shares if the Merger is consummated; and (2) does not vote in favor --- thereof. MBI will include notice of the Effective Date in its letter to all shareholders of First Sterling notifying them of the procedures to exchange their shares for those of MBI. Such letter shall be sent promptly following the Effective Date. Within 10 days after the shareholders' vote is effective or 30 days after the shareholder delivers to First Sterling the written demand for payment, whichever is later, Merger Sub shall send each shareholder who has delivered a written demand for payment a statement setting forth the opinion of Merger Sub as to the estimated fair value of the shares, First Sterling's latest balance sheet as of the end of a fiscal year ended not earlier than 16 months before the delivery of the statement, together with the statement of income for that year and the latest available interim financial statements, and either a commitment to pay for the shares of the dissenting shareholder at the estimated fair value thereof upon transmittal to Merger Sub of the certificate or certificates, or other evidence of ownership, with respect to the shares. A VOTE AGAINST THE MERGER, WHETHER BY PROXY OR IN PERSON, WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN DEMAND FOR PAYMENT FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS. Upon consummation of the Merger, Merger Sub shall pay to each dissenter who transmits to Merger Sub the certificate or other evidence of ownership of the shares the amount Merger Sub estimates to be the fair value of the shares, plus accrued interest, accompanied by a written explanation of how the interest was calculated. Upon payment of the agreed value, the dissenting shareholder shall cease to have any interest in such shares or in First Sterling or MBI. - 38 - 44 If the dissenting shareholder does not agree with the opinion of Merger Sub as to the estimated fair value of the shares or the amount of interest due, the dissenting shareholder must, within 30 days from the delivery of Merger Sub's statement of value, notify Merger Sub in writing, of the shareholder's estimated fair value and interest due and demand payment for the difference between the shareholder's estimate of fair value and interest due and the amount of the payment by Merger Sub. If, within 60 days from delivery to Merger Sub of the shareholder notification of estimate of fair value of shares and interest due, Merger Sub and the dissenting shareholder have not agreed in writing upon the fair value of the shares and interest due, Merger Sub shall either pay the difference in value demanded by the shareholder, with interest, or file a petition in the circuit court of the county in which either the registered office or the principal office of Merger Sub is located, requesting the court to determine the fair value of the shares and interest due. The "fair value" determined by the court may be more or less than the amount offered to First Sterling shareholders under the Merger Agreements. The judgment shall be payable only upon, and simultaneously with, the surrender to MBI of the certificate or certificates representing said shares of First Sterling Common Stock. Upon the payment of the judgment, the dissenting shareholder shall cease to have any interest in such shares or in First Sterling or MBI. THE FOREGOING SUMMARY OF THE PROVISIONS REGARDING DISSENTERS' RIGHTS UNDER THE ILLINOIS STATUTE IS QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF THE ILLINOIS STATUTE WHICH IS ATTACHED HERETO AS ANNEX B. ------- First Sterling shareholders who are interested in perfecting dissenters' rights pursuant to the Illinois Statute in connection with the Merger should consult with their counsel for advice as to the procedures required to be followed. PRO FORMA FINANCIAL INFORMATION ------------------------------- COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and First Sterling and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Merger, the proposed acquisitions of Conway, Hawkeye and Metro and the acquisition of Ameribanc, by merger with and into a wholly owned subsidiary of MBI, which was completed on April 30, 1992. The data presented is based upon the supplemental consolidated financial statements and related notes of MBI and the consolidated financial statements and related notes of First Sterling, Conway, Hawkeye, Metro and Ameribanc included in this Proxy Statement/Prospectus or in documents incorporated herein by reference, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing elsewhere herein. This information should be read in conjunction with such historical and pro forma financial statements and related notes thereto. The assumptions used in the preparation of this table appear in the notes to the pro forma financial information appearing elsewhere in this Proxy Statement/Prospectus. See "PRO FORMA FINANCIAL INFORMATION." This data is 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 Ameribanc merger, or the proposed acquisitions of Conway, Hawkeye and Metro had been consummated prior to the periods indicated. - 39 - 45
MBI/ MBI/ First Sterling/ First Sterling First Sterling All Entities All Entities MBI First Sterling Pro Forma Pro Forma Pro Forma Pro Forma Reported Reported Combined Equivalent Combined Equivalent -------- -------- ------------ -------------- ------------ -------------- Book Value per Share: September 30, 1995 $25.43 $ 4.96 $ 25.50 $ 3.61 $ 25.16 $ 3.56 December 31, 1994 23.47 4.53 23.53 3.33 23.09 3.27 Cash Dividends Declared per Share: Nine months ended September 30, 1995 $ 0.99 $ 0.12 $ 0.99 $ 0.14 $ 0.99 $ 0.14 Year ended December 31, 1994 1.12 0.16 1.12 0.16 1.12 0.16 Year ended December 31, 1993 0.99 0.04 0.99 0.14 0.99 0.14 Year ended December 31, 1992 0.93 -- 0.93 0.13 0.93 0.13 Earnings per Share Before Change in Accounting Principle: Nine months ended September 30, 1995 $ 2.95 $ 0.36 $ 2.94 $ 0.42 $ 2.88 $ 0.41 Year ended December 31, 1994 3.22 0.50 3.22 0.46 3.22 0.46 Year ended December 31, 1993 2.79 0.35 2.79 0.39 2.80 0.40 Year ended December 31, 1992 2.42 0.42 2.44 0.35 2.44 0.35 Market Price per Share: At July 21, 1995 $45.13 $ 4.87 n/a n/a n/a n/a At October 27, 1995 41.75 4.96 n/a n/a n/a n/a - ------------------- Includes the effect of pro forma adjustments for First Sterling and Ameribanc, as appropriate. See "PRO FORMA FINANCIAL INFORMATION." Based on the pro forma combined per share amounts multiplied by 0.1415, the conversion ratio applicable to one share of First Sterling Common Stock in the Merger. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to pro forma financial statements. See "PRO FORMA FINANCIAL INFORMATION." Includes the effect of pro forma adjustments for First Sterling, Ameribanc, Conway, Hawkeye and Metro as appropriate. See "PRO FORMA FINANCIAL INFORMATION." The market value of MBI Common Stock disclosed as of July 21, 1995, the last trading day preceding the public announcement of the Merger, and as of October 27, 1995, the latest available date prior to the filing of the Proxy Statement/Prospectus, is based on the last sale price as reported on the NYSE Composite Tape. There are no publicly available quotations of First Sterling Common Stock. The market price per share of First Sterling Common Stock disclosed as of July 21, 1995 and October 27, 1995, respectively, is the book value per share as of June 30, 1995 and September 30, 1995, respectively, the most recent date prior to July 21, 1995 and October 27, 1995, respectively, for which information is available.
PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma combined consolidated balance sheet gives effect to the Merger, and the proposed acquisitions of Conway, Hawkeye and Metro as if each of the mergers were consummated on December 31, 1994. MBI acquired Ameribanc 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 Ameribanc from May 1, 1992 forward. The following pro forma combined consolidated income statements include the results of operations of Ameribanc from January 1, 1992 through the date of acquisition. The following pro forma combined consolidated income statements for the nine months ended September 30, 1995 and 1994 and for the years ended December 31, 1994, 1993 and 1992 set forth the results of operations of MBI combined with the results of operations of First Sterling, Conway, Hawkeye and Metro as if the Merger, and the proposed acquisitions of Conway, Hawkeye and Metro had - 40 - 46 occurred as of the first day of the period presented. As stated above, the pro forma combined consolidated income statements for the year ended December 31, 1992 include the results of operations of Ameribanc from January 1, 1992 through the date of acquisition. The unaudited pro forma combined consolidated financial statements should be read in conjunction with the accompanying Notes to the Pro Forma Combined Consolidated Financial Statements and with the historical financial statements of MBI, First Sterling, Conway, Hawkeye, Metro and Ameribanc. The historical interim financial information for the nine months ended September 30, 1995 and 1994, used as a basis for the pro forma combined consolidated financial statements, include all necessary adjustments, which, in management's opinion, are necessary to present the data fairly. These pro forma combined consolidated financial statements may not be indicative of the results of operations that actually would have occurred if the completed and proposed acquisitions had been consummated on the dates assumed above or of the results of operations that may be achieved in the future. Due to the immateriality of the results of operations of Wedge, AmeriFirst, Southwest and Plains Spirit to that of MBI, individually and in the aggregate, the unaudited pro forma combined consolidated financial statements contained herein do not reflect the acquisitions of Wedge, AmeriFirst, Southwest or Plains Spirit for any period prior to the respective acquisition dates of such entities. - 41 - 47 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (THOUSANDS) (UNAUDITED)
MBI, First First Sterling Conway All Entities Sterling Pro Forma Hawkeye Pro Forma First Adjust- Combined Metro Combined MBI Sterling ments Consolidated Conway Hawkeye Metro Adjustments Consolidated ----------- -------- ------------- ------------ -------- ---------- ------- --------------- ------------ ASSETS Cash and due from banks $ 822,849 $ 7,167 $ (2,373) $ 827,643 $ 15,043 $ 96,917 $ 200 $ (1,420) $ 903,522 -- (33,961) -- (900) Due from banks- interest bearing 97,473 97,473 99 200 1,366 99,138 Federal funds sold and repurchase agreements 179,778 827 180,605 125 102,004 -- 282,734 Investments in debt and equity securities -- -- Trading 4,696 -- 4,696 -- -- -- 4,696 Available-for-sale 768,422 46,239 814,661 577 287,270 7,084 1,109,592 Held-to-maturity 3,074,207 26,675 3,100,882 4,353 127,896 19,247 3,252,378 ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Total 3,847,325 72,914 -- 3,920,239 4,930 415,166 26,331 -- 4,366,666 Loans and leases 10,648,008 85,681 10,733,689 75,792 1,298,589 54,674 12,162,744 Reserve for possible loan losses (187,872) (1,380) (189,252) (287) (21,553) (510) (211,602) ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Net Loans and Leases 10,460,136 84,301 -- 10,544,437 75,505 1,277,036 54,164 -- 11,951,142 Other assets 611,092 4,793 18,269 615,885 4,620 101,242 1,288 8,598 723,035 (18,269) -- (8,598) -- 192,819 -- (192,819) 5,911 (5,911) ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Total Assets $16,018,653 $170,002 $ (2,373) $16,186,282 $100,322 $1,992,565 $83,349 $ (36,281) $18,326,237 =========== ======== ======== =========== ======== ========== ======= ========= ===========
- 42 - 48 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (THOUSANDS) (UNAUDITED)
MBI, First First Sterling Conway All Entities Sterling Pro Forma Hawkeye Pro Forma First Adjust- Combined Metro Combined MBI Sterling ments Consolidated Conway Hawkeye Metro Adjustments Consolidated ----------- -------- ------------- ------------ -------- ---------- ------- --------------- ------------ LIABILITIES Deposits Non-interest bearing $ 1,798,605 $ 20,613 $ $ 1,819,218 $ 1,191 $ 204,619 $ 2,728 $ -- $ 2,027,756 Interest bearing 9,875,943 111,900 9,987,843 86,725 1,512,456 73,984 11,661,008 Foreign 160,736 -- 160,736 -- -- -- 160,736 ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Total Deposits 11,835,284 132,513 -- 11,967,797 87,916 1,717,075 76,712 -- 13,849,500 Federal funds purchased and repurchase agreements 1,611,392 17,917 1,629,309 -- 15,003 -- 1,644,312 Other borrowings 949,186 -- 949,186 3,248 46,241 400 999,075 Other liabilities 203,624 1,303 204,927 560 21,427 326 227,240 ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Total Liabilities 14,599,486 151,733 -- 14,751,219 91,724 1,799,746 77,438 -- 16,720,127 SHAREHOLDERS' EQUITY Preferred stock 12,153 12,153 12,153 Common stock 279,658 3,685 2,607 282,265 1,032 135 192 1,610 324,247 (3,685) (1,032) 39,375 (135) 997 (192) Capital surplus 216,757 799 1,877 218,634 4 105,129 1,409 (574) 284,553 (799) (4) 65,889 (105,129) 604 (1,409) Retained earnings 936,311 13,785 13,785 950,096 7,562 87,555 4,310 7,562 1,049,523 (13,785) (7,562) 87,555 (87,555) 4,310 (4,310) Treasury stock (25,712) (2,373) (28,085) (1,420) (64,366) (33,961) (900) ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Total Shareholders' Equity 1,419,167 18,269 (2,373) 1,435,063 8,598 192,819 5,911 (36,281) 1,606,110 ----------- -------- -------- ----------- -------- ---------- ------- --------- ----------- Total Liabilities and Shareholders' Equity $16,018,653 $170,002 $ (2,373) $16,186,282 $100,322 $1,992,565 $83,349 $ (36,281) $18,326,237 =========== ======== ======== =========== ======== ========== ======= ========= ===========
See notes to pro forma combined consolidated financial statements. - 43 - 49 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, First All Entities Sterling, Pro Pro Formas First Forma Combined Combined MBI Sterling Consolidated Conway Hawkeye Metro Consolidated ----------- --------- ------------ ---------- --------- --------- ----------------- Interest Income $ 854,404 $ 9,069 $ 863,473 $ 5,704 $ 105,900 $ 4,745 $ 979,822 Interest Expense 410,097 4,247 414,344 3,291 49,337 2,614 469,586 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income 444,307 4,822 449,129 2,413 56,563 2,131 510,236 Provision for Possible Loan Losses 28,928 162 29,090 45 249 30 29,414 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income after Provision for Possible Loan Losses 415,379 4,660 420,039 2,368 56,314 2,101 480,822 Other Income Trust 48,252 129 48,381 -- 3,888 -- 52,269 Service charges 50,062 242 50,304 138 6,267 -- 56,709 Credit card fees 14,169 -- 14,169 -- 1,451 -- 15,620 Securities gains (losses) 3,672 (1) 3,671 -- 104 (508) 3,267 Other 65,325 286 65,611 169 8,485 214 74,479 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Income 181,480 656 182,136 307 20,195 (294) 202,344 Other Expense Salaries and employee benefits 195,825 1,735 197,560 682 23,528 766 222,536 Net occupancy and equipment 53,547 475 54,022 243 6,825 137 61,227 Other 107,572 1,411 108,983 520 19,825 627 129,955 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Expense 356,944 3,621 360,565 1,445 50,178 1,530 413,718 ----------- --------- ----------- ---------- ---------- ---------- ----------- Income Before Income Taxes 239,915 1,695 241,610 1,230 26,331 277 269,448 Income Taxes 81,156 386 81,542 382 9,004 293 91,221 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Income Before Change in Accounting Principle $ 158,759 $ 1,309 $ 160,068 $ 848 $ 17,327 $ (16) $ 178,227 =========== ========= =========== ========== ========== ========== =========== Per Share Data Average Common Shares Outstanding 53,629,980 54,099,404 61,656,363 Net Income Before Change in Accounting Principle $ 2.95 $ 2.94 $ 2.88
See notes to pro forma combined consolidated financial statements - 44 - 50 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, First All Entities Sterling, Pro Pro Formas First Forma Combined Combined MBI Sterling Consolidated Conway Hawkeye Metro Consolidated ----------- --------- ------------ ---------- --------- --------- ------------ Interest Income $ 730,270 $ 8,289 $ 738,559 $ 4,765 $ 90,495 $ 4,149 $ 837,968 Interest Expense 284,939 3,257 288,196 2,564 37,414 2,188 330,362 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income 445,331 5,032 450,363 2,201 53,081 1,961 507,606 Provision for Possible Loan Losses 26,374 66 26,440 45 48 (17) 26,516 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income after Provision for Possible Loan Losses 418,957 4,966 423,923 2,156 53,033 1,978 481,090 Other Income Trust 46,560 124 46,684 -- 3,804 -- 50,488 Service charges 52,089 289 52,378 89 5,918 -- 58,385 Credit card fees 18,087 -- 18,087 -- 1,272 -- 19,359 Securities gains (losses) 1,718 (44) 1,674 -- 396 -- 2,070 Other 40,971 300 41,271 301 8,702 240 50,514 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Income 159,425 669 160,094 390 20,092 240 180,816 Other Expense Salaries and employee benefits 190,801 1,766 192,567 585 22,878 756 216,786 Net occupancy and equipment 51,837 491 52,328 191 6,032 133 58,684 Other 117,502 1,650 119,152 689 18,349 524 138,714 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Expense 360,140 3,907 364,047 1,465 47,259 1,413 414,184 ----------- --------- ----------- ---------- ---------- ---------- ----------- Income Before Income Taxes 218,242 1,728 219,970 1,081 25,866 805 247,722 Income Taxes 78,033 441 78,474 397 8,420 295 87,586 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Income Before Change in Accounting Principle $ 140,209 $ 1,287 $ 141,496 $ 684 $ 17,446 $ 510 $ 160,136 =========== ========= =========== ========== ========== ========== =========== Per Share Data Average Common Shares Outstanding 51,900,015 52,369,439 59,926,398 Net Income Before Change in Accounting Principle $ 2.68 $ 2.68 $ 2.64
See notes to pro forma combined consolidated financial statements. - 45 - 51 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1994 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, First All Entities Sterling, Pro Pro Formas First Forma Combined Combined MBI Sterling Consolidated Conway Hawkeye Metro Consolidated ----------- --------- ------------ ---------- --------- --------- ------------ Interest Income $ 994,896 $ 11,165 $ 1,006,061 $ 6,257 $ 123,173 $ 5,680 $ 1,141,171 Interest Expense 399,349 4,453 403,802 3,487 51,601 3,046 461,936 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income 595,547 6,712 602,259 2,770 71,572 2,634 679,235 Provision for Possible Loan Losses 43,201 66 43,267 60 64 10 43,401 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income after Provision for Possible Loan Losses 552,346 6,646 558,992 2,710 71,508 2,624 635,834 Other Income Trust 60,769 168 60,937 -- 5,119 -- 66,056 Service charges 68,783 385 69,168 195 8,024 -- 77,387 Credit card fees 24,895 -- 24,895 -- 1,693 -- 26,588 Securities gains (losses) 2,177 (43) 2,134 -- 402 -- 2,536 Other 53,134 368 53,540 211 11,565 471 65,787 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Income 209,758 916 210,674 406 26,803 471 238,354 Other Expense Salaries and employee benefits 258,546 2,388 260,934 727 30,229 953 292,843 Net occupancy and equipment 69,784 652 70,436 236 8,101 157 78,930 Other 163,740 2,076 165,816 750 24,776 728 192,070 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Expense 492,070 5,116 497,186 1,713 63,106 1,838 563,843 ----------- --------- ----------- ---------- ---------- ---------- ----------- Income Before Income Taxes 270,034 2,446 272,480 1,403 35,205 1,257 310,345 Income Taxes 101,705 592 102,297 551 11,460 474 114,782 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Income Before Change in Accounting Principle $ 168,329 $ 1,854 $ 170,183 $ 852 $ 23,745 $ 783 $ 195,563 =========== ========= =========== ========== ========== ========== =========== Per Share Data Average Common Shares Outstanding 51,957,002 52,426,426 59,983,385 Net Income Before Change in Accounting Principle $ 3.22 $ 3.22 $ 3.22
See notes to pro forma combined consolidated financial statements. - 46- 52 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1993 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, First All Entities Sterling, Pro Pro Formas First Forma Combined Combined MBI Sterling Consolidated Conway Hawkeye Metro Consolidated ----------- --------- ------------ ---------- --------- --------- ------------ Interest Income $ 971,482 $ 11,219 $ 982,701 $ 5,849 $ 123,129 $ 6,306 $ 1,117,985 Interest Expense 390,911 4,538 395,449 3,309 53,662 3,561 455,981 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income 580,571 6,681 587,252 2,540 69,467 2,745 662,004 Provision for Possible Loan Losses 63,513 258 63,771 60 789 129 64,749 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income after Provision for Possible Loan Losses 517,058 6,423 523,481 2,480 68,678 2,616 597,255 Other Income Trust 61,996 147 62,143 -- 4,786 -- 66,929 Service charges 67,144 351 67,495 112 7,317 -- 74,924 Credit card fees 24,312 -- 24,312 -- 1,377 -- 25,689 Securities gains (losses) 5,121 11 5,132 -- 179 9 5,320 Other 61,130 338 61,468 173 12,227 366 74,234 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Income 219,703 847 220,550 285 25,886 375 247,096 Other Expense Salaries and employee benefits 245,469 2,654 248,123 559 30,080 858 279,620 Net occupancy and equipment 70,911 695 71,606 186 7,763 153 79,708 Other 191,663 2,278 193,941 614 24,296 714 219,565 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Expense 508,043 5,627 513,670 1,359 62,139 1,725 578,893 ----------- --------- ----------- ---------- ---------- ---------- ----------- Income Before Income Taxes 228,718 1,643 230,361 1,406 32,425 1,266 265,458 Income Taxes 85,467 366 85,833 517 10,607 477 97,434 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Income Before Change in Accounting Principle $ 143,251 $ 1,277 $ 144,528 $ 889 $ 21,818 $ 789 $ 168,024 =========== ========= =========== ========== ========== ========== =========== Per Share Data Average Common Shares Outstanding 50,965,103 51,434,527 58,991,486 Net Income Before Change in Accounting Principle $ 2.79 $ 2.79 $ $2.80
See notes to pro forma combined consolidated financial statements. - 47 - 53 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1992 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, First All Entities Sterling, Pro Pro Formas First Forma Combined Combined MBI/ABNK Sterling Consolidated Conway Hawkeye Metro Consolidated ----------- --------- ------------ ---------- --------- --------- ------------ Interest Income $ 1,040,492 $ 12,453 $ 1,052,945 $ 6,142 $ 128,261 $ 7,293 $ 1,194,641 Interest Expense 501,802 6,025 507,827 3,874 64,389 4,753 580,843 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income 538,690 6,428 545,118 2,268 63,872 2,540 613,798 Provision for Possible Loan Losses 79,787 375 80,162 60 1,677 202 82,101 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Interest Income after Provision for Possible Loan Losses 458,903 6,053 464,956 2,208 62,195 2,338 531,697 Other Income Trust 58,835 129 58,964 -- 4,174 -- 63,138 Service charges 64,813 462 65,275 97 6,482 -- 71,854 Credit card fees 21,745 -- 21,745 -- 547 -- 22,292 Securities gains 5,590 22 5,612 4 617 (29) 6,204 Other 55,091 347 55,438 72 10,671 486 66,667 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Income 206,074 960 207,034 173 22,491 457 230,155 Other Expense Salaries and employee benefits 224,948 2,400 227,348 438 27,887 816 256,489 Net occupancy and equipment 64,466 637 65,103 103 6,893 171 72,270 Other 196,930 1,968 198,898 525 22,960 733 223,116 ----------- --------- ----------- ---------- ---------- ---------- ----------- Total Other Expense 486,344 5,005 491,349 1,066 57,740 1,720 551,875 ----------- --------- ----------- ---------- ---------- ---------- ----------- Income Before Income Taxes 178,633 2,008 180,641 1,315 26,946 1,075 209,977 Income Taxes 60,990 457 61,447 459 8,609 445 70,960 ----------- --------- ----------- ---------- ---------- ---------- ----------- Net Income Before Change in Accounting Principle $ 117,643 $ 1,551 $ 119,194 $ 856 $ 18,337 $ 630 $ 139,017 =========== ========= =========== ========== ========== ========== =========== Per Share Data Average Common Shares Outstanding 47,972,446 48,441,870 55,998,829 Net Income Before Change in Accounting Principle $ 2.43 $ 2.44 $ 2.44
See notes to pro forma combined consolidated financial statements. - 48 - 54 MERCANTILE BANCORPORATION INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Represents MBI supplemental historical consolidated financial statements reflecting the acquisition of UNSL, effective January 3, 1995, and the acquisitions of CMB and TCB, effective May 1, 1995, each of which was accounted for as a pooling-of-interests. The acquisitions of First Sterling, Conway, Hawkeye and Metro will be accounted for as poolings-of-interests. In conjunction with all of the proposed acquisitions, MBI may repurchase up to 891,390 shares of its own common stock in the open market. Acquisition of Conway with 322,000 shares of MBI Common Stock. Elimination of MBI's investment in Conway. Acquisition of First Sterling with 521,424 shares of MBI Common Stock. Elimination of MBI's investment in First Sterling. Acquisition of Hawkeye with 7,874,903 shares of MBI Common Stock, based on the exchange ratio of 0.585 shares of MBI Common Stock per share of Hawkeye common stock. Elimination of MBI's investment in Hawkeye. Acquisition of Metro with 199,446 shares of MBI Common Stock, based on the exchange ratio of 1.0286 shares of MBI Common Stock per share of Metro common stock. Elimination of MBI's investment in Metro. Upon consummation of the proposed acquisition of Hawkeye, MBI expects to record certain adjustments related to the proposed acquisition and to conform Hawkeye's accounting and credit policies regarding loan and other asset valuations to those of MBI. The pre-tax adjustments are expected to total $30-35 million and would include an increase in the provision for loan losses to conform Hawkeye's credit evaluation policies to those of MBI and an increase in other expense largely to accrue for change of control agreements, contract cancellation penalties and professional fees. - 49 - 55 INFORMATION REGARDING FIRST STERLING ------------------------------------ BUSINESS GENERAL. First Sterling is a bank holding company registered with the Federal Reserve Board under the BHCA. First Sterling currently owns all of the issued and outstanding shares of capital stock of First National Bank of Sterling-Rock Falls, a national banking association chartered under the laws of the United States (the "Bank"). As of September 30, 1995, on a consolidated basis, First Sterling had total assets of $170.0 million, total deposits of $132.5 million, total loans of $84.3 million and shareholders' equity of $18.3 million. First Sterling is a full service community bank which provides a full complement of banking services to its customers, primarily individuals and small businesses in the communities of Sterling, Illinois and Rock Falls, Illinois. First Sterling accepts demand, savings and time deposits, makes commercial, agricultural, consumer and real estate loans and provides trust and other customary commercial banking services. First National Bank of Sterling-Rock Falls was formed by the merger of First National Bank of Sterling and Rock Falls National Bank on December 9, 1991. The predecessor of First National Bank of Sterling was granted a charter in 1934 as The National Bank of Sterling and, after changing its name to First National Bank of Sterling, was acquired by First Sterling Bancorp, Inc. in 1983. Rock Falls National Bank was chartered in 1945 and was acquired by First Sterling in 1990. COMPETITION. The activities in which First Sterling engages are highly competitive and the communities in which it provides services are also served by other banks and thrifts, as well as small credit unions. Competition among these financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges, the convenience of banking facilities and the quality of services rendered. First Sterling believes it has successfully competed in its marketplace by providing superior service to its customers and by successfully creating a market niche in lending to individuals. However, First Sterling's competitors may have certain competitive advantages, including affiliations with larger bank holding companies or less rigorous Federal or state regulation of their activities, that permit them to more effectively provide some services. Further, additional competition for depositors' funds may come from a variety of sources, including United States Government securities, private issuers of debt obligations, mutual funds and suppliers of other investment alternatives. First Sterling's principal executive offices are located at 305 4th Avenue in Sterling, Illinois (phone: (815) 626-0045) and it has a branch office at 300 First Avenue in Rock Falls. GENERAL DESCRIPTION OF CAPITAL STOCK. First Sterling's authorized capital stock consists of 5,000,000 shares of Common Stock, 3,685,061 shares of which were issued and outstanding as of the date hereof. First Sterling Common Stock was held of record by approximately 66 shareholders as of the date hereof. - 50 - 56 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 The following is a discussion and analysis of the financial condition and performance of First Sterling and the Bank for the three years ended December 31, 1994, and should be read in conjunction with the consolidated financial statements and notes thereto. OVERVIEW. First Sterling and its two banking offices are located in Sterling and Rock Falls, Illinois. First Sterling is a leading commercial banking organization in its local market and conducts a full service community banking and trust business through the Bank. First Sterling has competed effectively with a variety of competitors in its market, including affiliates or branches of much larger bank holding company organizations, a smaller independent community bank, a successful mutual savings association and credit unions. Nonbank competitors, such as mutual funds, also compete for the Bank's deposit customers. The Bank has concentrated on long-term customer relationships and quality service. First Sterling has established a long period of continued profitability, together with an increasing level of capital, despite growing competition in the financial services industry. Total asset and deposit growth are primarily dependent on economic and population factors in the Bank's local market area. The Sterling - Rock Falls area has not experienced significant economic or population growth over the past few years, as reflected in the relatively stable asset and deposit/repurchase agreement totals over this period. Management of First Sterling considers the Sterling - Rock Falls area to be stable in economic terms, with noticeable improvement from the recession years of 1991 and 1990. Total assets at December 31, 1994 were $163,295,000 compared to $167,513,000 at the prior year end, resulting in a decrease of 2.5%. Total deposits and repurchase agreements also decreased modestly by 4.7% from December 31, 1993. The decrease in total assets and deposits and repurchase agreements followed a period of several years of stable asset and deposit volumes. Primarily due to federal monetary policy, market interest rates rose substantially during 1994. For example, the national prime rate was 6% on January 1, 1994, compared to 8.5% at the end of the year. Like many other banking organizations, First Sterling did not raise the interest rates paid on its deposit products in proportion to the rise in rates on U.S. Treasury securities and other debt instruments. In fact, the cost of funds for all of the Bank's interest-bearing deposits decreased in 1994 as compared to 1993. Conservative pricing, while helping the net interest margin, contributed to a modest loss of 2.7% in average interest-bearing deposits in 1994. The decrease in average interest-bearing deposits in 1994 was offset by an increase of $1,377,000, or 7.8%, in average noninterest-bearing demand deposits. In addition, the average balance of repurchase agreements increased $891,000, or 5.6%, in 1994 as compared to the prior year. While year end total assets, deposits and repurchase agreements all decreased somewhat from 1993 levels, average assets actually increased 0.25% in 1994. AVERAGE BALANCES. The following table sets forth certain information relating to First Sterling's average consolidated balance sheets and reflects the yield on average assets and cost of average liabilities for the years indicated. - 51 - 57 AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------- 1994 1993 ---------------------------------- ---------------------------------- Average Average Interest Yield/ Interest Yield/ Average Income/ Rate Average Income/ Rate Balance Expense Paid Balance Expense Paid ----------- ------- ------- ------- ------- ------- (dollars in thousands) ASSETS Loans $ 76,293 $ 6,613 8.67% $ 73,185 $ 6,640 9.07% Securities: Taxable 59,563 3,510 5.89 60,877 3,536 5.81 Tax exempt 16,111 1,388 8.62 13,397 1,246 9.30 Mutual fund investment 212 5 2.36 984 40 4.07 Money market fund and other short-term investments 1,137 48 4.22 773 22 2.85 Federal funds sold 1,727 73 4.23 5,230 159 3.04 -------- ------- -------- ------- Total interest earning assets/ interest income/overall yield 155,043 11,637 7.51 154,446 11,643 7.54 Allowance for loan losses (1,480) (1,409) Noninterest-earning assets 11,445 11,563 -------- -------- Total assets $165,008 $164,600 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY NOW and money market deposits $ 31,173 $ 650 2.09% $ 32,882 $ 761 2.31% Savings deposits 19,813 406 2.05 19,971 450 2.25 Time deposits 60,646 2,767 4.56 61,918 2,841 4.59 Repurchase agreements 16,706 625 3.74 15,815 486 3.07 Federal funds purchased 97 5 5.15 -- -- -- -------- ------- -------- ------- Total interest-bearing liabilities/ interest expense/overall rate 128,435 4,453 3.47 130,587 4,538 3.48 ------- ------- Demand deposits - non-interest bearing 18,930 17,553 Other liabilities 920 676 -------- -------- Total liabilities 148,285 148,815 Shareholders' equity 16,723 15,785 -------- -------- Total liabilities and shareholders' equity $165,008 $164,600 ======== ======== Net interest income/ interest rate spread $7,184 4.04% $7,105 4.06% ====== ==== ====== ==== Net yield on interest-earning assets 4.63% 4.60% ==== ==== Interest-bearing liabilities to earnings assets ratio 82.84% 84.55% ======== ======== - -------------------- Average balances include nonaccrual loans. The rate information is calculated based upon average amortized cost for securities. The 1994 average balance of the valuation allowance for securities available-for-sale was $162 and is not considered material for this presentation. Interest and yields are presented on a fully tax equivalent basis utilizing a 34% rate.
- 52 - 58 NET INTEREST INCOME. Net interest income represents the difference between interest earned on loans, securities and other earnings assets, and the interest expense on the deposits and other borrowings which fund them. Net interest income is the principal source of earnings for First Sterling. In the preceding table, net interest income is presented on a fully tax equivalent basis which adjusts the tax exempt status of earnings from certain securities, primarily obligations of state and local governments. The table of average balances, tax equivalent yields and rates should also be referred to in analyzing the net interest income. Changes in interest rates and the mix of interest-earning assets and the interest-bearing liabilities are prominent factors affecting net interest income. Another important factor is the ratio of interest-bearing liabilities to interest-earning assets, which was 82.8%, 84.6% and 86.5% in 1994, 1993 and 1992, respectively. First Sterling's net interest rate spread equals the excess of the fully tax equivalent yield on earning assets over the rate on interest-bearing liabilities. The net yield on average earning assets equals net interest income divided by average earning assets. A summary of First Sterling's interest rate spread, net of yield earning assets and net interest income follows, presented on a fully tax equivalent basis.
1994 1993 1992 ---- ---- ---- (dollars in thousands) Net interest rate spread 4.04% 4.06% 3.88% Net yield on earning assets 4.63 4.60 4.50 Net interest income $7,184 $7,105 $6,873
As explained earlier, interest rates rose sharply in 1994. In 1993, rates were relatively stable, as the national prime rate remained at 6% throughout the entire year. Rates declined somewhat in 1992, as the national prime rate declined from 6.5% at January 1 to 6% by about mid-year. Despite changes in interest rates, First Sterling managed its pricing and mix of earning assets and interest-bearing liabilities to maintain a stable interest margin throughout this three year period. - 53 - 59 The following table sets forth changes in net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities compared to changes in interest rates for the periods indicated.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE YEAR ENDED YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1993 COMPARED TO COMPARED TO DECEMBER 31, 1993 DECEMBER 31, 1992 ------------------------------ ------------------------------- INCREASE (DECREASE) ATTRIBUTABLE TO CHANGE IN ----------------------------------------------------------------- RATE VOLUME NET RATE VOLUME NET ---- ------ --- ---- ------ --- (dollars in thousands) INTEREST INCOME Loans $ (301) $ 274 $ (27) $ (510) $ (218) $(728) Securities Taxable 49 (75) (26) (729) 371 (358) Tax exempt (99) 241 142 (143) 80 (63) Mutual fund investment (12) (23) (35) (6) 18 12 Money market fund and other short-term investments 14 12 26 (5) (6) (11) Federal funds sold 47 (133) (86) (31) (76) (107) ------ ------ ----- ------- ------ ------ Total interest income (302) 296 (6) (1,424) 169 (1,255) INTEREST EXPENSE NOW and money market deposits (72) (39) (111) (325) 100 (225) Savings deposits (40) (4) (44) (211) 25 (186) Time deposits (18) (56) (74) (641) (327) (968) Repurchase agreements 111 28 139 (127) 60 (67) Other borrowings -- 5 5 -- (41) (41) ------ ------ ----- ------- ------ ------ Total interest expense (19) (66) (85) (1,034) (183) (1,487) ------ ------ ----- ------- ------ ------ Net interest income $ (283) $ 362 $ 79 $ (120) $ 352 $ 232 ====== ====== ===== ======= ====== ====== - --------------------------- Average balances include nonaccrual loans. Presented on a fully tax equivalent basis utilizing a 34% rate. Rate/volume variance is allocated to rate variance and volume variance on an absolute basis.
- 54 - 60 LOANS. The following table shows the year end balance of loans outstanding for the last two years.
LOAN PORTFOLIO DECEMBER 31 ---------------------------------------------------------- 1994 1993 ---------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (dollars in thousands) Commercial and agricultural $ 39,214 50.2% $ 32,775 43.4% Real estate - mortgage 17,454 22.3 16,809 22.3 Real estate - construction 265 0.3 467 0.6 Installment, net of unearned income 19,175 24.5 22,845 30.2 Direct lease financing 2,060 2.7 2,661 3.5 -------- ----- ---------- ----- Total loans 78,168 100.0% 75,557 100.0% ===== ===== Less: Deferred loan fees (11) (16) Allowance for loan losses (1,446) (1,476) -------- ---------- Total loans, net $ 76,711 $ 74,065 ======== ==========
Loans, net of the allowance for loan losses, increased by 3.6% during 1994 to $76,711,000. The largest increase was in commercial and agricultural loans which increased $6,439,000, or 19.6%. Most of the new commercial loans were real estate financings. The majority of these loans were to owner occupied businesses with maximum terms of five years at fixed rates. Loans to agricultural borrowers were approximately $9,600,000 and $7,130,000 at December 31, 1994 and 1993, respectively. The local agricultural economy generally performed satisfactorily in 1994. Installment loans are primarily loans to individuals for automobile purchases, home improvements and other consumer purposes. As of December 31, 1994, approximately half of the installment loan portfolio consisted of indirect automobile paper. Installment loans continued to decrease during 1994 due to aggressive pricing by competitors and more conservative bank underwriting practices as compared to earlier years. During 1994, the Bank sold most of its student loans, as management determined that labor and administrative costs of holding and servicing these loans was no longer an attractive business activity. Proceeds from the sale of the student loan portfolio were $3,651,000, including a gain of $40,000. - 55 - 61 The following table sets forth the remaining maturities, based on contractual maturity dates, for commercial and agricultural loans and real estate construction loans at December 31, 1994. MATURITIES OF LOANS
ONE YEAR ONE TO OVER OR LESS FIVE YEARS FIVE YEARS TOTAL ------- ---------- ---------- ----- (dollars in thousands) Commercial and agricultural $ 17,378 $ 19,235 $ 2,601 $ 39,214 Real estate - construction 265 -- -- 265 -------- -------- ------- -------- Total $ 17,643 $ 19,235 $ 2,601 $ 39,479 ======== ======== ======= ========
The following table indicates the total of commercial and agricultural loans and real estate construction loans with fixed and adjustable rates which mature in greater than one year.
(dollars in thousands) Fixed Rate $16,499 Floating or Adjustable Rates 5,337 ------- Total $21,836 =======
The Bank also maintains a small lease financing portfolio. The leases are primarily to federal and local governmental entities and to agricultural customers. CREDIT QUALITY AND THE ALLOWANCE FOR LOAN LOSSES. As scheduled below, the trends in nonperforming loans are favorable. Management of First Sterling continues to emphasize the early identification of loan related problems. Management is not currently aware of any other significant loan, group of loans or segment of the loan portfolio not included in the table below as to which there are serious doubts as to the ability of the borrower(s) to comply with the present loan payment terms. - 56 - 62 The following table sets forth the amounts of nonperforming loans and other real estate as of December 31, 1994 and 1993.
NONPERFORMING ASSETS December 31 ------------------ 1994 1993 ---- ---- (dollars in thousands) Loans Nonaccrual status $ 257 $ 566 90 days or more past due, still accruing 99 157 Restructured -- -- ------ ------ Total nonperforming loans 356 723 Other real estate owned 36 46 ------ ------ Total nonperforming assets $ 392 $ 769 ====== ====== Nonperforming loans as a percentage of total loans 0.46% 0.96% Nonperforming assets as a percentage of total assets 0.24 0.46 Nonperforming loans as a percentage of the allowance for loan losses 24.62 48.98
When serious doubt exists as to the collectability of a loan, the accrual of interest is discontinued. Generally, loans ninety days or more past due are placed on nonaccrual status, unless they are well secured and in the process of collection. The interest on nonaccrual loans which would have been accrued, as well as the interest collected on such loans, was not material in 1994 and 1993. The allowance for loan losses is maintained at a level considered adequate to cover possible losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values and other factors and estimates which are subject to change over time. The Board of Directors and management of First Sterling work together in a coordinated credit approval and review process. The approval and review process is designed to help assure that underwriting standards are maintained as loans are originated. The review process is also intended to identify borrowers who might be experiencing financial difficulties. Once identified, potential problem borrowers are closely monitored, and are considered when establishing specific loan loss allowances or charge-offs. Risk codes or ratings are assigned to loans by management to help assess credit quality. The Bank has also established an internal loan review function to help provide ongoing monitoring of credit risk. The risk code ratings are used in "watch list" reporting of potential problem credits and also in establishing allocations of the loan loss allowance to groups of loans. Specific allocations of the loan loss allowance are also made for individual problem borrowers. Other factors considered by the Board of Directors and management of First Sterling in determining the adequacy of the allowance for loan losses each quarter include changes in loan volume and trends in net charge-offs, nonaccrual loans, other watch list loans and loan delinquencies. Local and national economic conditions are also documented and considered in reviewing the adequacy of the allowance for loan losses. - 57 - 63 The following table sets forth an analysis of the allowance for loan losses activity for the past two years, including the ratio of net charge-offs to average loans.
ALLOWANCE FOR LOAN LOSSES DECEMBER 31 ------------------------ 1994 1993 ---- ---- (dollars in thousands) Allowance at beginning of year $ 1,476 $ 1,329 Loans charged-off: Commercial and agricultural 25 29 Real estate - mortgage 39 33 Consumer 110 260 Direct lease financing 20 3 -------- -------- Total 194 325 -------- -------- Recoveries: Commercial and agricultural 19 63 Real estate - mortgage 11 1 Consumer 68 146 Direct lease financing -- 4 -------- -------- Total 98 214 -------- -------- Net charge-offs 96 111 -------- -------- Additions charged to operating expense 66 258 -------- -------- Allowance at end of year $ 1,446 $ 1,476 ======== ======== Ratio of net charge-offs to average loans outstanding 0.13% 0.15%
Net loan charge-offs were not significant during 1994 and 1993. Management of First Sterling believes that this level of net charge-offs is a further reflection of the adequacy of the allowance for loan losses, the quality of the loan portfolio and overall credit administration procedures. - 58 - 64 The following table summarizes First Sterling's allocation of the allowance for loan losses to the various loan categories as of December 31, 1994 and 1993.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31 ---------------------------------------------------------- 1994 1993 ---------------------------- ------------------------- PERCENT PERCENT OF LOANS OF LOANS IN EACH IN EACH CATEGORY CATEGORY TO TOTAL TO TOTAL ALLOWANCE LOANS ALLOWANCE LOANS --------- -------- --------- -------- (dollars in thousands) Commercial and agricultural $ 723 50.2% $ 528 43.4% Real estate - mortgage 113 22.3 137 22.3 Real estate - construction -- 0.3 -- 0.6 Installment 478 24.5 510 30.2 Direct lease financing 17 2.7 24 3.5 Unallocated 115 -- 277 -- --------- ----- --------- ----- Total $ 1,446 100.0% $ 1,476 100.0% ========= ===== ========= =====
PROVISION FOR LOAN LOSSES. The provision for loan losses was $66,000 in 1994 compared to $258,000 and $375,000 in 1993 and 1992, respectively. Credit quality improved considerably in 1993 and 1994 as compared to 1992. The table below indicates the positive trends in various measures of credit quality in the three year period ended December 31, 1994.
1994 1993 1992 ---- ---- ---- Nonaccrual loans to total loans .33% .74% 1.13% Total nonperforming loans to total loans .46 .96 1.72 Net charge-offs to average loans .13 .15 .50
Loan loss provisions decreased during the three years ended December 31, 1994 primarily because of improving credit quality, as indicated above. SECURITIES. On January 1, 1994, First Sterling adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which requires classifications of debt securities as either held-to-maturity, trading or available-for-sale. Securities classified as available-for-sale are carried at fair value. Accordingly, certain securities were reclassified as available-for-sale as of January 1, 1994. First Sterling has never maintained a trading account. Prior to 1994, all debt securities were considered held for investment and were carried at amortized cost. United States Treasury and Government Agency fixed rate securities with average maturities of thirty months or less are generally classified as available-for-sale. All mortgage-backed securities and collateralized mortgage obligations are classified as available-for-sale. Asset-backed corporate securities are also generally classified as available-for-sale. Securities classified as held-to-maturity are those which First Sterling has the ability and positive intent to hold until maturity. Longer term, fixed rate securities with bullet maturities are generally classified as held-to-maturity. In addition, most obligations of states and political subdivisions and corporate securities (other than those which are asset-backed) are classified as held-to-maturity. - 59 - 65 Holdings of mortgage-backed securities and collateralized mortgage obligations are primarily issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Federal National Mortgage Association ("Fannie Mae") and the Government National Mortgage Association ("Ginnie Mae"). Most of the mortgage-backed securities and some of the collateralized mortgage obligations have adjustable rates. The objectives of the securities portfolio are to provide First Sterling both with a source of liquidity and a maximum return within predetermined risk limitations. The securities portfolio is an important tool for First Sterling's overall interest rate and credit risk management. The total carrying value of securities decreased $5,050,000 in 1994. Of this decrease, $1,138,000 was due to adjusting the available-for-sale securities to fair value at December 31, 1994. The remaining decrease was primarily due to maturities of U.S. Treasury notes and maturities and principal repayments of collateralized mortgage obligations that were not reinvested in securities due to increased loan demand and a modest decrease in deposits. The amortized cost of U.S. Treasury notes and collateralized mortgage obligations decreased 17.8% and 11.7%, respectively, in 1994. No debt securities were sold in 1994, 1993 or 1992. Traditionally, First Sterling has been a "buy and hold" investor in debt securities. In 1992, a mutual fund investment in adjustable rate mortgage-backed securities was purchased. This mutual fund investment did not perform as expected and it was sold in 1994 for a $46,000 loss. The following table sets forth the carrying value of First Sterling's securities portfolio at December 31, 1994 and 1993.
SECURITIES PORTFOLIO DECEMBER 31 --------------------------------------------------- 1994 1993 ---------------------- ------------------------ PERCENT PERCENT CARRYING OF CARRYING OF VALUE PORTFOLIO VALUE PORTFOLIO ----------------------- ------------------------- (dollars in thousands) Securities available-for-sale U.S. Treasury $ 9,130 19.7% -- -- U.S. government agencies 5,170 11.2 -- -- States and political subdivisions 1,740 3.8 -- -- Mortgage-backed 12,944 27.9 -- -- Collateralized mortgage obligations 11,448 24.7 -- -- Corporate and other 5,906 12.7 -- -- -------- ----- Total $ 46,338 100.0% -- -- ======== ===== Securities held-to-maturity U.S. Treasury $ 3,112 11.8% $ 15,051 19.3% U.S. government agencies 990 3.8 6,075 7.8 States and political subdivisions 18,860 71.3 19,746 25.4 Mortgage-backed -- -- 13,426 17.3 Collateralized mortgage obligations -- -- 13,460 17.3 Corporate and other 3,473 13.1 10,065 12.9 -------- ----- --------- ----- Total $ 26,435 100.0% $ 77,823 100.0% ======== ===== ========= =====
- 60 - 66 As of December 31, 1994, First Sterling held no securities of any single issuer, other than the U.S. Treasury and U.S. government agencies and corporations (including Freddie Mac, Fannie Mae and Ginnie Mae) that exceeded 10% of shareholders' equity. First Sterling holds municipal securities which, although not related, are considered low risk investments. Other securities held by First Sterling are considered to be investment grade. The following table sets forth the maturities and weighted average yields of the debt securities portfolio at December 31, 1994.
SECURITIES MATURITY DISTRIBUTION AND PORTFOLIO YIELDS DECEMBER 31, 1994 GREATER THAN 1 YEAR GREATER THAN 5 YEARS LESS THAN OR AND LESS THAN OR AND LESS THAN OR GREATER EQUAL TO 1 YEAR EQUAL TO 5 YEARS EQUAL TO 10 YEARS THAN 10 YEARS TOTALS BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- (dollars in thousands) Securities available-for-sale - ----------------------------- U.S. Treasury $ 3,036 6.51% $ 6,223 6.08% $ -- -- $ -- -- $ 9,259 6.22% U.S. government agencies 1,000 6.07 4,230 5.72 -- -- 219 6.00% 5,449 5.80 Mortgage-backed 244 8.47 8,903 6.35 2,457 6.74% 1,515 7.46 13,119 6.60 Collateralized mortgage obligations 1,314 6.19 5,266 6.06 5,293 6.60 17 7.70 11,890 6.32 States and political subdivisions 1,002 5.66 461 7.13 -- -- 278 7.20 1,741 6.29 Corporate and other 507 6.36 3,188 6.99 1,002 7.15 1,321 6.35 6,018 6.82 ------- ---- ------- ---- ------ ---- ------- ---- ------- ---- Total $ 7,103 6.30% $28,271 6.23% $8,752 6.70% $ 3,350 6.90% $47,476 6.38% ======= ==== ======= ==== ====== ==== ======= ==== ======= ==== Securities held-to-maturity - --------------------------- U.S. Treasury $ -- -- $ 3,112 5.73% $ -- -- $ -- -- $ 3,112 5.73% U.S. government agencies -- -- 990 8.24 -- -- -- -- 990 8.24 Mortgage-backed -- -- -- -- -- -- -- -- -- -- Collateralized mortgage obligations -- -- -- -- -- -- -- -- -- -- State and political subdivisions 5,956 8.44% 11,074 7.94 1,650 6.87% 180 9.77% 18,860 8.02 Corporate and other 1,253 8.75 2,220 6.83 -- -- -- -- 3,473 7.52 ------- ---- ------- ---- ------ ---- ------- ---- ------- ---- Total $ 7,209 8.49% $17,396 7.42% $1,650 6.87% $ 180 9.77% $26,435 7.69% ======= ==== ======= ==== ====== ==== ======= ==== ======= ==== - ----------------------------------------- The yield is reflected on a fully tax equivalent basis utilizing a 34% tax rate and is based on amortized cost. Mortgage-backed securities and collateralized mortgage obligations reflect the contractual maturity of the related instrument.
DEPOSITS. As discussed above, there was a modest decrease in total deposits during 1994. The primary reasons for the decrease are the competitive banking environment and the aggressive deposit pricing of the other local financial institutions. The decrease in deposit volume in the periods prior to 1993 was primarily due to corporate clients moving funds to repurchase agreements. - 61 - 67 The following table summarizes the maturities of time deposits in denominations of $100,000 or more as of December 31, 1994.
AMOUNT AND MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE CERTIFICATES MATURITY PERIOD OF DEPOSITS --------------- ------------ (dollars in thousands) Three months or less $ 664 Over three months through six months 1,883 Over six months through twelve months 1,905 Over twelve months 5,131 ------- Total $ 9,583 =======
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under agreements to repurchase ("repurchase agreements") have become an important funding source for the Bank over the past few years. Management of the Bank has encouraged major deposit customers to consider repurchase agreements. Unlike deposits, repurchase agreements are not subject to FDIC deposit insurance. Typical repurchase agreement customers are governmental entities and commercial businesses. The following table sets forth certain information regarding repurchase agreements for 1994 and 1993.
1994 1993 ---- ---- (dollars in thousands) End of year balance $16,066 $17,052 Maximum amount outstanding at any month-end 17,647 18,234 Average rate at the end of the year 4.63% 3.07% Average rate for the year 3.74 3.05 Average balance outstanding during the year $16,706 $15,815
CAPITAL RESOURCES. First Sterling is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is required to be "Tier 1 Capital." Under these guidelines, First Sterling's Tier 1 Capital consists of shareholders' equity (exclusive of unrealized gains and losses, net of tax, on securities available-for-sale) less intangible assets. First Sterling's total capital consists of Tier 1 Capital plus the allowance for loan losses. Risk-based capital ratios are calculated with the reference to risk-weighted assets including certain off-balance sheet exposures. In addition to the risk-based capital requirements, the Federal Reserve Board requires a minimum leverage ratio (Tier 1 Capital to total assets) of 3%, provided that all but the highest rated bank holding companies which are not experiencing or anticipating significant growth are expected to maintain a ratio of 1% to 2% above the stated minimum. - 62 - 68 At December 31, 1994, First Sterling's actual and required capital ratios were as follows:
RISK-BASED RISK-BASED TIER 1 TOTAL CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO --------------------- ----------------------- ------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ACTUAL REQUIRED ------ -------- ------ -------- ------ -------- 17.9% 8% 16.7% 4% 10.48% 3% - 5%
NONINTEREST INCOME. Noninterest income includes service charges on deposit accounts, security gains and losses, trust fees and other commissions and fees. Total noninterest income was $916,000, $847,000 and $960,000 in 1994, 1993 and 1992, respectively. Most of the increase in 1994, after adjusting for security gains and losses, was due to increased deposit fee income and a one time gain of $40,000 from the sale of a majority of the Bank's student loan portfolio. The decrease in 1993 was primarily due to lower levels of deposit fee income, as more accounts maintained sufficient balances to offset service charges. NONINTEREST EXPENSE. Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, and other operating expenses. Total noninterest expenses decreased $511,000, or 9.1%, in 1994 which followed a $622,000, or 12.4%, increase in 1993. Salaries and benefits account for almost half of total noninterest expenses. These payroll costs decreased 10% in 1994 following a 10.6% increase in 1993. These fluctuations are primarily due to a compensation payment in 1993 to two executive officers of First Sterling who had served without pay and spent a considerable amount of time over the previous ten years on First Sterling matters. Without the special payment to these two executive officers, salary and benefits expense would have decreased 4.7% in 1993 as compared to 1992, and the 1994 and 1993 expense amounts would have been virtually the same. In the fourth quarter of 1991, First Sterling merged the former Rock Falls National Bank and First National Bank of Sterling to form First National Bank of Sterling-Rock Falls. Particularly since the merger of the two banks, management has sought to achieve greater efficiencies and economies of scale. As a result, the number of full-time equivalent employees of the Bank has decreased from 85 at January 1, 1992 to 72 at December 31, 1994. This reduction in force has helped control payroll related expenses. Data processing expense increased $258,000 in 1994, primarily due to one time conversion costs of $266,000 associated with switching to a new data processing servicer which were directly expensed. Environmental expense in 1993 was $356,000, as compared to zero in 1994 and 1992. The expense in 1993 primarily represents consulting fees to study a matter discovered in 1993, as well as a $250,000 expense accrual to provide for future remediation costs. Management has concluded that any additional environmental expenses will not be material to First Sterling's financial position or results of operations. Professional fees in 1993 were greater than normal because of costs incurred regarding the possible merger of First Sterling into a larger bank holding company. Although these merger negotiations terminated in 1993, First Sterling incurred costs related to services provided by legal counsel and accountants. - 63 - 69 Except for the effects of additional executive compensation, environmental expense and higher professional fees in 1993, as well as the data processing conversion costs in 1994, First Sterling's total noninterest expense in 1994 and 1993 was less than the amount incurred in 1992. INCOME TAXES. Income tax expense was $592,000, $366,000 and $457,000 in 1994, 1993 and 1992, respectively. The primary reasons for the expense fluctuations during this period were changes in pretax income. First Sterling reduces federal income tax expense through investments in tax exempt securities. Historically, First Sterling has earned a higher fully tax equivalent yield on tax exempt investments than on taxable securities. The presence of the alternative minimum tax effectively limits First Sterling's tax exempt investments to certain desired levels. In 1993, First Sterling invested $343,000 in a low income housing project. Federal income tax credits from this investment resulted in tax benefits of $38,000 and $15,000 in 1994 and 1993, respectively. Beginning in 1993, First Sterling adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 changed First Sterling's method of accounting for income taxes from the deferred method (Accounting Principles Board Opinion No. 11) to an asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of asset and liabilities. The cumulative effect of this change was $202,000 and primarily represents the impact of adjusting deferred taxes to reflect current tax rates and recognizing alternative minimum tax credit carryforwards as deferred tax assets. NET INCOME. Net income increased $375,000, or 25.4%, in 1994. The principal reasons for increased earnings in 1994 were the reduced provision for loan losses, higher noninterest income and a 9.1% reduction in noninterest expense. Net income in 1993 decreased $72,000, or 4.6%, from 1992, despite a 3.9% increase in net interest income. Reduced earnings were due to the increase of $622,000, or 12.4%, in noninterest expense and a decrease of $111,000, or 24%, in service charges on deposits. These items more than offset improved net interest income after the provision for loan losses and the one-time $202,000 tax benefit from the adoption of SFAS 109. LIQUIDITY AND INTEREST RATE SENSITIVITY ANALYSIS. The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest-bearing liabilities. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring a financial institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. - 64 - 70 A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. First Sterling's gap position is illustrated in a table below. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers knowing that sufficient funds will be available to meet their credit needs. In addition to federal funds and interest-bearing deposits in banks, marketable securities, particularly those of shorter maturities, are a principal source of asset liquidity. Most of these securities are now designated as available-for-sale. Securities available-for-sale or held-to-maturity which mature in one year or less approximated $14,312,000 at December 31, 1994, representing 19.4% of the total securities portfolio. Rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Federal funds on which the rate varies daily and loans tied to the prime rate differ considerably from long-term securities and fixed rate loans. Time deposits over $100,000 are more rate sensitive than savings accounts. Management of the Bank has portrayed savings accounts as immediately repriceable, because of management's ability to change the savings interest rate. With a significant percentage of First Sterling's loan portfolio floating with the prime rate or repriceable within 30 days, there is an immediate effect on interest income when rates rise or fall, while interest expense changes more slowly as certificates of deposit mature. In addition, the interest margin on low cost core deposits is increased in a period of rising rates, as experienced in 1994 with the increase in the prime rate. As the interest rate sensitivity table shows, First Sterling is liability sensitive through the one year time horizon ending December 31, 1995. - 65 - 71 The following table sets forth First Sterling's interest rate sensitivity at December 31, 1994. INTEREST RATE SENSITIVITY ANALYSIS
OVER THREE OVER ONE THREE THROUGH THROUGH OVER MONTHS TWELVE FIVE FIVE OR LESS MONTHS YEARS YEARS TOTAL ------- ------ ----- ----- ----- (dollars in thousands) Interest-earning assets: Money market investment $ 827 $ -- $ -- $ -- $ 827 Securities 21,836 10,691 27,665 12,581 72,773 Loans 13,630 14,652 44,993 4,893 78,168 -------- -------- ------- ------- -------- Total interest rate sensitive assets $ 36,293 $ 25,343 $72,658 $17,474 $151,768 ======== ======== ======= ======= ======== Interest-bearing liabilities: NOW and money market deposits $ 27,510 $ -- $ -- $ -- $ 27,510 Savings deposits 19,032 87 -- -- 19,119 Time deposits and repurchase agreements 22,809 24,369 29,178 23 76,379 Federal funds purchased 2,100 -- -- -- 2,100 -------- -------- ------- ------- -------- Total rate sensitive liabilities $ 71,451 $ 24,456 $29,178 $ 23 $125,108 ======== ======== ======= ======= ======== Excess interest-earning assets (liabilities) $(35,158) $ 887 $43,480 $17,451 $ 26,660 Cumulative excess interest-earning assets (liabilities) (35,158) (34,271) 9,209 26,660 26,660 Cumulative interest rate sensitivity gap to total assets (21.5)% (21.0)% 5.6% 16.3% 16.3% Cumulative interest rate sensitivity ratio 50.1% 64.3% 107.4% 121.3% 121.3% - ------------------------------------------------- Cumulative excess interest-earning assets (liabilities) divided by total assets. Interest-earning assets divided by interest-bearing liabilities.
CASH FLOWS. As shown in the consolidated statements of cash flows for the three years ended December 31, 1994, First Sterling's cash flows from operations exceeded net income each year. Cash flows from operating activities exceeded accrual basis net income by $712,000, $1,739,000 and $427,000 in 1994, 1993 and 1992, respectively. Management expects ongoing operating activities to continue to be a primary source of cash flow for First Sterling. First Sterling has experienced a relatively stable level of deposits and repurchase agreements over the past several years, which has helped maintain an adequate level of cash for First Sterling's activities. While competition for deposit and repurchase agreement customers is expected to remain keen and future growth cannot be predicted with any certainty, First Sterling plans to continue to actively seek profitable new deposit and repurchase agreement business. The increase in loans and decrease in deposits in 1994 was funded primarily through: a $2,800,000 decrease in federal funds sold and a $2,100,000 increase in federal funds purchased; cash - 66 - 72 flows from operations; proceeds from security maturities, calls and paydowns which exceeded the purchases of new securities by nearly $4,000,000; the sale of a mutual fund investment; and $3,651,000 in proceeds from the sale of the Bank's student loan portfolio. Loan growth and an increase in First Sterling's securities portfolio in 1993 were funded primarily through cash flows from operations and a decrease of $5,964,000 in cash and cash equivalents. In 1992, net security purchases of approximately $8,300,000 were funded primarily by a net decrease in loans. To insure the ability to meet its funding needs, including any unexpected strain on liquidity, First Sterling has a $6,500,000 federal funds line of credit from two independent banks. In addition, First Sterling also has the ability to borrow funds, if necessary, directly from the Federal Reserve Bank. First Sterling has no notes payable or similar debt on its balance sheet. The lack of a debt service requirement allows First Sterling to use its funds for other operating purposes. Equity capital is in excess of regulatory requirements, as determined on both risk-based and leverage ratio criteria. Cash dividends have been a relatively modest percentage of net income, beginning with 10% in 1993 and increasing to 32% in 1994. The Merger Agreement also now limits dividends to $.04 per share per quarter. There are no planned capital outlays which would be a significant burden on First Sterling's cash flows. RECENT ACCOUNTING PRONOUNCEMENTS. Statements of Financial Accounting Standards No. 114 and No. 118 were adopted at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for losses to require an increase, such increase is reported as bad debt expense. The effect of adopting this standard is not considered material to First Sterling due to the relatively low amount of nonperforming loans at December 31, 1994. First Sterling's allowance for loan losses is considered adequate after considering the effect of SFAS 114 and 118. In May 1995, the Financial Accounting Standards Board issued SFAS 122, "Accounting for Mortgage Servicing Rights." Adoption of SFAS 122 applies prospectively, in fiscal years beginning after December 15, 1995, to transactions in which a mortgage banking enterprise sells or securitizes mortgage loans with servicing rights retained. SFAS 122 also requires impairment evaluations of all amounts capitalized as mortgage servicing rights. SFAS 122 is not expected to have any material effect on First Sterling, since First Sterling does not sell mortgage loans in the secondary market or service mortgage loans for other investors. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 The following discussion focuses on the consolidated financial condition of First Sterling at September 30, 1995, and the consolidated results of operations for the nine months ended September 30, 1995, compared to the same period in 1994. This discussion should be read in conjunction with the interim condensed consolidated financial statements and notes thereto. - 67 - 73 FINANCIAL CONDITION. First Sterling's consolidated total assets increased $6,707,000, or 4.1%, from December 31, 1994 to September 30, 1995. Total assets were $170,002,000 at September 30, 1995, which is at or near a record high level for First Sterling. Average assets for the nine-month periods ended September 30, 1995 and 1994 were $165,540,000 and $165,439,000, respectively, virtually the same in each period. The growth in assets in 1995 was largely due to an increase of $5,259,000, or 4.1%, in total deposits and an increase of $1,651,000, or 10.3%, in securities sold under repurchase agreements. Noninterest-bearing demand deposits at September 30, 1995 were approximately the same as at the beginning of the year. The deposit growth in 1995 occurred primarily in time certificates of deposits, where the Bank realized increased volumes from retail, commercial and governmental customers. The Bank ran special promotions of thirteen- and twenty-month certificates of deposit in 1995, which contributed to growth in this area. The total carrying value of securities was $72,914,000 at September 30, 1995, which is only $141,000 more than the carrying value at December 31, 1994. There were no substantial changes in the mix of the securities portfolio at September 30, 1995, as compared to the beginning of the year. The maturity tables in Note 2 to First Sterling's consolidated financial statements indicate that maturities were shortened somewhat by September 30, 1995, compared to the beginning of the year, as a greater portion of the securities are now due within one year. In 1995, fair values of securities improved relative to amortized cost. Unrealized losses on securities available-for-sale were $50,000 at September 30, 1995, compared to $1,138,000 at December 31, 1994. Securities held-to-maturity had unrealized gains of $405,000 at September 30, 1995, compared to unrealized losses of $253,000 at the beginning of the year. Improvement in fair values was largely due to lower market interest rates at September 30, 1995, as well as shorter maturities in First Sterling's securities portfolio. Most of the growth in assets was in the loan portfolio. As of September 30, 1995, total loans had increased approximately $7.5 million, or 9.6%, since the beginning of the year. Management has more aggressively sought loan growth in 1995. Marketing and business development efforts have helped to increase volume in residential and commercial real estate loans, commercial and agricultural credits, and installment lending. Real estate mortgage loans have increased $1,485,000, or 8.5%, from December 31, 1994. Commercial and agricultural loans also increased significantly, by $3,479,000, or 8.9%. Largely through increased efforts in obtaining indirect loans from automobile dealers, installment loans were up $2,816,000, or 14.7%, from the beginning of the year. Shareholders' equity increased $1,585,000 during the nine months ended September 30, 1995. The increase is a result of net income of $1,309,000, unrealized gains on securities available-for-sale, net of deferred tax, of $718,000, and the payment of $442,000 in dividends. First Sterling's capital levels at September 30, 1995 remained well above amounts required by banking regulators. The leverage ratio at September 30, 1995 was 10.65%, compared to required levels ranging from 3% to 5%. NET INTEREST INCOME. Net interest income, the difference between interest income on earning assets and interest expense on interest-bearing liabilities, decreased $210,000, or 4.2%, for the nine months ended September 30, 1995, compared to the same period in 1994. While interest income increased 9.4%, interest expense increased 30.4%. The Bank is paying significantly more for its deposits and repurchase agreements in 1995 as compared to 1994. - 68 - 74 The growth in interest-bearing liabilities has been in higher cost time certificates of deposit and repurchase agreements. While the Bank did not increase deposit and repurchase agreement rates in 1994 as fast as the prime rate rose, it should be noted that rates at January 1, 1995 were significantly higher than at the beginning of 1994. Thus, the lag time in raising deposit and repurchase agreement rates was mostly gone by 1995. Due to competitive pressures, the Bank raised deposit and repurchase agreement rates in 1995. On the asset side, the national prime lending rate was 8.5% as of January 1, 1995, rose as high as 9%, and was at 8.75% at September 30, 1995. Longer term rates were generally lower at September 30, 1995, compared to the beginning of the year. The following table indicates changes in earning asset yields and rates on interest-bearing liabilities for the nine months ended September 30, 1995 and 1994.
1995 1994 ---- ---- Fully tax equivalent yield on average earning assets 8.04% 7.41% Rate on average interest-bearing liabilities 4.42 3.36 ---- ---- Net interest rate spread 3.62% 4.05% ==== ====
PROVISION FOR LOAN LOSSES. The provision for loan losses was $162,000 for the nine months ended September 30, 1995, compared to $66,000 for the same period in 1994. While nonaccrual loans have declined slightly from December 31, 1994, the higher loan loss provision in 1995 is largely due to loan growth and an increase in loans ninety days past due which are still accruing. The allowance for loan losses was 417% of nonperforming loans at September 30, 1995, compared to 519% at September 30, 1994 and 406% at December 31, 1994. Based upon its analysis, management believes the allowance for loan losses was adequate at September 30, 1995 to cover future possible loan losses. NONINTEREST INCOME. Noninterest income was $656,000 for the nine months ended September 30, 1995, compared to $669,000 for the same period in 1994. Securities losses were $1,000 in 1995 and $44,000 in 1994. The 1994 securities losses include a $46,000 loss on the sale of a mutual fund investment. Service charges on deposits decreased $47,000, or 16.3%, in 1995. Customers continued to use higher balances to avoid or reduce service charges. In addition, the number of customers subject to frequent overdraft and non-sufficient funds charges has decreased in 1995. Noninterest income in 1994 also includes a $40,000 gain on the sale of student loans. NONINTEREST EXPENSE. Total noninterest expense was $3,621,000 as of September 30, 1995, compared to $3,907,000 for the same period in 1994. The primary reasons for this 7.3% decrease are discussed below. In the second quarter of 1995, the Bank Insurance Fund ("BIF") reached its designated reserve ratio of 1.25% of insured deposits. As a result, the FDIC reduced risk-based BIF premium rates from a range of $.23 to $.31 to a range of $.04 to $.31 for every $100 of deposits. Since the Bank is subject to the lowest BIF premium rate, the rate reduction resulted in a cost reduction of $86,000, or 38.9%, for the nine months ended September 30, 1995 compared to the same period last year. - 69 - 75 Data processing conversion costs of $266,000 were incurred and expensed in the nine months ended September 30, 1994. Without these nonrecurring charges, data processing expense would have been $241,000 in 1994 as compared to $206,000 in the same period of 1995. Noninterest expenses classified as "other expenses" on the consolidated statements of income were $1,000,000 for the nine months ended September 30, 1995 compared to $786,000 for the prior year period. Reasons for the 27% increase include a $66,000 write off of repossessed collateral in 1995. Professional fees were $55,000 higher in 1995, as First Sterling engaged firms to: help with strategic and capital planning at the holding company level; consult with First Sterling regarding a proposed merger transaction; prepare a marketing study; and perform certain procedures which were previously done by the Bank's internal auditor. Several other expense categories increased somewhat during 1995, including marketing, supplies and postage, which in part reflect greater business development efforts. Salaries and benefits, occupancy and furniture and equipment expenses were slightly less as of September 30, 1995 as compared to the prior year period. Amortization expense related to intangible assets decreased $66,000 for the nine months ended September 30, 1995. The excess purchase price resulting from First Sterling's acquisition of First National Bank of Sterling was fully amortized by March 31, 1995. Amortization of the core deposit intangible asset was less in 1995 than in 1994 because First Sterling is using an accelerated method to amortize this asset over ten years. NET INCOME. Income before income taxes decreased by $33,000 in the 1995 period compared to 1994. However, income tax expense decreased $55,000 in 1995, primarily due to less pre-tax income, increased tax exempt interest income and less nondeductible amortization expense. As a result of the items discussed above, net income increased $22,000, or 1.7%, to $1,309,000 for the nine months ended September 30, 1995. The return on average assets increased slightly in 1995 to 1.05% as compared to 1.04% in the prior year period. - 70 - 76 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of the Record Date the number of shares of First Sterling Common Stock beneficially owned and the percentage of ownership of outstanding shares of First Sterling Common Stock by (a) each director and executive officer of First Sterling, (b) each person who is known by First Sterling to own beneficially 5% or more of such stock and (c) all directors and executive officers of First Sterling as a group:
BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER OWNED CLASS ---------------------------- ------------ ---------- John P. Goedert 1,002,358 27.20% William J. Hank 944,472 25.63 President John J. Grams 943,472 25.60 C.D. Oberwortmann 361,848 9.82 Shirley Oberwortmann 357,090 9.69 Elaine Mueller 238,060 6.46 William Sticklen 238,060 6.46 Jacqueline R. Hickey 217,772 5.91 Carl J. Spaeth 194,019 5.26 Director Carl A. Kautz 168,973 4.58 Vice President and Director David Grohne 117,772 3.20 Director Joseph D. Henderson 104,945 2.85 Executive Vice President and Director Joseph J. Turk 58,886 1.59 Director Andrew B. Barber 52,998 1.44 Director David L. Kingland 16,901 Director Roger A. Aschbrenner 435 Chief Financial Officer of the Bank Directors and Executive 1,659,401 45.03 Officers as a group (9 persons) - ------------------------------------ Less than 1% - 71 - 77 The business address for each of these individuals is 305 4th Avenue, Sterling, Illinois 61081. Includes 943,472 shares subject to the First Sterling Bancorp, Inc. 1986 Voting Trust (the "Trust") for which Mr. Goedert shares voting power as a trustee. Mr. Goedert disclaims beneficial ownership of all such shares, except for 3,495 shares subject thereto which are owned directly by him. Includes 943,472 shares subject to the Trust for which Mr. Hank shares voting power as a trustee. Mr. Hank disclaims beneficial ownership of all such shares except for 2,939 shares subject thereto which are owned directly by him. Includes 943,472 shares subject to the Trust for which Mr. Grams shares voting power as a trustee. Mr. Grams disclaims beneficial ownership of such shares, except for 23,950 shares subject thereto which are owned directly by him. Includes 119,030 shares held by Shirley Oberwortmann, Mr. Oberwortmann's wife. Also includes 4,758 shares held by Mr. Oberwortmann as custodian for Douglas Oberwortmann. Mr. Oberwortmann disclaims beneficial ownership of such shares. Includes 238,060 shares held by C.D. Oberwortmann, Mrs. Oberwortmann's husband. Mrs. Oberwortmann disclaims beneficial ownership of such shares. Represents shares of First Sterling Common Stock owned by a living trust for which Mr. Kautz is the trustee and beneficiary. Also, includes 75,000 shares held by Beverly A. Kautz, Mr. Kautz's wife, as trustee under a living trust for which Mrs. Kautz is the trustee and beneficiary. Mr. Kautz disclaims beneficial ownership of the shares held by his wife.
For purposes of the above table, a person is deemed to be a beneficial owner of shares of First Sterling Common Stock if the person has or shares the power to vote or to dispose of such shares. Unless otherwise indicated in the footnotes, each person has sole voting and investment power with respect to shares shown in the table as beneficially owned by such person. - 72 - 78 INFORMATION REGARDING MBI STOCK ------------------------------- DESCRIPTION OF MBI COMMON STOCK AND ATTACHED PREFERRED SHARE PURCHASE RIGHTS GENERAL. MBI has authorized 5,000,000 shares of MBI Preferred Stock, no par value, and 100,000,000 shares of MBI Common Stock, $5.00 par value. At September 30, 1995, MBI had 14,806 shares of MBI Preferred Stock issued and outstanding and 55,333,878 shares of MBI Common Stock outstanding. Under Missouri law, MBI's Board of Directors may generally approve the issuance of authorized shares of Preferred Stock and Common Stock without shareholder 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 MBI Preferred Stock. Except for the designation and reservation of Series A Junior Participating Preferred Stock pursuant to MBI's Preferred Share Purchase Rights Plan described below, and, in connection with the acquisition of TCB on May 1, 1995, the designation and issuance of (i) 5,306 shares of Series B-1 Preferred Stock and (ii) 9,500 shares of Series B-2 Preferred Stock, MBI's Board of Directors has not acted to designate or issue any shares of MBI Preferred Stock. The existence of a substantial number of unissued and unreserved shares of MBI Common Stock and undesignated shares of MBI Preferred Stock may enable the Board of Directors to issue shares to such persons and in such manner as may be deemed to have an anti-takeover effect. The following summary of the terms of MBI's capital stock does not purport to be complete and is qualified in its entirety by reference to the applicable provisions of MBI's Restated Articles of Incorporation and By-Laws and Missouri law. DIVIDENDS. The holders of MBI Common Stock are entitled to share ratably in dividends when, as and if declared by the 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 MBI Preferred Stock ranking superior as to dividends to MBI Common Stock. The Board of Directors of MBI intends to maintain its present policy of paying quarterly cash dividends on 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. Because MBI is a holding company, its ability to pay dividends is dependent upon receipt of dividends and/or management fees from its subsidiary banks. The payment of dividends to MBI by 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, each shareholder has cumulative voting rights which entitle 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 votes may be cast for one candidate for election as a director or may be distributed among two or more candidates. - 73 - 79 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 shareholders after the satisfaction of its liabilities (or after adequate provision is made therefor) and after preferences on any outstanding MBI Preferred Stock. ASSESSMENT AND REDEMPTION. Shares of MBI Common Stock are and 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 tenth day after public announcement 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 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. When exercisable, each Right will entitle the holder to buy 1/100 of a share of MBI 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 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 shareholders 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 shareholders 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 shareholders. 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 shareholders 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 shares of outstanding capital stock 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 approves 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 - 74 - 80 of the above provisions unless at least two-thirds of the Board of Directors first approves such an amendment, alteration, change or repeal. Such provisions may be deemed to have an anti-takeover effect. RESTRICTIONS ON RESALE OF MBI STOCK BY AFFILIATES Under Rule 145 of the Securities Act of 1933 (the "Securities Act"), certain persons who receive MBI Common Stock pursuant to the Merger and who are deemed to be "affiliates" of First Sterling will be limited in their right to resell the stock so received. The term "affiliate" is defined to include any person who, directly or indirectly, controls, or is controlled by, or is under common control with First Sterling at the time the Merger is submitted to a vote of the shareholders of First Sterling. Each affiliate of First Sterling (generally any director or executive officer or shareholder of First Sterling who beneficially owns a substantial number of outstanding shares of First Sterling Common Stock) who desires to resell the MBI Common Stock received in the Merger must sell such stock either pursuant to an effective registration statement or in accordance with an applicable exemption, such as the applicable provisions of Rule 145(d) under the Securities Act. Rule 145(d) provides that persons deemed to be affiliates may resell their stock received in the Merger 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 First Sterling may 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 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 First Sterling in the Merger will be legended as to the restrictions imposed upon resale of such stock. First Sterling has agreed to provide MBI with a list of those persons who may be deemed to be affiliates at the time of the Special Meeting. First Sterling has agreed to use all reasonable efforts to cause each such person to deliver to MBI prior to the Effective Time a written agreement to the effect that no sale will be made of any shares of MBI Common Stock received in the Merger by an affiliate of MBI except in accordance with the Securities Act and until such time as MBI shall first publish the financial results of at least 30 days of post-merger combined operations of First Sterling and MBI. The certificates of MBI Common Stock issued to affiliates of First Sterling in the Merger may contain an appropriate restrictive legend, and appropriate stop transfer orders may be given to the transfer agent for such certificates. COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF MBI AND FIRST STERLING MBI is incorporated under the laws of the State of Missouri, while First Sterling is incorporated under the laws of the State of Illinois. The rights of the shareholders of MBI are governed by MBI's Restated Articles of Incorporation and By-Laws and the Missouri Act. The rights of First Sterling shareholders are governed by First Sterling's Articles of Incorporation and By-Laws and by the Illinois Business Corporation Act of 1983, as amended (the "Illinois Act"). The rights of First Sterling shareholders who receive shares of MBI Common 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 shareholders, and, where applicable, the differences between the rights of MBI shareholders and First Sterling shareholders, are summarized below. - 75 - 81 PREFERRED SHARE PURCHASE RIGHTS PLAN. As described above under "- Preferred Share Purchase Rights Plan," MBI Common Stock has attached Rights, which may deter certain takeover proposals. First Sterling 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 shareholders of MBI to approve certain proposals. Under both MBI's Restated Articles and By-Laws, removal by the shareholders 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 shareholders called for the election of directors. Amendment by the shareholders 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 shares of capital stock entitled to vote, voting together as a single class, unless such amendment has previously been expressly approved by at least two-thirds of the Board of Directors. The Restated Articles of MBI additionally provide that, in addition to any shareholder vote required under the Missouri Act, 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 two-thirds of the Board of Directors of MBI approve the Business Combination, such Business Combination shall require only the vote of shareholders 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 two-thirds of the Board of Directors. To the extent that a potential acquiror's strategy depends on the passage of proposals which require a supermajority vote of MBI's shareholders, such provisions requiring a supermajority vote may have the effect of discouraging takeover attempts that do not have Board approval by making passage of such proposals more difficult. Neither First Sterling's Articles of Incorporation nor First Sterling's By-Laws require a supermajority vote of shareholders with respect to any item. VOTING FOR DIRECTORS. MBI's By-Laws provide for cumulative voting in the election of directors. Cumulative voting entitles each shareholder to cast an aggregate number of votes equal to the number of voting shares held, multiplied by the number of directors to be elected. Each shareholder may cast all such votes for one nominee or distribute them among two or more nominees, thus permitting holders of less than a majority of the outstanding shares of voting stock to achieve board representation. Neither First Sterling's Articles of Incorporation or By-Laws provide for cumulative voting. CLASSIFIED BOARD. As described under "- 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 diminishes the benefits of the cumulative voting rights to minority shareholders. First Sterling does not have a classified Board of Directors. - 76 - 82 ANTI-TAKEOVER STATUTES. The Missouri Act contains certain provisions applicable to Missouri corporations such as MBI which may be deemed to have an anti-takeover effect. Such provisions include Missouri's business combination statute and the control share acquisition statute. The Missouri business combination statute protects domestic corporations after hostile takeovers 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, leases, 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" (the "Acquisition Transaction") was approved by the board of directors of the corporation on or before the date of the Acquisition Transaction. Business Combinations may occur after the five-year period following the Acquisition Transaction only if: (i) prior to the stock acquisition by the Interested Shareholder, the board of directors approves the transaction in which the Interested Shareholder became an Interested Shareholder 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 bylaws expressly electing not to be covered by the statute; and (iii) certain circumstances in which a shareholder inadvertently becomes an Interested Shareholder. MBI's Restated Articles of Incorporation and By-Laws do not contain an election to "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 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 shareholder 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. Shareholders 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 - 77 - 83 Acquisition Statute so long as the transaction does not result in the purchasing party having voting power after the purchase in a percentage range (such ranges are 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 bylaws expressly electing not to be covered by the statute. MBI's Restated Articles of Incorporation and By-Laws do not contain an election to "opt out" of the Control Share Acquisition Statute. Illinois has a business combination statute similar to Missouri's which generally prohibits a domestic corporation from engaging in mergers or other business combinations with certain "interested shareholders" for a period of three years from the time that the person becomes an "interested shareholder". The three year moratorium can be avoided if (i) the business combination or transaction in which the shareholder became an interested shareholder is approved by the Board of Directors prior to the date on which the interested stockholder acquires the requisite percentage of stock, (ii) as a result of the transaction pursuant to which the shareholder became an "interested shareholder," the interested shareholder owned 85% or more of the voting shares of the corporation, excluding for purposes of determining the number of shares outstanding those shares owned by (A) persons who are directors and also officers, and (B) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (iii) subsequent to becoming an interested shareholder the transaction is approved by the Board of Directors and authorized (but not by written consent) by 66 2/3% or more of the corporation's shareholders (other than the interested shareholder). DISSENTERS' RIGHTS. Under both Section 351.455 of the Missouri Act and Article 5, Section 11.65 of the Illinois Statute, a shareholder of any corporation which is a 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 value of such shares. The provisions of the Illinois Statute are applicable to the shareholders of First Sterling. SHAREHOLDERS' RIGHT TO INSPECT. Under Section 351.215 of the Missouri Act, any shareholder of MBI may inspect the corporation's books and records for any reasonable and proper purpose. Such inspection may be made at any reasonable time or times. Shareholders of First Sterling have similar rights under Article 5, Section 7.75 of the Illinois Act. 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 consent of at least two-thirds of the number of directors then authorized under the By-Laws. MBI's Board of Directors currently has seventeen members. First Sterling's Board of Directors currently has eight members. The supermajority vote required for the amendment of MBI's By-Laws regarding a change in the number of directors may have the effect of making it more difficult to force an immediate change in the composition of a majority of the Board of Directors and may be deemed to have an anti-takeover effect. - 78 - 84 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 the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. As a savings and loan holding company, MBI is also subject to regulatory oversight by the OTS. As such, MBI is required to register and file reports with the OTS and is subject to regulation by the OTS. In addition, the OTS has enforcement authority over MBI which permits the OTS to restrict or prohibit activities that are determined to be a serious risk to its subsidiary savings association. 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, the OTS, the FDIC, the Comptroller of the Currency (the "Comptroller"), and state banking regulators. 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 and certain of its nonbank subsidiaries can borrow or otherwise obtain 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 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 capital stock and surplus. 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 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 agencies, for such year combined with its retained net profits for the preceding two years. In addition, a national bank or a state member bank 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 - 79 - 85 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 to, but not identical with, 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 shareholders' equity, certain non-cumulative and cumulative perpetual preferred 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. Bank holding companies are 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. 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. 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, banks 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 the 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. MBI believes that these changes will not, if adopted, have a material effect on its compliance with capital adequacy requirements. FDIC INSURANCE ASSESSMENTS The subsidiary banks of MBI are subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based premium schedule. Under this schedule, the annual premiums initially ranged from $.23 to $.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 - 80 - 86 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 condition 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. See "- FIRREA and FDICIA." The legislation adopted in August 1989 to provide for the resolution of insolvent savings associations also required the FDIC to establish separate deposit insurance funds -- the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. The law also requires the FDIC to set deposit insurance assessments at such levels as will cause BIF and SAIF to reach their "designated reserve ratios" of 1.25 percent of the deposits insured by them within a reasonable period of time. Due to low costs of resolving bank insolvencies in the last few years, BIF reached its designated reserve ratio in May, 1995. As a result, FDIC recently lowered deposit insurance assessment rates on banks by revising the range to $.04 to $.31 for every $100 of deposits. However, the balance in SAIF is not expected to reach the designated reserve ratio until about the year 2002, as the law provides that a significant portion of the costs of resolving past insolvencies of savings associations must be paid from this source. MBI, which has acquired substantial amounts of SAIF-insured deposits during the years from 1989 to the present, is required to pay deposit insurance premiums on these SAIF-insured deposits. Currently, SAIF-member institutions pay deposit insurance premiums based on a schedule of from $0.23 to $0.31 per $100 of deposits. Bills have recently been proposed by the U.S. Congress to recapitalize the SAIF through a one-time special assessment of approximately 85 basis points on the amount of deposits held by the institution. If such special assessment occurs, it is expected that the deposit premiums paid by the SAIF-member institutions would be reduced to approximately $0.04 for every $100 of deposits and would have the effect of immediately reducing the capital of SAIF-member institutions by the amount of the fee (provided SAIF-member institutions are not permitted to amortize the expense of the one-time fee over a period of years). MBI cannot predict whether the special assessment proposal will be enacted, or, if enacted, the amount of any one-time fee or whether ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums. If the one-time assessment is not enacted, it is presently expected that the SAIF will not be recapitalized until 2002 and the disparity between SAIF and BIF deposit premiums will continue. MBI does not expect that either such additional deposit insurance costs or the proposed one-time assessment will have a significant, adverse effect on its earnings. PROPOSALS TO OVERHAUL THE SAVINGS ASSOCIATION INDUSTRY Proposals recently have been introduced in the U.S. Congress that, if adopted, would overhaul the savings association industry. The most significant of these proposals would recapitalize the SAIF through a one-time special assessment (See "- FDIC Insurance Assessment"), spread the FICO Bond obligation across the BIF and SAIF, merge the Comptroller and the OTS, abolish the federal savings association charter, require federal thrifts to convert to commercial banks and merge the SAIF and the BIF. MBI cannot predict whether these or any other legislative proposals will be enacted, or, if enacted, the final form of the law. 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. This support may be required at times when MBI may not find itself able to provide it. In addition, any capital loans by MBI to any of - 81 - 87 its subsidiaries would also be subordinate in right of payment to deposits and certain other indebtedness of such subsidiary. 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 shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the bank holding company's capital needs, asset quality and overall financial condition. FIRREA AND FDICIA 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. FDICIA instituted certain changes to the supervisory process, including provisions that mandate certain regulatory agency actions against undercapitalized institutions within specified time limits. FDICIA contains various other provisions that may affect the operations of banks and savings institutions. The prompt corrective action provision of FDICIA requires 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 based on the capital categorization, 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") may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (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 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 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 FDIC and the Federal Reserve Board adopted capital-related regulations under FDICIA. Under those regulations, a bank will be well capitalized if it: (i) had a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier 1 capital to adjusted total assets of 5% or greater; and (iv) was 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. A bank will be adequately capitalized if it was not "well capitalized" and: (i) had a risk-based capital ratio of 8% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted - 82 - 88 assets of 4% or greater; and (iii) had 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 ratios of core capital to adjusted total assets were 3% or greater). FDICIA also makes 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 imposes 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. DEPOSITOR PREFERENCE STATUTE 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 First Sterling'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 shareholders of such an institution in their capacity as such. THE INTERSTATE BANKING AND COMMUNITY DEVELOPMENT LEGISLATION In September 1994, legislation was enacted that may have a significant effect in restructuring the banking industry in the United States. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates the interstate expansion and consolidation of banking organizations by permitting (i) bank holding companies that are adequately capitalized and managed 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) 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) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) 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) 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 is 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. The Riegle Community Development and Regulatory Improvement Act of 1994, also enacted in September 1994, is intended to (i) increase the flow of loans to businesses in distressed communities by providing incentives to lenders to provide credit within those communities, (ii) remove impediments to the securitization of small business loans, (iii) provide for a reduction in paperwork and to streamline bank regulation through, for example, the coordination of examinations in a bank holding company context, a reduction in the number of currency transaction reports required and improvements to the National Flood Insurance Program that include enabling lenders to force place flood insurance and (iv) increase the level of consumer protection provided to customers in banking transactions. MBI believes that these provisions of the new law will not have a material effect on its operation. - 83 - 89 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS ----------------------------------------- KPMG Peat Marwick LLP served as MBI's independent accountants for the year ended December 31, 1994 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 Securities and Exchange Commission and other regulatory authorities and consultation on financial accounting and reporting matters. Crowe, Chizek and Company served as First Sterling's independent accountants for the year ended December 31, 1994 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. LEGAL MATTERS ------------- Certain legal matters will be passed upon for MBI by Thompson & Mitchell, St. Louis, Missouri and for First Sterling by Ward, Murray, Pace & Johnson, P.C., Sterling, Illinois. Ole Bly Pace, III, a member of Ward, Murray, Pace & Johnson, P.C., beneficially owns 2,544 shares of First Sterling Common Stock. EXPERTS ------- The consolidated financial statements of Mercantile Bancorporation Inc. as of December 31, 1994, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1994 incorporated by reference in MBI's Annual Report on Form 10-K, and the supplemental consolidated financial statements of Mercantile Bancorporation Inc. as of December 31, 1994, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1994, contained in MBI's Current Report on Form 8-K dated May 31, 1995, have been incorporated by reference herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of First Sterling Bancorp, Inc. as of December 31, 1994 (audited) and for the year then ended have been included herein in reliance upon the report of Crowe, Chizek and Company, independent certified public accountants, whose report is included herein, and upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements incorporated in this Proxy Statement/Prospectus from Hawkeye's Annual Report on Form 10-K for the year ended December 31, 1994 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. OTHER MATTERS ------------- The Board of Directors of First Sterling, at the date hereof, is not aware of any business to be presented at the Special Meeting other than that referred to in the Notice of Special Meeting and discussed herein. If any other matter should properly come before the Special Meeting, the persons named - 84 - 90 as proxies will have discretionary authority to vote the shares represented by proxies in accordance with their discretion and judgment as to the best interests of First Sterling. SHAREHOLDER PROPOSALS --------------------- If the Merger is approved, the other conditions to the Merger are satisfied and the Merger is consummated, shareholders of First Sterling will become shareholders of MBI at the Effective Time. MBI shareholders may submit to MBI proposals for formal consideration at the 1996 annual meeting of MBI's shareholders and inclusion in MBI's proxy statement for such meeting. All such proposals must have been received in writing by the Corporate Secretary at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by November 25, 1995. - 85 - 91 CONSOLIDATED FINANCIAL STATEMENTS INDEX ----- Page ----- REPORT OF INDEPENDENT AUDITORS................................. F-1 CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994 (AUDITED) AND 1993 (UNAUDITED).................................................. F-2 CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1994 (AUDITED), 1993 (UNAUDITED) AND 1992 (UNAUDITED)........................................ F-3 to F-4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1994 (AUDITED), 1993 (UNAUDITED) AND 1992 (UNAUDITED)....................... F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1994 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1994 (AUDITED), 1993 (UNAUDITED) AND 1992 (UNAUDITED)....................... F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... F-7 to F-25 - 86 - 92 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders First Sterling Bancorp, Inc. Sterling, Illinois We have audited the accompanying consolidated balance sheet of First Sterling Bancorp, Inc. as of December 31, 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Sterling Bancorp, Inc. as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for securities during 1994. /s/ Crowe, Chizek and Company Oak Brook, Illinois September 7, 1995 F - 1 93 FIRST STERLING BANCORP, INC. CONSOLIDATED BALANCE SHEETS September 30, 1995 (unaudited) December 31, 1994 and 1993 (unaudited) (In thousands of dollars, except per share data) - ---------------------------------------------------------------------------------------------------
----December 31,---- (Unaudited) ------------ September 30, ------------- (Unaudited) 1995 1994 1993 ---- ---- ---- ASSETS Cash and due from banks $ 7,167 $ 8,174 $ 6,421 Federal funds sold - - 2,800 Money market fund investment 827 585 592 -------- -------- -------- Total cash and cash equivalents 7,994 8,759 9,813 Securities available-for-sale 46,239 46,338 - Securities held-to-maturity (fair value: $27,080, $26,182 and $79,697, respectively) 26,675 26,435 77,823 Mutual fund investment, net of $32 valuation allowance in 1993 - - 968 Loans, less allowance for loan losses of $1,380, $1,446, and $1,476, respectively 84,301 76,711 74,065 Premises and equipment, net 1,698 1,777 1,775 Intangible assets 208 278 458 Interest receivable and other assets 2,887 2,997 2,611 -------- -------- -------- $170,002 $163,295 $167,513 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Demand - noninterest-bearing $ 20,613 $ 20,312 $ 19,098 Time, $100,000 and over 13,529 9,583 11,362 Other interest-bearing deposits 98,371 97,359 102,940 -------- -------- -------- Total deposits 132,513 127,254 133,400 Securities sold under agreements to repurchase 17,717 16,066 17,052 Federal funds purchased 200 2,100 - Interest payable and other liabilities 1,303 1,191 922 -------- -------- -------- Total liabilities 151,733 146,611 151,374 Commitments and contingencies (Notes 3 and 10) Shareholders' equity Common stock, $1 par value: 5,000,000 shares authorized; 3,685,061 shares issued and outstanding 3,685 3,685 3,685 Paid-in capital in excess of par 799 799 799 Retained earnings 13,818 12,951 11,655 Net unrealized gain (loss) on securities available- for-sale, net of deferred tax of $17 and $387 in 1995 and 1994, respectively (33) (751) - -------- -------- -------- Total shareholders' equity 18,269 16,684 16,139 -------- -------- -------- $170,002 $163,295 $167,513 ======== ======== ======== - ------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
F - 2 94 FIRST STERLING BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME Nine months ended September 30, 1995 (unaudited) and 1994 (unaudited) Years ended December 31, 1994, 1993 (unaudited) and 1992 (unaudited) (In thousands of dollars, except per share data) - ---------------------------------------------------------------------------------------------------
(Unaudited) ---Years ended December 31,--- Nine months ended ------------------------ ---September 30,--- ------------- (Unaudited) (Unaudited) 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- Interest income Loans (including fee income) $ 5,351 $ 4,903 $ 6,613 $ 6,640 $ 7,368 Bankers acceptances - 15 21 - 4 Balances with banks and money market fund investment 32 19 27 22 33 Federal funds sold 122 62 73 159 266 Securities Taxable 2,823 2,616 3,515 3,576 3,918 Exempt from federal income tax 741 674 916 822 864 ---------- ---------- ---------- ---------- ---------- 9,069 8,289 11,165 11,219 12,453 Interest expense Deposits 3,570 2,822 3,823 4,052 5,431 Federal funds purchased and repurchase agreements 677 435 630 486 553 Note payable - - - - 41 ---------- ---------- ---------- ---------- ---------- 4,247 3,257 4,453 4,538 6,025 ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME 4,822 5,032 6,712 6,681 6,428 Provision for loan losses 162 66 66 258 375 ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,660 4,966 6,646 6,423 6,053 Noninterest income Securities and mutual fund investment gains (losses), net (1) (44) (43) 11 22 Trust department income 129 124 168 147 129 Service charges on deposits 242 289 385 351 462 Other commissions and fees 286 300 406 338 347 ---------- ---------- ---------- ---------- ---------- 656 669 916 847 960 Noninterest expense Salaries and employee benefits 1,735 1,766 2,388 2,654 2,400 Occupancy expense 266 268 355 356 362 FDIC deposit insurance 135 221 295 294 303 Data processing, including conversion costs of $266 in 1994 206 507 578 320 344 Furniture and equipment expense 209 223 297 339 275 Amortization of intangible assets 70 136 180 212 218 Environmental expense - - - 356 - Other expenses 1,000 786 1,023 1,096 1,103 ---------- ---------- ---------- ---------- ---------- 3,621 3,907 5,116 5,627 5,005 ---------- ---------- ---------- ---------- ---------- - ---------------------------------------------------------------------------------------------------- (Continued) F - 3 95 FIRST STERLING BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME Nine months ended September 30, 1995 (unaudited) and 1994 (unaudited) Years ended December 31, 1994, 1993 (unaudited) and 1992 (unaudited) (In thousands of dollars, except per share data) - --------------------------------------------------------------------------------------------------- (Unaudited) ---Years ended December 31,--- Nine months ended ------------------------ ---September 30,--- ------------- (Unaudited) (Unaudited) 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD $ 1,695 $ 1,728 $ 2,446 $ 1,643 $ 2,008 Provision for income taxes 386 441 592 366 457 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting method 1,309 1,287 1,854 1,277 1,551 Cumulative effect of a change in accounting for income taxes - - - 202 - ---------- ---------- ---------- ---------- ---------- NET INCOME $ 1,309 $ 1,287 $ 1,854 $ 1,479 $ 1,551 ========== ========== ========== ========== ========== Earnings per share Income before cumulative effect of a change in accounting method $ .36 $ .35 $ .50 $ .35 $ .42 Cumulative effect of accounting change - - - .05 - ---------- ---------- ---------- ---------- ---------- Net income $ .36 $ .35 $ .50 $ .40 $ .42 ========== ========== ========== ========== ========== Weighted average shares outstanding 3,685,061 3,685,061 3,685,061 3,685,061 3,686,320 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
F - 4 96 FIRST STERLING BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY Nine months ended September 30, 1995 (unaudited) Years ended December 31, 1994, 1993 (unaudited) and 1992 (unaudited) (In thousands of dollars, except per share data) - -----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain/ Unearned Paid-In (Loss) on Portion of Book Capital Securities Restricted Total Value Common Stock in Excess Retained Available- Stock Shareholders Per Shares Par Value of Par Earnings for-Sale Awards Equity Share ------ --------- ------ -------- -------- ------ ------ ----- Balance, January 1, 1992 3,687,578 $ 3,688 $ 739 $ 8,804 $ $ (56) $ 13,175 $ 3.57 ====== Purchase and retirement of common stock 2,517 (3) (4) - (7) Amortization of restricted stock awards 56 56 Change in valuation allowance on mutual fund investment (12) - (12) Tax benefit from restricted stock awards 64 - 64 Net income - - 1,551 - - 1,551 --------- ------- ----- -------- ------ ----- -------- Balance, December 31, 1992 3,685,061 3,685 799 10,343 - - 14,827 $ 4.02 ====== Dividends ($.04 per share) - - - (147) - - (147) Change in valuation allowance on mutual fund investment - - - (20) - - (20) Net income - - - 1,479 - - 1,479 --------- ------- ----- -------- ------ ----- -------- Balance, December 31, 1993 3,685,061 3,685 799 11,655 - - 16,139 $ 4.38 ====== Dividends ($.16 per share) - - - (590) - - (590) Change in valuation allowance on mutual fund investment - - - 32 - - 32 Cumulative effect of change in accounting method for securities, net of deferred tax - - - - 578 - 578 Net income - - - 1,854 - - 1,854 Unrealized loss on securities available-for-sale, net of deferred tax - - - - (1,329) - (1,329) --------- ------- ----- -------- ------ ----- -------- Balance, December 31, 1994 3,685,061 3,685 799 12,951 (751) - 16,684 $ 4.53 ====== Dividends ($ .12 per share) - - - (442) - - (442) Net income - - - 1,309 - - 1,309 Unrealized gain on securities available-for-sale, net of deferred tax - - - - 718 - 718 --------- ------- ----- -------- ------ ----- -------- Balance, September 30, 1995 3,685,061 $ 3,685 $ 799 $ 13,818 $ (33) $ - $ 18,269 $ 4.96 ========= ======= ===== ======== ====== ===== ======== ====== - ----------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
F - 5 97 FIRST STERLING BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1995 (unaudited) Years ended December 31, 1994, 1993 (unaudited) and 1992 (unaudited) (in thousands of dollars, except per share data) - -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) Nine months ended ---Years ended December 31,--- ---September 30,--- ------------------------ ------------- (Unaudited) (Unaudited) 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,309 $ 1,287 $ 1,854 $ 1,479 $ 1,551 Adjustments to reconcile net income to net cash from operating activities Cumulative effect of change in accounting method - - - (202) - Discount accretion/premium amortization, net (184) 24 (5) 178 144 Amortization of restricted stock award - - - - 56 Provision for loan losses 162 66 66 258 375 Depreciation 145 152 203 261 199 Amortization of intangible assets 70 135 180 212 218 Loss on sale of mutual fund investment - 46 46 - - (Gain) loss on sales and calls of securities 1 (2) (3) 1 (1) Gain on sale of loans - (40) (40) - - Deferred loan fees (11) (4) (5) (2) 3 Change in interest receivable and other assets (260) (247) 1 820 (263) Change in interest payable 121 (31) (10) (32) (252) Change in other liabilities (9) 459 279 245 (52) ------- ------- ------- ------- -------- Net cash provided by operating activities 1,344 1,845 2,566 3,218 1,978 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities held-to-maturity and bankers acceptances (4,322) (3,315) (3,711) (25,806) (36,437) Proceeds from maturities and calls of securities held-to-maturity 4,282 1,677 2,414 20,518 28,159 Purchase of securities available-for-sale (7,019) (7,480) (7,911) - - Proceeds of maturities and calls of securities available-for-sale 7,963 10,393 13,128 - - Proceeds from sale of security available-for-sale 226 - - - - Proceeds from loan sales - 3,651 3,651 - - Purchase of mutual fund investment - - - - (1,000) Proceeds from sale of mutual fund investment - 954 954 - - Net decrease (increase) in loans (7,741) (4,354) (6,318) (2,939) 7,948 Property and equipment expenditures (66) (174) (205) (88) (192) Investment in real estate development - - - (343) - ------- ------- ------- ------- -------- Net cash provided by (used in) investing activities (6,677) 1,352 2,002 (8,658) (1,522) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 5,259 (5,267) (6,146) (123) (2,269) Net (decrease) increase in securities sold under repurchase agreements 1,651 253 (986) (254) 6,504 Net increase (decrease) in federal funds purchased (1,900) - 2,100 - - Repayments on note payable - - - - (850) Purchase and retirement of common stock - - - - (7) Dividends paid (442) (442) (590) (147) - Tax benefit from restricted stock award - - - - 64 ------- ------- ------- ------- -------- Net cash provided by (used in) financing activities 4,568 (5,456) (5,622) (524) 3,442 ------- ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents (765) (2,259) (1,054) (5,964) 3,898 Cash and cash equivalents at beginning of period 8,759 9,813 9,813 15,777 11,879 ------- ------- ------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,994 $ 7,554 $ 8,759 $ 9,813 $ 15,777 ======= ======= ======= ======= ======== Supplemental disclosures of cash flow information Cash paid during the period for Interest $ 4,126 $ 3,288 $ 4,463 $ 4,570 $ 6,277 Income taxes 307 387 589 438 335 - ----------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
F - 6 98 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation and Basis of Presentation: The consolidated financial - --------------------------------------- statements of First Sterling Bancorp, Inc. (the "Company") include the accounts of its wholly-owned subsidiary, First National Bank of Sterling - Rock Falls (the "Bank"). Prior to 1994, the Bank was a wholly-owned subsidiary of Rock Falls Bancshares, Inc. ("Rock Falls") while Rock Falls was a wholly-owned subsidiary of the Company. Rock Falls was merged into the Company in 1994. First National Bank of Sterling ("FNBS") and Rock Falls National Bank ("RFNB") merged their operations in December of 1991. The surviving bank was named First National Bank of Sterling - Rock Falls. Prior to the merger, FNBS was a wholly-owned subsidiary of the Company and RFNB was a wholly-owned subsidiary of Rock Falls. The Company's acquisition of the FNBS in 1983 was accounted for as a purchase. The excess of the purchase price over the fair value of net assets acquired is being amortized over twelve years on the straight-line method. On January 17, 1990, the Company acquired all of the outstanding common stock of Rock Falls for cash in the amount of $4,300,000. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the acquired assets and liabilities assumed have been recorded at their estimated fair market values at the date of acquisition and the resulting adjustments are being amortized over their respective lives. Significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The accompanying interim condensed consolidated financial statements as of September 30, 1995 and for the nine months ended September 30, 1995 and 1994 are prepared without audit and reflect all adjustments which are of a normal and recurring nature and, in the opinion of management, are necessary to present interim financial statements of the Company in accordance with generally accepted accounting principles. The interim financial statements do not purport to contain all the necessary financial disclosures covered by generally accepted accounting principles that might otherwise be necessary for complete financial statements. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes of the Company for the years ended December 31, 1994, 1993, and 1992. The results of operations for the nine-month period ended September 30, 1995, are not necessarily indicative of the results to be expected for the full year. - ------------------------------------------------------------------------------- (Continued) F - 7 99 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and Cash Equivalents: For purposes of reporting cash flows, cash and - ------------------------- cash equivalents include cash on hand, noninterest-bearing amounts due from banks, money market fund investments, and federal funds sold. Generally, federal funds are sold for one-day periods. Securities: Beginning January 1, 1994, debt securities are classified as - ---------- held-to-maturity when the Company has the positive intent and ability to hold those securities to maturity. Accordingly, securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. All other securities are classified as available-for-sale since the Company may decide to sell those securities in response to changes in market interest rates, liquidity needs, changes in the Company's tax situation, changes in yields on alternative investments and for other reasons. Securities available-for-sale are carried at fair value with unrealized gains and losses charged or credited, net of deferred income taxes, to a valuation allowance included as a separate component of equity. Realized gains and losses on disposition are based on the net proceeds and the adjusted carrying amounts of the securities sold, using the specific identification method. Loans and Loan Income: Loans are stated net of unearned income, deferred - --------------------- loan fees, and the allowance for loan losses. Interest income on real estate, commercial and agricultural, and most installment loans is accrued on the simple interest method over the terms of the respective loans based upon principal balances outstanding. For other installment loans, unearned income is recognized as income using a method which approximates the interest method. Where serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. Loan fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as a yield adjustment. Statement of Financial Accounting Standards No. 114 and No. 118 were adopted at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as part of the provision for loan losses. The effect of adopting these standards was not material to the Company's consolidated financial position. Beginning in 1995, for impairment recognized in accordance with SFAS 114, the entire change in present value of expected cash flows or current collateral value is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Office Buildings and Equipment: Office buildings and equipment are stated - ------------------------------ at cost less accumulated depreciation. Office buildings and related components are depreciated primarily on the straight-line method over estimated useful lives ranging from fifteen to forty years. Equipment and furniture are depreciated on both the straight-line and accelerated methods over estimated useful lives ranging from three to fifteen years. - ------------------------------------------------------------------------------- (Continued) F - 8 100 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other Real Estate: Real estate owned, other than that used in the normal - ----------------- course of business, is carried at the lower of cost or fair value less estimated selling expenses. Any reduction to fair value from a related loan at the time of acquisition is accounted for as a loan loss. Income Taxes: The provision for income taxes is based on an asset and - ------------ liability approach that requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. See Note 9 regarding change in accounting method. Earnings Per Share: Earnings per share are computed based on the weighted - ------------------ average number of shares outstanding during the period. Book Value Per Share: Book value per share is computed by dividing total - -------------------- shareholders' equity by the number of common shares outstanding at each date. NOTE 2 - SECURITIES Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 requires classifications of debt securities as either held-to-maturity, trading or available-for-sale. The cumulative effect of adopting SFAS 115 increased shareholders' equity at January 1, 1994 by $578,000, which is the after tax effect of the adjustment from amortized cost to fair value for securities available-for-sale at that date. The 1993 and 1992 financial statements reflect the terminology contained in SFAS 115. - ------------------------------------------------------------------------------- (Continued) F - 9 101 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) The amortized cost, gross unrealized gains and losses, and fair value of securities are as follows:
September 30, 1995 ------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- -------- Securities available-for-sale U.S. Treasury $ 7,263 $ 17 $ (9) $ 7,271 U.S. government agencies 8,714 15 (110) 8,619 States and political subdivisions 1,387 10 - 1,397 Mortgage-backed 11,527 228 (20) 11,735 Collateralized mortgage obligations 12,262 42 (194) 12,110 Corporate and other 5,136 4 (33) 5,107 -------- ------- -------- -------- 46,289 316 (366) 46,239 Securities held-to-maturity U.S. Treasury 3,078 - (6) 3,072 U.S. government agencies 2,003 73 - 2,076 States and political subdivisions 18,457 314 (41) 18,730 Collateralized mortgage obligations 926 48 - 974 Corporate and other 2,211 17 - 2,228 -------- ------- -------- -------- 26,675 452 (47) 27,080 -------- ------- -------- -------- $ 72,964 $ 768 $ (413) $ 73,319 ======== ======= ======== ======== - ------------------------------------------------------------------------------- (Continued) F - 10 102 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) December 31, 1994 ----------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Securities available-for-sale U.S. Treasury $ 9,259 $ - $ (129) $ 9,130 U.S. government agencies 5,449 - (279) 5,170 States and political subdivisions 1,741 13 (14) 1,740 Mortgage-backed 13,119 52 (227) 12,944 Collateralized mortgage obligations 11,890 1 (443) 11,448 Corporate and other 6,018 - (112) 5,906 -------- ------- -------- -------- 47,476 66 (1,204) 46,338 Securities held-to-maturity U.S. Treasury 3,112 - (132) 2,980 U.S. government agencies 990 - - 990 States and political subdivisions 18,860 318 (319) 18,859 Corporate and other 3,473 - (120) 3,353 -------- ------- -------- -------- 26,435 318 (571) 26,182 -------- ------- -------- -------- $ 73,911 $ 384 $ (1,775) $ 72,520 ======== ======= ======== ======== December 31, 1993 ----------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Securities held-to-maturity U.S. Treasury $ 15,051 $ 476 $ - $ 15,527 U.S. government agencies 6,075 83 (23) 6,135 States and political subdivisions 19,746 822 (32) 20,536 Mortgage-backed 13,426 374 (4) 13,796 Collateralized mortgage obligations 13,460 29 (38) 13,451 Corporate and other 10,065 207 (20) 10,252 -------- ------- -------- -------- $ 77,823 $ 1,991 $ (117) $ 79,697 ======== ======= ======== ========
- ------------------------------------------------------------------------------- (Continued) F - 11 103 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) The amortized cost and estimated market value of debt securities at September 30, 1995 and December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 1995 ------------------ Amortized Fair Cost Value ------------------ Securities available-for-sale Due in one year or less $ 10,425 $ 10,346 Due after one through five years 9,589 9,569 Due after five years through ten years 1,002 996 Due after ten years 1,484 1,483 -------- -------- 22,500 22,394 Mortgage-backed 11,527 11,735 Collateralized mortgage obligations 12,262 12,110 -------- -------- $ 46,289 $ 46,239 ======== ======== Securities held-to-maturity Due in one year or less $ 6,582 $ 6,647 Due after one year through five years 17,505 17,779 Due after five years through ten years 1,303 1,303 Due after ten years 359 377 -------- -------- 25,749 26,106 Collateralized mortgage obligations 926 974 -------- -------- $ 26,675 $ 27,080 ======== ======== - ------------------------------------------------------------------------------- (Continued) F - 12 104 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) December 31, 1994 ----------------- Amortized Fair Cost Value ------------------ Securities available-for-sale Due in one year or less $ 5,545 $ 5,536 Due after one year through five years 14,102 13,613 Due after five years through ten years 1,002 995 Due after ten years 1,818 1,802 -------- -------- 22,467 21,946 Mortgage-backed 13,119 12,944 Collateralized mortgage obligations 11,890 11,448 -------- -------- $ 47,476 $ 46,338 ======== ======== December 31, 1994 ----------------- Amortized Fair Cost Value ------------------ Securities held-to-maturity Due in one year or less $ 7,209 $ 7,268 Due after one year through five years 17,396 17,186 Due after five years through ten years 1,650 1,548 Due after ten years 180 180 -------- -------- $ 26,435 $ 26,182 ======== ========
Securities with a carrying value of approximately $36,099,000, $32,677,000 and $28,505,000 were pledged at September 30, 1995, December 31, 1994 and 1993, respectively, to secure trust and public deposits, repurchase agreements, and for other purposes as required or permitted by law. Interest on obligations of state and political subdivisions with an amortized cost of approximately $2,464,000, $3,901,000, $4,555,000 at September 30, 1995, December 31, 1994 and 1993, respectfully, is subject to federal income tax. - ------------------------------------------------------------------------------- (Continued) F - 13 105 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) Proceeds from sales of debt securities and the gross realized gains and losses on such sales were as follows:
----Nine Months Ended---- ----------------- September 30, September 30, ---Year Ended December 31,--- ------------- ------------- ----------------------- 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- Proceeds from sales $ 226 $ - $ - $ - $ - Gross realized gains - - - - Gross realized losses (1) - - - - Net gains and (losses) on calls/prepayments - 2 3 (1) 1
Gross proceeds from the sale of a mutual fund investment during 1994 were $954,000, resulting in a loss of $46,000. Recoveries on a security previously written down resulted in gains of $12,000 in 1993 and $21,000 in 1992. NOTE 3 - LOANS The Bank makes loans to and obtains deposits from customers primarily in Whiteside County, Illinois, and surrounding areas. Most loans are secured by specific items of collateral, including commercial and residential real estate and other business and consumer assets. Loans are summarized as follows:
September 30, ---December 31,--- ------------- ------------ 1995 1994 1993 ---- ---- ----- Real estate - construction $ 283 $ 265 $ 467 Real estate - mortgage 18,939 17,454 16,809 Commercial and agricultural 42,693 39,214 32,775 Installment, net of unearned income 21,991 19,175 22,845 Direct lease financing 1,775 2,060 2,661 ------ ------ ------ 85,681 78,168 75,557 Deferred loan fees - (11) (16) Allowance for loan losses (1,380) (1,446) (1,476) ------ ------ ------ Loans, net $84,301 $76,711 $74,065 ======= ======= =======
Loans in nonaccrual status approximated $196,000, $257,000 and $561,000 at September 30, 1995, and December 31, 1994 and 1993, respectfully. The interest not recorded on nonaccrual loans was not material to the consolidated financial statements. - ------------------------------------------------------------------------------- (Continued) F - 14 106 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 3 - LOANS (Continued) Certain executive officers, directors and companies with which they are affiliated have borrowed funds from the Company. Activity with respect to aggregate loans to these related parties for the nine months ended September 30, 1995 and the year ended December 31, 1994 follows: Total loans at January 1, 1994 $ 2,244 New loans 727 Repayments (572) ------- Totals loans at December 31, 1994 2,399 New loans 1,653 Repayments (1,259) ------- Total loans at September 30, 1995 $ 2,793 =======
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to make loans, standby letters of credit, and unused lines of credit. The Bank's exposure to credit loss in the event of nonperformance by the other parties to these financial instruments is represented by the contractual amount of the instruments. The Bank uses the same credit policy to make such commitments as is used for on-balance-sheet items. These financial instruments are summarized as follows:
----December 31,---- ------------ September 30, ------------- 1995 1994 1993 ---- ---- ---- Financial instruments whose contract amounts represent credit risk: Unused lines of credit $ 2,525 $ 2,168 $ 1,832 Standby letters of credit 566 216 170
Since many commitments to make loans expire without being used, the amounts above do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include commercial and residential real estate and other business and consumer assets. - ------------------------------------------------------------------------------- (Continued) F - 15 107 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized below.
Nine Months Ended September 30, ----Year Ended December 31,---- ------------- ----------------------- 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- Balance at beginning of period $ 1,446 $ 1,476 $ 1,476 $ 1,329 $ 1,337 Provision for loan losses 162 66 66 258 375 Recoveries on loans previously charged off 74 78 98 214 240 Loans charged off (302) (142) (194) (325) (623) ------- ------- ------- ------- ------- Balance at end of period $ 1,380 $ 1,478 $ 1,446 $ 1,476 $ 1,329 ======= ======= ======= ======= =======
Impairment of loans having total carrying values of $259,000 at September 30, 1995 has been recognized in conformity with SFAS 114. The total allowance for loan losses related to these loans was $111,000 at September 30, 1995. NOTE 5 - PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31, 1994 and 1993:
1994 1993 ---- ---- Land $ 682 $ 678 Building and improvements 2,183 2,181 Furniture, equipment and software 1,874 1,674 ------- ------- Total cost 4,739 4,533 Less accumulated depreciation and amortization 2,962 2,758 ------- ------- Net book value $ 1,777 $ 1,775 ======= =======
Depreciation expense was $203,000, $261,000 and $199,000 in 1994, 1993 and 1992, respectively. NOTE 6 - INTANGIBLE ASSETS The intangible value assigned to RFNB's core deposits was $643,000 at the acquisition date. The carrying value of the core deposit intangible asset was $245,000 and $293,000 at December 31, 1994 and 1993, respectively. The core deposit intangible asset was determined in consideration of the value of RFNB's noninterest bearing demand, NOW, savings, and money market deposit accounts. The valuation method estimated annual cash flow differentials of the core deposit interest and handling costs as compared to the interest and handling costs of alternative funds sources, such as certificates of deposit, and then discounted such cash flow differentials to their present value. - ------------------------------------------------------------------------------- (Continued) F - 16 108 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 6 - INTANGIBLE ASSETS (Continued) The core deposit intangible asset is being amortized over ten years on an accelerated method. Amortization charged to expense was $48,000, $80,000 and $86,000 in 1994, 1993 and 1992, respectively. The unamortized excess purchase price resulting from the Company's acquisition of FNBS was $0, $33,000 and $165,000 at September 30, 1995, December 31, 1994 and 1993, respectively, and is included in intangible assets in the balance sheet. Amortization expense was $132,000 for each of the years ended December 31, 1994, 1993 and 1992. NOTE 7 - RETAINED EARNINGS AND CAPITAL REQUIREMENTS Banking regulations limit the amount of dividends that banks may pay without the prior approval of their regulatory agency. The subsidiary Bank had approximately $1,333,000 of retained earnings against which dividends may be charged without prior approval as of December 31, 1994. The Company is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is required to be "Tier 1 Capital". Under these guidelines, the Company's Tier 1 Capital consists of common stockholders' equity (exclusive of unrealized gains and losses, net of tax, on securities available-for-sale) less intangible assets. The Company's total capital consists of Tier 1 Capital plus the allowance for loan losses. Risk-based capital ratios are calculated with the reference to risk-weighted assets including certain off-balance sheet exposures. As of December 31, 1994, the Company's Tier 1 and total capital risk weighted ratios were approximately 16.7% and 17.9, respectively. In addition to the risk-based capital requirements, the Federal Reserve System requires a minimum leverage ratio (Tier 1 Capital to total assets) of 3%, provided that all but the highest rated bank holding companies which are not experiencing or anticipating significant growth are expected to maintain a ratio of 1% to 2% above the stated minimum. The Company's leverage ratio at December 31, 1994 was 10.48% Per the terms of the merger agreement discussed in Note 13, the Company's dividends per share are limited to $.04 per quarter through the completion of the merger transaction. - ------------------------------------------------------------------------------- (Continued) F - 17 109 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 8 - PROFIT SHARING PLAN The Bank maintains a profit sharing plan covering substantially all employees. The plan includes a 401(k) feature. The Bank matches 25% of the first 4% of compensation which each employee voluntarily contributes to the plan. Additional contributions to the plan are determined at the discretion of the Bank's Board of Directors. Profit sharing expense was $151,000, $143,000 and $119,000 for the years ended December 31, 1994 and 1993 and 1992, respectively. NOTE 9 -INCOME TAXES The provision for income taxes for the nine months ended September 30, 1995 and 1994 represents tax expense calculated using annualized rates on taxable income generated during the respective periods. For the nine months ended September 30, 1995 and 1994, the provision for income taxes was less than the amounts computed by applying the statutory corporate tax vote of 34% to income before income taxes. The reasons for the differences are substantially the same as for the year ended December 31, 1994. Beginning in 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method (Accounting Principles Board Opinion No. 11) to an asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The cumulative effect of this change was $202,000 and primarily represents the impact of adjusting deferred taxes to reflect current tax rates and recognizing alternative minimum tax credit carryforwards as deferred tax assets. The provision for federal income taxes for the years ended December 31, 1994, 1993 and 1992, consists of the following:
1994 1993 1992 ---- ---- ---- Currently payable tax $ 520 $ 446 $ 439 Deferred tax (benefit) 72 (80) 18 Change in valuation allowance - - - ----- ----- ----- $ 592 $ 366 $ 457 ===== ===== =====
There was no state income tax expense in 1994, 1993 or 1992. - ------------------------------------------------------------------------------- (Continued) F - 18 110 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (Continued) The consolidated balance sheets include the following amounts of deferred tax assets and liabilities as of December 31, 1994 and 1993:
1994 1993 ---- ---- Deferred tax assets Allowance for loan losses $ 219 $ 229 Deferred loan fees 4 5 Alternative minimum tax credit carryforwards 22 85 Unrealized losses on securities available-for-sale 387 - Other items 80 98 ----- ----- Gross deferred tax assets 712 417 Deferred tax liabilities Depreciation (4) (3) Market discount accretion (4) (3) Leases (25) (47) ----- ------ Gross deferred tax liabilities (33) (53) Valuation allowance on deferred tax assets - - ----- ----- Net deferred tax asset $ 679 $ 364 ===== =====
The provision for income taxes differs from that computed at the statutory federal corporate tax rate as follows:
1994 1993 1992 ---- ---- ---- Income tax calculated at 34% statutory rate $ 832 $ 559 $ 683 Add (subtract) tax effect of: Tax exempt interest income, net of nondeductible interest expense (298) (278) (311) Nondeductible amortization of intangible assets 61 72 74 Low income housing tax credits (38) (15) - Other items, net 35 28 11 ------ ------ ------ Provision for income taxes $ 592 $ 366 $ 457 ====== ====== ======
- ------------------------------------------------------------------------------- (Continued) F - 19 111 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (Continued) Timing differences in the recognition of income and expense for tax and financial reporting purposes resulted in deferred tax expense as follows for the year ended December 31, 1992: Provision for loan losses $ 3 Restricted stock awards 128 Direct lease financing (99) Accretion of market discount on securities (8) Depreciation 11 Other items, net (17) ----- $ 18 =====
NOTE 10 - COMMITMENTS AND CONTINGENCIES From time to time, the Company and the Bank are involved in legal actions arising in the ordinary course of business. Management believes the ultimate liability from such actions, if any, will not have a material effect on the Company's financial condition. NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents: For those short-term instruments, the carrying - ------------------------- amount is a reasonable estimate of fair value. Securities: For securities, fair value equals quoted market price, if - ---------- available. If a quoted market price is not available, fair value is estimated using quoted market prices of similar securities. Loans: The fair value of loans is estimated by discounting future cash - ----- flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. - ------------------------------------------------------------------------------- (Continued) F - 20 112 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Deposits and Repurchase Agreements: The fair value of fixed-maturity - ---------------------------------- certificates of deposit and repurchase agreements is estimated using the rates currently offered for instruments of similar remaining maturities. The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand on the reporting date. Federal Funds Purchased: The carrying value of this short-term financial - ----------------------- instrument is a reasonable estimate of fair value. Accrued Interest Receivable and Payable: The carrying value of these - --------------------------------------- financial instruments is a reasonable estimate of fair value. Commitments to Extend Credit, Standby Letters of Credit and Unused Lines of - -------------------------------------------------------------------------- Credit: The fair value of these commitments is not material. - ------ The carrying values and estimated fair values of the Company's financial instruments at December 31, 1994 and 1993 are as follows:
1 9 9 4 1 9 9 3 ------- ------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets Cash and cash equivalents $ 8,174 $ 8,174 $ 6,421 $ 6,421 Securities 72,773 72,520 77,823 79,697 Mutual fund investment - - 968 968 Loans, less allowance for loan losses 76,711 77,248 74,065 76,657 Interest receivable 1,320 1,320 1,371 1,371 Financial liabilities Deposits with no stated maturities $ 66,860 $ 66,860 $ 73,930 $ 73,930 Deposits with stated maturities and repurchase agreements 76,460 75,954 76,522 76,907 Federal funds purchased 2,100 2,100 - - Interest payable 403 403 393 393
- ------------------------------------------------------------------------------- (Continued) F - 21 113 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 12 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Following is condensed financial information of the Company as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992: CONDENSED BALANCE SHEETS December 31, 1994 and 1993
1994 1993 ---- ---- ASSETS Cash and cash equivalents $ 605 $ 587 Securities available-for-sale 976 - Investment in real estate development 320 331 Excess of purchase price over fair value of assets acquired 33 165 Due from subsidiary 298 194 Investment in subsidiary 14,377 14,716 Other assets 75 146 -------- -------- Total assets $ 16,684 $ 16,139 ======== ======== SHAREHOLDERS' EQUITY $ 16,684 $ 16,139 ======== ========
- ------------------------------------------------------------------------------- (Continued) F - 22 114 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 12 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- Income Dividends from subsidiary $ 1,650 $ 1,000 $ 850 Interest on money market account and securities 50 21 19 ------- ------- ------- Total income 1,700 1,021 869 ------- ------- ------- Expenses Salaries and employee benefits 86 366 56 Amortization of intangible asset 132 132 132 Loss on investment in real estate development 11 12 - Interest expense - - 41 Other 86 237 53 ------- ------- ------- Total expenses 315 747 282 ------- ------- ------- INCOME BEFORE INCOME TAXES, EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 1,385 274 587 Income tax benefit 82 203 47 ------- ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 1,467 477 634 Equity in undistributed earnings of subsidiary 387 946 917 ------- ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 1,854 1,423 1,551 Cumulative effect of a change in accounting for income taxes - 56 - ------- ------- ------- NET INCOME $ 1,854 $ 1,479 $ 1,551 ======= ======= =======
- ------------------------------------------------------------------------------- (Continued) F - 23 115 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 12 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,854 $ 1,479 $ 1,551 Adjustments to reconcile net income to net cash used in operating activities Amortization of intangible asset 132 132 132 Amortization of restricted stock award - - 56 Equity in undistributed net income of subsidiary (387) (946) (917) Loss on investment in real estate development 11 12 - Premium amortization on securities 7 - - (Increase) decrease in due from subsidiary and other assets (5) 58 276 Increase (decrease) in other liabilities - (48) 48 ------- ------- ------- Net cash provided by operating activities 1,612 687 1,146 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available-for-sale (1,004) - - Investment in real estate development - (343) - ------- ------- ------- Net cash used in investing activities (1,004) (343) - CASH FLOWS FROM FINANCING ACTIVITIES Repayment of note payable - - (850) Dividends paid (590) (147) - Purchase and retirement of common stock - - (7) Tax benefit from restricted stock awards - - 64 ------- ------- ------- Net cash used in financing activities (590) (147) (793) ------- ------- ------- Net increase in cash and cash equivalents 18 197 353 Cash and cash equivalents at beginning of year 587 390 37 ------- ------- ------- Cash and cash equivalents at end of year $ 605 $ 587 $ 390 ======= ======= =======
- ------------------------------------------------------------------------------- (Continued) F - 24 116 FIRST STERLING BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 and 1994 December 31, 1994, 1993 and 1992 Information as to December 31, 1993 and 1992 and September 30, 1995 and 1994 is unaudited (Table amounts in thousands of dollars, except per share data) - ------------------------------------------------------------------------------- NOTE 13 - MERGER AGREEMENT On July 24, 1995, the Company signed an agreement to merge with a wholly-owned subsidiary of Mercantile Bancorporation Inc. Terms of the agreement call for the exchange of .1415 shares of Mercantile Bancorporation Inc. common stock for each share of the Company's common stock. The transaction is expected to be accounted for as a pooling of interests. The merger is subject to approval of regulatory authorities and the shareholders of the Company. - ------------------------------------------------------------------------------- F - 25 117 ANNEX A ------- October ----, 1995 Board of Directors First Sterling Bancorp, Inc. 305 4th Avenue Sterling, IL 61081 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, of the merger consideration to be received by the shareholders of First Sterling Bancorp, Inc. ("Sterling") pursuant to the Agreement and Plan of Merger (the "Agreement"), dated July 24, 1995, between Sterling, Mercantile Bancorporation Inc. ("Mercantile"), and its wholly owned subsidiary Mercantile Bancorporation Incorporated of Illinois ("MB Illinois"). The Agreement provides that Sterling will be merged with and into MB Illinois and each outstanding share of Common Stock of Sterling will be converted into and be exchangeable for 0.1415 shares of Common Stock, $5.00 par value, of Mercantile and the associated "Rights" under the "Rights Agreement" as defined in the Agreement. During the course of our engagement, we have, among other things: 1) reviewed the Agreement, the audited financial statements for Sterling for the fiscal year ended December 31, 1994, the unaudited financial statements of Sterling for the two fiscal years ended December 31, 1993 and for Mercantile for the three fiscal years ended December 31, 1994, and the unaudited financial statements for Sterling and Mercantile for the period ended September 30, 1995 as provided to us, as well as other internally generated Sterling reports relating to asset/liability management, asset quality and so forth; 2) reviewed and analyzed other material bearing upon the financial and operating condition of Mercantile and Sterling and material prepared in connection with the proposed transaction; 3) reviewed the operating characteristics of certain other financial institutions deemed relevant to the contemplated transaction; 4) reviewed the nature and terms of recent sale and merger transactions involving banks, bank holding companies and other financial institutions that we consider relevant; 5) reviewed historical and current market data for Mercantile common stock; 6) reviewed financial and other information provided to us by the managements of Mercantile and Sterling; 7) conducted meetings with members of the senior management of Mercantile and Sterling for the purpose of reviewing the future prospects of Mercantile and Sterling; and 8) evaluated the pro forma ownership of Mercantile common stock by Sterling shareholders, relative to the pro forma contribution of Sterling's assets, liabilities, equity and earnings to the pro forma company. A - 1 118 The Chicago Corporation, as part of its investment banking business, is continually engaged in the valuation of banks and bank holding companies and thrifts and thrift holding companies in connection with mergers and acquisitions as well as initial and secondary offerings of securities as well as valuations for other purposes. The Chicago Corporation is a member of all principal U.S. Securities exchanges and in the conduct of our broker-dealer activities may from time to time purchase securities from, and sell securities to, Sterling and Mercantile. In rendering this fairness opinion we have acted exclusively on behalf of the Board of Directors of Sterling and will receive a fee from Sterling for our services. In rendering this opinion, we have relied upon, without independent verification, the accuracy and completeness of the financial and other information and representations provided to us by Mercantile and Sterling. Based on the foregoing and our experience as investment bankers, we are of the opinion that, as of the date hereof, the consideration to be received by the shareholders of Sterling as described in the Agreement, is fair from a financial point of view. Sincerely, A - 2 119 ANNEX B ------- Following is the text of the dissenters' rights provisions set forth at Sections 11.65 and 11.70, respectively, of the Illinois Business Corporation Act of 1983, as amended: Sec. 11.65. Right to Dissent. (a) A shareholder of a corporation is entitled to dissent from, and obtain payment for his or her shares in the event of any of the following corporate actions: (1) consummation of a plan of merger or consolidation or a plan of share exchange to which the corporation is a party if (i) shareholder authorization is required for the merger or consolidation or the share exchange by Section 11.20 or the articles of incorporation or (ii) the corporation is a subsidiary that is merged with its parent or another subsidiary under Section 11.30; (2) consummation of sale, lease or exchange of all, or substantially all, of the property and assets of the corporation other than in the usual and regular course of business; (3) an amendment of the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it: (i) alters or abolishes a preferential right of such shares; (ii) alters or abolishes a right in respect of redemption, including a provision respecting a sinking fund for the redemption or repurchase, of such shares; (iii) in the case of a corporation incorporated prior to January 1, 1982, limits or eliminates cumulative voting rights with respect to such shares; or (4) any other corporate action taken pursuant to a shareholder vote if the articles of incorporation, by-laws, or a resolution of the board of directors provide that shareholders are entitled to dissent and obtain payment for their shares in accordance with the procedures set forth in Section 11.70 or as may be otherwise provided in the articles, by-laws or resolution. (b) A shareholder entitled to dissent and obtain payment for his or her shares under this Section may not challenge the corporate action creating his or her entitlement unless the action is fraudulent with respect to the shareholder or the corporation or constitutes a breach of a fiduciary duty owed to the shareholder. (c) A record owner of shares may assert dissenters' rights as to fewer than all the shares recorded in such person's name only if such person dissents with respect to all shares beneficially owned by any one person and notifies the corporation in writing of the name and address of each person on whose behalf the record owner asserts dissenters' rights. The rights of a partial dissenter are determined as if the shares as to which dissent is made and the other shares were recorded in the names of different shareholders. A beneficial owner of shares who is not the record owner may assert dissenters' rights as to shares held on such person's behalf only if the beneficial owner submits to the corporation the record owner's written consent to the dissent before or at the same time the beneficial owner asserts dissenters' rights. Sec. 11.70. Procedure to Dissent. (a) If the corporate action giving rise to the right to dissent is to be approved at a meeting of shareholders, the notice of meeting shall inform the shareholders of their right to dissent and the procedure to dissent. If, prior to the meeting, the corporation furnishes to the shareholders material information with respect to the transaction that will objectively enable a shareholder to vote on the transaction and to determine whether or not to exercise dissenters' rights, a shareholder may assert dissenter' rights only if the shareholder delivers to the corporation before the vote is taken a written demand for payment for his or her shares if the proposed action is consummated, and the shareholder does not vote in favor of the proposed action. (b) If the corporate action giving rise to the right to dissent is not to be approved at a meeting of shareholders, the notice to shareholders describing the action taken under Section 11.30 or Section 7.10 shall inform the shareholders of their right to dissent and the procedure to dissent. If, prior to or concurrently with the notice, the corporation furnishes to the shareholders material information with respect to the transaction that will objectively enable a shareholder to determine whether or not to exercise B - 1 120 dissenters' rights, a shareholder may assert dissenter's rights only if he or she delivers to the corporation within 30 days from the date of mailing the notice a written demand for payment for his or her shares. (c) Within 10 days after the date on which the corporate action giving rise to the right to dissent is effective or 30 days after the shareholder delivers to the corporation the written demand for payment, whichever is later, the corporation shall send each shareholder who has delivered a written demand for payment a statement setting forth the opinion of the corporation as to the estimated fair value of the shares, the corporation's latest balance sheet as of the end of a fiscal year ending not earlier than 16 months before the delivery of the statement, together with the statement of income for that year and the latest available interim financial statements, and either a commitment to pay for the shares of the dissenting shareholder at the estimated fair value thereof upon transmittal to the corporation of the certificate or certificates, or other evidence of ownership, with respect to the shares, or instructions to the dissenting shareholder to sell his or her shares within 10 days after delivery of the corporation's statement to the shareholder. The corporation may instruct the shareholder to sell only if there is a public market for the shares at which the shares may be readily sold. If the shareholder does not sell within that 10 day period after being so instructed by the corporation, for purposes of this Section the shareholder shall be deemed to have sold his or her shares at the average closing price of the shares, if listed on a national exchange, or the average of the bid and asked price with respect to the shares quoted by a principal market maker, if not listed on a national exchange, during that 10 day period. (d) A shareholder who makes written demand for payment under this Section retains all other rights of a shareholder until those rights are cancelled or modified by the consummation of the proposed corporate action. Upon consummation of that action, the corporation shall pay to each dissenter who transmits to the corporation the certificate or other evidence of ownership of the shares the amount the corporation estimates to be the fair value of the shares, plus accrued interest, accompanied by a written explanation of how the interest was calculated. (e) If the shareholder does not agree with the opinion of the corporation as to the estimated fair value of the shares or the amount of interest due, the shareholder, within 30 days from the delivery of the corporation's statement of value, shall notify the corporation in writing of the shareholder's estimated fair value and amount of interest due and demand payment for the difference between the shareholder's estimate of fair value and interest due and the amount of the payment by the corporation or the proceeds of sale by the shareholder, whichever is applicable because of the procedure for which the corporation opted pursuant to subsection (c). (f) If, within 60 days from delivery to the corporation of the shareholder notification of estimate of fair value of the shares and interest due, the corporation and the dissenting shareholder have not agreed in writing upon the fair value of the shares and interest due, the corporation shall either pay the difference in value demanded by the shareholder, with interest, or file a petition in the circuit court of the county in which either the registered office or the principal office of the corporation is located, requesting the court to determine the fair value of the shares and interest due. The corporation shall make all dissenters, whether or not residents of this State, whose demands remain unsettled parties to the proceeding as an action against their shares and all parties shall be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. Failure of the corporation to commence an action pursuant to this Section shall not limit or affect the right of the dissenting shareholders to otherwise commence an action as permitted by law. (g) The jurisdiction of the court in which the proceeding is commenced under subsection (f) by a corporation is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the power described in the order appointing them, or in any amendment to it. B - 2 121 (h) Each dissenter made a party to the proceeding is entitled to judgment for the amount, if any, by which the court finds that the fair value of his or her shares, plus interest, exceeds the amount paid by the corporation or the proceeds of sale by the shareholder, whichever amount is applicable. (i) The court, in a proceeding commenced under subsection (f), shall determine all costs of the proceeding, including the reasonable compensation and expenses of the appraisers, if any, appointed by the court under subsection (g), but shall exclude the fees and expenses of counsel and experts for the respective parties. If the fair value of the shares as determined by the court materially exceeds the amount which the corporation estimated to be the fair value of the shares or if no estimate was made in accordance with subsection (c), then all or any part of the costs may be assessed against the corporation. If the amount which any dissenter estimated to be the fair value of the shares materially exceeds the fair value of the shares as determined by the court, then all or any part of the costs may be assessed against that dissenter. The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable, as follows: (1) Against the corporation and in favor of any or all dissenters if the court finds that the corporation did not substantially comply with the requirements of subsections (a), (b), (c), (d), or (f). (2) Against either the corporation or a dissenter and in favor of any other party if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Section. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and that the fees for those services should not be assessed against the corporation, the court may award to that counsel reasonable fees to be paid out of the amounts awarded to the dissenters who are benefited. Except as otherwise provided in this Section, the practice, procedure, judgment and costs shall be governed by the Code of Civil Procedure. (j) As used in this Section: (1) "Fair value", with respect to a dissenter's shares, means the value of the shares immediately before the consummation of the corporate action to which the dissenter objects excluding any appreciation or depreciation in anticipation of the corporate action, unless exclusion would be inequitable. (2) "Interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. B - 3 122 PROXY FIRST STERLING BANCORP, INC. 305 4TH AVENUE STERLING, ILLINOIS 61081 FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD DECEMBER ---, 1995 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned shareholder(s) of FIRST STERLING BANCORP, INC. ("First Sterling"), does hereby nominate, constitute and appoint - ------------------------------ and ------------------------------ or each of them (with full power to act alone), true and lawful proxies and attorneys-in-fact, with full power of substitution, for the undersigned and in the name, place and stead of the undersigned to vote all of the shares of Common Stock, $1.00 par value, of First Sterling standing in the name of the undersigned on its books at the close of business on November ---, 1995 at the Special Meeting of Shareholders to be held at the offices of First Sterling, 305 4th Avenue, Sterling, Illinois, on --------------------, December ---, 1995, at ----- .m. Central Time, and at any adjournments or postponements thereof, with all the powers the undersigned would possess if personally present, as follows: 1. To consider and vote upon the adoption and approval of the Agreement and Plan of Merger dated July 24, 1995 (the "Merger Agreement"), pursuant to which First Sterling will be merged with and into Mercantile Bancorporation Incorporated of Illinois, a Missouri corporation and wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), in a transaction which would result in the business and operations of First Sterling being continued through such wholly owned subsidiary, and whereby, upon consummation of the merger, each share of First Sterling Common Stock will be converted into the right to receive 0.1415 of a share of MBI Common Stock, as set forth in detail in the accompanying Proxy Statement/Prospectus. / / FOR / / AGAINST / / ABSTAIN 2. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The undersigned hereby revokes any other proxies to vote at such meeting and hereby ratifies and confirms all that the proxies and attorneys-in-fact, or each of them, appointed hereunder may lawfully do by virtue hereof. Said proxies and attorneys-in-fact, without limiting their general authority, are specifically authorized to vote in accordance with their best judgment with respect to all matters incident to the conduct of the Special Meeting. (PLEASE SIGN AND DATE ON REVERSE SIDE) (Continued on Reverse Side) THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL LISTED ABOVE. Dated: --------------- ------------------------- Signature of Shareholder ------------------------- Signature of Shareholder When signing as an attorney, executor, administrator, trustee or guardian, please give full title. If more than one person holds the power to vote the same shares, all must sign. All joint owners must sign. The undersigned hereby acknowledges receipt of the Notice of Special Meeting and the Proxy Statement/Prospectus (with all enclosures and attachments) dated - --------------, 1995, relating to the Special Meeting. PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE. 123 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ------------------------------------------ Item 20. Indemnification of Officers and Directors - --------------------------------------------------- Sections 351.355(1) and (2) of The General and Business Corporation Law of the State of Missouri provide that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of an action or suit by or in the right of the corporation, the corporation may not indemnify such persons against judgments and fines and no person shall be indemnified as to any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the court in which the action or suit was brought determines upon application that such person is fairly and reasonably entitled to indemnity for proper expenses. Section 351.355(3) provides that, to the extent that a director, officer, employee or agent of the corporation has been successful in the defense of any such action, suit or proceeding or any claim, issue or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred in connection with such action, suit or proceeding. Section 351.355(7) provides that a corporation may provide additional indemnification to any person indemnifiable under subsection (1) or (2), provided such additional indemnification is authorized by the corporation's articles of incorporation or an amendment thereto or by a shareholder-approved bylaw or agreement, and provided further that no person shall thereby be indemnified against conduct which was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct or which involved an accounting for profits pursuant to Section 16(b) of the Securities Exchange Act of 1934. Article 12 of the Restated Articles of Incorporation of MBI provides that MBI shall extend to its directors and executive officers the indemnification specified in subsections (1) and (2) and the additional indemnification authorized in subsection (7) and that it may extend to other officers, employees and agents such indemnification and additional indemnification. Pursuant to directors' and officers' liability insurance policies, with total annual limits of $30,000,000, MBI's directors and officers are insured, subject to the limits, retention, exceptions and other terms and conditions of such policy, against liability for any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the directors or officers of MBI, individually or collectively, or any matter claimed against them solely by reason of their being directors or officers of MBI. II-1 124 Item 21. Exhibits and Financial Statement Schedules - ---------------------------------------------------- A. Exhibits. See Exhibit Index. ---------- B. Financial Statement Schedules. Not Applicable. ------------------------------ Item 22. Undertakings - ---------------------- (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of MBI pursuant to the foregoing provisions, or otherwise, MBI has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by MBI of expenses incurred or paid by a director, officer or controlling person of MBI in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, MBI will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (2) MBI hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of MBI's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) MBI hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (4) MBI undertakes that every prospectus (i) that is filed pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415 (Section 230.415 of this chapter), will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) MBI hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in the documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. II-2 125 (6) MBI hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. (7) MBI hereby undertakes: (a) To file during any period in which offers and sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof), which individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (b) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 126 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, MBI has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri, on October 26, 1995. MERCANTILE BANCORPORATION INC. By: /s/ Thomas H. Jacobsen ------------------------------- Thomas H. Jacobsen Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned officers and directors of Mercantile Bancorporation Inc., hereby severally and individually constitute and appoint Thomas H. Jacobsen and John Q. Arnold, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Registration Statement on Form S-4 and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signature Title Date ---------- ------ ---- /s/ Thomas H. Jacobsen Chairman of the Board, October 26, 1995 - ------------------------------------------ Thomas H. Jacobsen President, Chief Executive Principal Executive Officer Officer and Director /s/ John Q. Arnold Senior Executive Vice President and October 26, 1995 - ------------------------------------------ John Q. Arnold Chief Financial Officer Principal Financial Officer /s/ Michael T. Normile Senior Vice President - Finance October 26, 1995 - ------------------------------------------ Michael T. Normile and Control Principal Accounting Officer /s/ Richard P. Conerly Director October 26, 1995 - ------------------------------------------ Richard P. Conerly II-4 127 Signature Title Date ---------- ------ ---- /s/ Harry M. Cornell, Jr. Director October 26, 1995 - ------------------------------------------ Harry M. Cornell, Jr. /s/ Earl K. Dille Director October 26, 1995 - ------------------------------------------ Earl K. Dille /s/ William A. Hall Director October 26, 1995 - ------------------------------------------ William A. Hall /s/ Thomas A. Hays Director October 26, 1995 - ------------------------------------------ Thomas A. Hays /s/ William G. Heckman Director October 26, 1995 - ------------------------------------------ William G. Heckman /s/ Frank Lyon, Jr. Director October 26, 1995 - ------------------------------------------ Frank Lyon, Jr. /s/ Charles H. Price II Director October 26, 1995 - ------------------------------------------ Charles H. Price II /s/ Harvey Saligman Director October 26, 1995 - ------------------------------------------ Harvey Saligman Director October --, 1995 - ------------------------------------------ Craig D. Schnuck Director October --, 1995 - ------------------------------------------ Robert L. Stark /s/ Patrick T. Stokes Director October 26, 1995 - ------------------------------------------ Patrick T. Stokes /s/ Francis A. Stroble Director October 26, 1995 - ------------------------------------------ Francis A. Stroble /s/ John A. Wright Director October 26, 1995 - ------------------------------------------ John A. Wright
II-5 128 EXHIBIT INDEX
Exhibit Number Description Page - ------ ----------------- 2.1 Agreement and Plan of Merger dated as of July 24, 1995 by and among MBI, Merger Sub and First Sterling. 2.2 Form of Voting Agreements dated as of July 24, 1995 and entered into by and between MBI and certain of the shareholders of First Sterling. 3.1 MBI's Restated Articles of Incorporation, as amended and currently in effect, filed as Exhibit 3.1 to MBI's Report on Form 10-Q for the quarter ended June 30, 1994, incorporated herein by reference. 3.2 MBI's By-Laws, as amended and currently in effect, filed as Exhibit 3.2 to MBI's Registration Statement No. 33-57489, are incorporated herein by reference. 4.1 Form of Indenture Regarding Subordinated Securities between MBI and The First National Bank of Chicago, Trustee, filed as Exhibit 4.1 to MBI's Report on Form 8-K dated September 24, 1992, is incorporated herein by reference. 4.2 Rights Agreement dated as of May 23, 1988 between MBI and Mercantile Bank, as Rights Agent (including as exhibits thereto the form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and the form of Right Certificate), filed as Exhibits 1 and 2 to MBI's Registration Statement No. 0-6045 on Form 8-A, dated May 24, 1988, is incorporated herein by reference. 4.3 Certificate of Designation, Preferences, and Relative Rights, Qualifications, Limitations and Restrictions of the Series B-1 Preferred Stock of MBI, filed as Exhibit 4-1 to MBI's Report on Form 10-Q for the quarter ended March 31, 1995 (File No. 1-11792), is incorporated herein by reference. 4.4 Certificate of Designation, Preferences, and Relative Rights, Qualifications, Limitations and Restrictions of the Series B-2 Preferred Stock of MBI, filed as Exhibit 4-2 to MBI's Report on Form 10-Q for the quarter ended March 31, 1995 (File No. 1-11792), is incorporated herein by reference. 5.1 Opinion of Thompson & Mitchell as to the legality of the securities being registered. 8.1 Opinion of Thompson & Mitchell regarding certain tax matters in the Merger. 10.1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10-3 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.2 Mercantile Bancorporation Inc. Amended and Restated Retirement Plan for Directors filed as Exhibit 10 to MBI's Report on Form 10-Q for the quarter ended March 31, 1995 (File No. 1-11792), is incorporated herein by reference. II-6 129 10.3 The Mercantile Bancorporation Inc. Executive Incentive Compensation Plan, filed as Appendix C to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders is incorporated herein by reference. 10.4 The Mercantile Bancorporation Inc. Employee Stock Purchase Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.5 The Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K for the year ended December 31, 1990 (File No. 1-11792), is incorporated herein by reference. 10.6 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-6 to MBI's Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.7 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan, filed as Appendix B to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. 10.8 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan for Non-Employee Directors, filed as Appendix E to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. 10.9 The Mercantile Bancorporation Inc. Voluntary Deferred Compensation Plan, filed as Appendix D to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. 10.10 Form of Employment Agreement for Thomas H. Jacobsen, as amended, filed as Exhibit 10-8 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.11 Form of Employment Agreement for John W. McClure, W. Randolph Adams, John Q. Arnold and Certain Other Executive Officers, as amended, filed as Exhibit 10-9 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.12 Form of Change of Control Employment Agreement for John W. McClure, W. Randolph Adams, John Q. Arnold and Certain Other Executive Officers, filed as Exhibit 10-10 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.13 Agreement and Plan of Reorganization dated August 17, 1993, by and among MBI and United Postal Bancorp, Inc., filed as Exhibit 2.1 to MBI's Registration Statement No. 33-50981, is incorporated herein by reference. 10.14 Amended and Restated Agreement and Plan of Reorganization dated as of December 2, 1994 by and among MBI and TCBankshares, Inc., filed as Exhibit 2.1 to MBI's Report on Form 8-K dated December 21, 1994, is incorporated herein by reference. II-7 130 10.15 The Mercantile Bancorporation Inc. Supplemental Retirement Plan, filed as Exhibit 10-12 to MBI's Report on Form 10-K for the year ended December 31, 1992 (File No. 1-11792), is incorporated herein by reference. 10.16 Agreement and Plan of Reorganization dated as of August 4, 1995 by and between MBI and Hawkeye Bancorporation, filed as Exhibit 2.1 to MBI's Registration Statement No. 33-63609, is incorporated herein by reference. 23.1 Consent of KPMG Peat Marwick LLP with regard to the use of its reports on MBI's financial statements. 23.2 Consent of Crowe, Chizek and Company with regard to the use of its reports on First Sterling's financial statements. 23.3 Consent of Deloitte & Touche LLP with regard to the use of its reports on Hawkeye's financial statements. 23.4 Consent of The Chicago Corporation. 23.5 Consent of Thompson & Mitchell (included in Exhibit 5.1). 24.1 Power of Attorney (included on signature page hereto).
II-8 EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ AGREEMENT AND PLAN OF MERGER between MERCANTILE BANCORPORATION INC. and MERCANTILE BANCORPORATION INCORPORATED OF ILLINOIS as Buyers, and FIRST STERLING BANCORP, INC. as Seller ---------------------------- Dated July 24, 1995 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 2
TABLE OF CONTENTS Page ---- ARTICLE I THE MERGER. . . . . . . . . . . . . . . . . . . . 1 1.01. The Merger. . . . . . . . . . . . . . . . . . . . 1 1.02. Closing . . . . . . . . . . . . . . . . . . . . . 1 1.03. Effective Time. . . . . . . . . . . . . . . . . . 1 1.04. Additional Actions. . . . . . . . . . . . . . . . 2 1.05. Articles of Incorporation and Bylaws. . . . . . . 2 1.06. Boards of Directors and Officers. . . . . . . . . 2 1.07. Conversion of Securities. . . . . . . . . . . . . 2 1.09. Dissenting Shares.. . . . . . . . . . . . . . . . 4 1.10. No Fractional Shares. . . . . . . . . . . . . . . 4 1.11. Closing of Stock Transfer Books . . . . . . . . . 5 1.12. Anti-Dilution Adjustments . . . . . . . . . . . . 5 1.13. Reservation of Right to Revise Transaction. . . . 5 ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. . . . . . . . . . . . . . . . . . . . . . 6 2.01. Organization and Authority. . . . . . . . . . . . 6 2.02. Subsidiaries. . . . . . . . . . . . . . . . . . . 6 2.03. Capitalization. . . . . . . . . . . . . . . . . . 7 2.04. Authorization . . . . . . . . . . . . . . . . . . 7 2.05. Seller Financial Statements.. . . . . . . . . . . 8 2.06. Seller Reports. . . . . . . . . . . . . . . . . . 9 2.07. Title to and Condition of Assets. . . . . . . . . 9 2.08. Real Property . . . . . . . . . . . . . . . . . . 10 2.09. Taxes . . . . . . . . . . . . . . . . . . . . . . 11 2.10. Material Adverse Change . . . . . . . . . . . . . 12 2.11. Loans, Commitments and Contracts. . . . . . . . . 12 2.12. Absence of Defaults . . . . . . . . . . . . . . . 15 2.13. Litigation and Other Proceedings. . . . . . . . . 15 2.14. Directors' and Officers' Insurance. . . . . . . . 15 2.15. Compliance with Laws. . . . . . . . . . . . . . . 16 2.16. Labor . . . . . . . . . . . . . . . . . . . . . . 17 2.17. Material Interests of Certain Persons . . . . . . 18 2.18. Allowance for Loan and Lease Losses; Non-Performing Assets . . . . . . . . . . . . . . 18 2.19. Employee Benefit Plans. . . . . . . . . . . . . . 19 2.20. Conduct of Seller to Date . . . . . . . . . . . . 20 2.21. Absence of Undisclosed Liabilities. . . . . . . . 21 2.22. Proxy Statement, Etc. . . . . . . . . . . . . . . 22 2.23. Registration Obligations. . . . . . . . . . . . . 22 2.24. Tax and Regulatory Matters. . . . . . . . . . . . 22 2.25. Brokers and Finders . . . . . . . . . . . . . . . 23 2.26. Interest Rate Risk Management Instruments . . . . 23 3 Page ---- ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYERS. . . . . . . . . . . . . . . . . . . . . . 23 3.01. Organization and Authority. . . . . . . . . . . . 23 3.02. Capitalization of Mercantile. . . . . . . . . . . 23 3.03. Authorization . . . . . . . . . . . . . . . . . . 24 3.04. Mercantile Financial Statements . . . . . . . . . 25 3.05. Mercantile Reports. . . . . . . . . . . . . . . . 26 3.06. Material Adverse Change . . . . . . . . . . . . . 26 3.07. Legal Proceedings or Other Adverse Facts. . . . . 26 3.08. Registration Statement, Etc.. . . . . . . . . . . 26 3.09. Brokers and Finders . . . . . . . . . . . . . . . 27 ARTICLE IV CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME. . . . . . . . . . . . . . . . . . . . . . . 27 4.01. Conduct of Businesses Prior to the Effective Time 27 4.02. Forbearances of Seller. . . . . . . . . . . . . . 27 4.03. Forbearances of Buyers. . . . . . . . . . . . . . 30 ARTICLE V ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . 30 5.01. Access and Information. . . . . . . . . . . . . . 30 5.02. Registration Statement; Regulatory Matters. . . . 31 5.03. Shareholder Approval. . . . . . . . . . . . . . . 32 5.04. Current Information . . . . . . . . . . . . . . . 32 5.05. Conforming Entries. . . . . . . . . . . . . . . . 33 5.06. Environmental Reports . . . . . . . . . . . . . . 34 5.07. Agreements of Affiliates. . . . . . . . . . . . . 34 5.08. Expenses. . . . . . . . . . . . . . . . . . . . . 35 5.09. Miscellaneous Agreements. . . . . . . . . . . . . 35 5.10. Employee Agreements and Benefits. . . . . . . . . 36 5.11. Press Releases. . . . . . . . . . . . . . . . . . 36 5.12. State Takeover Statutes . . . . . . . . . . . . . 36 5.13. Directors' and Officers' Indemnification. . . . . 36 5.14. Tax Opinion Certificates. . . . . . . . . . . . . 37 5.15. Best Efforts to Insure Pooling. . . . . . . . . . 37 ARTICLE VI CONDITIONS. . . . . . . . . . . . . . . . . . . . 37 6.01. Conditions to Each Party's Obligation To Effect the Merger. . . . . . . . . . . . . . . . . . . . 37 6.02. Conditions to Obligations of Seller To Effect the Merger. . . . . . . . . . . . . . . . . . . . 38 6.03. Conditions to Obligations of Buyers To Effect the Merger. . . . . . . . . . . . . . . . . . . . 38 - ii - 4 Page ---- ARTICLE VII TERMINATION, AMENDMENT AND WAIVER . . . . . . . . 39 7.01. Termination . . . . . . . . . . . . . . . . . . . 39 7.02. Effect of Termination . . . . . . . . . . . . . . 40 7.03. Amendment . . . . . . . . . . . . . . . . . . . . 40 7.04. Waiver. . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE VIII GENERAL PROVISIONS. . . . . . . . . . . . . . . . 41 8.01. Survival of Representations, Warranties and Agreements; Updating Schedules. . . . . . . . . . 41 8.02. Indemnification . . . . . . . . . . . . . . . . . 41 8.03. No Assignment; Successors and Assigns . . . . . . 42 8.04. No Implied Waiver . . . . . . . . . . . . . . . . 42 8.05. Headings. . . . . . . . . . . . . . . . . . . . . 42 8.06. Entire Agreement. . . . . . . . . . . . . . . . . 42 8.07. Counterparts. . . . . . . . . . . . . . . . . . . 42 8.08. Notices . . . . . . . . . . . . . . . . . . . . . 42 8.09. Severability. . . . . . . . . . . . . . . . . . . 44 Exhibit A Form of Letter of Transmittal Exhibit B Form of Affiliate Agreement Exhibit C Shareholder Tax Certificate Exhibit D Officer/Director Tax Certificate Exhibit E Form of Opinion of Counsel of Mercantile Exhibit F Form of Opinion of Counsel of Seller - iii - 5 AGREEMENT AND PLAN OF MERGER ---------------------------- This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into on July 24, 1995 by and among MERCANTILE BANCORPORATION INC., a Missouri corporation ("Mercantile"), MERCANTILE BANCORPORATION INCORPORATED OF ILLINOIS, a Missouri corporation ("Merger Sub" and, collectively with Mercantile, the "Buyers") and FIRST STERLING BANCORP, INC., an Illinois corporation ("Seller"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Merger Sub is a wholly-owned subsidiary of Mercantile, and each of Mercantile and Merger Sub is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"); and WHEREAS, Seller is registered as a bank holding company under the BHCA; and WHEREAS, the respective Boards of Directors of Seller and Merger Sub and the Executive Committee of the Board of Directors of Mercantile have approved the merger (the "Merger") of Seller with and into Merger Sub pursuant to the terms and subject to the conditions of this Agreement; and WHEREAS, the parties desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the transactions contemplated by this Agreement. NOW THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: ARTICLE I --------- THE MERGER 1.01. The Merger. (a) Subject to the terms and ---------- conditions of this Agreement, Seller shall be merged with and into Merger Sub in accordance with Chapter 351 of the Missouri Revised Statutes (the "Missouri Statute") and Article 11 of the Illinois Business Corporation Act (the "Illinois Act"), and the separate corporate existence of Seller shall cease. Merger Sub shall be the surviving corporation of the Merger (sometimes referred to herein as the "Surviving Corporation") and shall continue to be governed by the laws of the State of Missouri. 1.02. Closing. The closing (the "Closing") of the ------- Merger shall take place at 10:00 a.m., local time, on the date that the Effective Time (as defined in Section 1.03) occurs (the "Closing Date"). 1.03. Effective Time. The Merger shall become -------------- effective (the "Effective Time") upon the issuance of the certificate of merger by the Secretary of State of the State of Missouri. Buyers shall cause articles of merger to be filed with the Secretary of State of the 6 State of Missouri and a certificate of merger to be filed with the Secretary of State of the State of Illinois, as soon as practicable after the Closing. Unless otherwise mutually agreed in writing by Buyers and Seller, subject to the terms and conditions of this Agreement, the Effective Time shall occur on such date as Buyers shall notify Seller in writing (such notice to be at least five business days in advance of the Effective Time), which date shall be the last to occur of (i) January 2, 1996 and (ii) the first business day of the first full calendar month commencing at least five business days following the satisfaction of all conditions set forth in Section 6.01(a) and 6.01(b) (the "Approval Date"). 1.04. Additional Actions. If, at any time after the ------------------ Effective Time, either of the Buyers shall consider or be advised that any further deeds, assignments or assurances or any other acts are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, all right, title or interest in, to or under any of the rights, properties or assets of Seller or (b) otherwise carry out the purposes of this Agreement, Seller and its respective officers and directors, shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such deeds, assignments or assurances and to do all acts necessary or desirable to vest, perfect or confirm title and possession to such rights, properties or assets in the Surviving Corporation and otherwise to carry out the purposes of this Agreement, and the officers and directors of the Surviving Corporation are authorized in the name of Seller or otherwise to take any and all such action. 1.05. Articles of Incorporation and Bylaws. The ------------------------------------ Articles of Incorporation and Bylaws of Merger Sub in effect immediately prior to the Effective Time shall be the Articles of Incorporation and Bylaws of the Surviving Corporation following the Merger, until otherwise amended or repealed. 1.06. Boards of Directors and Officers. The -------------------------------- directors and officers of Merger Sub immediately prior to the Effective Time shall be the directors and officers, respectively, of the Surviving Corporation following the Merger, and such directors and officers shall hold office in accordance with the Surviving Corporation's Bylaws and applicable law. 1.07. Conversion of Securities. At the Effective ------------------------ Time, by virtue of the Merger and without any action on the part of Buyers, Seller or the holder of any of the following securities: (a) Each share of the common stock, $1.00 par value, of Merger Sub that is issued and outstanding immediately prior to the Effective Time shall remain outstanding and shall be unchanged after the Merger and shall thereafter constitute all of the issued and outstanding capital stock of the Surviving Corporation; and (b) Each share of common stock, $1.00 par value, of Seller ("Seller Common Stock") issued and outstanding at the Effective Time (other than any shares held by Seller, Mercantile or any of their respective wholly owned subsidiaries (in each case other than in a fiduciary capacity or as a result of debts previously contracted), which shall be cancelled, and other than any Dissenting Shares (as - 2 - 7 defined in Section 1.09)), shall cease to be outstanding and shall be converted into and become the right to receive 0.1415 shares (the "Exchange Ratio") of common stock, $5.00 par value, of Mercantile and the associated rights under the "Mercantile Rights Agreement," as such term is defined in Section 3.02 hereof ("Mercantile Common Stock"). The Exchange Ratio was computed by aggregating the total number of shares of Seller Common Stock that were issued and outstanding on the date of this Agreement with the total number of shares of Seller Common Stock that are reserved for issuance pursuant to options, warrants, scrip, rights to subscribe to, calls or commitments relating to, or securities or rights convertible into, Seller Common Stock and dividing such number of shares of Seller Common Stock into 521,424, the aggregate number of shares of Mercantile Common Stock to be issued in the Merger. 1.08. Exchange Procedures. ------------------- (a) As soon as practicable following, and in any event no more than five (5) business days after the Effective Time, Mercantile shall mail or cause to be mailed to holders of record of certificates formerly representing shares of Seller Common Stock (the "Certificates"), as identified on the Seller Shareholder List, as provided pursuant to Section 1.11 hereof, letters advising them of the effectiveness of the Merger and instructing them to tender such Certificates to Mercantile or its duly appointed agent (such agent to be reasonably acceptable to Seller) as exchange agent (the "Exchange Agent"), pursuant to the letter of transmittal (in substantially the form set forth in Exhibit A to this Agreement) enclosed therewith. --------- (b) Subject to Section 1.11, after the Effective Time, each previous holder of a Certificate that surrenders such Certificate to Exchange Agent, with a properly completed and executed letter of transmittal with respect to such Certificate will be entitled to a certificate or certificates representing the number of full shares of Mercantile Common Stock, into which the Certificate so surrendered shall have been converted pursuant to this Agreement, and any distribution theretofore declared and not yet paid with respect to such shares of Mercantile Common Stock and any amount due with respect to fractional shares, without interest. Such shares of Mercantile Common Stock, any amount due with respect to fractional shares and any distribution shall be delivered by Mercantile to each such holder as promptly as practicable after such surrender. (c) Each outstanding Certificate shall until duly surrendered to Buyers be deemed to evidence ownership of the consideration into which the stock previously represented by such Certificate shall have been converted pursuant to this Agreement. (d) After the Effective Time, holders of Certificates shall cease to have rights with respect to the stock previously represented by such Certificates, and their sole rights shall be to exchange such Certificates for the consideration provided for in this Agreement. After the closing of the transfer books as described in Section 1.11 hereof, there shall be no further transfer on the records of Seller of Certificates, and if such Certificates are presented to Seller for transfer, they shall be cancelled against - 3 - 8 delivery of the consideration provided therefor in this Agreement. Buyers shall not be obligated to deliver the consideration to which any former holder of Seller Common Stock is entitled as a result of the Merger until such holder surrenders the Certificates as provided herein. No dividends declared on Mercantile Common Stock will be remitted to any person entitled to receive Mercantile Common Stock under this Agreement until such person surrenders the Certificate representing the right to receive such Mercantile Common Stock, at which time such dividends shall be remitted to such person, without interest and less any taxes that may have been imposed thereon. Certificates surrendered for exchange by an affiliate shall not be exchanged until Buyers have received a written agreement from such affiliate as required pursuant to Section 5.07 hereof. No party to this Agreement nor any affiliate thereof shall be liable to any holder of stock represented by any Certificate for any consideration paid to a public official pursuant to applicable abandoned property, escheat or similar laws. 1.09. Dissenting Shares. ----------------- (a) "Dissenting Shares" means any shares held by any holder who becomes entitled to payment of the fair value of such shares under Section 11.70 of the Illinois Act. Any holders of Dissenting Shares shall be entitled to payment for such shares only to the extent permitted by and in accordance with the provisions of such law and Mercantile shall cause the Surviving Corporation to pay such consideration with funds provided by Mercantile. (b) Each party hereto shall give the other prompt notice of any written demands for the payment of the fair value of any shares, withdrawals of such demands, and any other instruments, served pursuant to the Illinois Act received by such party, and Seller shall give Mercantile the opportunity to participate in all negotiations and proceedings with respect to such demands. Seller shall not voluntarily make any payment with respect to any demands for payment of fair value and shall not, except with the prior written consent of Mercantile, which consent shall not be unreasonably withheld, settle or offer to settle any such demands. 1.10. No Fractional Shares. Notwithstanding any other -------------------- provision of this Agreement, neither certificates nor scrip for fractional shares of Mercantile Common Stock shall be issued in the Merger. Each holder who otherwise would have been entitled to a fraction of a share of Mercantile Common Stock shall receive in lieu thereof cash (without interest) in an amount determined by multiplying the fractional share interest to which such holder would otherwise be entitled by the closing stock price of Mercantile Common Stock on the New York Stock Exchange ("NYSE") Composite Tape as reported in The Wall Street Journal on the ----------------------- Closing Date. No such holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share. - 4 - 9 1.11. Closing of Stock Transfer Books. ------------------------------- (a) The stock transfer books of Seller shall be closed at the end of business on the business day immediately preceding the Closing Date. In the event of a transfer of ownership of Seller Common Stock which is not registered in the transfer records prior to the closing of such record books, the shares of Mercantile Common Stock issuable with respect to such stock may be delivered to the transferee, if the Certificate or Certificates representing such stock is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and all applicable stock transfer taxes are paid. (b) At the Effective Time, Seller shall provide Buyer with a complete and verified list of registered holders of Seller Common Stock based upon its stock transfer books as of the closing of said transfer books (the "Seller Shareholder List"). Buyers shall be entitled to rely upon the Seller Shareholder List to establish the identity of those persons entitled to receive consideration specified in this Agreement, which List shall be conclusive with respect thereto. In the event of a dispute with respect to ownership of stock represented by any Certificate, Buyers shall be entitled to deposit any consideration represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto. 1.12. Anti-Dilution Adjustments. If between the date of ------------------------- this Agreement and the Effective Time a share of Mercantile Common Stock shall be changed into a different number of shares of Mercantile Common Stock or a different class of shares by reason of reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then appropriate and proportionate adjustment or adjustments will be made to the Exchange Ratio such that each shareholder of Seller shall be entitled to receive such number of shares of Mercantile Common Stock or other securities as such shareholder would have received pursuant to such reclassification, recapitalization, split-up, combination, exchange of shares or readjustment or as a result of such stock dividend had the record date therefor been immediately following the Effective Time. 1.13. Reservation of Right to Revise Transaction. ------------------------------------------ Buyers may at any time change the method of effecting the acquisition of Seller by Buyers (including without limitation the provisions of this Article I) if and to the extent Buyers deem such change to be desirable to provide for (i) a merger of Merger Sub with and into Seller, in which Seller is the surviving corporation or (ii) a merger of Seller directly into Mercantile, in which Mercantile is the surviving corporation, provided, -------- however, that no such change shall (A) alter or change the amount - ------- or kind of the consideration to be received by the shareholders of Seller in the Merger, (B) adversely affect any representation, warranty or covenant of Buyers contained herein, (C) adversely affect the tax treatment to Seller shareholders, as generally described in Section 6.01(e) hereof, (D) otherwise adversely affect the rights of Seller or any shareholders of Seller hereunder, or (E) impede or delay receipt of any approvals referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. - 5 - 10 ARTICLE II ---------- REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER As an inducement to Buyers to enter into and perform their respective obligations under this Agreement, and, except as otherwise provided herein, notwithstanding any examination, inspection, audit or any other investigation made by Buyers, Seller represents and warrants to and covenants with Buyers as follows: 2.01. Organization and Authority. Seller is a -------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Illinois, is duly qualified to do business and is in good standing in all jurisdictions where the ownership or leasing of its properties or the conduct of its business requires it to be so qualified and the failure to be so qualified or in good standing would have a material adverse affect on the Condition of the Seller and the Seller Subsidiaries (as such terms are defined in Section 2.02), taken as a whole and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. Seller is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHCA. True and complete copies of the Articles of Incorporation and Bylaws of Seller and of the Articles of Association and Bylaws of First National Bank of Sterling--Rock Falls ("Bank"), a national banking association and wholly-owned subsidiary of Seller, each as in effect on the date of this Agreement, have been provided to Buyers. 2.02. Subsidiaries. ------------ (a) Schedule 2.02 sets forth, a complete and correct ------------- list of all of Seller's "Subsidiaries" (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC"); each a "Seller Subsidiary" and collectively the "Seller Subsidiaries"), all outstanding Equity Securities (as defined in Section 2.03) of each of which are owned directly or indirectly by Seller. All of the outstanding shares of capital stock of the Seller Subsidiaries owned directly or indirectly by Seller are validly issued, fully paid and nonassessable and are owned free and clear of any lien, claim, charge, option, encumbrance, agreement, mortgage, pledge, security interest or restriction (a "Lien") with respect thereto. Each of the Seller Subsidiaries is a corporation or bank duly incorporated or organized and validly existing under the laws of its jurisdiction of incorporation or organization, and has corporate power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted. Each of the Seller Subsidiaries is duly qualified to do business in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires it so to be qualified, except where the failure to so qualify would not have a material adverse effect on the financial condition, results of operations or business (collectively, the "Condition") of Seller - 6 - 11 and the Seller Subsidiaries, taken as a whole. Neither Seller nor any Seller Subsidiary owns beneficially, directly or indirectly, any shares of any class of Equity Securities or similar interests of any corporation, bank, business trust, association or organization, or any interest in a partnership or joint venture of any kind, other than those identified as Seller Subsidiaries in Schedule 2.02 hereof. (b) The deposits of Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") under the Federal Deposit Insurance Act of 1950, as amended (the "FDI Act"). 2.03. Capitalization. The authorized capital stock of -------------- Seller consists of 5,000,000 shares of Seller Common Stock, of which, as of March 31, 1995, 3,685,061 shares were issued and outstanding. Since March 31, 1995, no Equity Securities of Seller have been issued. "Equity Securities" of an issuer means capital stock or other equity securities of such issuer, options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any capital stock or other Equity Securities of such issuer, or contracts, commitments, understand- ings or arrangements by which such issuer is or may become bound to issue additional shares of its capital stock or other Equity Securities of such issuer, or options, warrants, scrip or rights to purchase, acquire, subscribe to, calls on or commitments for any shares of its capital stock or other Equity Securities. Except as set forth above, there are no other Equity Securities of Seller outstanding. All of the issued and outstanding shares of Seller Common Stock are validly issued, fully paid, and nonassessable, and have not been issued in violation of any preemptive right of any shareholder of Seller. Seller has previously delivered a valid list of shareholders dated on or prior to the date of this Agreement. 2.04. Authorization. ------------- (a) Seller has the corporate power and authority to enter into this Agreement and, subject to the approval of this Agreement by the shareholders of Seller and Regulatory Authorities (as defined in Section 2.06), to carry out its obligations hereunder. The only shareholder vote required for Seller to approve this Agreement is the affirmative vote of the holders of at least two-thirds of the outstanding shares of Seller Common Stock entitled to vote at a meeting called for such purpose. The execution, delivery and performance of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby in accordance with and subject to the terms of this Agreement have been duly authorized by the Board of Directors of Seller. Subject to the approval of Seller's shareholders and subject to the receipt of such approvals of the Regulatory Authorities as may be required by statute or regulation, this Agreement is a valid and binding obligation of Seller enforceable against Seller in accordance with its terms. (b) Neither the execution nor delivery nor performance by Seller of this Agreement, nor the consummation by Seller of the transactions contemplated hereby, nor compliance by Seller with any of the provisions hereof, will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or - 7 - 12 result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of Seller or any of the Seller Subsidiaries under any of the terms, conditions or provisions of (x) its articles of incorporation or bylaws or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Seller or any of the Seller Subsidiaries is a party or by which it may be bound, or to which Seller or any of the Seller Subsidiaries or any of the properties or assets of Seller or any of the Seller Subsidiaries may be subject, or (ii) subject to compliance with the statutes and regulations referred to in subsection (c) of this Section 2.04 violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Seller or any of the Seller Subsidiaries or any of their respective properties or assets; other than, with respect to (i) and (ii) above, such violations, conflicts, breaches, defaults, terminations, accelerations or Liens which would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. (c) Other than in connection or in compliance with the provisions of the Missouri Act, the Illinois Act, the Securities Act of 1933 and the rules and regulations thereunder (the "Securities Act"), the Securities Exchange Act of 1934 and the rules and regulations thereunder (the "Exchange Act"), the securities or blue sky laws of the various states or filings, consents, reviews, authorizations, approvals or exemptions required under the BHCA, the Illinois Bank Holding Company Act of 1957 (the "Illinois BHCA"), or any required approvals of the Federal Reserve Board, the Illinois Commissioner of Banks and Trust Companies (the "Illinois Commissioner"), or other governmental agencies or governing boards having regulatory authority over Seller or any Seller Subsidiary, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Seller of the transactions contemplated by this Agreement. 2.05. Seller Financial Statements. --------------------------- (a) Attached hereto as Schedule 2.05(a) are copies of ---------------- the following financial statements: (i) Audited consolidated balance sheets of Seller as of September 30, 1994 and 1993, related audited consolidated statements of income, changes in shareholders' equity and cash flows for each of the three (3) years in the period ended December 31, 1994, together with the notes thereto, audited by Seller's independent auditors; (ii) Unaudited consolidated balance sheets of Seller as of June 30, 1995 and 1994 and related consolidated statements of income, and changes in shareholders' equity for the nine-month period ended June 30, 1995; - 8 - 13 (iii) The Form F.R. Y-9C and F.R. Y-9LP reports of Seller as of September 30, 1994, 1993 and 1992 and as of March 31, 1995; and (iv) The Consolidated Reports of Condition and Income of Bank as of and for the years ended December 31, 1994, 1993 and 1992, as filed by Bank with the FDIC. (b) The financial statements referenced in Schedule -------- 2.05(a) are referred to collectively as the "Seller ------- Financial Statements." The Seller Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") or, as to the financial statements referenced in subsections (a) (iii) and (iv) above, regulatory accounting principles, consistently applied during the periods involved, and present fairly (subject, in the case of the Seller Financial Statements referred to in (a)(ii) to normal year end adjustments and to the absence of cash flow statements for the periods specified therein) the consolidated financial position of Seller, Bank and their respective Subsidiaries, as the case may be, at the dates thereof and the consolidated results of operations and cash flows (with respect to the Seller Financial Statements described in (a)(i)) of Seller, Bank and their respective Subsidiaries, as the case may be, for the periods stated therein. (c) Seller and the Seller Subsidiaries have each prepared, kept and maintained through the date hereof true, correct and complete financial and other books and records of their affairs which fairly reflect their respective financial conditions and results of operations. 2.06. Seller Reports. Since June 30, 1995, each of -------------- Seller and the Seller Subsidiaries has timely filed all material reports, registrations and statements, together with any required amendments thereto, that it was required to file with any federal, state, municipal, or local government, securities, banking, savings and loan, insurance and other governmental or regulatory authority, and the agencies and staffs thereof (such entities being referred to herein collectively as the "Regulatory Authorities" and individually as a "Regulatory Authority"), having jurisdiction over the affairs of it. All such material reports and statements filed with any such Regulatory Authority are collectively referred to herein as the "Seller Reports." As of each of their respective dates, the Seller Reports complied in all material respects with all the rules and regulations promulgated by the applicable Regulatory Authority. With respect to Seller Reports filed with the Regulatory Authorities, there is no material unresolved violation, criticism or exception by any Regulatory Authority with respect to any report or statement filed by, or any examinations of, Seller or any of the Seller Subsidiaries. 2.07. Title to and Condition of Assets. -------------------------------- (a) Except as may be reflected in the Seller Financial Statements and with the exception of all real property Seller and the Seller Subsidiaries have, and at the Closing Date will have, good and marketable title to its owned properties and assets, including, without limitation, those reflected in the Seller Financial Statements (except those disposed of since the date thereof), free and clear of any Lien, except - 9 - 14 for Liens for (i) taxes, assessments or other governmental charges not yet delinquent (ii) Liens that do not in the aggregate materially adversely affect the conduct of the business of Seller and the Seller Subsidiaries, taken as a whole, as presently conducted or the aggregate value of all such property and assets, and (iii) as set forth or described in the Seller Financial Statements or any subsequent Seller financial statements delivered to Buyers prior to the Effective Time. (b) No material properties or assets that are reflected as owned by Seller or any of the Seller Subsidiaries in the Seller Financial Statements as of June 30, 1995 have been sold, leased, transferred, assigned or otherwise disposed of since June 30, 1995, except in the ordinary course of business. (c) All furniture, fixtures, vehicles, machinery and equipment and computer software owned or used by Seller or the Seller Subsidiaries, including any such items leased as a lessee, (taken as a whole as to each of the foregoing with no single item deemed to be of material importance) are, in all material respects, in good working order and free of known defects, subject only to normal wear and tear. The operation by Seller or the Seller Subsidiaries of such properties and assets is in compliance with all applicable laws, ordinances and rules and regulations of any governmental authority having jurisdiction over such use, except where the failure to be in compliance would not have a material adverse effect on the Condition of the Seller and the Seller Subsidiaries, taken as a whole. 2.08. Real Property. ------------- (a) The legal description of each parcel of real property owned by Seller or any of the Seller Subsidiaries (other than real property acquired in foreclosure or in lieu of foreclosure in the course of the collection of loans and being held by Seller or a Seller Subsidiary for disposition as required by law) is set forth in Schedule -------- 2.08(a) under the heading "Owned Real Property" (such real ------- property being herein referred to as the "Owned Real Property"). The legal description of each parcel of real property leased by Seller or any of the Seller Subsidiaries is also set forth in Schedule 2.08(a) under the heading ---------------- "Leased Real Property" (such real property being herein referred to as the "Leased Real Property"). Collectively, the Owned Real Property and the Leased Real Property is herein referred to as the "Real Property." (b) There is no pending action involving Seller or any of the Seller Subsidiaries as to the title of or the right of Seller or any of the Seller Subsidiaries to use any of the Real Property, the resolution of which is reasonably likely to have a material adverse effect on the use of any such real property, provided however, that Seller shall provide Mercantile with notice of any such actions, whether they are reasonably likely to have a material adverse effect or not. (c) Neither Seller nor any of the Seller Subsidiaries has any interest in any other real property except interests as a mortgagee, and except for any real property acquired in foreclosure or in lieu of foreclosure and being held for disposition as required by law. - 10 - 15 (d) None of the buildings, structures or other improvements located on the Real Property encroaches upon or over any adjoining parcel of real estate or any easement or right-of-way or "setback" line in any material respect and all such buildings, structures and improvements are located and constructed in conformity with all applicable zoning ordinances and building codes except where such encroachment or non-conformity does not individually or in the aggregate materially adversely affect the use or value of the parcel of Real Property. (e) Except as set forth in Schedule 2.15(c) none of the buildings, structures or improvements located on the Owned Real Property are the subject of any official complaint or notice by any governmental authority of violation of any applicable zoning ordinance or building code, and to the best knowledge of Seller there is no zoning ordinance, building code, use or occupancy restriction or condemnation action or proceeding pending, or, threatened, with respect to any such building, structure or improvement except such restrictions, actions or proceedings that do not individually or in the aggregate materially adversely affect the use or value of the parcel of Owned Real Property. Except as set forth in Schedule 2.15(c) the Owned Real Property is in generally good condition for its intended purposes, ordinary wear and tear excepted, and has been maintained in accordance with reasonable and prudent business practices applicable to like facilities. (f) Except as set forth in Schedule 2.15(c) or except ---------------- as may be reflected in the Seller Financial Statements or with respect to such easements, Liens, defects or encumbrances as do not individually or in the aggregate materially adversely affect the use or value of the parcel of Owned Real Property, Seller and the Seller Subsidiaries have, and at the Closing Date will have, good and marketable title to their respective Owned Real Properties. 2.09. Taxes. Seller and each Seller Subsidiary have ----- timely filed or will timely (including extensions) file all material tax returns required to be filed at or prior to the Closing Date ("Seller Returns"). Each of Seller and the Seller Subsidiaries has paid, or set up adequate reserves on the Seller Financial Statements for the payment of, all taxes required to be paid in respect of the periods covered by such returns and has set up reserves on the most recent Seller Financial Statements substantially equal to the amount of all taxes anticipated to be payable in respect of all periods up to and including the latest period covered by such Seller Financial Statements. Neither Seller nor any Seller Subsidiary has any liability material to the Condition of Seller and the Seller Subsidiaries, taken as a whole, for any such taxes in excess of the amounts so paid or reserves so established, and no material deficiencies for any tax, assessment or governmental charge have been proposed, asserted or assessed (tentatively or definitely) against any of Seller or any of the Seller Subsidiaries which would not be covered by existing reserves. Neither Seller nor any of the - 11 - 16 Seller Subsidiaries is delinquent in the payment of any tax, assessment or governmental charge, nor has it requested any extension of time within which to file any tax returns in respect of any fiscal year which have not since been filed and no requests for waivers of the time to assess any tax are pending. Neither the Seller or any of the Seller Subsidiaries has been audited by the Internal Revenue Service (the "IRS") or appropriate state tax authorities during the previous seven years. There is no deficiency or refund litigation or, to the best knowledge of Seller, matter in controversy with respect to Seller Returns. Neither Seller nor any of the Seller Subsidiaries has extended or waived any statute of limitations on the assessment of any tax due that is currently in effect. 2.10. Material Adverse Change. Since June 30, 1995, ----------------------- there has been no material adverse change in the Condition of Seller and the Seller Subsidiaries, taken as a whole, except as may have resulted or may result from changes to laws and regulations, GAAP or regulatory accounting principles or interpretations thereof, or changes in economic conditions, including interest rates, applicable to commercial banking institutions generally and other than for changes to the extent of established reserves or accruals in the Seller Financial Statements. 2.11. Loans, Commitments and Contracts. -------------------------------- (a) Schedule 2.11(a) contains a complete and accurate ---------------- listing as of the date hereof of all contracts entered into with respect to deposits of $250,000 or more, by account, and all loan agreements and commitments, notes, security agreements, repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements, and other documents relating to or involving extensions of credit and other commitments to extend credit by Seller or any of the Seller Subsidiaries with respect to any one entity or related group of entities in excess of $250,000, to which any of the foregoing is a party or by which it is bound, by account, and, where applicable, such other information as shall be reasonably necessary to identify any related group of entities. (b) Except as set forth on Schedule 2.11(b) and except ---------------- for the contracts and agreements required to be listed on Schedule 2.11(a) and the loans required to be listed on ---------------- Schedule 2.11(f), as of the date hereof neither Seller nor ---------------- any of the Seller Subsidiaries is a party to or is bound by any: (i) agreement, contract, arrangement, understanding or commitment with any labor union; (ii) franchise or license agreement; (iii) written employment, severance or termination pay, agency, consulting or similar agreement or commitment in respect of personal services; (iv) any material agreement, arrangement or commitment (A) not made in the ordinary course of business, or (B) pursuant to which Seller or any of the Seller Subsidiaries is or may become obligated to invest in or contribute to any Seller Subsidiary other than pursuant to Seller Employee Plans (as that - 12 - 17 term is defined in Section 2.19 hereof) and agreements relating to joint ventures or partnerships set forth in Schedule 2.02, true and complete copies of which have ------------- been furnished to Buyers; (v) any agreement, indenture or other instrument not disclosed in the Seller Financial Statements relating to the borrowing of money by Seller or any of the Seller Subsidiaries or the guarantee by Seller or any of the Seller Subsidiaries of any such obligation (other than trade payables or instruments related to transactions entered into in the ordinary course of business by Seller or any of the Seller Subsidiaries, such as deposits, Federal Funds borrowings and repurchase and reverse repurchase agreements), other than such agreements, indentures or instruments providing for annual payments of less than $50,000; (vi) any contract containing covenants which limit the ability of Seller or any of the Seller Subsidiaries to compete in any line of business or with any person or which involves any restrictions on the geographical area in which, or method by which, Seller or any of the Seller Subsidiaries may carry on their respective businesses (other that as may be required by law or any applicable Regulatory Authority); (vii) any other contract or agreement which would be a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K as promulgated by the SEC (if Seller had a class of securities registered under Section 12 of the Exchange Act) to be performed after the date of this Agreement; (viii) any lease with annual rental payments aggregating $50,000 or more; (ix) loans or other obligations payable or owing to any officer, director or employee except (A) salaries, wages and directors' fees or other compensation incurred and accrued in the ordinary course of business and (B) obligations due in respect of any depository accounts maintained by any of the foregoing at the Seller or any of the Seller Subsidiaries in the ordinary course of business; (x) loans or debts payable or owing by any executive officer or director of Seller or any of the Seller Subsidiaries or any other person or entity deemed an "executive officer" or a "related interest" of any of the foregoing, as such terms are defined in Regulation O of the Federal Reserve Board; (xi) any other agreement, contract, arrange- ment, understanding or commitment involving an obligation by Seller or any of the Seller Subsidiaries of more than $50,000 and extending beyond six months from the date hereof that cannot be cancelled without cost or penalty upon notice of 30 days or less, other than contracts entered into in respect of deposits, loan agreements, and commitments, notes, security agreements, repurchase and reverse repurchase - 13 - 18 agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements and other documents relating to transactions entered into by Seller or any of the Seller Subsidiaries in the ordinary course of business and not involving extensions of credit with respect to any one entity or related group of entities in excess of $250,000. (c) Seller and/or the Seller Subsidiaries carry property, liability, director and officer errors and omissions, products liability and other insurance coverage as set forth in Schedule 2.11(c) under the heading ---------------- "Insurance." (d) True, correct and complete copies of the agreements, contracts, leases, insurance policies and other documents referred to in Schedules 2.11 (a), (b) and (c) ------------------------------- have been or shall be furnished or made available to Buyers. (e) To the best knowledge of Seller, each of the agreements, contracts, leases, insurance policies and other documents referred to in Schedules 2.11 (a), (b) and (c) is ------------------------------- a valid, binding and enforceable obligation of the parties sought to be bound thereby, except as the enforceability thereof against the parties thereto (other than Seller or any of the Seller Subsidiaries) may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws now or hereafter in effect relating to the enforcement of creditors' rights generally, and except that equitable principles may limit the right to obtain specific performance or other equitable remedies and except where the failure of such agreement, contract, lease, insurance policy or other document would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. (f) Schedule 2.11(f) under the heading "Loans" ---------------- contains a true, correct and complete listing, as of the date of this Agreement, by account, of (i) all loans in excess of $100,000 of the Seller or any of the Seller Subsidiaries which have been accelerated during the past twelve months; (ii) all loan commitments or lines of credit of Seller or any of the Seller Subsidiaries in excess of $100,000 which have been terminated by Seller or any of the Seller Subsidiaries during the past twelve months by reason of default or adverse developments in the condition of the borrower or other events or circumstances affecting the credit of the borrower; (iii) all loans, lines of credit and loan commitments in excess of $100,000 as to which Seller or any of the Seller Subsidiaries has given written notice of its intent to terminate during the past twelve months; (iv) with respect to all loans in excess of $100,000 all notification letters and other written communications from Seller or any of the Seller Subsidiaries to any of their respective borrowers, customers or other parties during the past twelve months wherein Seller or any of the Seller Subsidiaries has requested or demanded that actions be taken to correct existing defaults or facts or circumstances which may become defaults; (v) each borrower, customer, or other party which has notified Seller or any of the Seller Subsidiaries during the past twelve months of, or has asserted against Seller or any of the Seller Subsidiaries, in each case in writing, any "lender liability" or similar claim, and, to the best knowledge of Seller, each borrower, customer or other party which has given Seller or any of the - 14 - 19 Seller Subsidiaries any oral notification of, or orally asserted to and against Seller or any of the Seller Subsidiaries, any such claim; (vi) all loans in excess of $50,000 (A) that are contractually past due 90 days or more in the payment of principal and/or interest, (B) that are on non-accrual status, (C) that have been classified "doubtful," "substandard," "loss" or the equivalent thereof by any Regulatory Authority, (D) where a reasonable doubt exists as to the timely future collectibility of principal and/or interest, whether or not interest is still accruing or the loan is less than 90 days past due, (E) the interest rate terms have been reduced and/or the maturity dates have been extended subsequent to the agreement under which the loan was originally created due to concerns regarding the borrower's ability to pay in accordance with such initial terms, or (F) where a specific reserve allocation exists in connection therewith. 2.12. Absence of Defaults. Neither Seller nor any of ------------------- the Seller Subsidiaries is in violation of its charter documents or bylaws or in default under any material agreement, commitment, arrangement, lease, insurance policy, or other instrument or document, whether entered into in the ordinary course of business or otherwise and whether written or oral, and there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default thereunder, except, in all cases, where such default would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. 2.13. Litigation and Other Proceedings. Except as set -------------------------------- forth on Schedule 2.13 neither Seller nor any of the Seller Subsidiaries is a party to any pending or, to the best knowledge of Seller, threatened claim, action, suit, investigation or proceeding, or is subject to any order, judgment or decree, except for matters which, in the aggregate, will not have, or reasonably could not be expected to have, a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. Without limiting the generality of the foregoing, there are no actions, suits or proceedings pending or, to the best knowledge of Seller, threatened against Seller or any of the Seller Subsidiaries or any of their respective officers or directors by any shareholder of Seller or any of the Seller Subsidiaries (or any former shareholder of Seller or any of the Seller Subsidiaries) or involving claims under the Community Reinvestment Act of 1977, as amended, the Bank Secrecy Act, the fair lending laws or any other applicable laws except such claims as would not be reasonably expected to have a material adverse affect on the Condition of Sellers and the Seller Subsidiaries, taken as a whole. 2.14. Directors' and Officers' Insurance. Each of ---------------------------------- Seller and the Seller Subsidiaries has taken or will take all requisite action (including without limitation the making of claims and the giving of notices) pursuant to its directors' and officers' liability insurance policy or policies in order to preserve all rights thereunder in all material respects with respect to all matters (other than matters arising in connection with this Agreement and the transactions contemplated hereby) occurring prior to the Effective Time that are known to Seller, except for such matters which, individually or in the aggregate, will not have and reasonably could not be expected to have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. - 15 - 20 2.15. Compliance with Laws. -------------------- (a) To the best knowledge of Seller, Seller and each of the Seller Subsidiaries have all permits, licenses, authorizations, orders and approvals of, and have made all filings, applications and registrations with, all Regulatory Authorities that are required in order to permit them to own or lease their respective properties and assets and to carry on their respective businesses as presently conducted; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and to the best knowledge of Seller no suspension or cancellation of any of them is threatened; and all such filings, applications and registrations are current; in each case above, except for permits, licenses, authoriza- tions, orders, approvals, filings, applications and registrations the failure to have (or have made) or be current which would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. (b) (i) Except as set forth on the Schedules attached hereto, each of Seller and the Seller Subsidiaries has complied with all laws, regulations and orders (including without limitation zoning ordinances, building codes, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and securities, tax, environmental, civil rights, and occupational health and safety laws and regulations including without limitation in the case of Seller or any Seller Subsidiary that is a bank or savings association, banking organization, banking corporation or trust company, all statutes, rules, regulations and policy statements pertaining to the conduct of a banking, deposit- taking, lending or related business, or to the exercise of trust powers) and governing instruments applicable to it and to the conduct of its business, except where such failure to comply would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole, and (ii) neither Seller nor any of the Seller Subsidiaries is in default under, and to the best knowledge of Seller no event has occurred which, with the lapse of time or notice or both, could result in the default under, the terms of any judgment, order, writ, decree, permit, or license of any Regulatory Authority or court, whether federal, state, municipal or local, and whether at law or in equity, except where such default would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. (c) Except as otherwise scheduled on Schedule 2.15(c) hereto, neither Seller nor any of the Seller Subsidiaries is subject to or reasonably likely to incur a liability as a result of its ownership, operation, or use of any Property (as defined below) of Seller (whether directly or, to the best knowledge of Seller, as a consequence of such Property being part of the investment portfolio of Seller or any of the Seller Subsidiaries) (A) that is contaminated by or contains any hazardous waste, toxic substance, or related materials, including without limitation asbestos, PCBs, pesticides, herbicides, and any other substance or waste that is hazardous to human health or the environment (collectively, a "Toxic Substance"), or (B) on which any Toxic Substance has been stored, disposed of, placed, or used in the construction thereof; and which, in each case above, reasonably could be expected to have a - 16 - 21 material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. "Property" shall include all property (real or personal) owned or controlled by Seller or any of the Seller Subsidiaries, including without limitation property under foreclosure, property held by Seller or any of the Seller Subsidiaries in its capacity as a trustee and property in which any venture capital or similar unit of Seller or any of the Seller Subsidiaries has an interest. Except as set forth in Schedule 2.15(c)no action, suit or proceeding is pending and no material claim has been asserted against Seller or any of the Seller Subsidiaries relating to Property of Seller or any of the Seller Subsidiaries before any court or other Regulatory Authority or arbitration tribunal relating to Toxic Substances, pollution or the environment, and there is no outstanding judgment, order, writ, injunction, decree or award against or affecting Seller or any of the Seller Subsidiaries with respect to the same. Except for statutory or regulatory restrictions of general application, no Regulatory Authority has placed any restriction on the business of Seller or any of the Seller Subsidiaries which reasonably could be expected to have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. (d) Since December 31, 1991, neither Seller nor any of the Seller Subsidiaries has received any notification or communication which has not been resolved from any Regulatory Authority (i) asserting that any Seller or any of the Seller Subsidiaries is not in substantial compliance with any of the statutes, regulations or ordinances that such Regulatory Authority enforces, except with respect to matters which reasonably could not be expected to have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole, (ii) threatening to revoke any license, franchise, permit or governmental authorization that is material to the Condition of Seller and the Seller Subsidiaries, taken as a whole, including without limitation such company's status as an insured depository institution under the FDI Act, (iii) requiring or threatening to require Seller or any of the Seller Subsidiaries, or indicating that Seller or any of the Seller Subsidiaries may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting or purporting to direct, restrict or limit in any material manner the operations of Seller or any of the Seller Subsidiaries, including without limitation any restriction on the payment of dividends. No such cease and desist order, agreement or memorandum of understanding or other agreement is currently in effect. (e) Neither Seller nor any of the Seller Subsidiaries is required by Section 32 of the FDI Act to give prior notice to any federal banking agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive officer. 2.16. Labor. No work stoppage involving Seller or any ----- of the Seller Subsidiaries is pending or, to the best knowledge of Seller, threatened. Neither Seller nor any of the Seller Subsidiaries is involved in, or, to the best knowledge of Seller, threatened with or any labor dispute, arbitration, lawsuit or administrative proceeding, involving the employees of Seller or any of the Seller Subsidiaries which reasonably could be expected to have a material - 17 - 22 adverse affect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. None of the employees of Seller or the Seller Subsidiaries are represented by any labor union or any collective bargaining organization. 2.17. Material Interests of Certain Persons. To the ------------------------------------- best knowledge of Seller no officer or director of Seller or any of the Seller Subsidiaries, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any interest in any contract or property (real or personal, tangible or intangible), used in, or pertaining to the business of, Seller or any of the Seller Subsidiaries, which in the case of Seller and each of the Seller Subsidiaries would be required to be disclosed by Item 404 of Regulation S-K promulgated by the SEC if such entity had a class of securities registered under Section 12 of the Exchange Act. 2.18. Allowance for Loan and Lease Losses; Non-Performing --------------------------------------------------- Assets. - ------ (a) All of the accounts, notes, and other receivables which are reflected in the Seller Financial Statements as of June 30, 1995 were acquired in the ordinary course of business and, to the best knowledge of Seller, as of June 30, 1995, were collectible in full in the ordinary course of business, except for possible loan and lease losses which are adequately provided for in all material respects in the allowance for loan and lease losses reflected in such Seller Financial Statements, and the collection experience of Seller and the Seller Subsidiaries since June 30, 1995, to the date hereof has not deviated in any material and adverse manner from the credit and collection experience of the Seller and the Seller Subsidiaries, taken as a whole, in the nine months ended June 30, 1995. (b) The allowances for loan losses contained in the Seller Financial Statements were established in accordance with the past practices and experiences of Seller and the Seller Subsidiaries, and the allowance for loan and lease losses shown on the consolidated condensed balance sheet of Seller and the Seller Subsidiaries as of June 30, 1995, were adequate in all material respects under the requirements of GAAP, or regulatory accounting principles, as the case may be to provide for possible losses on loans and leases (including without limitation accrued interest receivable) and credit commitments (including without limitation stand-by letters of credit) as of the date of such balance sheet. (c) Schedule 2.18(c) sets forth as of the date of this ---------------- Agreement all assets classified by Seller as real estate acquired through foreclosure or repossession, including impaired loans. (d) The aggregate amount of all Nonperforming Assets (as defined below) on the books of Seller and its Subsidiaries does not exceed six-tenths of one percent of the gross amounts of all loans and leases on the books of Seller and the Seller Subsidiaries taken as a whole, plus Nonperforming Assets. "Nonperforming Assets" shall mean (i) all loans (A) that are contractually past due 90 days or more in the payment of principal and/or interest, (B) that are on nonaccrual status, (C) that have - 18 - 23 been classified "doubtful," "loss," or the equivalent thereof by any Regulatory Agency, (D) where the interest rate terms have been reduced and/or the maturity dates have been extended subsequent to the agreement under which the loan was originally created due to concerns regarding the borrower's ability to pay in accordance with such initial terms, or (E) where a specific reserve allocation exists in connection therewith, and (ii) all assets classified by Seller as real estate acquired through foreclosure or repossession, including impaired loans, and all other assets acquired through foreclosure or repossession. 2.19. Employee Benefit Plans. ---------------------- (a) Schedule 2.19(a) lists all pension, retirement, ---------------- supplemental retirement, stock option, stock purchase, stock ownership, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, medical, disability, vacation, group insurance, severance and other employee benefit, incentive and welfare policies, contracts, plans and arrangements, and all trust agreements related thereto, maintained by or contributed to by Seller or any of the Seller Subsidiaries in respect of any of the present or former directors, officers, or other employees of and/or consultants to Seller or any of the Seller Subsidiaries (collectively, "Seller Employee Plans"). Seller has furnished Buyers with the following documents with respect to each Seller Employee Plan: (i) a true and complete copy of all written documents comprising such Seller Employee Plan (including amendments and individual agreements relating thereto) or, if there is no such written document, an accurate and complete description of the Seller Employee Plan; (ii) the most recently filed Form 5500 (including all schedules thereto), if applicable; (iii) the most recent financial statements and actuarial reports, if any; (iv) the summary plan description currently in effect and all material modifications thereof, if any; and (v) the most recent IRS determination letter, if any. (b) All Seller Employee Plans have been maintained and operated in all material respects in accordance with their terms and the requirements of all applicable statutes, orders, rules and final regulations, including without limitation, to the extent applicable, ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). All contributions required to be made to Seller Employee Plans by Seller or any Seller Subsidiaries have been made. (c) With respect to each of the Seller Employee Plans which is a pension plan (as defined in Section 3(2) of ERISA) (the "Pension Plans"): (i) each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined to be so qualified by the IRS and such determination letter may still be relied upon, and each related trust is exempt from taxation under Section 501(a) of the Code; (ii) the present value of all benefits vested and all benefits accrued under each Pension Plan which is subject to Title IV of ERISA did not, in each case, as of the last applicable annual valuation date (as indicated on Schedule 2.19(a)), exceed ---------------- the value of the assets of the Pension Plan allocable to such vested - 19 - 24 or accrued benefits; (iii) there has been no "prohibited transaction," as such term is defined in Section 4975 of the Code or Section 406 of ERISA, which could subject any Pension Plan or associated trust, or the Seller or any of the Seller Subsidiaries, to any tax or penalty; (iv) no Pension Plan or any trust created thereunder has been terminated, nor has there been any "reportable events" with respect to any Pension Plan, as that term is defined in Section 4043 of ERISA since January 1, 1989; and (v) no Pension Plan or any trust created thereunder has incurred any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA (whether or not waived). No Pension Plan is a "multiemployer plan" as that term is defined in Section 3(37) of ERISA. (d) Except as set forth on Schedule 2.19(a) neither ---------------- Seller nor any of the Seller Subsidiaries has any liability for any post-retirement health, medical or similar benefit of any kind whatsoever, except as required by statute or regulation. (e) Neither Seller nor any of the Seller Subsidiaries has any material liability under ERISA or the Code as a result of its being a member of a group described in Sections 414(b), (c), (m) or (o) of the Code. (f) Neither the execution nor delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby, will (i) result in any payment (including without limitation severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of Seller or any of the Seller Subsidiaries from any of such entities, (ii) increase any benefit otherwise payable under any of the Seller Employee Plans or (iii) result in the acceleration of the time of payment of any such benefit. Seller shall use its best efforts to insure that no amounts paid or payable by Seller, the Seller Subsidiaries or Buyers to or with respect to any employee or former employee of Seller or any of the Seller Subsidiaries will fail to be deductible for federal income tax purposes by reason of Section 280G of the Code. 2.20. Conduct of Seller to Date. From and after June ------------------------- 30, 1995, through the date of this Agreement, except as set forth in the Seller Financial Statements: (i) Seller and the Seller Subsidiaries have conducted their respective businesses in the ordinary and usual course consistent with past practices; (ii) neither Seller nor any of the Seller Subsidiaries has issued, sold, granted, conferred or awarded any of its Equity Securities, or any corporate debt securities which would be classified under GAAP as long-term debt on the balance sheets of Seller or the Seller Subsidiaries; (iii) Seller has not effected any stock split or adjusted, combined, reclassified or otherwise changed its capitalization; (iv) Seller has not declared, set aside or paid any dividend other than its regular quarterly dividends or other distribution in respect of its capital stock, or purchased, redeemed, retired, repurchased, or exchanged, or otherwise acquired or disposed of, directly or indirectly, any of its Equity Securities, whether pursuant to the terms of such Equity Securities or otherwise; (v) neither Seller nor any of the Seller Subsidiaries has incurred any obligation or liability (absolute or contingent), except liabilities incurred in the ordinary course of business or which are not - 20 - 25 material to the Condition of Seller and the Seller Subsidiaries, taken as a whole, or subjected to Lien any of its assets or properties other than in the ordinary course of business consistent with past practice or which are not material to the Condition of Seller and the Seller Subsidiaries, taken as a whole; (vi) neither Seller nor any of the Seller Subsidiaries has discharged or satisfied any Lien or paid any obligation or liability (absolute or contingent), other than in the ordinary course of business; (vii) neither Seller nor any of the Seller Subsidiaries has sold, assigned, transferred, leased, exchanged, or otherwise disposed of any of its material properties or assets other than for a fair consideration in the ordinary course of business; (viii) except as required by contract or law or plan, neither Seller nor any of the Seller Subsidiaries has (A) increased the rate of compensation of, or paid any bonus to, any of its directors, officers, or other employees, except in accordance with existing policy, (B) entered into any new, or amended or supplemented any existing, employment, management, consulting, deferred compensation, severance, or other similar contract, (C) entered into, terminated, or substantially modified any of the Seller Employee Plans or (D) agreed to do any of the foregoing; (ix) neither Seller nor any Seller Subsidiary has suffered any damage, destruction, or loss, whether as the result of fire, explosion, earthquake, accident, casualty, labor trouble, requisition, or taking of property by any Regulatory Authority, flood, windstorm, embargo, riot, act of God or the enemy, or other casualty or event, except where such damage, destruction or loss does not materially adversely affect the Condition of Seller or the Seller Subsidiaries, taken as a whole; (x) neither Seller nor any of the Seller Subsidiaries has cancelled or compromised any debt, except for debts charged off or compromised in accordance with the past practice of Seller and the Seller Subsidiaries, and (xi) neither Seller nor any of the Seller Subsidiaries has entered into any material transaction, contract or commitment outside the ordinary course of its business. 2.21. Absence of Undisclosed Liabilities. ---------------------------------- (a) As of the date of this Agreement, neither Seller nor any of the Seller Subsidiaries has any debts, liabili- ties or obligations equal to or exceeding $25,000, individually or $150,000 in the aggregate, whether accrued, absolute, contingent or otherwise and whether due or to become due, which are required to be reflected in the Seller Financial Statements or the notes thereto in accordance with GAAP consistently applied except: (i) liabilities and obligations reflected on the Seller Financial Statements; (ii) operating leases reflected on Schedule -------- 2.11; and ---- (iii) debts, liabilities or obligations incurred since June 30, 1995 in the ordinary and usual course of their respective businesses, none of which are for breach of contract, breach of warranty, torts, infringements or lawsuits and none of which have a material adverse effect on the Condition of the Seller and the Seller Subsidiaries, taken as a whole. (b) Neither Seller nor any of the Seller Subsidiaries was as of June 30, - 21 - 26 1995, and since such date to the date hereof has become a party to, any contract or agreement, excluding deposits, loan agreements, and commitments, notes, security agreements, repurchase and reverse repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements and other documents relating to transactions entered into by Seller or any of the Seller Subsidiaries in the ordinary course of business which affected, affects or may reasonably be expected to affect, materially and adversely, the Condition of the Seller and the Seller Subsidiaries, taken as a whole. 2.22. Proxy Statement, Etc. None of the information --------------------- regarding Seller or any of the Seller Subsidiaries to be supplied by Seller for inclusion or included in (i) the Registration Statement on Form S-4 to be filed with the SEC by Mercantile for the purpose of registering the shares of Mercantile Common Stock to be exchanged for shares of Seller Common Stock pursuant to the provisions of this Agreement (the "Registration Statement"), (ii) the Proxy Statement to be mailed to Seller's shareholders in connection with the meeting to be called to consider the Merger (the "Proxy Statement") or (iii) any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby will, at the respective times such documents are filed with any Regulatory Authority and, in the case of the Registration Statement, when it becomes effective and, with respect to the Proxy Statement, when mailed, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the meeting of Seller's shareholders referred to in Section 5.03, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. All documents which Seller or any of the Seller Subsidiaries is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. 2.23. Registration Obligations. Neither Seller nor any ------------------------ of the Seller Subsidiaries is under any obligation, contingent or otherwise, which will survive the Effective Time by reason of any agreement to register any transaction involving any of its securities under the Securities Act. 2.24. Tax and Regulatory Matters. Neither Seller nor -------------------------- any of the Seller Subsidiaries has taken or agreed to take any action or has any knowledge of any fact or circumstance that would (i) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code or (ii) materially impede or delay receipt of any approval referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. - 22 - 27 2.25. Brokers and Finders. Except for The Chicago ------------------- Corporation, neither Seller nor any of the Seller Subsidiaries nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Seller or any of the Seller Subsidiaries in connection with this Agreement or the transactions contemplated hereby. The aggregate amount of all liabilities incurred by Seller and/or the Seller Subsidiaries in respect of the retention of The Chicago Corporation, as aforesaid, and due and payable by Seller and/or the Seller Subsidiaries shall not exceed one percent (1%) of the total consideration paid in connection with the Merger. 2.26. Interest Rate Risk Management Instruments. ----------------------------------------- Neither Seller nor any of the Seller Subsidiaries are parties to, nor are any of their properties or assets bound by, interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements. ARTICLE III ----------- REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYERS As an inducement to Seller to enter into and perform its obligations under this Agreement, and notwithstanding any examination, inspection, audit or other investigation made by Seller, Buyers jointly and severally represent and warrant to and covenant with Seller as follows: 3.01. Organization and Authority. Mercantile and Merger -------------------------- Sub are each corporations duly organized, validly existing and in good standing under the laws of the State of Missouri, are each qualified to do business and are each in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted, except where the failure to be so qualified would not have a material adverse effect on the Condition of Mercantile and its Subsidiaries, taken as a whole. Each of Mercantile and Merger Sub is registered as a bank holding company with the Federal Reserve Board under the BHCA. True and complete copies of the Articles of Incorporation and Bylaws of Mercantile and Merger Sub, each in effect on the date of this Agreement, have been provided to Seller. 3.02. Capitalization of Mercantile. The authorized ---------------------------- capital stock of Mercantile consists of (i) 100,000,000 shares of Mercantile Common Stock, of which, as of July 7, 1995, 54,194,248 shares were issued and outstanding and (ii) 5,000,000 shares of preferred stock, no par value ("Mercantile Preferred Stock"), issuable in series, of which 5,306 shares of Series B-1 Preferred Stock and 9,500 shares of Series B-2 Preferred Stock are issued and outstanding. Mercantile has designated 1,000,000 shares of Mercantile Preferred Stock as "Series A Junior Participating Preferred Stock" and has reserved such shares under a Rights Agreement dated May 23, 1988 (the "Mercantile Rights Agreement"), between Mercantile and Mercantile Bank of St. Louis National Association, as Rights Agent. As of July 7, 1995, Mercantile had reserved (i) 4,764,581 shares of Mercantile Common - 23 - 28 Stock for issuance under the Mercantile stock option and incentive plans; (ii) 675,000 shares of Mercantile Common Stock for issuance upon the acquisition of Southwest Bancshares, Inc. ("SBI") pursuant to the Agreement and Plan of Merger dated January 27, 1995 by and between Mercantile, Ameribanc, Inc. ("ABNK") and SBI; (iii) 661,385 shares of Mercantile Common Stock for issuance upon the acquisition of AmeriFirst Bancorporation, Inc. ("ABI") pursuant to the Agreement and Plan of Merger dated February 16, 1995, as amended, by and between Mercantile, ABNK and ABI; and (iv) 322,000 shares of Mercantile Common Stock for issuance upon the acquisition of Security Bank of Conway, F.S.B. ("Conway"), pursuant to the Agreement and Plan of Reorganization between Mercantile and Conway dated July 7, 1995. From July 7, 1995 through the date of this Agreement, no Equity Securities of Mercantile have been issued (excluding the number of shares disclosed in this Section 3.02 pursuant to the consummation of the SBI, ABI and Conway acquisitions and any shares of Mercantile Common Stock which may have been issued under Mercantile stock option and incentive plans). Mercantile continually evaluates possible acquisitions and may prior to the Effective Time enter into one or more agreements providing for, and may consummate, the acquisition by it of another bank, association, bank holding company, savings and loan holding company or other company (or the assets thereof) for consideration that may include Equity Securities. In addition, prior to the Effective Time, Mercantile may, depending on market conditions and other factors, otherwise determine to issue equity, equity-linked or other securities for financing purposes. Notwithstanding the foregoing, Buyers have not taken and will not take any action that would (i) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code or (ii) materially impede or delay receipt of any approval referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. Except as set forth above, there are no other Equity Securities of Mercantile outstanding. All of the issued and outstanding shares of Mercantile Common Stock are validly issued, fully paid, and nonassessable, and have not been issued in violation of any preemptive right of any shareholder of Mercantile. At the Effective Time, the shares of Mercantile Common Stock to be issued in the Merger will be duly authorized, validly issued, fully paid and nonassessable, and will not be issued in violation of any preemptive right of any shareholder of Mercantile. The shares of Mercantile Common Stock to be issued in the Merger will be listed on the NYSE as of the Effective Time. 3.03. Authorization. ------------- (a) Mercantile and Merger Sub each have the corporate power and authority to enter into this Agreement and to carry out their respective obligations hereunder. The execution, delivery and performance of this Agreement by Mercantile and Merger Sub and the consummation by Mercantile and Merger Sub of the transactions contemplated hereby have been duly authorized by all requisite corporate action of Mercantile and Merger Sub. Subject to the receipt of such approvals of the Regulatory Authorities as may be required by statute or regulation, this Agreement is a valid and binding obligation of Mercantile and Merger Sub enforceable against each in accordance with its terms. - 24 - 29 (b) Neither the execution, delivery and performance by Mercantile or Merger Sub of this Agreement, nor the consummation by Mercantile or Merger Sub of the transactions contemplated hereby, nor compliance by Mercantile or Merger Sub with any of the provisions hereof, will (i) violate, conflict with or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of Mercantile or Merger Sub under any of the terms, conditions or provisions of (x) their respective Articles of Incorporation or Bylaws, or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Mercantile or Merger Sub is a party or by which they may be bound, or to which Mercantile or Merger Sub or any of their respective properties or assets may be subject, or (ii) subject to compliance with the statutes and regulations referred to in subsection (c) of this Section 3.03, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Mercantile or Merger Sub or any of their respective properties or assets; other than, with respect to (i) and (ii) above, such violations, conflicts, breaches, defaults, terminations, accelerations or Liens which would not have a material adverse effect on the Condition of Mercantile and its Subsidiaries, taken as a whole. (c) Other than in connection with or in compliance with the provisions of the Missouri Statute, the Securities Act, the Exchange Act, the securities or blue sky laws of the various states or filings, consents, reviews, authorizations, approvals or exemptions required under the BHCA, the FDI Act or any required approvals of any other Regulatory Authority, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Mercantile and Merger Sub of the transactions contemplated by this Agreement. 3.04. Mercantile Financial Statements. The supplemental ------------------------------- consolidated balance sheets of Mercantile and its Subsidiaries as of December 31, 1994, 1993 and 1992 and related supplemental consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994, together with the notes thereto, audited by KPMG Peat Marwick LLP, and the consolidated balance sheet of Mercantile and its Subsidiaries as of March 31, 1995 and related consolidated statements of income and cash flows for the three- month period ended March 31, 1995, as filed with the SEC (collectively, the "Mercantile Financial Statements"), have been prepared in accordance with GAAP, present fairly the consolidated financial position of Mercantile and its Subsidiaries at the dates thereof and the consolidated results of operations, changes in shareholders' equity and cash flows of Mercantile and its Subsidiaries for the periods stated therein and are derived from the books and records of Mercantile and its Subsidiaries, which are complete and accurate in all material respects and have been maintained in accordance with good business practices. Neither Mercantile nor any of its Subsidiaries has any material contingent liabilities that are not described in the Mercantile Financial Statements. - 25 - 30 3.05. Mercantile Reports. Since January 1, 1992, each ------------------ of Mercantile and its Subsidiaries has timely filed all material reports, registrations and statements, together with any required amendments thereto, that it was required to file with any Regulatory Authority. All such reports and statements filed with any such Regulatory Authority are collectively referred to herein as the "Mercantile Reports." As of its respective date, each Mercantile Report complied in all material respects with all the rules and regulations promulgated by the applicable Regulatory Authority and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.06. Material Adverse Change. Since March 31, 1995, ----------------------- there has been no material adverse change in the Condition of Mercantile and its Subsidiaries, taken as a whole, except as may have resulted or may result from changes to laws and regulations, GAAP or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates, applicable to commercial banking institutions generally and other than for changes to the extent of established reserves or accruals in the Mercantile Financial Statements. 3.07. Legal Proceedings or Other Adverse Facts. There ---------------------------------------- is no legal action or other proceeding or investigation pending or, to the best knowledge of Buyers, threatened against Mercantile or any of its Subsidiaries that could be reasonably expected to prevent or adversely affect in a material manner or seek to prohibit the consummation of the transactions contemplated herein or have a material adverse effect on the Condition of Mercantile and its Subsidiaries, taken as a whole, nor is Mercantile or any of its Subsidiaries subject to any order of a court or governmental authority having any such effect. To the best knowledge of Buyers, there is no other fact that could be reasonably expected to prevent or adversely affect the consummation of the transactions contemplated herein. 3.08. Registration Statement, Etc. None of the ---------------------------- information regarding Mercantile or any of its Subsidiaries to be supplied by Buyers for inclusion or included in (i) the Registra- tion Statement, (ii) the Proxy Statement, or (iii) any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby will, at the respective times such documents are filed with any Regulatory Authority and, in the case of the Registration Statement, when it becomes effective and, with respect to the Proxy Statement, when mailed, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the meeting of shareholders referred to in Section 5.03, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. All documents which Mercantile or Merger Sub are responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. - 26 - 31 3.09. Brokers and Finders. Neither Mercantile, Merger ------------------- Sub nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Mercantile or Merger Sub in connection with this Agreement or the transactions contemplated hereby. ARTICLE IV ---------- CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME 4.01. Conduct of Businesses Prior to the Effective Time. ------------------------------------------------- During the period from the date of this Agreement to the Effective Time, Seller shall, and shall cause each of the Seller Subsidiaries to, conduct their respective businesses according to the ordinary and usual course consistent with past practices and shall, and shall cause each such Seller Subsidiary to, use all reasonable efforts to maintain and preserve its business organization, employees and advantageous business relationships and retain the services of its officers and key employees. 4.02. Forbearances of Seller. Except as set forth in ---------------------- Schedule 4.02 and except to the extent required by law, - ------------- regulation or Regulatory Authority, or with the prior written consent of Buyers, (unless otherwise specifically noted in this Section 4.02) during the period from the date of this Agreement to the Effective Time, Seller shall not and shall not permit any of the Seller Subsidiaries to: (a) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock (other than dividends from any of the Seller Subsidiaries to Seller or to another of the Seller Subsidiaries), except that Seller may declare and pay regular quarterly cash dividends of not more than $.04 per share on the Seller Common Stock, provided that Seller -------- shall not declare or pay its regular quarterly dividend for any quarter in which Seller shareholders will be entitled to receive a regular quarterly dividend on the shares of Mercantile Common Stock to be issued in the Merger; (b) enter into or amend any employment, severance or similar agreement or arrangement with any director, officer or employee, or materially modify any of the Seller Employee Plans or grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except (i) normal individual increases in compensation to employees consistent with past practice, (ii) as required by law or contract or plan and (iii) such increases of which Seller notifies Buyers in writing and which Buyers do not disapprove within 10 days of the receipt of such notice; (c) authorize, recommend, 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; - 27 - 32 (d) propose or adopt any amendments to its articles of incorporation, association or other charter document or bylaws; (e) issue, sell, grant, confer or award any of its Equity Securities or effect any stock split or adjust, combine, reclassify or otherwise change its capitalization as it existed on the date of this Agreement; (f) 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; (g) (i) without first consulting with Mercantile, enter into, renew 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 date of any existing loan or credit commitment (collectively, "Lend to") in an amount in excess of $200,000 with respect to commercial transactions (including commercial construction transactions), $300,000 with respect to residential transactions, or in any amount which, when aggregated with any and all loans or credit commitments of Seller and the Seller Subsidiaries to such person or entity, would be in excess of $350,000; (ii) without first obtaining the written consent of Mercantile, Lend to any person or entity in an amount in excess of $500,000 or in any amount which, when aggregated with any and all loans or credit commitments of Seller and the Seller Subsidiaries to such person or entity, would be in excess of $750,000; (iii) Lend to any person other than in accordance with lending policies as in effect on the date hereof, provided that in the case of clauses (i) and (iii) -------- Seller or any of the Seller Subsidiaries may make any such loan in the event (A) Seller or any Seller Subsidiary has delivered to Buyers or their designated representative a notice of its intention to make such loan and such information as Buyers or their designated representative may reasonably require in respect thereof and (B) Buyers or their 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 Buyers or their designated representative of the notice of intention and information as aforesaid; or (iv) 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 Seller or any of the Seller Subsidiaries (except those denoted "pass" thereon), in an amount in excess of $100,000; provided, -------- however, that nothing in this paragraph shall prohibit ------- Seller or any Seller Subsidiary from honoring any contractual obligation in existence on the date of this Agreement. Notwithstanding clauses (i) and (ii) of this Section 4.02(g), Seller shall be authorized without first consulting with Buyers or obtaining Buyers' prior written consent, to increase the aggregate amount of any credit facilities theretofore established in favor of any person or entity (each a "Pre-Existing Facility"), provided that the aggregate amount of any and all such increases shall not be in excess of the lesser of five percent (5%) of such Pre-Existing Facilities or $25,000; - 28 - 33 (h) directly or indirectly (including through its officers, directors, employees or other representatives) (i) initiate, solicit or encourage any discussions, inquiries or proposals with any third party (other than Buyers) relating to the disposition of any significant portion of the business or assets of Seller or any of the Seller Subsidiaries or the acquisition of Equity Securities of Seller or any of the Seller Subsidiaries or the merger of Seller or any of the Seller Subsidiaries with any person (other than Buyers) or any similar transaction (each such transaction being referred to herein as an "Acquisition Transaction"), or (ii) provide any such person with information or assistance or negotiate with any such person with respect to an Acquisition Transaction, and Seller shall promptly notify Buyers 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; (i) knowingly take or omit to take any action that would (A) materially impede or delay the consummation of the transactions contemplated by this Agreement or the ability of Buyers or Seller to obtain any approval of any Regulatory Authority required for the transactions contemplated by this Agreement or to perform its covenants and agreements under this Agreement or (B) prevent or impede the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code; (j) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity in excess of $25,000 in the aggregate; (k) materially restructure or change its investment securities portfolio, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported, or, without first consulting with Mercantile, execute individual investment transactions of greater than $500,000 for U.S. Treasury Securities and $250,000 for all other investment instruments; (l) agree in writing or otherwise to take any of the foregoing actions or intentionally engage in any activity, enter into any transaction or knowingly take or omit to take any other action which would make any of the representations and warranties in Article II of this 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; or (m) enter into, increase or renew any loan or credit commitment (including standby letters of credit) to any executive officer or director of Seller or any of the Seller Subsidiaries, any Seller shareholder, or any entity controlled, directly or - 29 - 34 indirectly, by any of the foregoing or engage in any transaction with any of the foregoing which is of the type or nature sought to be regulated in 12 U.S.C. Section 371c and 12 U.S.C. Section 371c-1, without obtaining the prior written consent of Buyers, which consent shall not be unreasonably withheld. For purposes of this subsection (m), "control" shall have the meaning associated with that term under 12 U.S.C. Section 371c. 4.03. Forbearances of Buyers. During the period from ---------------------- the date of this Agreement to the Closing Date, Buyers shall not, and shall not permit any of their Subsidiaries to, without the prior written consent of Seller, agree in writing or otherwise intentionally engage in any activity, enter into any transaction or knowingly take or omit to take any other action: (a) that would (i) materially impede or delay the consummation of the transactions contemplated by this Agreement or the ability of Buyers or Seller to obtain any approval of any Regulatory Authority required for the transactions contemplated by this Agreement or to perform its covenants and agreements under this Agreement or (ii) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code; or (b) which would make any of the representations and warranties of Article III of this 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 action. ARTICLE V --------- ADDITIONAL AGREEMENTS 5.01. Access and Information. ---------------------- (a) Buyers and Seller shall each afford to the other, and to the other's accountants, counsel and other represen- tatives, reasonable access during normal business hours, during the period prior to the Effective Time, to all their respective properties, books, contracts, commitments and records and, during such period, each shall furnish promptly to the other (i) a copy of each report, schedule and other document filed or received by it during such period pursuant to the requirements of federal and state securities laws and (ii) all other information concerning its business, properties and personnel as the other may reasonably request. Except as required by law, each party shall, and shall cause its advisors and representatives to, (A) hold confidential all information obtained in connection with any transaction contemplated hereby with respect to the other party and its Subsidiaries (including information derived from such information) which is not otherwise public knowledge other than by violation of this provision, (B) in the event of a termination of this Agreement, return all documents (including copies or extracts thereof) obtained hereunder from the other party or any of its Subsidiaries to it and (C) cause all of such party's confidential information obtained or derived in connection with this Agreement or in connection with the negotiation of this Agreement to be treated as confidential and not use, or knowingly permit others to use, any such information for any purpose other than in connection herewith. - 30 - 35 (b) Buyers shall promptly following the date of this Agreement, commence its review of Seller and the Seller Subsidiaries and their respective operations, business affairs, prospects and financial condition, including, without limitation, those matters which are the subject of the Seller's representations and warranties (the "Due Diligence Review"). Buyers shall conclude such review by no later than twenty (20) business days after the date of this Agreement (the "Due Diligence Review Period"), but the pendency of such Due Diligence Review shall not delay Mercantile's obligation pursuant to Section 5.02 of this Agreement to file a Registration Statement with the SEC and all other necessary applications and filings with the appropriate Regulatory Authorities. Buyers shall advise Seller of any situation, event, circumstance or other matter which first comes to the attention of Buyers during the Due Diligence Review which could potentially result in the termination of this Agreement by Buyer pursuant to Section 7.01(d) hereof, or, if applicable, notify Seller as promptly as possible of the absence of any perceived impediment to the consummation of the Merger. Notwithstanding anything hereinabove contained or implied to the contrary, the Due Diligence Review shall not limit, restrict or preclude Buyers, at any time or from time to time thereafter, from conducting further such reviews or from exercising any rights available to it hereunder as a result of the existence or occurrence prior to the Due Diligence Period of any event or condition which was not detected in the Due Diligence Review by Buyers and which constitutes a breach of any representation, warranty or agreement of Seller under this Agreement, provided that no event or condition known to Buyers or information delivered by Seller to Buyers as a result of, or in connection with, the Due Diligence Review may be the basis for asserting the breach of any representation, warranty, or covenant after the time that Mercantile may terminate the Agreement pursuant to Section 7.01(d). 5.02. Registration Statement; Regulatory Matters. ------------------------------------------ (a) Mercantile shall prepare and, subject to the review and consent of Seller with respect to matters relating to Seller, file with the SEC as soon as is reasonably practicable the Registration Statement with respect to the shares of Mercantile Common Stock to be issued in the Merger. Mercantile shall prepare and, subject to the review and consent of Seller with respect to matters relating to Seller, use its best efforts to file as soon as is reasonably practicable applications for approval of the Merger with the Federal Reserve Board and the Illinois Commissioner and any other applicable Regulatory Authority and shall use its best efforts to cause the Registration Statement to become effective. Mercantile shall also take any action required to be taken under any applicable state blue sky or securities laws or the NYSE in connection with the issuance or listing of such shares, and Seller and the Seller Subsidiaries shall furnish Mercantile all information concerning Seller and the Seller Subsidiaries and the shareholders thereof as Mercantile may reasonably request in connection with any such action. - 31 - 36 (b) Seller and Buyers shall cooperate and use their respective best efforts to prepare all documentation, to effect all filings and to obtain all permits, consents, approvals and authorizations of all third parties and Regulatory Authorities necessary to consummate the transactions contemplated by this Agreement and, as and if directed by Mercantile, to consummate such other transactions by and among Mercantile's Subsidiaries and the Seller Subsidiaries concurrently with or following the Effective Time, provided that such actions do not impede -------- or delay (i) the receipt of any approval referred to in Section 6.01(b) or (ii) the consummation of the transactions contemplated by this Agreement or have any of the effects described in the proviso in Section 1.13. 5.03. Shareholder Approval. Seller shall call a meeting -------------------- of its shareholders to be held as soon as practicable after the date that the Registration Statement is declared effective by the SEC for the purpose of voting upon the Merger. In connection with such meeting, Mercantile shall prepare, subject to the review and consent of Seller, the Proxy Statement (which shall be part of the Registration Statement to be filed with the SEC by Mercantile) and mail the same to the shareholders of Seller. The Board of Directors of Seller shall submit for approval of Seller's shareholders the matters to be voted upon at such meeting. The Board of Directors of Seller hereby does and will recommend this Agreement and the transactions contemplated hereby to shareholders of Seller and use its reasonable best efforts to obtain any vote of Seller's shareholders necessary for the approval and adoption of this Agreement. The Company and its Board of Directors shall not be obligated to make the recommendation or otherwise solicit votes for the approval or adoption of the Agreement required by this Section 5.03 if the Board of Directors determines in good faith, after consultation with its legal counsel, that making such a recommendation or otherwise soliciting votes for the approval or adoption of the Agreement would be inconsistent with its fiduciary duties to the Company and its shareholders under applicable law. 5.04. Current Information. During the period from the ------------------- date of this Agreement to the Effective Time, each party shall promptly furnish the other with copies of all interim financial statements as the same become available and shall cause one or more of its designated representatives to confer on a regular and frequent basis with representatives of the other party. Each party shall promptly notify the other party of the following events immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the affected party with respect thereto: (a) an event which would cause any representation or warranty of such party or any Schedule to be untrue in any material respect, (b) any material adverse change in its Condition, (c) the issuance or commencement of any governmental complaint, investigation or hearing (or any communication indicating that the same may be contemplated), or (d) the institution or threat of material litigation involving such party, and shall keep the other party fully informed of such events. - 32 - 37 5.05. Conforming Entries. ------------------ (a) Notwithstanding that Seller believes that Seller and Seller Subsidiaries have established all reserves and taken all provisions for possible loan losses required by GAAP and applicable laws, rules and regulations, Seller recognizes that Buyers may have adopted different loan, accrual and reserve policies (including loan classifications and levels of reserves for possible loan losses). From and after the date of this Agreement to the Effective Time, Seller and Buyers shall consult and cooperate with each other with respect to conforming the loan, accrual and reserve policies of Seller and the Seller Subsidiaries to those policies of Buyers, as specified in each case in writing to Seller, based upon such consultation and as hereinafter provided. (b) In addition, from and after the date of this Agreement to the Effective Time, Seller and Buyers shall consult and cooperate with each other with respect to determining appropriate Seller accruals, reserves and charges to establish and take in respect of excess equipment write-off or write-down of various assets and other appropriate charges and accounting adjustments taking into account the parties' business plans following the Merger, as specified in each case in writing to Seller, based upon such consultation and as hereinafter provided. (c) Seller and Buyers shall consult and cooperate with each other with respect to determining, as specified in a written notice from Buyers to Seller, based upon such consultation and as hereinafter provided, the amount and the timing for recognizing for financial accounting purposes Seller's expenses of the Merger and the restructuring charges related to or to be incurred in connection with the Merger. (d) Subject to the language contained in the second sentence of this Section 5.05, at the request of Mercantile, Seller shall (i) establish and take such reserves and accruals as Mercantile reasonably shall request to conform Seller's loan, accrual and reserve policies to Mercantile's policies, and (ii) establish and take such accruals, reserves and charges in order to implement such policies in respect of excess facilities and equipment capacity, severance costs, litigation matters, write-off or write-down of various assets and other appropriate accounting adjustments, and to recognize for financial accounting purposes such expenses of the Merger and restructuring charges related to or to be incurred in connection with the Merger, in each case at such times as are reasonably requested by Mercantile in written notice to Seller. It is the objective of Mercantile and Seller that such reserves, accruals and charges referred to in this Section 5.05 shall be taken as of or immediately prior to December 31, 1995, and, in all events not later than as of immediately prior to the Closing Date, provided, however, -------- ------- that if such reserves, accruals and charges are to be taken as of or immediately prior to December 31, 1995 and the Closing Date is to occur thereafter, Mercantile shall certify to Seller on or prior to December 31, 1995 that the Buyer's representations and warranties are true and correct as of such date, that the Regulatory Authority approval conditions to its obligations contemplated by Section 6.01(b) have been satisfied or waived (except to the extent that any waiting - 33 - 38 period associated therewith may then have commenced but not expired) and that Buyers are otherwise in compliance with this Agreement, and Mercantile and Seller shall have mutually agreed by December 31, 1995 to the scheduling of the Closing Date; and provided, further, that Seller shall not be required -------- ------- to take any such action that is not consistent with GAAP and regulatory accounting principles. (e) No reserves, accruals or charges taken in accordance with Section 5.05(d) above may be a basis to assert a violation of a breach of a representation, warranty, or covenant of Seller herein. 5.06. Environmental Reports. Seller shall provide to --------------------- Buyers as soon a reasonably practicable, but not later than ten business days, after the acquisition, leasing, foreclosure or repossession by Seller or any of the Seller Subsidiaries of any other real property subsequent to the date hereof, a report of a phase one environmental investigation on such other real property (but excluding space in retail or similar establishments leased by Seller or any of the Seller Subsidiaries for automatic teller machines or bank branch facilities where the space leased comprises less than 20% of the total space leased to all tenants of such property). If required by the phase one report with respect to any parcel of real property referred to above, in the reasonable opinion of Mercantile, Seller shall also provide to Mercantile a phase two investigation report on such designated parcels. Mercantile shall have 15 business days from the receipt of any such phase two investigation report to notify Seller of any dissatisfaction with the contents of such report. If the estimated costs of all remedial or other corrective actions or measures with regard to the real properties referred to above required by applicable law exceed $100,000 in the aggregate, as reasonably estimated by an environmental expert retained for such purpose by Seller upon Mercantile's reasonable request and such costs will be incurred by Seller and the Seller Subsidiaries, or if such cost cannot be so reasonably estimated by such expert to be such amount or less with any reasonable degree of certainty, then Mercantile, after providing Seller with written notice of Mercantile's intent to do so and allowing Seller a six-month period from the date of such notice to take and complete, to the reasonable satisfaction of Mercantile, all such remedial or other corrective actions and measures (the aggregate cost which will be incurred by Seller and the Seller Subsidiaries shall not exceed $100,000) and shall have the right pursuant to Section 7.01(f) hereof to terminate this Agreement, which shall be Mercantile's sole remedy in such event. 5.07. Agreements of Affiliates. Set forth as Schedule ------------------------ -------- 5.07 is a list (which includes individual and beneficial - ---- ownership) of all persons whom Seller believes to be "affiliates" of Seller for purposes of Rule 145 under the Securities Act. Seller shall use all reasonable efforts to cause each person who is identified as an "affiliate" to deliver to Mercantile, as of the date hereof, or as soon as practicable hereafter, a written agreement in substantially the form set forth as Exhibit B to --------- this Agreement providing that each such person will agree not to sell, pledge, transfer or otherwise dispose of any shares of Mercantile Common Stock to be received by such person in the Merger except in compliance with the applicable provisions of the Securities Act and the rules and regulations promulgated thereunder, and until such time as financial results covering at least thirty (30) days of combined operations of Mercantile and Seller shall have been published. Prior to the Effective Time, and via letter, Seller shall amend and supplement Schedule 5.07 ------------- and use all reasonable efforts to cause each - 34 - 39 additional person who is identified as an "affiliate" to execute a written agreement as set forth in this Section 5.07. 5.08. Expenses. Each party hereto shall bear its own -------- expenses incident to preparing, entering into and carrying out this Agreement and to consummating the Merger, provided, however, -------- ------- that any and all fees and expenses paid by Seller to its legal counsel, shall not exceed the amount of $100,000; provided -------- further, however, that Buyers shall pay all printing and mailing - ------- expenses and filing fees associated with the Registration Statement, the Proxy Statement and regulatory applications. 5.09. Miscellaneous Agreements. ------------------------ (a) Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its respective best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as possible, including without limitation using its respective best efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby. (b) Seller, prior to the Effective Time, shall (i) consult and cooperate with Buyers regarding the implementation of those policies and procedures established by Buyers for its governance and that of its Subsidiaries and not otherwise referenced in Section 5.05 hereof, including, without limitation, policies and procedures pertaining to the accounting, asset/liability management, audit, credit, human resources, treasury and legal functions, and (ii) at the request of Buyers, conform Seller's existing policies and procedures in respect of such matters to Buyers' policies and procedures or, in the absence of any existing Seller policy or procedure regarding any such function, introduce Buyers' policies or procedures in respect thereof (to the extent deemed reasonable by Seller), unless to do so would cause Seller or any of the Seller Subsidiaries to be in violation of any law, rule or regulation of any Regulatory Authority having jurisdiction over Seller and/or the Seller Subsidiary affected thereby. No action taken in connection with the foregoing shall be the basis to assert the violation of a representation, warranty, or covenant of Seller herein. 5.10. Employee Agreements and Benefits. -------------------------------- (a) Following the Effective Time, Buyers shall cause the Surviving Corporation to honor in accordance with their terms all employment, severance and other compensation contracts set forth on Schedule 5.10 between Seller, any of ------------- the Seller Subsidiaries, and any current or former director, officer, employee or agent thereof, and all provisions for vested benefits or other vested amounts earned or accrued through the Effective Time under the Seller Employee Plans. (b) The provisions of any plan, program or arrangement providing for the issuance or grant of any interest in respect of the Equity Securities of Seller or any of - 35 - 40 the Seller Subsidiaries shall be deleted and terminated as of the Effective Time. (c) Except as set forth in Section 5.10(b) hereof, the Seller Employee Plans shall not be terminated by reason of the Merger but shall continue thereafter as plans of the Surviving Corporation until such time as the employees of the Seller and the Seller Subsidiaries are integrated into Mercantile's employee benefit plans that are available to other employees of Mercantile and its Subsidiaries, subject to the terms and conditions specified in such plans and to such changes therein as may be necessary to reflect the consummation of the Merger. Mercantile shall take such steps as are necessary or required to integrate the employees of Seller and the Seller Subsidiaries in Mercantile's employee benefit plans available to other employees of Mercantile and its Subsidiaries as soon as practicable after the Effective Time, with (i) full credit for prior service with Seller or any of the Seller Subsidiaries for purposes of vesting and eligibility for participation (but not benefit accruals under any defined benefit plan), and co-payments and deductibles, and (ii) waiver of all waiting periods and pre-existing condition exclusions or penalties. 5.11. Press Releases. Except as may be required by law, -------------- Seller and Mercantile shall consult and agree with each other as to the form and substance of any proposed press release relating to this Agreement or any of the transactions contemplated hereby. 5.12. State Takeover Statutes. Subject to the fiduciary ----------------------- duties of the Board of Directors, Seller will take all steps necessary to exempt the transactions contemplated by this Agreement and any agreement contemplated hereby from, and if necessary challenge the validity of, any applicable state takeover law. 5.13. Directors' and Officers' Indemnification. ---------------------------------------- Mercantile agrees that the Merger shall not affect or diminish any of the duties and obligations of indemnification of the Seller or any of the Seller Subsidiaries existing as of the Effective Time in favor of employees, agents, directors or officers of Seller or any of the Seller Subsidiaries arising by virtue of its Articles of Incorporation, Charter or Bylaws in the form in effect at the date of this Agreement or arising by operation of law or arising by virtue of any contract, resolution or other agreement or document existing at the date of this Agreement, and such duties and obligations are hereby expressly assumed by Mercantile, shall continue in full force and effect for so long as they would (but for the Merger) otherwise survive and continue in full force and effect, but in no event for a period of not less than five (5) years after the Closing Date. To the extent that Seller's existing directors' and officers' liability insurance policy would provide coverage for any action or omission occurring prior to the Effective Time, Seller agrees to give proper notice to the insurance carrier and to Mercantile of a potential claim thereunder so as to preserve Seller's rights to such insurance coverage. Mercantile represents that the directors' and officers' liability insurance policy maintained by it provides for coverage of "prior acts" for directors and officers of entities acquired by Mercantile including Seller and the Seller Subsidiaries on and after the Effective Time. 5.14. Tax Opinion Certificates. Seller shall use its ------------------------ reasonable to cause (a) no more than two of its executive officers or directors with regard to Exhibit C and (b) such --------- holders of one percent (1%) or more of the Seller Common Stock (including shares beneficially held) - 36 - 41 with regard to Exhibit D, in each case, as may be requested by --------- Thompson & Mitchell to timely execute and deliver to Thompson & Mitchell certificates substantially in the form of Exhibit C or --------- Exhibit D hereto, as the case may be. - --------- 5.15. Best Efforts to Insure Pooling. Each of Buyers ------------------------------ and Seller undertakes and agrees to use its best efforts to cause the Merger to qualify for pooling-of-interests accounting treat- ment. ARTICLE VI ---------- CONDITIONS 6.01. Conditions to Each Party's Obligation To Effect ----------------------------------------------- the Merger. The respective obligations of each party to effect - ---------- the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following conditions: (a) This Agreement shall have received the requisite approval of shareholders of Seller at the meeting of shareholders called pursuant to Section 5.03 of this Agreement. (b) All requisite approvals of this Agreement and the transactions contemplated hereby shall have been received from the Regulatory Authorities, and all waiting periods after such approvals required by law or regulation have been satisfied. (c) The Registration Statement shall have been declared effective and shall not be subject to a stop order or any threatened stop order and the Mercantile Common Stock to be issued in the Merger shall have been approved for listing on the NYSE. (d) Neither Seller nor Buyers 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. (e) Each of Buyers and Seller shall have received from Thompson & Mitchell an opinion (which opinion shall not have been withdrawn at or prior to the Effective Time) 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 Code and to the effect that, as a result of the Merger, except with respect to fractional share interests, holders of Seller Common Stock who receive Mercantile Common Stock in the Merger will not recognize gain or loss for federal income tax purposes, the basis of such Mercantile Common Stock will equal the basis of the Seller Common Stock for which it is exchanged and the holding period of such Mercantile Common Stock will include the holding period of the Seller Common Stock for which it is exchanged, assuming that such Seller Common Stock is a capital asset in the hands of the holder thereof at the Effective Time. 6.02. Conditions to Obligations of Seller To Effect the ------------------------------------------------- Merger. The obligations of - ------ - 37 - 42 Seller to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (a) Representations and Warranties. The ------------------------------ representations and warranties of Buyers set forth in Article III of this Agreement shall be true and correct in all material respects as of the Effective Time (as though made on and as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specified date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the Condition of Mercantile and its Subsidiaries taken as a whole and (iii) for the effect of transactions contemplated by this Agreement) and Seller shall have received a certificate of any Executive Vice President of Mercantile, signing solely in his capacity as an officer of Mercantile, to that effect. (b) Performance of Obligations. Buyers shall have -------------------------- performed in all material respects all obligations required to be performed by it under this Agreement prior to the Effective Time, and Seller shall have received a certificate of any Executive Vice President of Mercantile, signing solely in his capacity as an officer of Mercantile, to that effect. (c) Permits, Authorizations, etc. Buyers shall have ----------------------------- obtained any and all material permits, authorizations, consents, waivers and approvals required for the lawful consummation of the Merger. (d) Opinion of Counsel. Mercantile shall have ------------------ delivered to Seller an opinion of Mercantile's counsel dated as of the Closing Date or a mutually agreeable earlier date in substantially the form set forth as Exhibit E --------- to this Agreement. 6.03. Conditions to Obligations of Buyers To Effect the ------------------------------------------------- Merger. The obligations of Buyers to effect the Merger shall be - ------ subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (a) Representations and Warranties. The ------------------------------ representations and warranties of Seller set forth in Article II of this Agreement shall be true and correct in all material respects as of the Effective Time (as though made on and as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the Condition of the Seller Subsidiaries taken as a whole and (iii) for the effect of transactions contemplated by this Agreement) and Buyers shall have received a certificate of the President and the Chief Financial Officer of Seller, acting solely in their capacities as officers of Seller, to that effect. - 38 - 43 (b) Performance of Obligations. Seller shall have -------------------------- performed in all material respects all obligations required to be performed by it under this Agreement prior to the Effective Time, and Buyers shall have received a certificate of the President and the Chief Financial Officer of Seller acting solely in their capacities as officers of Seller, to that effect. (c) Permits, Authorizations, etc. Seller shall have ----------------------------- obtained any and all material permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the Merger. (d) Opinion of Counsel. Seller shall have delivered ------------------ to Buyers an opinion of Seller's counsel dated as of the Closing Date or a mutually agreeable earlier date in substantially the form set forth as Exhibit F to this --------- Agreement. (e) Opinion of KPMG Peat Marwick. Buyer shall have ---------------------------- received an opinion of KPMG Peat Marwick, satisfactory in form and substance to Mercantile, that the Merger will qualify for pooling-of-interests accounting treatment, which opinion shall not have been withdrawn at or prior to the Effective Time. ARTICLE VII ----------- TERMINATION, AMENDMENT AND WAIVER 7.01. Termination. This Agreement may be terminated at ----------- any time prior to the Effective Time, whether before or after approval by Seller shareholders: (a) by mutual consent by the Executive Committee of the Board of Directors of Mercantile and by the respective Boards of Directors of Seller and Merger Sub; (b) by the Executive Committee of the Board of Directors of Mercantile or the respective Boards of Directors of either Seller or Merger Sub at any time after April 30, 1996 if the Merger shall not theretofore have been consummated (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein); (c) by the Executive Committee of the Board of Directors of Mercantile or the respective Boards of Directors of either Seller or Merger Sub if (i) the Federal Reserve Board, the Illinois Commissioner, or any other federal and/or state regulatory agency whose approval is required for the consummation of the transactions contemplated hereby has denied approval of the Merger and such denial has become final and nonappealable or (ii) the shareholders of Seller shall not have approved this Agreement at the meeting referred to in Section 5.03; (d) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Merger Sub in the event (i) any situation, event, circumstance or other matter shall come to the attention of Mercantile or Merger Sub during the course of the Due Diligence Review conducted pursuant to Section 5.01(b) hereof which Mercantile or Merger Sub shall, in a good faith exercise of its - 39 - 44 reasonable discretion, believe to be inconsistent in any material and adverse respect with any of the representations or warranties of Seller, (ii) Mercantile or Merger Sub notifies Seller of such matters within five (5) business days after the end of the Due Diligence Review Period and such matters are not capable of being cured or have not been cured within thirty (30) days after written notice thereof to Seller; (e) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Merger Sub, on the one hand, or by the Board of Directors of Seller, on the other hand, in the event of a breach by the other party or parties to this Agreement of any representation, warranty or agreement contained herein, which breach is not cured within 30 days after written notice thereof is given to the breaching party by the non- breaching party or is not waived by the non-breaching party during such period; or (f) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Merger Sub pursuant to and in accordance with the provisions of Section 5.06 hereof. 7.02. Effect of Termination. In the event of termin- --------------------- ation of this Agreement as provided in Section 7.01 hereof, this Agreement shall forthwith become void and there shall be no liability on the part of Buyers or Seller or their respective officers or directors except as set forth in the second sentence of Section 5.01(a) and in Sections 5.08 and 8.02, and except that no termination of this Agreement pursuant to Section 7.01(e) shall relieve the breaching party of any liability to the non- breaching party or parties hereto arising from the intentional, deliberate and willful non-performance of any covenant contained herein, after giving notice to such breaching party and an opportunity to cure as set forth in Section 7.01(e). 7.03. Amendment. This Agreement, the Exhibits and the --------- Schedules hereto may be amended by the parties hereto, by action taken by or on behalf of the Executive Committee of the Board of Directors of Mercantile and the respective Boards of Directors of Merger Sub or Seller, at any time before or after approval of this Agreement by the shareholders of Seller; provided, however, -------- ------- that after any such approval by the shareholders of Seller no such modification shall (A) alter or change the amount or kind of the consideration to be received by the shareholders of Seller in the Merger, (B) adversely affect any representation, warranty or covenant of Buyer contained herein, (C) adversely affect the tax treatment to Seller shareholders, as generally described in Section 6.01(e) hereof, (D) otherwise adversely affect the rights of Seller or any shareholders of Seller hereunder, or (E) impede or delay receipt of any approvals, referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. This Agreement, the Exhibits and the Schedules hereto may not be amended except by an instrument in writing signed on behalf of each of Buyers and Seller. 7.04. Waiver. Any term, condition or provision of this ------ Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. - 40 - 45 ARTICLE VIII ------------ GENERAL PROVISIONS 8.01. Survival of Representations, Warranties and ------------------------------------------- Agreements; Updating Schedules. Except as otherwise provided in - ---------- ------------------ Section 5.01(b) herein no investigation by the parties hereto made heretofore or hereafter shall affect the representations and warranties of the parties which are contained herein and each such representation and warranty shall survive such investigation. Except as set forth below in this Section 8.01, all representations, warranties and agreements in this Agreement of Buyers and Seller or in any instrument delivered by Buyers or Seller pursuant to or in connection with this Agreement shall expire at the Effective Time or upon termination of this Agreement in accordance with its terms. In the event of consummation of the Merger, the agreements or representations contained in or referred to in Article I, Sections 5.02(b), 5.07, 5.08, 5.11, and 5.13 shall survive the Effective Time. In the event of termination of this Agreement in accordance with its terms, the agreements contained in or referred to in the second sentence of Section 5.01(a), and Sections 5.08, 7.02 and 8.02 shall survive such termination. Any Schedule delivered with this Agreement as of the date hereof, may be revised from time to time or at any time prior to the Effective Time to include therein the disclosure of additional information or other matters, but only to the extent that such additional information and other matters so disclosed in such revised Schedules first arises after the date hereof. 8.02. Indemnification. Buyers and Seller (hereinafter, --------------- in such capacity being referred to as the "Indemnifying Party") agree to indemnify and hold harmless each other and their officers, directors and controlling persons (each such other party being hereinafter referred to, individually and/or collectively, as the "Indemnified Party") against any and all losses, claims, damages or liabilities, joint or several, to which the Indemnified Party may become subject under the Securities Act, the Exchange Act or other federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof): (a) based primarily upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in the Proxy Statement, or in any amendment thereof or supplement thereto, and provided for inclusion thereof by the Indemnifying Party or (b) arise primarily out of or are based primarily upon the omission or alleged omission by the Indemnifying Party to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and agrees to reimburse each such Indemnified Party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. 8.03. No Assignment; Successors and Assigns. This ------------------------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but neither this Agreement nor any right or obligation set forth in any provision hereof may be transferred or assigned by any party hereto without the prior written consent of the other party, and any purported transfer or assignment in violation of this Section 8.03 shall be void and of no effect. There shall not be any third party beneficiaries of any provisions hereof except for Sections 1.07, 1.08, 5.08, 5.11, 5.13 and 8.02, which may be - 41 - 46 enforced against Buyers or Seller by the parties therein identified. 8.04. No Implied Waiver. No failure or delay on the ----------------- part of either party hereto to exercise any right, power or privilege hereunder or under any instrument executed pursuant hereto shall operate as a waiver nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 8.05. Headings. Article, section, subsection and -------- paragraph titles, captions and headings herein are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent or meaning of any provision hereof. 8.06. Entire Agreement. This Agreement, the Exhibits, ---------------- and the Schedules hereto constitute the entire agreement between the parties with respect to the subject matter hereof, and supersede all prior negotiations, representations, warranties, commitments, offers, letters of interest or intent, proposal letters, contracts, writings or other agreements or understandings, whether written or oral, with respect thereto. 8.07. Counterparts. This Agreement may be executed in ------------ one or more counterparts, and any party to this Agreement may execute and deliver this Agreement by executing and delivering any of such counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 8.08. Notices. All notices and other communications ------- hereunder shall be in writing and shall be deemed to be duly received (i) on the date given if delivered personally or (ii) upon confirmation of receipt, if by facsimile transmission or (iii) on the date received if mailed by registered or certified mail (return receipt requested), to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Buyers: Mercantile Bancorporation Inc. Mercantile Tower P.O. Box 524 St. Louis, Missouri 63166-0524 Attention: John W. Rowe Executive Vice President Mercantile Bank of St. Louis National Association Telephone: (314) 425-2952 Telecopy: (314) 425-2752 - 42 - 47 Copies to: Mercantile Bancorporation Inc. Mercantile Tower P.O. Box 524 St. Louis, Missouri 63166-0524 Attention: Jon W. Bilstrom, Esq. General Counsel and Secretary Telephone: (314) 425-8180 Telecopy: (314) 425-1386 and Thompson & Mitchell One Mercantile Center St. Louis, Missouri 63101 Attention: Robert M. LaRose, Esq. Telephone: (314) 342-1601 Telecopy: (314) 342-1717 (ii) if to Seller: First Sterling Bancorp, Inc. 315 Quail Ridge Drive Westmont, Illinois 60559 Attention: William Hank Telephone: (708) 749-5740 Telecopy: (708) 654-1246 Copies to: Carl A. Kautz 2327 27th Street Moline, Illinois 61265 Telephone: (308) 762-0339 Telecopy: (___) ___-____ and Charles W. Mulaney, Jr. Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive Chicago, Illinois 60606 Telephone: (312) 407-0700 Telecopy: (312) 407-0411 - 43 - 48 8.09. Severability. Any term, provision, covenant or ------------ restriction contained in this Agreement held by a court or a Regulatory Authority of competent jurisdiction to be invalid, void or unenforceable, shall be ineffective to the extent of such invalidity, voidness or unenforceability, but neither the remaining terms, provisions, covenants or restrictions contained in this Agreement nor the validity or enforceability thereof in any other jurisdiction shall be affected or impaired thereby. Any term, provision, covenant or restriction contained in this Agreement that is so found to be so broad as to be unenforceable shall be interpreted to be as broad as is enforceable. 8.10. Governing Law. This Agreement shall be governed by ------------- and controlled as to validity, enforcement, interpretation, effect and in all other respects by the internal laws of the State of Missouri. - 44 - 49 IN WITNESS WHEREOF, Buyers and Seller have caused this Agreement to be signed and, by such signature, acknowledged by their respective officers thereunto duly authorized, and such signatures to be attested to by their respective officers thereunto duly authorized, all as of the date first above written. "BUYERS" MERCANTILE BANCORPORATION INC. Attest: /s/ Michael J. Marshall By: /s/ John W. Rowe --------------------------------- ----------------------------- Michael J. Marshall John W. Rowe Senior Attorney and Assistant Secretary Executive Vice President Mercantile Bancorporation Inc. Mercantile Bank of St. Louis National Association MERCANTILE BANCORPORATION INCORPORATED OF ILLINOIS Attest: /s/ Michael J. Marshall By: /s/ John W. Rowe --------------------------------- ----------------------------- Michael J. Marshall John W. Rowe Senior Attorney and Assistant Secretary Vice President "SELLER" FIRST STERLING BANCORP, INC. Attest: /s/ William J. Hank By: /s/ Carl A. Kautz --------------------------------- ----------------------------- Carl A. Kautz Vice President 00338N95.MJM/TRH - 45 -
EX-2.2 3 VOTING AGREEMENT 1 VOTING AGREEMENT ---------------- This Voting Agreement dated as of July 24, 1995 is entered into between Mercantile Bancorporation Inc. ("Mercantile"), Mercantile Bancorporation Incorporated of Illinois ("Merger Sub") and the undersigned director and shareholder ("Shareholder") of First Sterling Bancorp, Inc. ("Seller"). WHEREAS, Seller, Mercantile and Merger Sub have proposed to enter into an Agreement and Plan of Merger (the "Agreement"), dated as of today, which contemplated the acquisition by Mercantile of 100% of the common stock of Seller (the "Seller Stock") by means of a merger of Seller with and into Merger Sub (the "Merger"); and WHEREAS, Mercantile and Merger Sub (collectively, "Buyers") are willing to expend the substantial time, effort and expense necessary to implement the Merger only if Shareholder enters into this Voting Agreement; and WHEREAS, the Shareholder believes that the Merger is in his or her best interest and the best interest of Seller; NOW, THEREFORE, in consideration of the premises, Shareholder hereby agrees as follows: 1. Voting Agreement. Shareholder shall vote, or cause to be ---------------- voted, all of the shares of Seller Stock he now or hereafter owns and over which he now has, or prior to the record date for voting at the Meeting (as hereinafter defined) acquires, voting control in favor of the Merger at the meeting of stockholders of Seller to be called for the purpose of approving the Merger (the "Meeting"); provided that nothing contained herein shall prohibit or restrain the Shareholder from complying with such Shareholder's fiduciary duties as a director of Seller. 2. No Competing Transaction. Shareholder shall not vote any ------------------------ of his shares of Seller Stock in favor of any other merger or sale of all or substantially all the assets of Seller to any person other than Mercantile or its affiliates until the consummation of the Merger, the termination of the Agreement, or the abandonment of the Merger by the mutual agreement of Seller and Buyers, whichever occurs first. 3. Transfers Subject to Agreement. Shareholder shall not ------------------------------ transfer his shares of Seller Stock unless the transferee, prior to such transfer, executes a voting agreement with respect to the transferred shares substantially to the effect of this Voting Agreement and reasonably satisfactory to Buyers. 4. No Ownership Interest. Nothing contained in this Voting --------------------- Agreement shall be deemed to vest in Mercantile any direct or indirect ownership or incidence of ownership of or with respect to any shares of Seller Stock. All rights, ownership and economic benefits of and relating to the shares of Seller Stock shall remain and belong to 2 Shareholder, and Buyers shall have no authority to manage, direct, superintend, restrict, regulate, govern or administer any of the policies or operations of Seller or exercise any power or authority to direct Shareholder in: (i) the voting of any of his shares of Seller Stock, except as otherwise expressly provided herein, or (ii) the performance of his duties or responsibilities as a director of Seller. 5. Evaluation of Investment. Shareholder, by reason of his ------------------------ knowledge and experience in financial and business matters and in his capacity as a director of a bank holding company, believes himself capable of evaluating the merits and risks of the potential investment in common stock of Mercantile, $5.00 par value ("Mercantile Common Stock"), contemplated by the Agreement. 6. Documents Delivered. Shareholder acknowledges: (i) having ------------------- reviewed the Agreement and its attachments, (ii) that all reports, proxy statements and other information with respect to Mercantile filed with the Securities and Exchange Commission (the "Commission") were, prior to his execution of this Voting Agreement, available for inspection and copying at the offices of the Commission, and (iii) that Mercantile delivered the following such documents to Seller: (a) Mercantile's Annual Report on Form 10-K for the year ended December 31, 1994; (b) Mercantile's Annual Report to Shareholders for the year ended December 31, 1994; (c) Mercantile's Current Reports on Form 8-K filed on May 12, 1995 and May 31, 1995; (d) Mercantile's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; and (e) Mercantile's Amendment #1 to the Annual Report on Form 10-K, filed as Form 10-K/A on June 29, 1995. Buyers hereby represent and warrant that all reports and filings referred to in (ii) and (iii) above, as of its respective date, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of circumstances under which they were made not misleading. 7. Amendment and Modification. The Voting Agreement may be -------------------------- amended, modified or supplemented at any time by the written approval of such amendment, modification or supplement by Shareholder and Buyers. 8. Entire Agreement. This Voting Agreement evidences the ---------------- entire agreement among the parties hereto with respect to the matters provided for herein and there are no agreements, representations or warranties with respect to the matters provided for herein other than those set forth herein and in the Agreement. This Voting Agreement supersedes any agreements among Seller and the Shareholder concerning the Merger, or disposition or control of the Seller Stock. 2 3 9. Severability. The parties hereto agree that if any ------------ provision of this Voting Agreement shall under any circumstances be deemed invalid or inoperative, this Voting Agreement shall be construed with the invalid or inoperative provisions deleted, and the rights and obligations of the parties shall be construed and enforced accordingly. 10. Counterparts. This Voting Agreement may be executed in ------------ two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11. Governing Law. The validity, construction, enforcement ------------- and effect of this Voting Agreement shall be governed by the internal laws of the State of Missouri. 12. Headings. The headings for the paragraphs of this Voting --------- Agreement are inserted for convenience only and shall not constitute a part hereof or affect the meaning or interpretation of this Voting Agreement. 13. Termination. This Voting Agreement shall terminate upon: ------------ (i) consummation of the Merger; (ii) the termination of the Agreement; (iii) the abandonment of the Merger by the mutual agreement of Seller and Buyers or (iv) the amendment of the Merger Agreement in any manner that (A) alters or changes the amount or kind of the consideration to be received by the shareholders of Seller in the Merger, (B) adversely affects any representation, warranty or covenant of Buyers contained in the Merger Agreement, (C) adversely affects the tax treatment to Seller shareholders, as generally described in Section 6.01(e) of the Merger Agreement, (D) otherwise adversely affects the rights of Seller or any shareholders of Seller under the Merger Agreement, or (E) impedes or delays receipt of any approvals, referred to in Section 6.01(b) of the Merger Agreement or the consummation of the transactions contemplated by the Merger Agreement, whichever occurs first. 3 4 14. Successors. This Voting Agreement shall be binding upon ---------- and inure to the benefit of Buyers and their successors, and Shareholder, such Shareholder's respective executors, personal representatives, administrators, heirs, legatees, guardians and other legal representatives. The Voting Agreement shall survive the death or incapacity of Shareholder. This Voting Agreement may be assigned by Mercantile only to an affiliate of Mercantile. MERCANTILE BANCORPORATION INC. By:------------------------------------------------- John W. Rowe Executive Vice President Mercantile Bank of St. Louis National Association SHAREHOLDER By:------------------------------------------------- 00295n95.mjm 4 EX-5.1 4 OPINION RE LEGALITY 1 Exhibit 5.1 [letterhead of Thompson & Mitchell] October 30, 1995 Mercantile Bancorporation Inc. P.O. Box 524 St. Louis, Missouri 63166-0524 Re: Registration Statement on Form S-4 ---------------------------------- Gentlemen: We refer you to the Registration Statement on Form S-4 filed by Mercantile Bancorporation Inc. (the "Company") on October 30, 1995 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended, pertaining to the proposed issuance by the Company of up to 521,424 shares of the Company's common stock, $5.00 par value (the "Shares"), in connection with the acquisition by merger of First Sterling Bancorp, Inc. ("First Sterling") pursuant to the Agreement and Plan of Merger dated July 24, 1995 (the "Merger Agreement"), by and among the Company, First Sterling and Mercantile Bancorporation Incorporated of Illinois, all as provided in the Registration Statement. In rendering the opinions set forth herein, we have examined such corporate records of the Company, such laws and such other information as we have deemed relevant, including the Company's Restated Articles of Incorporation and Bylaws, as amended and currently in effect, the resolutions adopted by the Executive Committee of the Company's Board of Directors relating to the merger transaction, certificates received from state officials and statements we have received from officers and representatives of the Company. In delivering this opinion, the undersigned assumed the genuineness of all signatures; the authenticity of all documents submitted to us as originals; the conformity to the originals of all documents submitted to us as certified, photostatic or conformed copies; the authenticity of the originals of all such latter documents; and the correctness of statements submitted to us by officers and representatives of the Company. Based only on the foregoing, the undersigned is of the opinion that: 1. The Company has been duly incorporated and is validly existing under the laws of the State of Missouri; and 1. The Shares to be sold by the Company, when issued as provided in the Merger Agreement, will be duly authorized, duly and validly issued and fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the section of the Proxy Statement/Prospectus entitled "Legal Matters." Very truly yours, /s/ Thompson & Mitchell EX-8.1 5 OPINION RE TAX MATTERS 1 Exhibit 8.1 [letterhead of Thompson & Mitchell] October 30, 1995 Board of Directors First Sterling Bancorp, Inc. 315 Quail Ridge Drive Westmont, Illinois 60559 Ladies and Gentlemen: You have requested our opinion with regard to certain federal income tax consequences of the proposed merger (the "Merger") of First Sterling Bancorp, Inc. ("First Sterling") with and into Mercantile Bancorporation Incorporated of Illinois ("Merger Sub"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"). In connection with the preparation of our opinion, we have examined and have relied upon the following: (i) The Agreement and Plan of Merger by and among MBI, Merger Sub, and First Sterling dated July 24, 1995, including the schedules and exhibits thereto (the "Agreement"); (ii) MBI's Registration Statement on Form S-4, including the Proxy Statement/Prospectus contained therein, filed with the Securities and Exchange Commission on October 30, 1995, as supplemented and amended to the date hereof (the "Registration Statement"); (iii) The representations and undertaking of MBI substantially in the form of Exhibit A hereto; (iv) The representations and undertakings of First Sterling and certain holders of First Sterling common stock, par value $1.00 per share ("First Sterling Common Stock"), substantially in the forms of Exhibit B and Exhibit C hereto; and (v) The Rights Agreement by and between MBI and Mercantile Bank of St. Louis National Association as rights agent, dated May 23, 1988. Our opinion is based solely upon applicable law and the factual information and undertakings contained in the above-mentioned documents. In rendering our opinion, we have assumed the accuracy of all information and the performance of all undertakings contained in each of such documents. We also have assumed the authenticity of all original documents, the conformity of all copies to the original documents, and the genuineness of all signatures. We have not attempted to verify independently the accuracy of any information in any such document, and we have assumed that such documents accurately and completely set forth all material facts relevant to this opinion. All of our assumptions were made with your consent. If any fact or assumption described herein or below is incorrect, any or all of the federal income tax consequences described herein may be inapplicable. 2 First Sterling Bancorp, Inc. October 30, 1995 Page 2 OPINION Subject to the foregoing, to the conditions and limitations expressed elsewhere herein, and assuming that the Merger is consummated in accordance with the Plan, we are of the opinion that for federal income tax purposes: 1. The Merger will constitute a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"). 2. Each shareholder of First Sterling who exchanges, in the Merger, shares of First Sterling Common Stock solely for shares of MBI common stock, par value $5.00 per share ("MBI Common Stock"): a) will recognize no gain or loss as a result of the exchange, except with regard to cash received in lieu of a fractional share, as discussed below (Code section 354(a)(1)); b) will have basis for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 3, below) equal to the aggregate adjusted tax basis of the shares of First Sterling Common Stock surrendered (Code section 358(a)(1)); and c) will have a holding period for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 3, below) which includes the period during which the shares of First Sterling Common Stock surrendered were held, provided that the shares of First Sterling Common Stock surrendered were capital assets in the hands of such holder at the time of the Merger (Code section 1223(1)). 3. Each shareholder of First Sterling who receives, in the Merger, cash in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received in the Merger and then redeemed by MBI. Provided that the shares of First Sterling Common Stock surrendered were capital assets in the hands of such holder at the time of the Merger, the receipt of such cash will cause the recipient to recognize capital gain or loss, equal to the difference between the amount of cash received and the portion of such holder's basis in the shares of MBI Common Stock allocable to the fractional share (Code sections 1001 and 1222; Rev. Rul. 66-365, 1966-2 C.B. 116; Rev. Proc. 77-41, 1977-2 C.B. 574). 4. Each shareholder of First Sterling who receives solely cash as a result of the exercise of dissenters' rights will recognize gain or loss (determined separately as to each block of First Sterling Common Stock exchanged) in an amount equal to the difference between (i) the amount of cash received by such shareholder and (ii) such shareholder's aggregate adjusted tax basis for the shares of First Sterling Common Stock surrendered, provided that the cash payment does not have the effect of the distribution of a dividend (Code sections 1001 and 302(a)). Such gain or loss will be capital gain or loss if the shares of First Sterling Common Stock surrendered were capital assets in the hands of the holder, and long-term or short-term depending on the holder's holding period for 3 First Sterling Bancorp, Inc. October 30, 1995 Page 3 each block of First Sterling Common Stock surrendered (Code section 1222). However, if the cash payment does have the effect of the distribution of a dividend, such shareholder will recognize income in the amount of the cash received (without regard to such shareholder's basis in the First Sterling Common Stock surrendered), which generally will be taxable as a dividend (Code sections 302(d) and 301). The determination of whether a cash payment has the effect of the distribution of a dividend will be made pursuant to the provisions and limitations of section 302 of the Code, taking into account the stock ownership attribution rules of section 318 of the Code. Because such determination generally will depend on the facts and circumstances of each First Sterling shareholder, we express no opinion as to whether the cash payments discussed in this paragraph 4 will be treated as having the effect of the distribution of a dividend. A cash payment will be considered not to have the effect of the distribution of a dividend under section 302 of the Code only if the cash payment (i) results in a "complete redemption" of such shareholder's actual and constructive stock interest, (ii) qualifies as a "substantially disproportionate" reduction in such shareholder's actual and constructive stock interest, or (iii) is not "essentially equivalent to a dividend" (Code section 302(b)(1), (2), (3)). A cash payment will result in a "complete redemption" of a shareholder's stock interest if such shareholder does not actually or constructively own any stock after the Merger. A reduction in a shareholder's stock interest will be "substantially disproportionate" if (i) the percentage of outstanding shares actually and constructively owned by such shareholder after the receipt of the cash payment is less than four-fifths (i.e., 80%) ---- of the percentage of outstanding shares actually and constructively owned by such shareholder immediately prior to the receipt of the cash payment, and (ii) such shareholder actually and constructively owns less than 50 percent of the number of shares outstanding after the receipt of the cash payment (Code section 302(b)(2)). The cash payment will not be "essentially equivalent to a dividend" if there has been a "meaningful reduction" (as the quoted term has been interpreted by judicial authorities and by rulings of the Internal Revenue Service (the "Service")) of the shareholder's actual and constructive ownership interest (Code section 302(b)(1); United States v. Davis, 397 U.S. ---------------------- 301 (1970); see, e.g., Rev. Rul. 76-385, 1976-2 C.B. 92; Rev. Rul. 76-364, --- ---- 1976-2 C.B. 91). Under the traditional analysis (which apparently continues to be used by the Service), section 302 of the Code will apply as though the distribution of cash were made by First Sterling in a hypothetical redemption of First Sterling Common Stock immediately prior to, and in a transaction separate from, the Merger (a "deemed pre-Merger redemption"). Thus, under the traditional analysis, the determination of whether a cash payment results in a complete redemption of interest, qualifies as a substantially disproportionate reduction of interest, or is not essentially equivalent to a dividend will be made by comparing (i) the shareholder's actual and constructive stock interest in First Sterling before the deemed pre-Merger redemption, with (ii) such shareholder's actual and constructive stock interest in First Sterling after the deemed pre-Merger redemption (but before the Merger). Nevertheless, in view of Commissioner v. Clark, 489 U.S. 726 (1989), many tax practitioners --------------------- believe that the continuing validity of the traditional analysis is open to question and that, in a transaction such as the Merger, the receipt of solely cash in exchange for stock actually owned should be treated in accordance with the principles of Commissioner v. Clark, supra, as if the First --------------------- ----- 4 First Sterling Bancorp, Inc. October 30, 1995 Page 4 Sterling Common Stock exchanged for cash in the Merger had instead been exchanged in the Merger for shares of MBI Common Stock followed immediately by a redemption of such shares by MBI for the cash payment (a "deemed post-Merger redemption"). Under this analysis, the determination of whether a cash payment satisfies any of the foregoing tests would be made by comparing (i) the shareholder's actual and constructive stock interest in MBI before the deemed post-Merger redemption (determined as if such shareholder had received solely MBI Common Stock in the Merger), with (ii) such shareholder's actual and constructive stock interest in MBI after the deemed post-Merger redemption. Because this analysis may be more likely to result in capital gain treatment than the traditional analysis, each First Sterling shareholder who receives solely cash in exchange for all of the First Sterling Common Stock he or she actually owns should consult his or her own tax advisor with regard to the proper treatment of such cash. The determination of ownership for purposes of the foregoing tests will be made by taking into account both shares actually owned by such shareholder and shares constructively owned by such shareholder pursuant to section 318 of the Code (Code section 302(c)). Under section 318 of the Code, a shareholder will be deemed to own stock that is owned or deemed to be owned by certain members of his or her family (spouse, children, grandchildren, and parents) and other related parties including, for example, certain entities in which such shareholder has a direct or indirect interest (including partnerships, estates, trusts and corporations), as well as shares of stock that such shareholder (or a related person) has the right to acquire upon exercise of an option or conversion right. Section 302(c)(2) of the Code provides certain exceptions to the family attribution rules for the purpose of determining whether a complete redemption of a shareholder's interest has occurred for purposes of Code section 302. * * * * * * * * * * * * We express no opinion with regard to (1) the federal income tax consequences of the Merger not addressed expressly by this opinion, including without limitation, (i) the tax consequences, if any, to those shareholders of First Sterling who acquired shares of First Sterling Common Stock pursuant to the exercise of employee stock options or otherwise as compensation, and (ii) the tax consequences to special classes of shareholders, if any, including without limitation, foreign persons, insurance companies, tax-exempt entities, retirement plans, and dealers in securities; and (2) federal, state, local, or foreign taxes (or any other federal, state, local, or foreign laws) not specifically referred to and discussed herein. Further, our opinion is based upon the Code, Treasury Regulations proposed or promulgated thereunder, and administrative interpretations and judicial precedents relating thereto, all of which are subject to change at any time, possibly with retroactive effect, and we assume no obligation to advise you of any subsequent change thereto. If there is any change in the applicable law or regulations, or if there is any new administrative or judicial interpretation of the applicable law or regulations, any or all of the federal income tax consequences described herein may become inapplicable. The foregoing opinion reflects our legal judgment solely on the issues presented and discussed herein. This opinion has no official status or binding effect of any kind. Accordingly, we cannot assure you that the Service or any court of competent jurisdiction will agree with this opinion. 5 First Sterling Bancorp, Inc. October 30, 1995 Page 5 We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to all references made to this letter and to this firm in the Registration Statement. Very truly yours, /s/ Thompson & Mitchell 6 Exhibit A CERTIFICATE ----------- The undersigned, * , [Undersigned's Title] of Mercantile ----------- Bancorporation Inc., a Missouri corporation ("MBI"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Agreement and Plan of Merger by and among MBI, Mercantile Bancorporation Incorporated of Illinois, a Missouri corporation ("Merger Sub"), and First Sterling Bancorp, Inc., an Illinois corporation ("First Sterling"), dated July 24, 1995, including the schedules and exhibits thereto (the "Agreement"), and (b) I am aware that (i) this Certificate will be relied on by Thompson & Mitchell, counsel for MBI, in rendering its opinion to First Sterling that the merger of First Sterling with and into Merger Sub (the "Merger") will constitute a reorganization within the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Merger. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF MBI, that: (1) The fair market value of the MBI common stock, par value $5.00 per share ("MBI Common Stock"), to be received by each First Sterling shareholder in the Merger (including cash to be received in lieu of fractional shares of MBI Common Stock, if any) will be approximately equal to the fair market value of the First Sterling common stock, par value $1.00 per share ("First Sterling Common Stock"), surrendered in the Merger by each such shareholder. (2) Except as otherwise set forth by the undersigned on an attachment hereto, MBI is aware of no plan, intention or arrangement (including any option or pledge) on the part of any holder of First Sterling Common Stock to sell, exchange or otherwise dispose of any of the MBI Common Stock to be received in the Merger, with the exception of fractional shares of MBI Common Stock to be exchanged for cash pursuant to the Merger. (3) Before the Merger, MBI will be in control of Merger Sub within the meaning of section 368(c) of the Code. 7 (4) After the Merger, (a) Merger Sub will not issue additional shares of its stock that would result in MBI losing control of Merger Sub within the meaning of section 368(c) of the Code, and (b) neither Merger Sub nor any other member of MBI's "affiliated group" (as the quoted term is defined in Code section 1504, the "MBI Affiliated Group") will have outstanding any warrants, options, convertible securities, or any other type of right (including any preemptive right) pursuant to which any person could acquire stock in Merger Sub that, if exercised or converted, would affect MBI's retention of control of Merger Sub (as defined above). No stock of Merger Sub will be issued in connection with the Merger. (5) In the Merger, MBI and Merger Sub will tender no consideration for First Sterling Common Stock other than MBI Common Stock, cash in lieu of fractional shares of MBI Common Stock, and payments made to dissenters, if any. (6) Neither MBI nor any other member of the MBI "Affiliated Group" has any plan or intention to redeem or otherwise reacquire any of the MBI Common Stock issued to the shareholders of First Sterling in the Merger. (7) Neither MBI nor any other member of the MBI Affiliated Group has any plan or intention (a) to liquidate Merger Sub, (b) to merge Merger Sub with and into another corporation, (c) to sell or otherwise dispose of (whether by dividend distribution or otherwise) the stock of Merger Sub, or (d) except for transfers described in section 368(a)(2)(C) of the Code, or dispositions made in the ordinary course of business or dispositions approved by Thompson & Mitchell, to cause, suffer, or permit Merger Sub to sell or otherwise dispose of (whether by dividend distribution or otherwise) (i) any assets of First Sterling acquired in the Merger, or (ii) any assets of any other member of First Sterling's "affiliated group" (as the quoted term is defined in Code section 1504, the "First Sterling Affiliated Group"). (8) After the Merger, Merger Sub will continue the historic businesses of First Sterling and the other members of the First Sterling Affiliated Group, or will use a significant portion of the historic business assets of the members of the First Sterling Affiliated Group in a business (no stock of any member of the First Sterling Affiliated Group shall be treated as a business asset for purposes of this representation). 8 (9) MBI, Merger Sub, First Sterling, and the shareholders of First Sterling will each pay their respective expenses, if any, incurred in connection with the Merger; provided, however, that MBI or Merger Sub may pay and assume those expenses of First Sterling that are solely and directly related to the Merger in accordance with the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187, including those printing, mailing and filing fees described in Section 5.08 of the Agreement. (10) Except with regard to Transaction Costs (as defined below), neither MBI nor any other member of the MBI Affiliated Group will pay any amount or incur any liability to or for the benefit of, or assume or cancel any liability of, any shareholder of First Sterling in connection with the Merger, and no liability to which First Sterling Common Stock is subject will be extinguished as a result of the Merger. For purposes of this representation, (a) the term "liability" shall include any undertaking to pay or to cause the reduction, release, or extinguishment of any obligation, without regard to whether any such undertaking or obligation is contingent or legally enforceable (for example and without limitation, the term "liability" includes an unenforceable agreement to cause the repayment of an obligation guaranteed by a First Sterling shareholder or to cause by other means the release of such guaranty), and (b) the term "Transaction Costs" shall mean amounts paid or liabilities incurred in connection with the Merger (i) to First Sterling shareholders with respect to the MBI Common Stock (including cash in lieu of fractional shares thereof) to be delivered in the Merger, (ii) to dissenters, if any, (iii) for legal, accounting, and investment banking and/or advisor services rendered to MBI or Merger Sub, if any, (iv) for those expenses payable or assumable by MBI or Merger Sub in accordance with representation above, and (v) as compensation to any employee of MBI or First Sterling or of any other member of the MBI Affiliated Group or the First Sterling Affiliated Group for services rendered in the ordinary course of his or her employment. (11) No indebtedness between First Sterling or any other member of the First Sterling Affiliated Group, on the one hand, and Merger Sub or MBI or any other member of the MBI Affiliated Group, on the other hand, exists or will exist prior to the Merger that (a) was issued or acquired at a discount, (b) will be settled, as a result of the Merger, at a discount, or (c) will result in the recognition of gain under Treasury Regulation Sec. 1.1502-13. No "installment obligation" (as the quoted term is defined for purposes of Code section 453B), between First Sterling, on the one hand, 9 and Merger Sub, on the other hand, exists or will exist prior to the Merger that will be extinguished as a result of the Merger. (12) The payment of cash in lieu of fractional shares of MBI Common Stock in the Merger will be solely for the purpose of avoiding the expense and inconvenience to MBI of issuing fractional shares and will not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to the First Sterling shareholders in lieu of fractional shares of MBI Common Stock will not exceed one percent of the total consideration that will be issued in the transaction to the First Sterling shareholders in exchange for their shares of First Sterling Common Stock. The fractional share interests of each First Sterling shareholder will be aggregated, and it is intended that no First Sterling shareholder will receive cash in lieu of fractional share interests in an amount equal to or greater than the value of one full share of MBI Common Stock. (13) None of the compensation to be paid or accrued after the Merger to or for the benefit of any shareholder-employee of First Sterling will be separate consideration for, or allocable to, any of his or her shares of First Sterling Common Stock; none of the shares of MBI Common Stock received in the Merger by any First Sterling shareholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation to be paid or accrued after the Merger to or for the benefit of any First Sterling shareholder-employee will be for services actually rendered in the ordinary course of his or her employment and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (14) All payments made to dissenters and all cash payments made in lieu of fractional shares of MBI Common Stock will be funded with assets of MBI. No such payments will be funded with assets of First Sterling. (15) With regard to the Rights Agreement by and between MBI and Mercantile Bank of St. Louis National Association (as successor in interest to Mercantile Bank National Association) as rights agent, dated May 23, 1988 (the "Rights Agreement"), no "Distribution Date" (as the quoted term is defined in the Rights Agreement) has occurred, and the Merger will not cause the occurrence of a Distribution Date. 10 (16) Neither MBI nor any other member of the MBI Affiliated Group owns, directly or indirectly, any stock of First Sterling other than in a fiduciary capacity; and neither MBI nor any other member of the MBI Affiliated Group has owned, directly or indirectly, any stock of First Sterling within the last five years, other than in a fiduciary capacity or as a result of foreclosure of previously contracted debts. (17) No terms of the Agreement have been waived or modified. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson & Mitchell at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made immediately before the Merger. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of MBI this ----- day of ------------, 1995. ----------------------------- 11 Exhibit B CERTIFICATE ----------- The undersigned, * , [Title] of First Sterling Bancorp, ------------- Inc., an Illinois corporation ("First Sterling"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Agreement and Plan of Merger by and among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Mercantile Bancorporation Incorporated of Illinois, an Illinois corporation ("Merger Sub"), and First Sterling, including the schedules and exhibits thereto, dated July 24, 1995 (the "Agreement"), and (b) I am aware that (i) this Certificate will be relied on by Thompson & Mitchell, counsel for MBI, in rendering its opinion to First Sterling that the merger of First Sterling with and into Merger Sub (the "Merger") will constitute a reorganization within the meaning of section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Merger. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF First Sterling, that: (1) To the knowledge of the undersigned, the fair market value of the MBI common stock, par value $5.00 per share ("MBI Common Stock"), to be received by each First Sterling shareholder in the Merger (including cash to be received in lieu of fractional shares of MBI Common Stock, if any) will be approximately equal to the fair market value of the First Sterling common stock, par value $1.00 per share ("First Sterling Common Stock"), surrendered in the Merger by each such shareholder. 12 (2) First Sterling will transfer to Merger Sub in the Merger assets representing at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, in each case, that were held by First Sterling immediately prior to the Merger. For purposes of this representation, First Sterling assets used to pay shareholders who receive cash and First Sterling assets used to pay expenses of the Merger or to fund any redemption or distribution within 24 months before the Merger (except for regular, normal dividends) shall be included as assets of First Sterling held immediately prior to the Merger. For purposes of this representation, any asset of First Sterling or any other member of First Sterling's "affiliated group" (as the quoted term is defined in Code section 1504) (the "First Sterling Affiliated Group") that is disposed of within 24 months before the Merger also shall be included as an asset of First Sterling held immediately prior to the Merger, if such asset was disposed of out of the ordinary course of business or in anticipation of the Merger. (3) At the time of the Merger and except with regard to Transaction Costs (as defined below), each liability of First Sterling and each liability to which an asset of First Sterling is subject will have been incurred by First Sterling in the ordinary course of business and no such liability will have been incurred in anticipation of the Merger. In addition, at the time of the Merger and except with regard to Transaction Costs, First Sterling will not, directly or indirectly, have paid (or loaned) any amount or incurred any liability to or for the benefit of, or assumed or cancelled any liability of, any First Sterling shareholder in connection with the Merger. For purposes of this representation, (a) the term "First Sterling" shall be deemed also to refer to each other member of the First Sterling Affiliated Group, (b) the term "liability" shall include any undertaking to pay or to cause the reduction, release, or extinguishment of, any obligation, without regard to whether any such undertaking or obligation is contingent or legally enforceable (for example and without limitation, the term "liability" includes an unenforceable agreement to cause the repayment of an obligation guaranteed by a First Sterling shareholder or to cause by other means the release of such guaranty), and (c) the term "Transaction Costs" shall mean amounts paid or liabilities incurred in connection with the Merger (i) to dissenters, if any, (ii) for legal, accounting, and investment banking and/or advisor services rendered to First Sterling or any other member of the First Sterling Affiliated Group, 13 if any, and (iii) as compensation to any employee of First Sterling or any other member of the First Sterling Affiliated Group for services rendered in the ordinary course of his or her employment. (4) Before the Merger, First Sterling will not have outstanding any warrants, options, convertible securities, or any other type of right (including any preemptive right) pursuant to which any person could acquire stock in First Sterling that, if exercised or converted after the Merger, would affect MBI's retention of control of Merger Sub (within the meaning of section 368(c) of the Code). (5) Expenses, if any, that are incurred in connection with the Merger and are properly attributable to First Sterling's shareholders will be paid by those shareholders and not by First Sterling. First Sterling will pay its own expenses that are incurred in connection with the Merger, with the exception of those printing and filing fees described in Section 5.08 of the Agreement. (6) No indebtedness between First Sterling or any other member of the First Sterling Affiliated Group, on the one hand, and Merger Sub or MBI or any other member of MBI's "affiliated group" (defined as above), on the other hand, exists or will exist prior to the Merger that (a) was issued or acquired at a discount, or (b) will be settled, as a result of the Merger, at a discount. No "installment obligation" (as the quoted term is defined for purposes of Code section 453B), between First Sterling, on the one hand, and Merger Sub, on the other hand, exists or will exist prior to the Merger that will be extinguished as a result of the Merger. (7) The fair market value of the assets of First Sterling to be transferred to Merger Sub will exceed the sum of the amount of liabilities to be assumed by Merger Sub, plus the amount of liabilities, if any, to which the assets to be transferred are subject. (8) The payment of cash in lieu of fractional shares of MBI Common Stock will be solely for the purpose of avoiding the expense and inconvenience to MBI of issuing fractional shares and will not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to the First Sterling shareholders in lieu of fractional shares of MBI Common Stock will not exceed one percent of the total consideration that will be issued in the transaction to the First Sterling shareholders in exchange for their shares of First Sterling Common Stock. The 14 fractional share interests of each First Sterling shareholder will be aggregated, and no First Sterling shareholder will receive cash in lieu of fractional share interests in an amount equal to or greater than the value of one full share of MBI Common Stock. (9) None of the compensation paid or accrued before the Merger to or for the benefit of any First Sterling shareholder-employee will be separate consideration for, or allocable to, any of their shares of First Sterling Common Stock; none of the shares of MBI Common Stock received in the Merger by any First Sterling shareholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation paid or accrued before the Merger to or for the benefit of any First Sterling shareholder-employee will be for services actually rendered in the ordinary course of his or her employment and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson & Mitchell at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that comes to the attention of the undersigned on or before the date of the Merger that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made immediately before the Merger. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of First Sterling this ----- day of ---------------, 1995. -------------------------- 15 Exhibit C SHAREHOLDER CERTIFICATE ----------------------- The undersigned shareholder of First Sterling Bancorp, Inc., an Illinois corporation ("First Sterling"), [shareholder's name], HEREBY -------------------- CERTIFIES that (a) I hold * shares of First Sterling common stock, par ------ value $1.00 per share ("First Sterling Common Stock"), (b) I am familiar with the terms and conditions of the Agreement and Plan of Merger by and among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Mercantile Bancorporation Incorporated of Illinois, a Missouri corporation ("Merger Sub"), and First Sterling, dated July 24, 1995 (the "Agreement"), and (c) I am aware that (i) this Certificate will be relied on by Thompson & Mitchell, counsel for MBI, in rendering its opinion to First Sterling that the merger of First Sterling with and into Merger Sub (the "Merger") will constitute a reorganization within the meaning of section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended, and (ii) the representations and undertaking recited herein will survive the Merger. The undersigned HEREBY FURTHER CERTIFIES that the undersigned has no plan, intention or arrangement (including any option or pledge) to sell, exchange or otherwise dispose of any of the MBI common stock, par value $5.00 per share ("MBI Common Stock"), to be received in the Merger, with the exception of any fractional share of MBI Common Stock to be exchanged for cash pursuant to the Merger. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson & Mitchell at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that comes to the attention of the undersigned on or before the date of the Merger that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made immediately before the Merger. IN WITNESS WHEREOF, the undersigned has executed this certificate, or caused this certificate to be executed by its duly authorized representative, this ----- day of ---------------, 1995. -------------------------- EX-23.1 6 CONSENT OF EXPERT 1 Exhibit 23.1 Independent Auditors' Consent ----------------------------- The Board of Directors and Stockholders Mercantile Bancorporation Inc.: We consent to the use of our report incorporated herein by reference and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG Peat Marwick LLP St. Louis, Missouri October 27, 1995 EX-23.2 7 CONSENT OF EXPERT 1 Exhibit 23.2 Consent of Independent Accountants ---------------------------------- We consent to the use in this Registration Statement on Form S-4 of Mercantile Bancorporation Inc., and the Prospectus which is a part thereof, of our report dated September 7, 1995 on the December 31, 1994 consolidated financial statements of First Sterling Bancorp, Inc. We also consent to the reference to us under the heading "Experts" in the Prospectus. /s/ Crowe Chizek and Company Oak Brook, Illinois October 27, 1995 EX-23.3 8 CONSENT OF EXPERT 1 Exhibit 23.3 Independent Auditors' Consent ----------------------------- We consent to the incorporation by reference in this Registration Statement of Mercantile Bancorporation Inc. on Form S-4 of our report dated January 24, 1995, appearing in the Annual Report on Form 10-K of Hawkeye Bancorporation for the year ended December 31, 1994 and to the reference to us under the heading "Experts" in the Prospectus, which is a part of this Registration Statement. /s/ Deloitte & Touche LLP Des Moines, Iowa October 26, 1995 EX-23.4 9 CONSENT OF EXPERT 1 Exhibit 23.4 Consent of The Chicago Corporation, Financial Advisor ----------------------------------------------------- The Chicago Corporation hereby consents to the use of its name in the Proxy Statement and Prospectus forming a part of this Registration Statement on Form S-4 and to the filing of its letter attached as Annex A to the Proxy Statement/Prospectus. In giving such consent, The Chicago Corporation does not admit that it falls within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, and the Rules and Regulations issued thereunder. /s/ The Chicago Corporation Chicago, Illinois October 27, 1995 -----END PRIVACY-ENHANCED MESSAGE-----