-----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, TKcFQVIDE9C81vYO+2RKO81/7ks7610hOVebn9g6P5X81zhbKy4duCvF+M/LfFbA qq3R79Ez4YoxERUefj7o1Q== 0000950114-95-000192.txt : 19951103 0000950114-95-000192.hdr.sgml : 19951103 ACCESSION NUMBER: 0000950114-95-000192 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19951102 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: 033-63925 FILM NUMBER: 95586857 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 NOVEMBER 2, 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 jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification organization) Number) 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. RICHARD N. MASSEY, ESQ. General Counsel and Thompson & Mitchell Rose Law Firm Secretary One Mercantile Center 120 East Fourth Street Mercantile Bancorporation St. Louis, Missouri Little Rock, Arkansas Inc. 63101 72201 St. Louis, Missouri (314) 231-7676 (501) 375-9131 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 322,000 N/A $8,671,080.00 $2,990.05 shares ==================================================================================================================================== 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 $8,598,362 aggregate book value of 10,324 shares of Common Stock, $100.00 par value, of Security Bank of Conway, F.S.B. 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 Available Information; Incorporation of Pages 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 Reorganization; Certain Federal Income Tax Consequences of the Reorganization; Information Regarding MBI Common Stock 5. Pro Forma Financial Information Pro Forma Financial Information 6. Material Contacts with the Company Summary Information; Terms of the Being Acquired Proposed Reorganization 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 Incorporation of Certain Information by Registrants Reference; Summary Information; Information Regarding MBI Common Stock 11. Incorporation of Certain Information Incorporation of Certain Information by 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 Not Applicable Other 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 Summary Information; Information Other Than S-2 or S-3 Companies Regarding Security Bank 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 Security Bank; Information Regarding Security Bank 19. Information if Proxies, Consents or Not Applicable Authorizations are not to be Solicited in an Exchange Offer
- ii - 4 [SECURITY BANK OF CONWAY, F.S.B.] -------------, 1995 Dear Fellow Shareholder: The Board of Directors cordially invites you to attend a Special Meeting of Shareholders of Security Bank of Conway, F.S.B. ("Security Bank") to be held at 4:30 p.m. Central Time, on Tuesday, January 16, 1996, at Security Bank, 1122 Van Ronkle, Conway, Arkansas (the "Special Meeting"). At this important meeting, you will be asked to consider and vote upon: 1. A proposal to approve the Amended and Restated Agreement and Plan of Reorganization dated as of July 7, 1995, as amended and restated as of September 18, 1995 (the "Reorganization Agreement"), which provides for (i) the sale by Security Bank of all of its assets and the assignment by Security Bank of all of its liabilities to Mercantile Bancorporation Inc. of Arkansas ("MBIA"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), in exchange for shares (collectively, the "Shares") of MBI common stock, (ii) the transfer by MBI (on behalf of MBIA) of the Shares to a qualified exchange agent (the "Exchange Agent"), on behalf of Security Bank, and (iii) upon consummation of (i) and (ii) above, (A) and upon the surrender by each Security Bank shareholder of his or her certificate(s) representing shares of Security Bank common stock, the distribution by the Exchange Agent of 31.189 shares of MBI common stock for each share of Security Bank common stock represented by a surrendered certificate, on behalf of Security Bank, as a liquidating distribution, and (B) the surrender by Security Bank of its charter to the Office of Thrift Supervision ((i) and (ii) are hereinafter referred to collectively as the "Purchase and Assumption"). Pursuant to the terms of the Reorganization Agreement, by way of those certain Assignment Agreements dated as of September 25, 1995, by and between (i) MBIA and The Twin City Bank, an Arkansas state-chartered bank and wholly owned subsidiary of MBIA ("TCB"), and (ii) MBIA and First National Bank of Conway County, a national banking association and wholly owned subsidiary of MBIA ("FNBCC") (effective October 2, 1995 FNBCC changed its name to Mercantile Bank of Conway County National Association ("MBCC")), MBIA has assigned its right to receive the assets and its obligation to assume the liabilities of Security Bank to TCB and MBCC, respectively. 2. A proposal to approve the dissolution of Security Bank upon consummation of the Purchase and Assumption. I have enclosed the following items relating to the Special Meeting and the proposed transactions: 1. Proxy Statement/Prospectus; 2. Proxy card; and 3. A pre-addressed return envelope to Security Bank 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 Security Bank and MBI and describe the terms and conditions of the proposed transaction. 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 SECURITY BANK CAREFULLY CONSIDERED AND APPROVED THE TERMS OF THE REORGANIZATION AGREEMENT AND THE DISSOLUTION AS BEING IN THE BEST INTEREST OF SECURITY BANK AND ITS SHAREHOLDERS. THE SECURITY BANK BOARD UNANIMOUSLY RECOMMENDS THAT 5 SHAREHOLDERS VOTE FOR THE PROPOSALS TO APPROVE THE REORGANIZATION AGREEMENT --- AND THE DISSOLUTION. APPROVAL BY THE SECURITY BANK SHAREHOLDERS OF THE REORGANIZATION AGREEMENT AND THE DISSOLUTION OF SECURITY BANK IS A CONDITION TO THE CONSUMMATION OF THE PROPOSED TRANSACTION. 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 Security Bank 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 Security Bank 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 the undersigned at (501) 327-7771. Sincerely, Bill F. Johnson President and Chief Executive Officer 6 SECURITY BANK OF CONWAY, F.S.B. 1122 Van Ronkle Conway, Arkansas 72033 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held January 16, 1996 TO THE SHAREHOLDERS OF SECURITY BANK OF CONWAY, F.S.B.: Notice is hereby given that a Special Meeting of Shareholders of SECURITY BANK OF CONWAY, F.S.B., a federal stock savings bank ("Security Bank"), will be held at Security Bank, 1122 Van Ronkle, Conway, Arkansas on Tuesday, January 16, 1996, at 4:30 p.m. Central Time, for the following purposes: (1) To consider a proposal to approve the Amended and Restated Agreement and Plan of Reorganization dated as of July 7, 1995, as amended and restated as of September 18, 1995 (the "Reorganization Agreement"), which provides for (i) the sale by Security Bank of all of its assets and the assignment by Security Bank of all of its liabilities to Mercantile Bancorporation Inc. of Arkansas ("MBIA"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), in exchange for shares (collectively, the "Shares") of MBI common stock, (ii) the transfer by MBI (on behalf of MBIA) of the Shares to a qualified exchange agent (the "Exchange Agent"), on behalf of Security Bank, and (iii) upon consummation of (i) and (ii) above, (A) and upon the surrender by each Security Bank shareholder of his or her certificate(s) representing shares of Security Bank common stock, the distribution by the Exchange Agent of 31.189 shares of MBI common stock for each share of Security Bank common stock represented by a surrendered certificate, on behalf of Security Bank, as a liquidating distribution, and (B) the surrender by Security Bank of its charter to the Office of Thrift Supervision ((i) and (ii) are hereinafter referred to collectively as the "Purchase and Assumption"). Pursuant to the terms of the Reorganization Agreement, by way of those certain Assignment Agreements dated as of September 25, 1995, by and between (i) MBIA and The Twin City Bank, an Arkansas state- chartered bank and wholly owned subsidiary of MBIA ("TCB"), and (ii) MBIA and First National Bank of Conway County, a national banking association and wholly owned subsidiary of MBIA ("FNBCC") (effective October 2, 1995 FNBCC changed its name to Mercantile Bank of Conway County National Association ("MBCC")), MBIA has assigned its right to receive the assets and its obligation to assume the liabilities of Security Bank to TCB and MBCC, respectively. (2) To consider a proposal to approve the dissolution of Security Bank upon consummation of the Purchase and Assumption. (3) 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 December 11, 1995. 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. BY ORDER OF THE BOARD OF DIRECTORS Conway, Arkansas Phillip T. Pascoe, Secretary - ----------, 1995 7 ******************************************************************************* * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH * * THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD * * NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION * * STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN * * OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE * * ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, * * SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR * * QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. * ******************************************************************************* SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1995 MERCANTILE BANCORPORATION INC. PROSPECTUS ------------------------- SECURITY BANK OF CONWAY, F.S.B. PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 16, 1996 This Prospectus of Mercantile Bancorporation Inc. ("MBI") relates to up to 322,000 shares of common stock, $5.00 par value ("Common Stock"), 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 Security Bank of Conway, F.S.B., a federal stock savings bank ("Security Bank"), upon consummation of the proposed transaction. Upon receipt of the requisite shareholder and regulatory approvals, the Reorganization (as hereinafter defined) will be consummated pursuant to the terms of the Amended and Restated Agreement and Plan of Reorganization, dated as of July 7, 1995, as amended and restated as of September 18, 1995, by and among MBI, Mercantile Bancorporation Inc. of Arkansas, a wholly owned subsidiary of MBI ("MBIA"), and Security Bank (the "Reorganization Agreement"). Pursuant to the Reorganization Agreement, MBIA will acquire the business of Security Bank, and shareholders of Security Bank will receive shares of MBI Common Stock in exchange for their shares of common stock, $100 par value, of Security Bank ("Security Bank Common Stock"), through (i) the sale by Security Bank of all of its assets and the assignment by Security Bank of all of its liabilities to MBIA, in exchange for shares (collectively, the "Shares") of MBI Common Stock, (ii) the transfer by MBI of the shares to a qualified exchange agent (the "Exchange Agent"), on behalf of Security Bank, and (iii) upon consummation of (i) and (ii) above, (A) and upon the surrender by each Security Bank shareholder of his or her certificate(s) representing shares of Security Bank Common Stock, the distribution by the Exchange Agent of 31.189 shares of MBI Common Stock (the "Distribution Ratio") for each share of Security Bank Common Stock represented by a surrendered certificate, on behalf of Security Bank, as a liquidating distribution, and (B) the surrender by Security Bank of its charter to the Office of Thrift Supervision (the "OTS") ((i), (ii) and (iii) are hereinafter referred to collectively as the "Reorganization"). Pursuant to the terms of the Reorganization Agreement, by way of those certain Assignment Agreements (the "Assignment Agreements") dated as of September 25, 1995, by and between (i) MBIA and The Twin City Bank, an Arkansas state-chartered bank and wholly owned subsidiary of MBIA ("TCB"), and (ii) MBIA and First National Bank of Conway County, a national banking association and wholly owned subsidiary of MBIA ("FNBCC") (effective October 2, 1995, FNBCC changed its name to Mercantile Bank of Conway County National Association ("MBCC")), MBIA has assigned its right to receive the assets and its obligation to assume the liabilities of Security Bank to TCB and MBCC, respectively. This Prospectus also serves as the Proxy Statement of Security Bank for use in connection with the Special Meeting of Shareholders of Security Bank (the "Special Meeting"), which will be held on January 16, 1996, 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 Reorganization, MBI will issue up to an aggregate of 322,000 shares of MBI Common Stock. Upon consummation of the Reorganization, the business and operations of Security Bank will be continued through TCB and MBCC. The fair market value of MBI Common Stock to be received pursuant to the Reorganization may fluctuate and at the consummation of the Reorganization may be more or less than the current fair market value of such shares. See "TERMS OF THE PROPOSED REORGANIZATION - General Description of the Reorganization." No fractional shares of MBI Common Stock will be issued in the Reorganization, but cash will be paid in lieu of such fractional shares. See "TERMS OF THE PROPOSED REORGANIZATION - Fractional Shares." 8 The transaction is intended to qualify as a reorganization under the Internal Revenue Code of 1986, as amended (the "Code"). The Reorganization generally is intended to achieve certain tax-deferral benefits for federal income tax purposes for Security Bank shareholders. See "SUMMARY INFORMATION - Federal Income Tax Consequences in General" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION." MBI Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "MTL." On November 1, 1995 the closing sale price for MBI Common Stock as reported on the NYSE Composite Tape was $43.50. This Proxy Statement/Prospectus, the Notice of Special Meeting and the form of proxy were first mailed to the shareholders of Security Bank on or about ------------, 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 -------------, 1995. - 2 - 9 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 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 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 - ---------------, 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 and June 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. - 3 - 10 (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 SECURITY BANK. 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 SECURITY BANK OR ANY OF THEIR SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE HEREOF. - 4 - 11 TABLE OF CONTENTS
Page ---- AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . 3 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE. . . . . . . 3 SUMMARY INFORMATION. . . . . . . . . . . . . . . . . . . . . . 8 Business of MBI . . . . . . . . . . . . . . . . . . . . . 8 Business of MBIA. . . . . . . . . . . . . . . . . . . . . 9 Business of Security Bank . . . . . . . . . . . . . . . . 9 The Proposed Reorganization . . . . . . . . . . . . . . . 10 Other Agreements. . . . . . . . . . . . . . . . . . . . . 11 Interests of Certain Persons in the Reorganization. . . . 11 Special Meeting of Security Bank Shareholders . . . . . . 11 Reasons for the Reorganization. . . . . . . . . . . . . . 12 Fractional Shares . . . . . . . . . . . . . . . . . . . . 13 Waiver and Amendment. . . . . . . . . . . . . . . . . . . 13 Federal Income Tax Consequences in General. . . . . . . . 13 Regulatory Approval . . . . . . . . . . . . . . . . . . . 14 Accounting Treatment. . . . . . . . . . . . . . . . . . . 14 Dissenters' Rights. . . . . . . . . . . . . . . . . . . . 14 Markets and Market Prices . . . . . . . . . . . . . . . . 14 Comparative Unaudited Per Share Data. . . . . . . . . . . 15 Summary Financial Data. . . . . . . . . . . . . . . . . . 16 INFORMATION REGARDING SPECIAL MEETING. . . . . . . . . . . . . 19 General . . . . . . . . . . . . . . . . . . . . . . . . . 19 Date, Time and Place. . . . . . . . . . . . . . . . . . . 19 Record Date; Vote Required. . . . . . . . . . . . . . . . 19 Voting and Revocation of Proxies. . . . . . . . . . . . . 19 Solicitation of Proxies . . . . . . . . . . . . . . . . . 20 TERMS OF THE PROPOSED REORGANIZATION . . . . . . . . . . . . . 20 General Description of the Reorganization . . . . . . . . 21 Other Agreements. . . . . . . . . . . . . . . . . . . . . 22 Interests of Certain Persons in the Reorganization. . . . 22 Background of and Reasons for the Reorganization; Board Recommendations . . . . . . . . . . . . . . . . . . . . 23 Conditions of the Reorganization. . . . . . . . . . . . . 25 Termination of the Reorganization Agreement . . . . . . . 28 Indemnification . . . . . . . . . . . . . . . . . . . . . 28 Closing Date. . . . . . . . . . . . . . . . . . . . . . . 28 Surrender of Security Bank Stock Certificates and Receipt of MBI Common Stock . . . . . . . . . . . . . . . . . . 29 Fractional Shares . . . . . . . . . . . . . . . . . . . . 29 Regulatory Approval . . . . . . . . . . . . . . . . . . . 29 Business Pending the Reorganization . . . . . . . . . . . 30 Waiver and Amendment. . . . . . . . . . . . . . . . . . . 33 Accounting Treatment. . . . . . . . . . . . . . . . . . . 33 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . 34 - 5 - 12 Page ---- RIGHTS OF DISSENTING SHAREHOLDERS OF SECURITY BANK . . . . . . 35 PRO FORMA FINANCIAL INFORMATION. . . . . . . . . . . . . . . . 36 Comparative Unaudited Per Share Data. . . . . . . . . . . 36 Pro Forma Combined Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . 37 INFORMATION REGARDING SECURITY BANK. . . . . . . . . . . . . . 47 Management's Discussion and Analysis of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . 47 Results of Operation. . . . . . . . . . . . . . . . . . . 47 Financial Condition, Capital Resources and Liquidity. . . 50 Results of Operation (Nine Month Comparison). . . . . . . 57 Liquidity and Capital Resources (Nine Month Comparison) . . . . . . . . . . . . . . . . . . . . . . 58 Pending Legislative Proposals . . . . . . . . . . . . . . 58 Properties. . . . . . . . . . . . . . . . . . . . . . . . 59 Impact of Future Accounting Pronouncement . . . . . . . . 59 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 59 Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . . 60 INFORMATION REGARDING MBI STOCK. . . . . . . . . . . . . . . . 61 Description of MBI Common Stock and Attached Preferred Share Purchase Rights . . . . . . . . . . . . . . . . . 61 Restrictions on Resale of MBI Stock by Affiliates . . . . 63 Comparison of the Rights of Shareholders of MBI and Security Bank . . . . . . . . . . . . . . . . . . . . . 63 SUPERVISION AND REGULATION . . . . . . . . . . . . . . . . . . 66 General . . . . . . . . . . . . . . . . . . . . . . . . . 66 Certain Transactions with Affiliates. . . . . . . . . . . 67 Payment of Dividends. . . . . . . . . . . . . . . . . . . 67 Capital Adequacy. . . . . . . . . . . . . . . . . . . . . 67 FDIC Insurance Assessments. . . . . . . . . . . . . . . . 68 Proposals to Overhaul the Savings Association Industry. . 69 Support of Subsidiary Banks . . . . . . . . . . . . . . . 69 FIRREA and FDICIA . . . . . . . . . . . . . . . . . . . . 69 Depositor Preference Statute. . . . . . . . . . . . . . . 70 The Interstate Banking and Community Development Legislation . . . . . . . . . . . . . . . . . . . . . . 71 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS. . . . . . . . . . . 71 LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . 71 EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . 72 SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . 72 CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . 73 - 6 - 13 Page ---- ANNEXES Annex A -- Dissenters' Rights Provisions Applicable to Federal Stock Savings Banks (12 C.F.R. Section 552.14). . . . . A-1
- 7 - 14 SUMMARY INFORMATION ------------------- The following is a summary of the important terms of the proposed Reorganization 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 Security Bank 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 ("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-interest 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 restated its consolidated financial statements as of and for the years ended December 31, 1994, 1993 and 1992. MBI 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 - 8 - 15 savings and loan holding company under the HOLA. This acquisition was accounted for under the purchase method of accounting. As of July 7, 1995, Plains Spirit reported total assets of $400.8 million. On August 1, 1995, MBI completed the acquisitions of (i) AmeriFirst Bancorporation, Inc. ("AmeriFirst"), a Missouri corporation and registered bank holding company under the BHCA, located in Sikeston, Missouri, and (ii) Southwest Bancshares, Inc. ("Southwest"), a Missouri corporation and registered bank holding company under the BHCA, located in Bolivar, Missouri. These acquisitions were accounted for under the pooling-of-interest method of accounting. As of August 1, 1995, AmeriFirst and Southwest reported total assets of $155.5 million and $187.7 million, respectively. On July 24, 1995, MBI entered into an agreement to acquire First Sterling Bancorp, Inc. ("Sterling"), located in Sterling, Illinois. Sterling, an Illinois corporation, is a registered bank holding company under the BHCA which owns one national banking association. As of September 30, 1995, Sterling reported 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. 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 23 commercial banks. 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 and operates from one location. 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. BUSINESS OF MBIA MBIA, an Arkansas corporation, is a wholly owned subsidiary of MBI which was organized on February 7, 1995. MBIA is a registered bank holding company under the BHCA. MBIA currently owns all of the capital stock of six banks which operate from 38 locations in Arkansas. BUSINESS OF SECURITY BANK Security Bank, a federal stock savings bank, commenced operations in 1961 and operates from three locations in central Arkansas. Security Bank currently owns all of the issued and outstanding shares of capital stock of Security Service Corporation, an Arkansas corporation ("SSC"), and Security Investments of Conway, Inc., an Arkansas corporation ("Security Investments"). As of the date hereof, 10,324 shares of Security Bank Common Stock were issued and outstanding. As of September 30, 1995, Security Bank reported, on a consolidated basis, 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. See "INFORMATION REGARDING SECURITY BANK." - 9 - 16 Security Bank's principal executive offices are located at 1122 Van Ronkle, Conway, Arkansas 72033, and its telephone number is (501) 327-7771. THE PROPOSED REORGANIZATION Subject to the satisfaction of the terms and conditions set forth in the Reorganization Agreement described below, MBIA will acquire the business and operations of Security Bank, and shareholders of Security Bank will receive shares of MBI Common Stock in exchange for their shares of Security Bank Common Stock, through (i) the sale by Security Bank of all of its assets and the assignment by Security Bank of all of its liabilities to MBIA, in exchange for the Shares, (ii) the transfer by MBI (on behalf of MBIA) of the shares to the Exchange Agent, on behalf of Security Bank, and (iii) upon consummation of (i) and (ii) above, (A) and upon the surrender by each Security Bank shareholder of his or her certificate(s) representing shares of Security Bank Common Stock, the distribution by the Exchange Agent of 31.189 shares of MBI Common Stock for each share of Security Bank Common Stock represented by a surrendered certificate, on behalf of Security Bank, as a liquidating distribution, and (B) the surrender by Security Bank of its charter to the OTS. Pursuant to the terms of the Reorganization Agreement, by way of the Assignment Agreements, MBIA has assigned its right to receive the assets and its obligation to assume the liabilities of Security Bank to TCB and MBCC. Upon consummation of the Reorganization, Security Bank's corporate existence will terminate. The Distribution Ratio is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI, MBIA or Security Bank prior to the consummation of the Reorganization. The fair market value of MBI Common Stock to be received pursuant to the Reorganization may fluctuate and at the consummation of the Reorganization 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 for purposes of effecting the distribution of the Shares, as a liquidating distribution on behalf of Security Bank, to the shareholders of Security Bank upon the surrender of their certificates representing shares of Security Bank Common Stock. The Reorganization Agreement provides that the consummation of the Reorganization is subject to certain terms and conditions, including the approval of the Reorganization Agreement by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Security Bank Common Stock and receipt of the requisite regulatory approvals and an opinion of counsel regarding certain federal income tax aspects of the transaction. For a discussion of each of the conditions to the Reorganization, see "TERMS OF THE PROPOSED REORGANIZATION - Conditions of the Reorganization." Unless the parties otherwise agree, the closing (the "Closing") of the Reorganization shall occur on such date (the "Closing Date") as MBIA shall notify Security Bank in writing (such notice to be at least five business days in advance of the Effective Time (as hereinafter defined)) but (i) not earlier than (A) the approval of the Reorganization Agreement by the shareholders of Security Bank and (B) the receipt of the last approval of the Reorganization by each of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the OTS, the Comptroller of the Currency (the "Comptroller"), the Federal Deposit Insurance Corporation (the "FDIC"), the Arkansas State Bank Commissioner (the "Arkansas Commissioner") and any other federal and/or state regulatory agency whose approval is required for the consummation of the Reorganization, and the expiration of all required waiting periods (the Federal Reserve Board, the OTS, the Comptroller, the FDIC, the Arkansas Commissioner and such other federal and/or state regulatory authorities are collectively referred to herein as the "Regulatory Authorities" and individually as a "Regulatory Authority"), and (ii) not later than the first business day of the first full calendar month commencing at least five days - 10 - 17 after (i) the approval of the Reorganization Agreement by the shareholders of Security Bank and (ii) the approval date of the Reorganization by the Regulatory Authorities and the expiration of all required waiting periods. The Reorganization will be consummated and become effective on the date and at the time (the "Effective Time") of the Closing. The Reorganization 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 Reorganization is not consummated by June 30, 1996. See "TERMS OF THE PROPOSED REORGANIZATION - Conditions of the Reorganization" and "- Termination of the Reorganization Agreement." OTHER AGREEMENTS Concurrent with the execution of the Reorganization Agreement, MBI and certain shareholders, including each director, of Security Bank executed separate Voting Agreements (the "Voting Agreements") by which each such shareholder agreed that he or she will vote all of the shares of Security Bank Common Stock then owned or subsequently acquired in favor of the approval of the Reorganization Agreement and the Dissolution at the Special Meeting. In addition, until the earliest to occur of the Effective Time of the Reorganization, the termination of the Voting Agreement or the termination of the Reorganization Agreement, such shareholders further agreed they will not vote any such shares in favor of the approval of any other competing acquisition proposal involving Security Bank and a third party. Each such shareholder also agreed that he or she will not transfer shares of Security Bank Common Stock unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement. As of the date hereof, such shareholders of Security Bank who executed Voting Agreements owned beneficially an aggregate of 7,586 shares of Security Bank Common Stock, or approximately 73.5% of the issued and outstanding shares. INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION Bill F. Johnson, President and Chief Executive Officer of Security Bank, has entered into an agreement with MBI whereby Mr. Johnson will serve as a senior executive of a successor of Security Bank for a period of two years commencing on the Closing Date. During such two year period, Mr. Johnson will receive a base salary of $103,600 per year (inclusive of director's fees, if any) and be entitled to participate in MBI's welfare plans and executive incentive programs, to use a company-owned vehicle and to be reimbursed for country club dues. Ritchie D. Howell, Senior Vice President of Security Bank, has entered into an agreement with MBI whereby he will serve as a Senior Vice President of a successor of Security Bank for a period of one year commencing on the Closing Date. During such one year period, Mr. Howell will receive a base salary of $73,600 per year (inclusive of director's fees, if any) and be entitled to participate in MBI's welfare plans and executive incentive programs, to use a company-owned vehicle and to be reimbursed for country club dues. See "TERMS OF THE PROPOSED REORGANIZATION - Interests of Certain Persons in the Reorganization." SPECIAL MEETING OF SECURITY BANK SHAREHOLDERS The Special Meeting will be held on January 16, 1996, at 4:30 p.m. Central Time, at Security Bank, 1122 Van Ronkle, Conway, Arkansas. Approval by the Security Bank shareholders of the Reorganization Agreement and the dissolution of Security Bank (the "Dissolution") requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Security Bank Common Stock. Only holders of record of Security Bank Common Stock at the close of business on December 11, 1995 (the "Record Date") will be entitled to notice of, and to vote at, the Special Meeting. At such date, there were 10,324 shares of Security Bank Common Stock outstanding. - 11 - 18 As of the date hereof, directors and executive officers of Security Bank and their affiliates owned beneficially an aggregate of 7,586 shares of Security Bank Common Stock, or approximately 73.5% of the shares entitled to vote at the Special Meeting. All of Security Bank's directors and their affiliates have indicated their intention to vote their shares for the approval of the Reorganization Agreement and the Dissolution. Additionally, each of the directors of Security Bank, pursuant to the terms of his or her respective Voting Agreement, has committed to vote his or her shares of Security Bank Common Stock for the approval of the Reorganization Agreement. As of the date hereof, such directors owned beneficially an aggregate of 7,586 shares of Security Bank Common Stock, or approximately 73.5% of the issued and outstanding shares. THE BOARD OF DIRECTORS OF SECURITY BANK CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE REORGANIZATION AND THE DISSOLUTION AS BEING IN THE BEST INTEREST OF SECURITY BANK AND ITS SHAREHOLDERS. THE SECURITY BANK BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSALS TO APPROVE THE --- REORGANIZATION AGREEMENT AND THE DISSOLUTION. REASONS FOR THE REORGANIZATION The Board of Directors of Security Bank believes that the Reorganization is in the best interest of Security Bank and its shareholders. In the course of reaching its determination to approve the Reorganization and recommend the approval of the Reorganization Agreement and the Dissolution to the shareholders of Security Bank, the Board of Directors, without assigning any relative or specific weights, considered a number of factors, including the following reasons: (i) The consideration to be paid by MBI. See "TERMS OF THE PROPOSED REORGANIZATION - General Description of the Reorganization." Depending upon the price of MBI Common Stock used in the calculation, the transaction value of consideration to be delivered by MBI reflects a price-to-book multiple of between 1.65 and 1.8 times Security Bank's unaudited book value as of June 30, 1995. The Board of Directors of Security Bank determined that these multiples compared favorably with the ratios of recently completed comparable bank and thrift merger transactions in Arkansas; (ii) The trends in the banking industry are toward consolidation and increased regulation, particularly, recent changes have resulted in an environment where community banks and thrifts have commanded in the past, and for some indefinite future period will command, attractive purchase prices; and the Board of Directors of Security Bank sought to take advantage of this environment; and prospective changes (ultimately adopted) in calculation of deposit insurance premiums for banks may competitively disadvantage thrifts and savings banks such as Security Bank in the future; (iii) Security Bank will benefit from MBI's capital, operations and regulatory expertise and management talent, and may achieve certain economies of scale in its banking operations; (iv) Management of Security Bank believes that MBI's philosophy is to provide its community banks with a substantial degree of operating autonomy, generally leaving existing management in place to manage the institution consistent with past management culture, so long as such culture is not inconsistent with MBI's policies; and (v) The annual dividend yield on MBI Common Stock offered in exchange for Security Bank Common Stock substantially exceeds the historical yield on Security Bank Common - 12 - 19 Stock, and there is a much broader and more liquid market for MBI Common Stock, which is listed and traded on the NYSE. MBI's Board of Directors believes that the Reorganization will enable MBIA to (i) increase its presence in central Arkansas through the acquisition of an established banking organization and (ii) enhance MBIA's ability to compete in the increasingly competitive banking and financial services industry. See "TERMS OF THE PROPOSED REORGANIZATION - Background of and Reasons for the Reorganization; Board Recommendations." FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the shareholders of Security Bank in connection with the Reorganization. Each holder of Security Bank 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 of the Reorganization. Cash received by Security Bank shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION." WAIVER AND AMENDMENT Any provision of the Reorganization Agreement, including, without limitation, the conditions to the consummation of the Reorganization and the restrictions described under the caption "TERMS OF THE PROPOSED REORGANIZATION - Business Pending the Reorganization," 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 Reorganization Agreement by the shareholders of Security Bank at the Special Meeting no such modification may (i) alter or change the amount or kind of the consideration to be received by the Security Bank shareholders in the Reorganization as a liquidating distribution or (ii) adversely affect the tax treatment to the Security Bank shareholders as a result of receiving shares of MBI Common Stock in the Reorganization. FEDERAL INCOME TAX CONSEQUENCES IN GENERAL Thompson & Mitchell, MBI's legal counsel, has delivered its opinion to the effect that, assuming the Reorganization occurs in accordance with the Reorganization Agreement and conditioned on the accuracy of certain representations made by MBI, MBIA, Security Bank and certain shareholders of Security Bank, the Reorganization will constitute a "reorganization" for federal income tax purposes and that, accordingly, no gain or loss will be recognized by Security Bank shareholders who exchange their shares of Security Bank Common Stock solely for shares of MBI Common Stock in the Reorganization. However, cash received in lieu of fractional shares may give rise to taxable income. EACH SECURITY BANK SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE REORGANIZATION TO SUCH SHAREHOLDER, INCLUDING THE APPLICABILITY OF VARIOUS STATE, LOCAL AND FOREIGN TAX LAWS. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION." - 13 - 20 REGULATORY APPROVAL The Reorganization is subject to the prior approval of each of the Federal Reserve Board, the OTS, the Comptroller, the FDIC and the Arkansas Commissioner. MBI has filed the required applications seeking such approvals with the Regulatory Authorities. The Reorganization cannot be consummated until receipt of approval from such agencies. In reviewing the Reorganization, the Regulatory Agencies will consider various factors, including possible anticompetitive effects of the Reorganization, and will examine the financial and managerial resources and future prospects of the combined organization. There can be no assurance that the necessary regulatory approvals will be received or as to the timing of such approvals. See "TERMS OF THE PROPOSED REORGANIZATION - Regulatory Approval" and "SUPERVISION AND REGULATION." ACCOUNTING TREATMENT It is intended that the Reorganization will be accounted for under the pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED REORGANIZATION - Accounting Treatment." DISSENTERS' RIGHTS Under federal law, a holder of Security Bank Common Stock may dissent from the Reorganization and receive payment of the "fair or appraised value" of such shares in cash if the Reorganization is consummated by following certain procedures set forth in 12 C.F.R. Section 552.14 ("Section 552.14"), the text of which is attached hereto as Annex A. Failure to follow such ------- procedures may result in the loss of dissenters' rights. Any Security Bank shareholder returning an executed proxy card which does not provide instructions to vote against the approval of the Reorganization Agreement will be deemed to have approved the Reorganization Agreement, thereby waiving any such dissenters' rights. See "RIGHTS OF DISSENTING SHAREHOLDERS OF SECURITY BANK." 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 the Nasdaq National Market under the symbol "MTRC." The last sale price reported for MBI Common Stock on July 7, 1995, the last trading date preceding the public announcement of the Reorganization, was $44.375. There is no established public trading market for Security Bank Common Stock. The following table sets forth for the periods indicated the high and low trading prices of MBI Common Stock. Management of Security Bank does not have knowledge of any transactions involving its shares for the periods indicated. - 14 - 21
MBI Security Bank -------------------------- ---------------------- 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 6.00 1994 - ---- First Quarter $34.125 $29.875 $ .28 $ -- Second Quarter 38.125 31.125 .28 -- Third Quarter 39.250 34.875 .28 -- Fourth Quarter 36.875 29.500 .28 6.00 1995 - ---- First Quarter $37.250 $31.250 $ .33 $ -- Second Quarter 44.875 36.000 .33 -- Third Quarter 47.000 41.625 .33 -- Fourth Quarter (through .33 -- November 1, 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 Security Bank.
COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and Security Bank and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Reorganization, the proposed acquisitions of Sterling, Hawkeye and Metro and the acquisition of Ameribanc, Inc. ("ABNK"), 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 Security Bank, Sterling, Hawkeye and Metro 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." These data are not necessarily indicative of the results of the future operations of the combined organization or the actual results that would have occurred if the Reorganization, the completed merger of ABNK or the proposed acquisitions of Sterling, Hawkeye and Metro had been consummated prior to the periods indicated. - 15 - 22
MBI/ Security Bank/ Security Bank Security Bank MBI/All Entities All Entities MBI Security Bank Pro Forma Pro Forma Pro Forma Pro Forma Reported Reported Combined Equivalent Combined Equivalent -------- ------------- ------------- --------------- ---------------- --------------- Book Value per Share: September 30, 1995 $ 25.43 $ 832.00 $ 25.42 $792.82 $25.16 $784.72 December 31, 1994 23.47 752.00 23.47 732.01 23.09 720.15 Cash Dividends Declared per Share: Nine months ended September 30, 1995 $ 0.99 $ -- $ 0.99 $ 30.88 $ 0.99 $ 30.88 Year ended December 31, 1994 1.12 6.00 1.12 34.93 1.12 34.93 Year ended December 31, 1993 0.99 6.00 0.99 30.88 0.99 30.88 Year ended December 31, 1992 0.93 6.00 0.93 29.01 0.93 29.01 Earnings per Share: Nine months ended September 30, 1995 $ 2.95 $ 80.73 $ 2.95 $ 92.01 $ 2.88 $ 89.82 Year ended December 31, 1994 3.22 82.53 3.21 100.12 3.22 100.43 Year ended December 31, 1993 2.79 75.26 2.79 87.02 2.80 87.33 Year ended December 31, 1992 2.42 82.91 2.43 75.79 2.44 76.10 Market Price per Share: At July 7, 1995 $ 44.38 -- n/a n/a n/a n/a At November 1, 1995 43.50 -- n/a n/a n/a n/a - ----------------------- Includes the effect of pro forma adjustments for Security Bank and ABNK, as appropriate. See "PRO FORMA FINANCIAL INFORMATION." Based on the pro forma combined per share amounts multiplied by 31.189, the distribution ratio applicable to one share of Security Bank Common Stock. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to the pro forma financial statements. See "PRO FORMA FINANCIAL INFORMATION." Includes the effect of pro forma adjustments for Security Bank, ABNK, Sterling, Hawkeye and Metro, as appropriate. See "PRO FORMA FINANCIAL INFORMATION." The market value of MBI Common Stock was determined as of the last trading day preceding the public announcement of the proposed acquisition and as of the latest available date prior to the filing of the Proxy Statement/Prospectus, based on the last sale price as reported on the NYSE Composite Tape. There are no publicly available quotations of Security Bank Common Stock and management of Security Bank is not aware of any trades in Security Bank Common Stock for the last three years.
SUMMARY FINANCIAL DATA The following table sets forth for the periods indicated certain summary historical consolidated financial information for MBI and Security Bank. The balance sheet data and income statement data included in the summary financial data of MBI 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 Security Bank included in the summary financial data for the five years ended December 31, 1994 are taken from Security Bank's audited 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 unaudited consolidated financial statements of MBI and Security Bank. These data include all adjustments which are, in the opinion of the respective managements of MBI and Security Bank, 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 Security Bank, 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." - 16 - 23 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.
- 17 - 24 SECURITY BANK OF CONWAY, F.S.B. 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. . . . . . . . . $ 80.73 $ 66.28 $ 82.53 $ 75.26 $ 82.91 $ 65.99 $ 58.63 Dividends declared. . . . . -- -- 6.00 6.00 6.00 6.00 6.00 Dividend payout ratio . . . -- -- 7.27 7.97 7.24 9.09 10.23 Book value at period end. . 832 741 752 676 606 529 469 Average common shares outstanding. . . . . . . . 10,324 10,324 10,324 10,324 10,324 10,324 10,324 EARNINGS (THOUSANDS) Interest income . . . . . . $ 5,704 $ 4,765 $ 6,257 $ 5,849 $ 6,142 $ 6,633 $ 6,394 Interest expense. . . . . . 3,291 2,564 3,487 3,309 3,874 4,710 4,664 -------- ------- ------- ------- ------- ------- ------- Net interest income . . . . 2,413 2,201 2,770 2,540 2,268 1,923 1,730 Provision for possible loan losses. . . . . . . . 45 45 60 60 60 42 33 Other income. . . . . . . . 292 390 406 285 173 144 147 Other expense . . . . . . . 1,445 1,465 1,713 1,359 1,066 981 910 Income taxes. . . . . . . . 382 397 551 629 459 363 329 -------- ------- ------- ------- ------- ------- ------- Net income. . . . . . . . . $ 833 $ 684 $ 852 $ 777 $ 856 $ 681 $ 605 ======== ======= ======= ======= ======= ======= ======= ENDING BALANCE SHEET (THOUSANDS) Total assets. . . . . . . . $100,323 $91,771 $92,113 $86,824 $84,967 $79,342 $70,419 Earning assets. . . . . . . 96,603 87,301 88,316 83,109 81,927 77,252 68,433 Investment securities . . . 3,981 10,665 7,760 13,683 8,215 2,076 2,008 Loans and leases, net of unearned income . . . . . 75,505 72,362 73,516 63,958 64,330 56,524 52,291 Deposits. . . . . . . . . . 87,758 80,210 80,425 78,715 78,300 73,529 65,128 Long-term debt . . . . . . -- -- -- -- -- -- -- Shareholders' equity. . . . 8,598 7,649 7,765 6,975 6,260 5,466 4,847 Reserve for possible loan losses. . . . . . . . 287 227 243 201 153 107 72 SELECTED RATIOS Return on average assets. . 1.15% 1.02% .95% .90% 1.04% .90% .89% Return on average equity. . 13.80 12.46 11.56 11.74 14.60 13.21 13.14 Net interest rate margin. . 3.27 2.73 2.75 2.84 2.55 2.21 2.18 Average equity to average assets . . . . . . 8.32 8.18 8.43 8.03 7.37 6.89 6.88 Reserve for possible loan losses to: Outstanding loans. . . . .38 .31 .33 .31 .24 .19 .14 Non-performing loans . . 111.74 99.15 486.02 13.37 - not meaningful
- 18 - 25 INFORMATION REGARDING SPECIAL MEETING ------------------------------------- GENERAL This Proxy Statement/Prospectus is being furnished to holders of Security Bank Common Stock in connection with the solicitation of proxies by the Board of Directors of Security Bank for use at the Special Meeting and any adjournments or postponements thereof at which the shareholders of Security Bank will consider and vote upon a proposal to approve the Reorganization Agreement, the proposal to approve the Dissolution 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 Security Bank, a proxy card and related instructions and a self-addressed return envelope to Security Bank for the proxy card. This Proxy Statement/Prospectus is also furnished by MBI to each holder of Security Bank Common Stock as a prospectus in connection with the issuance by MBI of shares of MBI Common Stock upon the consummation of the Reorganization. This Proxy Statement/Prospectus and the Notice of Special Meeting, proxy card and related materials are being first mailed to shareholders of Security Bank on -----------, 1995. DATE, TIME AND PLACE The Special Meeting will be held at Security Bank, 1122 Van Ronkle, Conway, Arkansas, on Tuesday, January 16, 1996, at 4:30 p.m. Central Time. RECORD DATE; VOTE REQUIRED On the Record Date, there were 10,324 shares of Security Bank 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 Security Bank Common Stock is required to approve the Reorganization Agreement. As of the Record Date, directors and executive officers of Security Bank and their affiliates owned beneficially an aggregate of 7,586 shares of Security Bank Common Stock, or approximately 73.5% of the outstanding shares of Security Bank Common Stock entitled to vote at the Special Meeting. All directors of Security Bank and their affiliates have indicated their intention to vote their shares for the approval of the Reorganization Agreement and the Dissolution at the Special Meeting. Additionally, each director of Security Bank, pursuant to the terms of his or her respective Voting Agreement, has committed to vote his or her shares of Security Bank Common Stock for approval of the Reorganization Agreement. As of the Record Date, directors of Security Bank owned beneficially an aggregate of 7,586 shares of Security Bank Common Stock, or approximately 73.5% of the issued and outstanding shares. VOTING AND REVOCATION OF PROXIES Shares of Security Bank 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 of such vote. ANY SECURITY BANK SHAREHOLDER RETURNING AN EXECUTED PROXY CARD WHICH DOES NOT - 19 - 26 PROVIDE INSTRUCTIONS TO VOTE AGAINST THE APPROVAL OF THE REORGANIZATION AGREEMENT OR AGAINST THE APPROVAL OF THE DISSOLUTION WILL BE DEEMED TO HAVE APPROVED THE REORGANIZATION AGREEMENT AND THE DISSOLUTION. 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 Reorganization Agreement and the Dissolution. 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 Reorganization Agreement and the Dissolution. 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 Reorganization Agreement and the Dissolution. Any shareholder of Security Bank giving a proxy may revoke it at any time prior to the vote at the Special Meeting. Shareholders of Security Bank wishing to revoke a proxy prior to the vote may do so by delivering to the Secretary of Security Bank at 1122 Van Ronkle, Conway, Arkansas 72033 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 Security Bank 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 Security Bank. SOLICITATION OF PROXIES Security Bank will bear its own costs of soliciting proxies, except that MBIA 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 Security Bank may also solicit proxies in person or by telephone. Directors, executive officers and any other employees of Security Bank 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 SECURITY BANK 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 REORGANIZATION ------------------------------------ The following is a summary of the material terms and conditions of the Reorganization Agreement, which document is incorporated by reference herein. This summary is qualified in its entirety by the full text of the Reorganization Agreement. MBI, upon written or oral request, will furnish a copy of the Reorganization Agreement, without charge, to any person who receives a copy of this Proxy - 20 - 27 Statement/Prospectus. Such 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 REORGANIZATION Subject to the satisfaction of the terms and conditions set forth in the Reorganization Agreement, as described below, MBIA will acquire the business and operations of Security Bank, and shareholders of Security Bank will receive shares of MBI Common Stock in exchange for their shares of Security Bank Common Stock, through (i) the sale by Security Bank of all of its assets and the assignment by Security Bank of all of its liabilities to MBIA, in exchange for the Shares, (ii) the transfer by MBI (on behalf of MBIA) of the shares to the Exchange Agent, on behalf of Security Bank, and (iii) upon consummation of (i) and (ii) above, (A) and upon the surrender by each Security Bank shareholder of his or her certificate(s) representing shares of Security Bank Common Stock, the distribution by the Exchange Agent of 31.189 shares of MBI Common Stock for each share of Security Bank Common Stock represented by a surrendered certificate, on behalf of Security Bank, as a liquidating distribution, and (B) the surrender by Security Bank of its charter to the OTS. Pursuant to the terms of the Reorganization Agreement, by way of the Assignment Agreements, MBIA has assigned its right to receive the assets and its obligation to assume the liabilities of Security Bank to TCB and MBCC. Upon consummation of the Reorganization, Security Bank's corporate existence will terminate. The Distribution Ratio is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI, MBIA or Security Bank prior to the consummation of the Reorganization. The fair market value of MBI Common Stock to be received pursuant to the Reorganization may fluctuate and at the consummation of the Reorganization 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 Security Bank 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 Reorganization; Board Recommendations." The fact that the consideration is payable in shares of MBI Common Stock reflects the potential for change in the value of the MBI Common Stock and the desire to have the favorable tax attributes of a "reorganization" for federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION." 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 SECURITY BANK SHAREHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI COMMON STOCK RECEIVED BY A SECURITY BANK 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 Security Bank 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) representing the shares of Security Bank Common Stock in order to receive a new stock certificate evidencing the shares of MBI Common Stock to which such shareholder is entitled to receive as a liquidating distribution. Following the Closing Date, the Exchange Agent will mail to each Security Bank shareholder a notice of consummation of the Reorganization and a form of letter of transmittal, together with instructions and a return envelope to facilitate the exchange of such holder's - 21 - 28 certificate(s) representing Security Bank Common Stock for certificate(s) evidencing MBI Common Stock. No dividends or other distributions will be paid to a Security Bank shareholder with respect to shares of MBI Common Stock until such shareholder's letter of transmittal and stock certificates representing Security Bank 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 REORGANIZATION - Surrender of Security Bank Stock Certificates and Receipt of MBI Common Stock." No fractional shares of MBI Common Stock will be issued in the Reorganization as a liquidating distribution, but cash will be paid in lieu of such fractional shares, such cash being calculated by multiplying the holder's fractional share interest by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date of the Reorganization. See "- Fractional Shares." The shares of MBI Common Stock to be issued pursuant to the Reorganization will be freely transferable except by certain shareholders of Security Bank who are deemed to be "affiliates" of Security Bank. 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 Reorganization Agreement, MBI and certain shareholders, including all directors, of Security Bank executed separate Voting Agreements by which each such shareholder agreed that he or she will vote all of the shares of Security Bank Common Stock that he or she then owned or subsequently acquires in favor of the approval of the Reorganization Agreement at the Special Meeting. In addition, until the earliest to occur of the Effective Time of the Reorganization, the termination of the Voting Agreements or the abandonment of the Reorganization, each such shareholder further agreed that he or she will not vote any such shares in favor of the approval of any other competing acquisition proposal involving Security Bank and a third party. Each such shareholder also agreed that he or she will not transfer shares of Security Bank 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, such shareholders of Security Bank owned beneficially an aggregate of 7,586 shares of Security Bank Common Stock, or approximately 73.5% of the issued and outstanding shares. INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION Bill F. Johnson, President and Chief Executive Officer of Security Bank, has entered into an arrangement with MBI whereby Mr. Johnson will serve as a senior executive officer of a successor of Security Bank for a period of two years commencing on the Closing Date. During such two-year period, Mr. Johnson will receive a base salary of $103,600 per year (inclusive of director's fees, if any), subject to normal individual increases accorded to employees consistent with past practice, and be entitled to participate in MBI's welfare plans and executive incentive programs, to use a company-owned vehicle and to be reimbursed for country club dues. In the event of the death or "disability" of Mr. Johnson during the term of the employment agreement, or in the event his employment is involuntarily terminated other than for "cause" during such period, Mr. Johnson, or his estate, will continue to receive the salary payments as if Mr. Johnson had completed his employment obligation under the employment agreement. In addition, Mr. Johnson will be provided a conditional supplemental retirement benefit upon his retirement from the successor of Security Bank, after two years from the Closing Date, which will be based upon an average base salary compensation for the five-year period ending January 1, 1998 and an assumed twenty years of benefit service. - 22 - 29 Ritchie D. Howell, Senior Vice President of Security Bank, has entered into an arrangement with MBI whereby he will serve as a Senior Vice President of a successor of Security Bank for a period of one year commencing on the Closing Date. During such one-year period, Mr. Howell will receive a base salary of $73,600 per year (inclusive of director's fees, if any), subject to normal individual increases accorded to employees consistent with past practices, and be entitled to participate in MBI's welfare plans and executive incentive programs, to use a company-owned vehicle and to be reimbursed for country club dues. In the event of the death or "disability" of Mr. Howell during the term of the employment agreement, or in the event his employment is involuntarily terminated other than for "cause" during such period, Mr. Howell, or his estate, will continue to receive the salary payments as if Mr. Howell had completed his employment obligation under the employment agreement. BACKGROUND OF AND REASONS FOR THE REORGANIZATION; BOARD RECOMMENDATIONS BACKGROUNDS OF THE REORGANIZATIONS. Security Bank was founded on July 3, 1961 as an Arkansas state-chartered savings bank based in Conway, Arkansas and subsequently converted to a federal chartered stock savings bank on May 1, 1989. Security Bank's primary marketing area includes Faulkner County of north central Arkansas, an area of increasing commercial and population growth. Economic and regulatory changes, including advances in technology and increased competition and regulatory complexity, have led to a consolidation within the banking and thrift industries. In Arkansas, a number of banks and thrifts or their holding companies have, during the past few years, been acquired or have engaged in merger or consolidation transactions due to these pressures. From time to time, the Board of Directors of Security Bank and the management of Security Bank have considered various strategies for Security Bank, including merging with a larger company. During prior years, Security Bank has been informally contacted by several local or regional bank holding companies with the purpose of pursuing an acquisition of or merger with Security Bank. In early 1995, representatives of MBI contacted members of Security Bank's Board of Directors regarding a potential acquisition and submitted an expression of interest. After a review of the expression of interest, the Board of Directors of Security Bank encouraged MBI to consider a higher price. The degree of interest expressed by MBI along with the continuing pace of merger activity among banks and thrifts in Arkansas prompted Security Bank's Board of Directors to contact potential merger partners on behalf of Security Bank. During January through June of 1995, members of the Board of Directors approached a number of bank holding companies identified by the Board of Directors as prospective purchasers. The list of prospective purchasers included a publicly traded bank holding company based in Arkansas, a large privately held bank holding company based in Arkansas and one publicly traded bank holding company from Tennessee. During this time, MBI expressed a further interest in acquiring Security Bank. The Board of Directors of Security Bank determined that MBI's expression of interest was within the range of adequacy as to price and MBI was encouraged to continue negotiations. One other interested party expressed an interest in acquiring Security Bank. Negotiations and contacts between MBI or this other party and members of Security Bank's Board of Directors continued. Through continued contact and negotiation, the prospective purchasers other than the two mentioned above were determined by Security Bank not to be interested in making an adequate proposal at that time. MBI's final proposal, expressed in June, 1995, called for a 100% stock for stock tax-free acquisition with a fixed number of shares of MBI Common Stock to be issued to the Security Bank - 23 - 30 shareholders. This number of shares was based upon the trading price for shares of MBI Common Stock during the days prior to reaching the final agreement on the remaining terms of the proposal. MBI's proposal was deemed to be superior to any other expression of interest based primarily on the difference in the purchase price per share for each share of Security Bank Common Stock, the significantly greater liquidity of MBI Common Stock and the superior dividend rate on MBI Common Stock. Members of the Board of Directors of Security Bank thereupon began negotiations with MBI with respect to a definitive agreement. After further negotiation and a mutual review by each party of the respective operations of the other party, the Board of Directors of Security Bank approved the definitive agreement at a special meeting held on July 7, 1995. MBI, MBIA and Security Bank subsequently executed the definitive agreement on July 7, 1995. Due to regulatory considerations, MBI, MBIA and Security Bank agreed to revise the structure of the transaction such that it would be affected through a purchase and assumption transaction rather than a merger. On September 18, 1995, MBI, MBIA and Security Bank executed an amended and restated agreement. The Board of Directors of Security Bank previously had approved the Reorganization Agreement at a special meeting held on September 18, 1995. MBIA was represented by representatives of MBI during negotiations with Security Bank. SECURITY BANK'S REASONS AND BOARD RECOMMENDATION. In light of the foregoing, the Board of Directors of Security Bank has voted to unanimously recommend the approval of the Reorganization Agreement by the shareholders of Security Bank for, among others, the following reasons: (i) The consideration to be paid by MBI (on behalf of MBIA). See "TERMS OF THE PROPOSED REORGANIZATION - General Description of the Reorganization." Depending upon the price of MBI Common Stock used in the calculation, the transaction value of consideration to be delivered by MBI reflects a price-to-book multiple of between 1.65 and 1.8 times Security Bank's unaudited book value as of June 30, 1995. The Board of Directors of Security Bank determined that these multiples compared favorably with the ratios of recently completed comparable bank and thrift merger transactions in Arkansas; (ii) The trends in the banking industry are toward consolidation and increased regulation, particularly, recent changes have resulted in an environment where community banks and thrifts have commanded in the past, and for some indefinite future period will command, attractive purchase prices; and the Board of Directors of Security Bank sought to take advantage of this environment; and prospective changes (ultimately adopted) in calculation of deposit insurance premiums for banks may competitively disadvantage thrifts and savings banks such as Security Bank in the future; (iii) Security Bank will benefit from MBI's capital, operations and regulatory expertise and management talent, and may achieve certain economies of scale in its banking operations; (iv) Management of Security Bank believes that MBI's philosophy is to provide its community banks with a substantial degree of operating autonomy, generally leaving existing management in place to manage the institution consistent with past management culture, so long as such culture is not inconsistent with MBI's policies; and (v) The annual dividend yield on MBI Common Stock offered in exchange for Security Bank Common Stock substantially exceeds the historical yield on Security Bank Common Stock, - 24 - 31 and there is a much broader and more liquid market for MBI Common Stock, which is listed and traded on the NYSE. THE BOARD OF DIRECTORS OF SECURITY BANK UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF SECURITY BANK VOTE FOR THE --- PROPOSALS TO APPROVE THE REORGANIZATION AGREEMENT AND THE DISSOLUTION. 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 Security Bank and projected synergies which are anticipated to result from the Reorganization. The Executive Committee concluded that the Reorganization presents an unique opportunity for MBI and MBIA to increase their presence in central Arkansas through the acquisition of an established banking organization having operations in the targeted area. MBI's decision to pursue discussions with Security Bank was primarily a result of MBI's assessment of the value of Security Bank's banking franchise, its asset base within that area and the compatibility of the businesses of the two banking organizations. CONDITIONS OF THE REORGANIZATION The respective obligations of MBI, MBIA and Security Bank to consummate the Reorganization are subject to the satisfaction of certain mutual conditions, including the following: (1) The Reorganization Agreement shall be approved by the holders of at least two-thirds of the outstanding shares of Security Bank Common Stock at the Special Meeting. (2) The Reorganization Agreement and the transactions contemplated therein shall have been approved by the Federal Reserve Board, the OTS, the Comptroller, the FDIC, the Arkansas Commissioner 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 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 Reorganization, shall have been declared effective and not be subject to a stop order or any threatened stop order and the shares of MBI Common Stock to be issued in the Reorganization shall have been listed on the NYSE. (4) Neither Security Bank, MBI nor MBIA 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 Reorganization. (5) Each of MBI, MBIA and Security Bank 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 Reorganization will constitute a reorganization within the meaning of Section 368 of the Code and to the effect that, as a result of the Reorganization, except with respect to cash received in lieu of fractional share interests, holders of Security Bank Common Stock who receive MBI Common Stock in the Reorganization will not recognize gain or loss for federal income tax purposes, the basis of such MBI Common Stock will - 25 - 32 equal the basis of the Security Bank Common Stock for which it is exchanged and the holding period of such MBI Common Stock will include the holding period of the Security Bank Common Stock for which it is exchanged, assuming that such Security Bank Common Stock is a capital asset in the hands of the holder thereof as of the Effective Time. The obligations of MBI and MBIA to consummate the Reorganization are subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of Security Bank made in the Reorganization Agreement shall be true and correct in all material respects as of July 7, 1995 and 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 financial condition, results of operations or business of Security Bank and its subsidiaries taken as a whole (excluding changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates applicable to commercial banking institutions generally) and (iii) for the effect of transactions contemplated by the Reorganization Agreement, and MBI shall have received a certificate of the President and Chief Financial Officer of Security Bank, acting solely in their capacities as officers of Security Bank, to that effect. (2) Security Bank shall have performed in all material respects all obligations required to be performed by it under the Reorganization Agreement prior to the Effective Time, and MBI shall have received a certificate of the President and Chief Financial Officer of Security Bank, acting solely in their capacities as officers of Security Bank, to that effect. (3) Security Bank shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of Security Bank for the lawful consummation of the Reorganization. (4) Since July 7, 1995, there shall have been no material adverse change in the financial condition, results of operations or business of Security Bank or its subsidiaries, taken as a whole, except as may have resulted from changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates, applicable to thrift institutions generally. (5) Rose Law Firm, counsel to Security Bank, shall have delivered to MBI an opinion regarding certain legal matters. (6) MBI and MBIA shall have received an opinion of KPMG Peat Marwick LLP, satisfactory to MBI and MBIA, that the Reorganization will qualify for pooling-of-interests accounting treatment, which opinion shall not have been withdrawn at or prior to the Effective Time. - 26 - 33 (7) MBI and MBIA shall have received from each of the affiliates of Security Bank an executed agreement with respect to certain limitations on the transfer of shares of MBI Common Stock that he, she or it is to receive in the Reorganization as a liquidating distribution. (8) MBI and MBIA shall have received from Security Bank all additional documents as shall be necessary, in the reasonable opinion of MBI and MBIA, to consummate the Reorganization and carry out the intent and purposes of the Reorganization Agreement. Security Bank's obligation to consummate the Reorganization is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of MBI and MBIA made in the Reorganization Agreement shall be true and correct in all material respects as of July 7, 1995 and 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 financial condition, results of operations or business of MBI and its subsidiaries taken as a whole (excluding changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates applicable to commercial banking institutions generally) and (iii) for the effect of transactions contemplated by the Reorganization Agreement, and Security Bank shall have received a certificate of the Group President - Emerging Markets of MBI, signing solely in his capacity as an officer of MBI, to that effect. (2) MBI and MBIA shall have performed in all material respects all obligations required to be performed by it under the Reorganization Agreement prior to the Effective Time, and Security Bank shall have received a certificate of the Group President - Emerging Markets of MBI, signing solely in his capacity as an officer of MBI, to that effect. (3) MBI and MBIA shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of MBI and MBIA for the lawful consummation of the Reorganization. (4) Since July 7, 1995, there shall have been no material adverse change in the financial condition, results of operations or business of MBI and its subsidiaries, taken as a whole, except as may have resulted from changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates, applicable to commercial banking institutions generally. (5) Thompson & Mitchell, counsel to MBI and MBIA, shall have delivered to Security Bank an opinion regarding certain legal matters. - 27 - 34 TERMINATION OF THE REORGANIZATION AGREEMENT The Reorganization Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the shareholders of Security Bank, by mutual consent of the Executive Committee of the Board of Directors of MBI and the respective Board of Directors of MBIA and Security Bank, or unilaterally by the Executive Committee of the Board of Directors of MBI, the Board of Directors of MBIA or the Board of Directors of Security Bank: (i) at any time after June 30, 1996, if the Reorganization 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 Reorganization Agreement); (ii) if the Federal Reserve Board, the OTS, the Comptroller, the FDIC, the Arkansas Commissioner or any other federal and/or state regulatory authority whose approval is required for consummation of the Reorganization shall have issued a final nonappealable denial of such approval; (iii) if the shareholders of Security Bank shall not have approved the Reorganization Agreement at the Special Meeting; or (iv) in the event of a breach by the other party of any representation, warranty or agreement contained in the Reorganization 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 MBI and the Board of Directors of MBIA may terminate the Reorganization Agreement in certain circumstances if Security Bank acquires property after July 7, 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 property would exceed $250,000 in the aggregate. No assurance can be given that the Reorganization will be consummated on or before June 30, 1996 or that MBI, MBIA or Security Bank will not elect to terminate the Reorganization Agreement if the Reorganization has not been consummated on or before such date. In the event of the termination of the Reorganization 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) MBIA 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 Reorganization Agreement. INDEMNIFICATION Security Bank and MBIA have agreed to indemnify each other against any claims or liabilities to which any such party may become subject under federal or state securities laws or regulations, to the extent that such claim or liability arises out of 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 Reorganization will be consummated and become effective on the Closing Date upon satisfaction of all conditions to the Reorganization. Under the Reorganization Agreement, unless the parties otherwise agree, the Closing Date shall be such date as MBIA shall notify Security Bank in writing but (i) not earlier than (A) the receipt of the requisite approval of the Reorganization Agreement by the shareholders of Security Bank and (B) the approval of the Reorganization by the Federal Reserve Board, the OTS, the Comptroller, the FDIC, the Arkansas Commissioner and any other federal and/or state regulatory agency whose approval is required, and all waiting periods for such approvals have been - 28 - 35 satisfied, and (ii) not later than the first business day of the first full calendar month commencing at least five days after the approval of the Reorganization Agreement by the shareholders of Security Bank, the approval date of the Reorganization by the Regulatory Authorities and the expiration of all required waiting periods. The Reorganization will be consummated and become effective at the Effective Time. SURRENDER OF SECURITY BANK STOCK CERTIFICATES AND RECEIPT OF MBI COMMON STOCK At the Effective Time of the Reorganization, MBI, on behalf of MBIA, will deliver to the Exchange Agent, on behalf of Security Bank, the Shares in exchange for and as full payment for the purchase of all of the assets and the assumption of all of the liabilities of Security Bank by TCB and MBCC. Each holder of Security Bank Common Stock, upon submission to the Exchange Agent, on behalf of Security Bank, of a properly executed letter of transmittal and surrender to the Exchange Agent of the stock certificate(s) representing shares of Security Bank Common Stock, will be entitled to receive, as a liquidating distribution, a stock certificate evidencing 31.189 shares of MBI Common Stock for each share of Security Bank Common Stock evidenced by the certificate(s). See "- General Description of the Reorganization." Following the Effective Time of the Reorganization, the Exchange Agent will mail to each Security Bank shareholder of record as of the Effective Time notification of the consummation of the Reorganization and of entitlement to their share of the Shares as a liquidating distribution. 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 Security Bank Common Stock and the receipt of shares of MBI Common Stock as a liquidating distribution. It will be the responsibility of each holder of Security Bank shares to submit all certificates evidencing such holder's shares of Security Bank Common Stock to the Exchange Agent. No dividends or other distribution will be paid to a Security Bank shareholder with respect to shares of MBI Common Stock until such shareholder's properly completed letter of transmittal and stock certificates representing Security Bank 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 Reorganization and the date of the surrender of a Security Bank 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 or documentation and/or insurance bond in lieu thereof. FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the shareholders of Security Bank in connection with the Reorganization. Each holder of Security Bank Common Stock who otherwise would have been entitled to receive a fraction of a share of MBI Common Stock as a liquidating distribution 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 of the Reorganization. Cash received by Security Bank shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION." REGULATORY APPROVAL In addition to the approval of the Reorganization Agreement by the shareholders of Security Bank, the obligations of the parties to effect the Reorganization are subject to the prior approval - 29 - 36 of the Reorganization by each of the Federal Reserve Board, the OTS, the Comptroller, the FDIC and the Arkansas Commissioner. Applications for such approvals have been filed with the Regulatory Authorities. In reviewing the applications, the Regulatory Authorities will consider, among other things, whether the effect of the Reorganization would be to substantially lessen competition in the relevant markets. In addition, the Regulatory Authorities will 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 their review, the Regulatory Authorities will 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 Regulatory Authorities have the authority to deny an application if they conclude that the combined organization would have inadequate capital. MBI and Security Bank are not aware of any governmental approvals or actions that may be required for consummation of the Reorganization 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 Reorganization. See "SUPERVISION AND REGULATION." BUSINESS PENDING THE REORGANIZATION The Reorganization Agreement provides that, during the period from July 7, 1995 to the Effective Time, Security Bank will conduct its business according to the ordinary and usual course consistent with past and current 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 7, 1995 to the Closing Date, except as provided in the Reorganization Agreement, Security Bank will not, and will not permit any of its subsidiaries to, without the prior written consent of MBI and MBIA: (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 Security Bank subsidiaries to Security Bank or to another of the Security Bank subsidiaries), except that Security Bank may declare and pay regular annual cash dividends of not more than $6.00 per share on the Security Bank Common Stock. For any partial year after 1995, Security Bank shall be permitted to declare and pay dividends equal to $1.50 per share on the Security Bank Common Stock for each full calendar quarter ending prior to the Effective Time; (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 Security Bank employee plans or policies 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 (including bonus payments) to employees consistent with past practice, (ii) as required by law or contract and (iii) such increases - 30 - 37 of which Security Bank 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 Reorganization), 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, as the case may be, or other charter documents or bylaws; (5) issue, sell, grant, confer or award any 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 7, 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 and MBIA, 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 $400,000 with respect to commercial transactions (including commercial construction transactions), $350,000 with respect to residential transactions, or in any amount which, when aggregated with any and all loans or credit commitments of Security Bank and its subsidiaries to such person or entity, would be in excess of $350,000; (ii) without first obtaining the written consent of MBI and MBIA, lend to any person or entity in an amount in excess of $500,000 or in any amount which, or when aggregated with any and all loans or credit commitments of Security Bank 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 7, 1995, except that in the case of clauses (i) and (iii) hereof, Security Bank or any of its subsidiaries may make any such loan in the event (A) Security Bank or any of its subsidiaries has delivered to MBI and MBIA or their designated representative a notice of its intention to make such loan and such information as MBI or MBIA or their designated representative may reasonably require in respect thereof and (B) MBI or MBIA 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 and MBIA 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 Security Bank or any subsidiary of Security Bank (except those denoted "pass" thereon), in an amount in excess of $100,000; provided, however, that Security Bank and any Security Bank subsidiary shall not be prohibited from honoring any contractual obligation in existence on July 7, 1995 or, with respect to loans described in clause (i) above, making such loans after consulting with MBI and MBIA. - 31 - 38 Notwithstanding clauses (i) and (ii), Security Bank shall be authorized, without first consulting with MBI and MBIA or obtaining MBI's and MBIA's prior written consent, to increase the aggregate amount of the 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; (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 and MBIA) relating to the disposition of any significant portion of the business or assets of Security Bank 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 Security Bank or any of its subsidiaries or the merger of Security Bank or any of its subsidiaries with any person (other than MBI and MBIA) 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 Security Bank shall promptly notify MBI and MBIA 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. (9) take any action that would (i) materially impede or delay the consummation of the transactions contemplated by the Reorganization Agreement or the ability of MBI, MBIA or Security Bank to obtain any approval of any regulatory authority required for the transactions contemplated by the Reorganization Agreement or to perform its covenants and agreements under the Reorganization Agreement, or (ii) prevent or impede the transactions contemplated by the Reorganization Agreement 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; (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; (12) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or intentionally take or omit to take any other act which would make any of the representations and warranties of Security Bank in the Reorganization 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 - 32 - 39 (13) enter into, increase or renew any loan or credit commitment (including standby letters of credit) to any executive officer or director of Security Bank or any subsidiary of Security Bank, any shareholder of Security Bank, 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 and MBIA, which consent shall not be unreasonably withheld. From the date of the Reorganization Agreement to the Closing Date, except as provided in the Reorganization Agreement, MBI and MBIA will not, and will not permit any of their subsidiaries to, without the prior written consent of Security Bank, enter into any transaction or take or omit to take any other action: (1) that would (i) materially impede or delay the consummation of the transactions contemplated by the Reorganization Agreement or the ability of MBI, MBIA or Security Bank to obtain any approval of any regulatory authority required for the transactions contemplated by the Reorganization Agreement or to perform its covenants and agreements under the Reorganization Agreement, or (ii) prevent the transactions contemplated by the Reorganization Agreement from qualifying as a reorganization within the meaning of Section 368 of the Code; or (2) which would make any of the representations and warranties of MBI or MBIA in the Reorganization 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. WAIVER AND AMENDMENT Any provision of the Reorganization Agreement, including, without limitation, the conditions to the consummation of the Reorganization and the restrictions described under "- Business Pending the Reorganization," 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 Reorganization Agreement by the shareholders of Security Bank at the Special Meeting no such modification may (i) alter or change the amount or kind of consideration to be received by the Security Bank shareholders in the Reorganization or (ii) adversely affect the tax treatment to Security Bank shareholders as a result of receiving the shares of MBI Common Stock in the Reorganization as a liquidating distribution. ACCOUNTING TREATMENT The Reorganization is intended to be accounted for under the pooling-of-interests method of accounting. It is a condition to MBI's and MBIA's consummation of the Reorganization, unless otherwise waived, that KPMG Peat Marwick LLP, MBI's independent accountants, deliver to MBI and MBIA an opinion that the Reorganization will qualify for pooling-of-interests accounting treatment. - 33 - 40 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION ------------------------------------------------------------- The following discussion is based upon an opinion of Thompson & Mitchell, counsel to MBI and MBIA ("Counsel"), and except as otherwise indicated, reflects Counsel's opinion. The discussion is a general summary of the material United States federal income tax ("federal income tax") consequences of the Reorganization to certain Security Bank shareholders and does not purport to be a complete analysis or listing of all potential tax considerations or consequences relevant to a decision whether to vote for the approval of the Reorganization. The discussion does not address the federal income tax consequences of the Reorganization that are applicable to Security Bank 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 Security Bank Common Stock pursuant to the exercise of employee stock options or otherwise as compensation. Each shareholder's individual circumstances may affect the tax consequences of the Reorganization to such shareholder. In addition, the discussion does not address the effect of any applicable state, local or foreign tax laws, or the effect of any federal tax laws other than those pertaining to the federal income tax. AS A RESULT, EACH SECURITY BANK SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE REORGANIZATION TO SUCH SHAREHOLDER. The discussion assumes that shares of Security Bank Common Stock are held as capital assets (within the meaning of Section 1221 of the Code) at the Effective Time. Security Bank has received an opinion from Counsel to the effect that, assuming the Reorganization occurs in accordance with the Reorganization Agreement, the Reorganization will constitute a "reorganization" under Section 368(a)(1) of the Code with the following federal income tax consequences: (1) Security Bank shareholders will recognize no gain or loss as a result of the surrender of their Security Bank Common Stock solely for shares of MBI Common Stock pursuant to the Reorganization, 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 Security Bank shareholder in the Reorganization (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 Security Bank Common Stock surrendered. (3) The holding period of the shares of MBI Common Stock received by each Security Bank shareholder in the Reorganization (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 Security Bank Common Stock surrendered therefor. (4) A Security Bank shareholder who receives cash in the Reorganization 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 Reorganization 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 interest. - 34 - 41 Counsel's opinion is subject to the conditions and assumptions stated therein and relies upon various representations made by MBI, Security Bank and certain shareholders of Security Bank. If any of these representations or assumptions is inaccurate, the tax consequences of the Reorganization could differ from those described herein. Counsel's opinion is also based upon the Code, regulations proposed or promulgated thereunder, and administrative interpretations and judicial precedents relating thereto, 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 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. The receipt of Counsel's opinion again as of the date of the closing of the Reorganization is a condition to the consummation of the Reorganization. An opinion of counsel, unlike a private letter ruling from the Internal Revenue Service (the "Service"), has no binding effect on the Service. The Service could take a position contrary to Counsel's opinion and, if the matter were litigated, a court may reach a decision contrary to the opinion. Neither MBI nor Security Bank has requested an advance ruling as to the federal income tax consequences of the Reorganization, and the Service is not expected to issue such a ruling. THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION TO CERTAIN SECURITY BANK SHAREHOLDERS AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SECURITY BANK SHAREHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EACH SECURITY BANK SHAREHOLDER. ACCORDINGLY, EACH SECURITY BANK SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE REORGANIZATION, 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 SECURITY BANK -------------------------------------------------- Shareholders of Security Bank will have dissenters' rights if they have not voted in favor of the Reorganization Agreement and if they comply with the procedures for the exercise of such rights as set forth in Section 552.14. These provisions contain detailed information as to a shareholder's right to dissent and obtain payment for his or her shares and the procedural steps to be followed by a dissenting shareholder. The following description is only a summary of these provisions and is qualified in its entirety by referenced to Section 552.14, which is attached to this Proxy Statement/Prospectus as Annex A. ------- A Security Bank shareholder electing to exercise his or her rights to dissent from the Reorganization is required to file with the Security Bank (addressed to Mr. Bill F. Johnson, President, Security Bank of Conway, F.S.B., 1122 Van Ronkle, Conway, Arkansas 72033) prior to voting on the Reorganization, a written statement identifying himself or herself and stating his or her intention to demand appraisal of and payment for his or her shares. This demand must be made in addition to, and separate from, any proxy or vote against the Reorganization Agreement. If the Reorganization is effected, within ten days thereafter the resulting institution must (i) give notice of the Closing Date by mail to any dissenting shareholder who has not voted in favor of - 35 - 42 the Reorganization, (ii) make a written offer to each dissenting shareholder to pay for his or her shares of Security Bank Common Stock a specified price deemed by the resulting institution to be the fair value of such shares, and (iii) inform any dissenting shareholder that, within 60 days of the Effective Time, the dissenting shareholder must file a petition with the Office of Thrift Supervision, 1700 G Street, N.W., Washington, DC 20552, if the shareholder and the resulting institution do not agree as to the fair market value and surrender the certificates representing the shares as to which the dissent applies. A shareholder entitled to file a petition with the OTS who fails to file such petition within 60 days of the Closing Date shall be deemed to have accepted the terms offered under the Reorganization Agreement. If within 60 days of the Closing Date, the fair value is agreed upon between the resulting institution and any dissenting shareholder, payment will be made within 90 days of the Closing Date. If within such period, however, the resulting institution and any dissenting shareholder do not agree as to the fair value of such shares, such shareholder may file a petition with the OTS demanding a determination of the fair market value of the stock. A copy of such petition also must be sent by registered or certified mail to the resulting institution. Any such shareholder who fails to file the petition within 60 days of the Closing Date shall be deemed to have accepted the liquidating distribution that is payable with respect to the shares of Security Bank Common Stock as set forth in the Reorganization Agreement. Each dissenting shareholder, within 60 days of the Closing Date, must submit his or her stock certificates to the Exchange Agent for notation thereon that an appraisal and payment have been demanded. The stock certificates should be sent to KeyCorp Shareholder Services, Inc., c/o Corporate Trust Division, P.O. Box 6477, Cleveland, Ohio 44101. Any shareholder who fails to submit his or her certificates will not be entitled to appraisal rights and will be deemed to have accepted the terms of the Reorganization Agreement. Any shareholder who is demanding payment for his or her shares in accordance with Section 552.14 shall not thereafter be entitled to vote or exercise any rights of a shareholder except the right to receive payment for his or her shares pursuant to the provisions of Section 552.14 and the right to maintain certain legal actions. The respective shares for which payment has been demanded shall not thereafter be considered outstanding for the purposes of any subsequent vote of shareholders. Because of the detailed provisions and requirements of Section 552.14, each dissenting shareholder should consult with his or her own legal counsel concerning the procedures and remedies available to him or her. Any failure to follow the detailed procedures set forth in Section 552.14 may result in a shareholder losing his or her right to claim fair value as described therein. THE ABOVE SUMMARY OF THE PROVISIONS REGARDING DISSENTERS' RIGHTS UNDER THE RULES AND REGULATIONS OF THE OTS IS QUALIFIED IN ITS ENTIRETY BY THE TEXT OF SECTION 552.14 WHICH IS ATTACHED HERETO AS ANNEX A. ------- 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 Security Bank and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Reorganization, the proposed acquisitions of Sterling, Hawkeye and Metro and the acquisition of Ameribanc, Inc. by merger with and into a wholly owned subsidiary of MBI, which was completed on April 30, 1992 (ABNK is the surviving entity from that merger). The data presented - 36 - 43 is based upon the supplemental consolidated financial statements and related notes of MBI and the consolidated financial statements and related notes of Security Bank, Sterling, 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 Reorganization, the completed mergers of ABNK, or the proposed acquisitions of Sterling, Hawkeye and Metro had been consummated prior to the periods indicated.
MBI/ MBI/ALL Security Bank/ Security Bank Security Bank Entities All Entities MBI Security Bank Pro Forma Pro Forma Pro Forma Pro Forma Reported Reported Combined Equivalent Combined Equivalent -------- -------- ------------ -------------- ------------ -------------- Book Value per Share: September 30, 1995 $25.43 $832.00 $25.42 $792.82 $25.16 $784.72 December 31, 1994 23.47 752.00 23.47 732.01 23.09 720.15 Cash Dividends Declared per Share: Nine months ended September 30, 1995 $ 0.99 $ -- $ 0.99 $ 30.88 $ 0.99 $ 30.88 Year ended December 31, 1994 1.12 6.00 1.12 34.93 1.12 34.93 Year ended December 31, 1993 0.99 6.00 0.99 30.88 0.99 30.88 Year ended December 31, 1992 0.93 6.00 0.93 29.01 0.93 29.01 Earnings per Share: Nine months ended September 30, 1995 $ 2.95 $ 80.73 $ 2.95 $ 92.01 $ 2.88 $ 89.82 Year ended December 31, 1994 3.22 82.53 3.21 100.12 3.22 100.43 Year ended December 31, 1993 2.79 75.26 2.79 87.02 2.80 87.33 Year ended December 31, 1992 2.42 82.91 2.43 75.79 2.44 76.10 Market Price per Share: At July 7, 1995 $44.38 -- n/a n/a n/a n/a At November 1, 1995 43.50 -- n/a n/a n/a n/a - ---------------------- Includes the effect of pro forma adjustments for Security Bank and ABNK, as appropriate. See "PRO FORMA FINANCIAL INFORMATION." Based on the pro forma combined per share amounts multiplied by 31.189, the distribution ratio applicable to one share of Security Bank Common Stock. 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 Security Bank, ABNK, Sterling, Hawkeye and Metro, as appropriate. See "PRO FORMA FINANCIAL INFORMATION." The market value of MBI Common Stock was determined as of the last trading day preceding the public announcement of the proposed acquisition and as of the latest available date prior to the filing of the Proxy Statement/Prospectus, based on the last sale price as reported on the NYSE Composite Tape. There are no publicly available quotations of Security Bank Common Stock and management of Security Bank is not aware of any trades in Security Bank Common Stock for the last three years.
PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma combined consolidated balance sheet gives effect to the Reorganization and the proposed acquisitions of Sterling, Hawkeye and Metro as if each of the acquisitions had been consummated on December 31, 1994. - 37 - 44 MBI acquired ABNK on April 30, 1992, which acquisition was accounted for under the purchase method of accounting. Accordingly, the historical results of operations of MBI include the results of operations of ABNK from May 1, 1992 forward. The following pro forma combined consolidated income statements include the results of operations of ABNK 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 Security Bank, Sterling, Hawkeye and Metro as if the Reorganization and the proposed acquisitions of Sterling, Hawkeye and Metro had 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 ABNK 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, Security Bank, Sterling, Hawkeye, Metro and ABNK. 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 financial condition and results of operations of Wedge, AmeriFirst, Southwest and Plains Spirit to that of MBI, individually and on an aggregate basis, the unaudited pro forma combined consolidated financial statements contained herein do not reflect the acquisitions of Wedge, AmeriFirst, Southwest and Plains Spirit for any period prior to the respective acquisition dates of such entities. - 38 - 45 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (THOUSANDS) (UNAUDITED)
MBI, Security Bank Pro Forma Security Bank Combined MBI Security Bank Adjustments Consolidated -------- ------------- --------------- ------------ ASSETS Cash and due from banks $ 822,849 $ 15,043 $ (1,420) $ 836,472 Due from banks-interest bearing 97,473 99 97,572 Federal funds sold and repurchase agreements 179,778 125 179,903 Investments in debt and equity securities Trading 4,696 -- 4,696 Available-for-sale 768,422 577 768,999 Held-to-maturity 3,074,207 4,353 3,078,560 ------------ -------- -------- ------------ Total 3,847,325 4,930 -- 3,852,255 Loans and leases 10,648,008 75,792 10,723,800 Reserve for possible loan losses (187,872) (287) (188,159) ------------ -------- -------- ------------ Net Loans and Leases 10,460,136 75,505 -- 10,535,641 Other assets 611,092 4,620 8,598 615,712 (8,598) ------------ -------- -------- ------------ Total Assets $ 16,018,653 $100,322 $ (1,420) $ 16,117,555 ============ ======== ======== ============ Sterling All Entities Hawkeye Pro Forma Metro Combined Sterling Hawkeye Metro Adjustments Consolidated --------- ---------- -------- --------------- ------------ ASSETS Cash and due from banks $ 7,167 $ 96,917 $ 200 $ (2,373) $ 903,522 (33,961) (900) Due from banks-interest bearing 200 1,366 99,138 Federal funds sold and repurchase agreements 827 102,004 282,734 Investments in debt and equity securities Trading -- -- -- 4,696 Available-for-sale 46,239 287,270 7,084 1,109,592 Held-to-maturity 26,675 127,896 19,247 3,252,378 --------- ---------- -------- --------- ----------- Total 72,914 415,166 26,331 -- 4,366,666 Loans and leases 85,681 1,298,589 54,674 12,162,744 Reserve for possible loan losses (1,380) (21,553) (510) (211,602) --------- ---------- -------- --------- ----------- Net Loans and Leases 84,301 1,277,036 54,164 -- 11,951,142 Other assets 4,793 101,242 1,288 18,269 723,035 (18,269) 192,819 (192,819) 5,911 (5,911) --------- ---------- -------- -------- ----------- Total Assets $ 170,002 $1,992,565 $ 83,349 $(37,234) $18,326,237 ========= ========== ======== ======== ===========
- 39 - 46 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (THOUSANDS) (UNAUDITED)
MBI, Security Bank Pro Forma Security Bank Combined MBI Security Bank Adjustments Consolidated -------- ------------- --------------- ------------ LIABILITIES Deposits Non-interest bearing $ 1,798,605 $ 1,191 $ -- $ 1,799,796 Interest bearing 9,875,943 86,725 9,962,668 Foreign 160,736 -- 160,736 ----------- -------- --------- ----------- Total Deposits 11,835,284 87,916 -- 11,923,200 Federal funds purchased and repurchase agreements 1,611,392 -- 1,611,392 Other borrowings 949,186 3,248 952,434 Other liabilities 203,624 560 204,184 ----------- -------- --------- ----------- Total Liabilities 14,599,486 91,724 -- 14,691,210 SHAREHOLDERS' EQUITY Preferred stock 12,153 12,153 Common stock 279,658 1,032 1,610 281,268 (1,032) Capital surplus 216,757 4 (574) 216,183 (4) Retained earnings 936,311 7,562 7,562 943,873 (7,562) Treasury stock (25,712) (1,420) (27,132) ----------- -------- --------- ----------- Total Shareholders' Equity 1,419,167 8,598 (1,420) 1,426,345 ----------- -------- --------- ----------- Total Liabilities and Shareholders' Equity $16,018,653 $100,322 $ (1,420) $16,117,555 =========== ======== ========= =========== Sterling All Entities Hawkeye Pro Forma Metro Combined Sterling Hawkeye Metro Adjustments Consolidated --------- ---------- -------- --------------- ------------ LIABILITIES Deposits Non-interest bearing $ 20,613 $ 204,619 $ 2,728 $ 2,027,756 Interest bearing 111,900 1,512,456 73,984 11,661,008 Foreign -- -- -- 160,736 ----------- ---------- --------- ----------- ----------- Total Deposits 132,513 1,717,075 76,712 -- 13,849,500 Federal funds purchased and repurchase agreements 17,917 15,003 -- 1,644,312 Other borrowings -- 46,241 400 999,075 Other liabilities 1,303 21,427 326 227,240 ----------- ---------- --------- ----------- ----------- Total Liabilities 151,733 1,799,746 77,438 -- 16,720,127 SHAREHOLDERS' EQUITY Preferred stock -- 12,153 Common stock 3,685 135 192 2,607 324,247 (3,685) 39,375 (135) 997 (192) Capital surplus 799 105,129 1,409 1,877 284,553 (799) 65,889 (105,129) 604 (1,409) Retained earnings 13,785 87,555 4,310 13,785 1,049,523 (13,785) 87,555 (87,555) 4,310 (4,310) Treasury stock (2,373) (64,366) (33,961) (900) ----------- ---------- --------- ----------- ----------- Total Shareholders' Equity 18,269 192,819 5,911 (37,234) 1,606,110 ----------- ---------- --------- ----------- ----------- Total Liabilities and Shareholders' Equity $ 170,002 $1,992,565 $ 83,349 $ (37,234) $18,326,237 =========== ========== ========= =========== =========== See notes to pro forma combined consolidated financial statements.
- 40 - 47 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, Security Bank All Entities Pro Forma Pro Forma Combined Combined MBI Security Bank Consolidated Sterling Hawkeye Metro Consolidated ------------- -------------- -------------- ----------- ------------ -------- ----------------- Interest Income $ 854,404 $ 5,704 $ 860,108 $ 9,069 $ 105,900 $ 4,745 $ 979,822 Interest Expense 410,097 3,291 413,388 4,247 49,337 2,614 469,586 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income 444,307 2,413 446,720 4,822 56,563 2,131 510,236 Provision for Possible Loan Losses 28,928 45 28,973 162 249 30 29,414 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 415,379 2,368 417,747 4,660 56,314 2,101 480,822 Other Income Trust 48,252 -- 48,252 129 3,888 -- 52,269 Service charges 50,062 138 50,200 242 6,267 -- 56,709 Credit card fees 14,169 -- 14,169 -- 1,451 -- 15,620 Securities gains (losses) 3,672 -- 3,672 (1) 104 (508) 3,267 Other 65,325 154 65,479 286 8,485 214 74,464 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Income 181,480 292 181,772 656 20,195 (294) 202,329 Other Expense Salaries and employee benefits 195,825 682 196,507 1,735 23,528 766 222,536 Net occupancy and equipment 53,547 243 53,790 475 6,825 137 61,227 Other 107,572 520 108,092 1,411 19,825 627 129,955 ------------ ---------- ------------ --------- ---------- -------- ----------- Total Other Expense 356,944 1,445 358,389 3,621 50,178 1,530 413,718 ------------ ---------- ------------ --------- ---------- -------- ----------- Income Before Income Taxes 239,915 1,215 241,130 1,695 26,331 277 269,433 Income Taxes 81,156 382 81,538 386 9,004 293 91,221 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Income Before Change in Accounting Principle $ 158,759 $ 833 $ 159,592 $ 1,309 $ 17,327 $ (16) $ 178,212 ============ ========== ============ ========= ========== ======== ============ Per Share Data Average Common Shares Outstanding 53,629,980 53,919,980 61,656,353 Net Income Before Change in Accounting Principle $ 2.95 $ 2.95 $ 2.88 See notes to pro forma combined consolidated financial statements.
- 41 - 48 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, Security Bank All Entities Pro Forma Pro Forma Combined Combined MBI Security Bank Consolidated Sterling Hawkeye Metro Consolidated ------------- -------------- -------------- ----------- ------------ -------- ----------------- Interest Income $ 730,270 $ 4,765 $ 735,035 $ 8,289 $ 90,495 $ 4,149 $ 837,968 Interest Expense 284,939 2,564 287,503 3,257 37,414 2,188 330,362 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income 445,331 2,201 447,532 5,032 53,081 1,961 507,606 Provision for Possible Loan Losses 26,374 45 26,419 66 48 (17) 26,516 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 418,957 2,156 421,113 4,966 53,033 1,978 481,090 Other Income Trust 46,560 -- 46,560 124 3,804 -- 50,488 Service charges 52,089 89 52,178 289 5,918 -- 58,385 Credit card fees 18,087 -- 18,087 -- 1,272 -- 19,359 Securities gains 1,718 -- 1,718 (44) 396 -- 2,070 Other 40,971 301 41,272 300 8,702 240 50,514 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Income 159,425 390 159,815 669 20,092 240 180,816 Other Expense Salaries and employee benefits 190,801 585 191,386 1,766 22,878 756 216,786 Net occupancy and equipment 51,837 191 52,028 491 6,032 133 58,684 Other 117,502 689 118,191 1,650 18,349 524 138,714 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Expense 360,140 1,465 361,605 3,907 47,259 1,413 414,184 ------------ ---------- ------------ --------- ---------- -------- ------------ Income Before Income Taxes 218,242 1,081 219,323 1,728 25,866 805 247,722 Income Taxes 78,033 397 78,430 441 8,420 295 87,586 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Income Before Change in Accounting Principle $ 140,209 $ 684 $ 140,893 $ 1,287 $ 17,446 $ 510 $ 160,136 ============ ========== ============ ========= ========== ======== ============ Per Share Data Average Common Shares Outstanding 51,900,015 52,190,015 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.
- 42 - 49 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1994 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, Security Bank All Entities Pro Forma Pro Forma Combined Combined MBI Security Bank Consolidated Sterling Hawkeye Metro Consolidated ------------- -------------- -------------- ----------- ------------ -------- ----------------- Interest Income $ 994,896 $ 6,257 $ 1,001,153 $ 11,165 $ 123,173 $ 5,680 $ 1,141,171 Interest Expense 399,349 3,487 402,836 4,453 51,601 3,046 461,936 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income 595,547 2,770 598,317 6,712 71,572 2,634 679,235 Provision for Possible Loan Losses 43,201 60 43,261 66 64 10 43,401 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 552,346 2,710 555,056 6,646 71,508 2,624 635,834 Other Income Trust 60,769 -- 60,769 168 5,119 -- 66,056 Service charges 68,783 195 68,978 385 8,024 -- 77,387 Credit card fees 24,895 -- 24,895 -- 1,693 -- 26,588 Securities gains 2,177 -- 2,177 (43) 402 -- 2,536 Other 53,134 211 53,345 406 11,565 471 65,787 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Income 209,758 406 210,164 916 26,803 471 238,354 Other Expense Salaries and employee benefits 258,546 727 259,273 2,388 30,229 953 292,843 Net occupancy and equipment 69,784 236 70,020 652 8,101 157 78,930 Other 163,740 750 164,490 2,076 24,776 728 192,070 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Expense 492,070 1,713 493,783 5,116 63,106 1,838 563,843 ------------ ---------- ------------ --------- ---------- -------- ------------ Income Before Income Taxes 270,034 1,403 271,437 2,446 35,205 1,257 310,345 Income Taxes 101,705 551 102,256 592 11,460 474 114,782 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Income Before Change in Accounting Principle $ 168,329 $ 852 $ 169,181 $ 1,854 $ 23,745 $ 783 $ 195,563 ============ ========== ============ ========= ========== ======== ============ Per Share Data Average Common Shares Outstanding 51,957,002 52,247,002 59,983,385 Net Income Before Change in Accounting Principle $ 3.22 $ 3.21 $ 3.22 See notes to pro forma combined consolidated financial statements.
- 43 - 50 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1993 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, Security Bank All Entities Pro Forma Pro Forma Combined Combined MBI Security Bank Consolidated Sterling Hawkeye Metro Consolidated ------------- -------------- -------------- ----------- ------------ -------- ----------------- Interest Income $ 971,482 $ 5,849 $ 977,331 $ 11,219 $ 123,129 $ 6,306 $ 1,117,985 Interest Expense 390,911 3,309 394,220 4,538 53,662 3,561 455,981 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income 580,571 2,540 583,111 6,681 69,467 2,745 662,004 Provision for Possible Loan Losses 63,513 60 63,573 258 789 129 64,749 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 517,058 2,480 519,538 6,423 68,678 2,616 597,255 Other Income Trust 61,996 -- 61,996 147 4,786 -- 66,929 Service charges 67,144 112 67,256 351 7,317 -- 74,924 Credit card fees 24,312 -- 24,312 -- 1,377 -- 25,689 Securities gains 5,121 -- 5,121 11 179 9 5,320 Other 61,130 173 61,303 338 12,227 366 74,234 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Income 219,703 285 219,988 847 25,886 375 247,096 Other Expense Salaries and employee benefits 245,469 559 246,028 2,654 30,080 858 279,620 Net occupancy and equipment 70,911 186 71,097 695 7,763 153 79,708 Other 191,663 614 192,277 2,278 24,296 714 219,565 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Expense 508,043 1,359 509,402 5,627 62,139 1,725 578,893 ------------ ---------- ------------ --------- ---------- -------- ------------ Income Before Income Taxes 228,718 1,406 230,124 1,643 32,425 1,266 265,458 Income Taxes 85,467 517 85,984 366 10,607 477 97,434 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Income Before Change in Accounting Principle $ 143,251 $ 889 $ 144,140 $ 1,277 $ 21,818 $ 789 $ 168,024 ============ ========== ============ ========= ========== ======== ============ Per Share Data Average Common Shares Outstanding 50,965,103 51,255,103 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.
- 44 - 51 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1992 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, Security Bank All Entities Pro Forma Pro Forma Combined Combined MBI Security Bank Consolidated Sterling Hawkeye Metro Consolidated ------------- -------------- -------------- ----------- ------------ -------- ----------------- Interest Income $ 1,040,492 $ 6,142 $ 1,046,634 $ 12,453 $ 128,261 $ 7,293 $ 1,194,641 Interest Expense 501,802 3,874 505,676 6,025 64,389 4,753 580,843 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income 538,690 2,268 540,958 6,428 63,872 2,540 613,798 Provision for Possible Loan Losses 79,787 60 79,847 375 1,677 202 82,101 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 458,903 2,208 461,111 6,053 62,195 2,338 531,697 Other Income Trust 58,835 -- 58,835 129 4,174 -- 63,138 Service charges 64,813 97 64,910 462 6,482 -- 71,854 Credit card fees 21,745 -- 21,745 -- 547 -- 22,292 Securities gains 5,590 4 5,594 22 617 (29) 6,204 Other 55,091 72 55,163 347 10,671 486 66,667 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Income 206,074 173 206,247 960 22,491 457 230,155 Other Expense Salaries and employee benefits 224,948 438 225,386 2,400 27,887 816 256,489 Net occupancy and equipment 64,466 103 64,569 637 6,893 171 72,270 Other 196,930 525 197,455 1,968 22,960 733 223,116 ------------ ---------- ------------ --------- ---------- -------- ------------ Total Other Expense 486,344 1,066 487,410 5,005 57,740 1,720 551,875 ------------ ---------- ------------ --------- ---------- -------- ------------ Income Before Income Taxes 178,633 1,315 179,948 2,008 26,946 1,075 209,977 Income Taxes 60,990 459 61,449 457 8,609 445 70,960 ------------ ---------- ------------ --------- ---------- -------- ------------ Net Income Before Change in Accounting Principle $ 117,643 $ 856 $ 118,499 $ 1,551 $ 18,337 $ 630 $ 139,017 ============ ========== ============ ========= ========== ======== ============ Per Share Data Average Common Shares Outstanding 47,972,446 48,262,446 55,998,829 Net Income Before Change in Accounting Principle $ 2.43 $ 2.43 $ 2.44 See notes to pro forma combined consolidated financial statements.
- 45 - 52 MERCANTILE BANCORPORATION INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Represents MBI restated 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-interest. The acquisitions of Security, Sterling, Hawkeye and Metro will be accounted for as pooling-of-interests. In connection with all of the proposed acquisitions, MBI may repurchase 891,390 shares of its own common stock in the open market. Acquisition of Security Bank with 322,000 shares of MBI Common Stock. Elimination of MBI's investment in Security Bank. Acquisition of Sterling with 521,424 shares of MBI Common Stock. Elimination of MBI's investment in 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 merger of Hawkeye, MBI expects to record certain adjustments related to the proposed merger 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 to largely accrue for change of control agreements, contract cancellation penalties and professional fees. - 46 - 53 INFORMATION REGARDING SECURITY BANK ----------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION This section presents an analysis of the consolidated financial condition of Security Bank and its wholly owned subsidiaries at December 31, 1994 and 1993 and the consolidated results of operations for the years ended December 31, 1994, 1993 and 1992. This review should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other financial data presented elsewhere in this Proxy Statement/Prospectus. DECEMBER 31, 1994, 1993 AND 1992 RESULTS OF OPERATION NET INCOME. Net income for the year ended December 31, 1994 was $851,761 as compared to $776,917 for the year ended December 31, 1993. This represents an increase of $74,844, or 9.63%, over 1993. This improvement was primarily due to an increase in net interest income of $229,925 and non-interest income of $120,463. Offsetting these improvements were increased operating expenses of $354,175, which was primarily due to increased salary expenses, costs incurred in conjunction with the conversion to an in-house computer system and the formation of a secondary market mortgage operation. Additionally, net income for the year ended December 31, 1993 included a one time charge of $112,000 related to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Net income for the year ended December 31, 1993 was $776,917 as compared to $855,992 for the year ended December 31, 1992. This represents a decrease of $79,075, or 9.24%. The primary reason for this decrease was the one time charge of $112,000 related to the adoption of SFAS No. 109, as previously discussed. NET INTEREST INCOME. The $229,925 improvement in net interest income for the year ended December 31, 1994 as compared to the year ended December 31, 1993, was primarily due to an approximately $9.8 million, or 15.35%, increase in loans, which had a favorable impact on Security Bank's net interest spread. The increase in the loan portfolio was a result of a record number of single family housing starts in Security Bank's market area and continued growth in the area's commercial development. This increase was funded primarily from a reduction in lower-yielding investment securities, totaling approximately $5.9 million, and an increase in interest-bearing liabilities, totaling approximately $4.4 million, which resulted in a more profitable mix of interest-earning assets and interest-bearing liabilities. The overall yield on interest-earning assets increased from 7.08% in 1993 to 7.22% in 1994. During the same period the cost of funds increased by only 1 basis point. Net interest income increased during the year ended December 31, 1993 by $271,431, or 12.29%, as compared to December 31, 1992. The primary reason for this increase was a reduction in interest rates paid on deposits which were partially offset by a reduction in rates earned on interest-earning assets. The average rate paid on interest-bearing liabilities decreased 88 basis points from 5.09% in 1992 to 4.21% in 1993 while the average rate earned on interest-earning assets decreased by only 66 basis points from 7.74% in 1992 to 7.08% in 1993. The improvement in net interest income was also influenced favorably by a large growth in loans and a more profitable mix of interest-earning assets. - 47 - 54 The following table sets forth interest income from average interest-earning assets, expressed in dollars and average yields, and interest expense on average interest-bearing liabilities, expressed in dollars and average rates. Interest income from investment securities includes the accretion and amortization of unearned discounts and premiums.
AVERAGE BALANCES, 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 $ 69,296 $ 5,535 7.99% $ 59,261 $ 4,916 8.30% Investment securities 12,854 557 4.33 17,239 734 4.26 Interest-bearing deposits 4,296 158 3.68 5,451 175 3.21 Federal funds sold 170 7 4.12 655 24 3.66 --------- -------- --------- ------- Total interest earning assets/ interest income/overall yield 86,616 6,257 7.22 82,606 5,849 7.08 Allowance for loan losses (224) (174) Non-interest-bearing deposits and cash 878 641 Other assets 5,016 2,991 --------- --------- Total assets $ 92,286 $ 86,064 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand deposits $ 13,509 $ 370 2.74% $ 13,285 $ 378 2.85% Savings deposits 7,569 190 2.51 7,644 192 2.51 Time deposits 58,652 2,751 4.69 57,545 2,729 4.74 FHLB advances 2,857 176 6.16 214 10 4.67 --------- -------- --------- ------- Total interest-bearing liabilities/ interest expense/overall rate 82,587 3,487 4.22 78,688 3,309 4.21 Demand deposits 1,167 762 Other liabilities 1,169 44 Total liabilities 84,923 79,494 Shareholders' equity 7,363 6,570 --------- --------- Total liabilities and shareholders' equity $ 92,286 $ 86,064 ========= ========= Net interest income/ interest rate spread $ 2,770 3.00% $ 2,540 2.87% ======== ==== ======= ==== Net earning assets/net yield on average interest-earning assets $ 4,029 3.20% $ 3,918 3.07% ========= ==== ========= ==== - ----------------------------- Average balances include loans 90 days or more past due. There were no non-accrual loans during 1994 or 1993. Average balances for each period have been calculated using the average month-end balances during the year. Interest income on loans includes $83,047 and $47,148 of fee income for the years ended December 31, 1994 and 1993, respectively. - 48 - 55
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.
VOLUME AND RATE VARIANCE -------------------------------------------------------------------------------------------- 1994 COMPARED TO 1993 1993 COMPARED TO 1992 ------------------------------------------ ------------------------------------------- INCREASE (DECREASE) ATTRIBUTABLE TO CHANGE IN RATE/ RATE/ RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET ---- ------ ------ --- ---- ------ ------ --- (dollars in thousands) INTEREST INCOME Interest-earning assets: Loans $(184) $ 833 $(30) $ 619 $(140) $ 47 $ (1) $ (94) Investment securities 12 (187) (2) (177) (575) 466 (245) (354) Interest-bearing deposits 26 (37) (6) (17) (7) 250 (87) 156 Federal funds sold 3 (18) (2) (17) (7) 5 1 (1) ----- ----- ---- ----- ----- ---- ----- ----- Total interest income (143) 591 (40) 408 (729) 768 (332) (293) INTEREST EXPENSE Interest-bearing liabilities: Interest-bearing demand deposits (15) 6 1 (8) 12 27 1 40 Savings deposits -- (2) -- (2) (14) 49 (4) 31 Time deposits (29) 52 (1) 22 (618) (21) 4 (635) FHLB advances 3 123 40 166 -- -- -- -- ----- ----- ---- ----- ----- ---- ----- ----- Total interest expense (41) 179 40 178 (620) 55 1 (564) ----- ----- ---- ----- ----- ---- ----- ----- Net interest income $(102) $ 412 $(80) $ 230 $(109) $713 $(333) $ 271 ===== ===== ==== ===== ===== ==== ===== =====
NON-INTEREST INCOME. The following table describes Security Bank's non-interest income for the periods indicated.
NON-INTEREST INCOME YEAR ENDED DECEMBER 31 ---------------------------------- 1994 1993 1992 ---------------------------------- (dollars in thousands) Commission income $116 $129 $ 5 Service charges on deposit accounts 195 112 97 FHLB dividends 24 16 17 Gain on sale of real estate, net 17 2 16 Gain on sale of investment securities -- -- 4 Other operating income 54 26 34 ---- ---- ---- Total non-interest income $406 $285 $173 ==== ==== ==== Non-interest income as a percent of average total assets .44% .33% .21%
Several miscellaneous fee increases (i.e. overdraft charges, stop payment fees, etc.) were implemented during late 1994 which contributed to the increase in service charge income. In late 1992, the investment subsidiary was started which accounts for the increase in commission income between 1992 and 1993. - 49 - 56 NON-INTEREST EXPENSE. The following table sets forth Security Bank's non-interest expenses for the periods indicated.
NON-INTEREST EXPENSE YEAR ENDED DECEMBER 31 ------------------------------------- 1994 1993 1992 ------------------------------------- (dollars in thousands) Salaries and employee benefits $ 727 $ 559 $ 438 Occupancy and equipment expense 236 186 103 FDIC premium and OTS assessment 228 196 196 Data processing 134 90 73 Other operating expense 388 328 256 ------ ------ ------ Total non-interest expense $1,713 $1,359 $1,066 ====== ====== ======
The increases in occupancy and equipment expense and data processing expense during 1994 are primarily due to increased depreciation and computer software amortization related to the purchase of an in-house computer system during the Summer of 1994. The increase in salaries and employee benefits in 1994 primarily resulted from the formation of a secondary mortgage loan department. In 1992, Security Bank began a large expansion project to the main branch which was completed and occupied in 1993. The depreciation and other costs associated with the use of this addition to the main branch were primary reasons for the increase in occupancy and equipment expense from 1992 to 1993. The start-up of the investment subsidiary was the primary reason for the increase in salaries and employee benefits between 1992 and 1993. FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY LENDING ACTIVITIES. Security Bank's major source of income is interest and fees on loans. The following table presents the composition of Security Bank's loan portfolio at the end of each of the periods indicated.
LOAN PORTFOLIO DECEMBER 31 ------------------------------------------------------ 1994 1993 ----------------------- ----------------------- AMOUNT PERCENT AMOUNT PERCENT ----------------------- ----------------------- (dollars in thousands) Mortgage loans: Real estate $ 58,187 78.54% $ 57,639 89.73% Construction, net 8,553 11.55 1,664 2.59 Mortgage loans held for sale 257 .35 -- -- Installment loans 6,269 8.46 4,018 6.25 Loans to depositors, secured by savings 816 1.10 916 1.43 -------- ------ -------- ----- Total loans $ 74,082 100.00% $ 64,237 100.00% ======== ====== ======== ======
- 50 - 57 The following table sets forth the remaining maturities, based on contractual maturity dates, for each category of loans at December 31, 1994.
MATURITIES OF LOANS ONE YEAR ONE TO OVER OR LESS FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- ----- (dollars in thousands) Real estate mortgage $14,915 $26,454 $16,818 $58,187 Real estate construction 7,485 144 924 8,553 Mortgage loans held for sale -- -- 257 257 Installment loans 1,162 5,107 -- 6,269 Loans to depositors, secured by savings 816 -- -- 816
The following table indicates loans with fixed and adjustable rates which mature in greater than one year.
FLOATING OR ADJUSTING FIXED RATES RATES ----------- ----------- (dollars in thousands) Real estate mortgage $ 30,491 $ 12,781 Real estate construction 1,068 -- Mortgage loans held for sale 257 -- Consumer loans 5,107 -- --------- --------- Total loans $ 36,923 $ 12,781 ========= =========
Security Bank makes all its loans to customers located within its home county of Faulkner and contiguous counties. Security has no foreign loans or highly leveraged transaction loans as defined by the Federal Reserve Board. DISCUSSION OF LENDING ACTIVITIES. Net loans at December 31, 1994 totaled $73.8 million, an increase of approximately $9.8 million from December 31, 1993, which was primarily due to a record number of single family housing starts in Faulkner County, Arkansas. Residential real estate loans increased by approximately $2.7 million in 1994 to approximately $51 million. Residential construction loans increased by approximately $6.9 million in 1994 to approximately $8.5 million. As previously discussed, the Conway area has experienced tremendous residential growth in recent years. Security Bank has focused on capitalizing on the demand for loans that this growth in real estate has created, which is evident in the increases in real estate loans. Consumer loans are primarily loans to individuals for the purchase of automobiles, boats, recreational vehicles and other personal and household items. These loans increased approximately $2.3 million to approximately $6.3 million in 1994. LOAN QUALITY. The quality of the loan portfolio continues to be exceptional due to close adherence to quality lending practices and requirements. Loan committees and lending authorities have been appropriately established in order to ensure compliance with Security Bank's loan policy. As proof of the quality of the loan portfolio, net loan charge-offs to average loans outstanding for the years ended December 31, 1994 and 1993 were approximately 0.026% and 0.020%, respectively. Further, Security - 51 - 58 Bank did not have any non-accrual loans throughout 1993 or 1994, and no foreclosed assets were held at December 31, 1994 or 1993. Loans which were contractually past due 90 days or more and still accruing interest totaled $9,400 and $14,800 at December 31, 1994 and 1993, respectively. At December 31, 1994, this amount represented 0.012% of the total loan portfolio and 0.010% of total assets, which was less than the 1993 figures of 0.023% and 0.017%, respectively. Loans that are non-performing are reviewed by management weekly, or more frequently if warranted. If the collection of interest is doubtful, the loans are placed on non-accrual status and the recognition of interest income is stopped. When management believes that a loan will not be collected in its entirety, appropriate specific reserves are established. If and when a loan is determined to be uncollectible, the loan is charged-off. Management considers the non-performing loans to be at a reasonable level. In comparison to its peer group, Security Bank's non-performing loans and net charge-offs have been extremely low. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, class of loans, delinquency and charge-off experience, potential substandard and doubtful credits and other factors that need to be evaluated in estimating potential loan losses. The adequacy of the allowance for loan losses is calculated quarterly through a systematic review of the loan portfolio. The results of these reviews are reported to management and the Board of Directors. While there can be no assurance that the allowance for loan losses will be adequate to cover all losses, management believes that the allowance is adequate. In addition, various regulatory agencies and an independent accounting firm periodically review the adequacy of the allowance for loan losses as an integral part of their routine examinations. - 52 - 59 The following table summarizes, for the periods indicated, activity in the allowance for loan losses, including loan charge-offs, recoveries, additions to the allowance and the ratio of net charge-offs to the average loans outstanding.
ALLOWANCE FOR LOAN LOSSES DECEMBER 31 --------------------- 1994 1993 ---- ---- (dollars in thousands) Allowance at beginning of period $ 201 $ 153 Loans charged-off: Consumer 18 16 ----- ----- Total charge-offs 18 16 ----- ----- Recoveries: Consumer -- 4 ----- ----- Total recoveries -- 4 ----- ----- Net loans charged-off 18 12 Additions to allowance charged to the provision for loan losses 60 60 ----- ----- Allowance at end of period $ 243 $ 201 ===== ===== Ratio of net loan charge-offs to average loans outstanding 0.026% 0.020%
Management believes that the low level of charge-offs are a further reflection of the quality of the loan portfolio and provides a good indication of the adequacy of the allowance for loan losses. INVESTMENT SECURITIES. The objectives of the investment portfolio are to provide Security Bank with a source of liquidity through maturities and earnings. Investments are selected by management based upon quality, rate of return and the liquidity needs of Security Bank. - 53 - 60 The following table sets forth Security Bank's investment securities portfolio at carrying value at the dates indicated.
INVESTMENT PORTFOLIO COMPOSITION AT DECEMBER 31 ----------------------------------------------------- 1994 1993 ---------------------- ---------------------- BOOK PERCENT OF BOOK PERCENT OF VALUE PORTFOLIO VALUE PORTFOLIO ---------------------- ----------------------- (dollars in thousands) U.S. Treasury securities $ 2,449 29.30% $ 3,935 27.68% Obligations of U.S. government corporations and agencies 3,495 41.81 5,683 39.97 Mortgage-backed securities 400 4.78 534 3.76 Corporate debt securities 2,016 24.11 4,065 28.59 ------- ------ ------- ------ Total $ 8,360 100.00% $14,217 100.00% ======= ====== ======= ======
The following table sets forth the maturities and weighted average yields of the investment portfolio at December 31, 1994.
INVESTMENT PORTFOLIO COMPOSITION BY MATURITY OVER ONE ONE YEAR THROUGH AFTER OR LESS FIVE YEARS FIVE YEARS TOTAL -------------------------- ------------------------ --------------------- -------------- BOOK MARKET BOOK MARKET BOOK MARKET BOOK MARKET VALUE VALUE YIELD VALUE VALUE YIELD VALUE VALUE YIELD VALUE VALUE ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (dollars in thousands) U.S. Treasury securities $2,449 $2,422 4.20% $-- $-- -- % $-- $-- -- % $2,449 $2,422 Obligations of U.S. government corporations and agencies 2,499 2,468 3.93 996 960 4.22 3,495 3,428 Mortgage-backed securities 5 5 9.50 34 34 9.50 361 362 9.50 400 401 Corporate debt securities 2,016 1,989 6.36 -- -- -- -- -- -- 2,016 1,989 ------ ------ ------ ---- ---- ---- ------ ------ Total $6,969 $6,884 4.73% $1,030 $994 4.39% $361 $362 9.50% $8,360 $8,240 ====== ====== ====== ==== ==== ==== ====== ======
Investment securities decreased by approximately $5.9 million at December 31, 1994 as compared to December 31, 1993, which was the result of increased loan demand as discussed previously. DEPOSITS. Security Bank has a stable core deposit base from within its market areas. Security Bank has no brokered deposits, and management does not accept any such deposits. Deposits have shown steady increases over the past two years, growing approximately $1.7 million, or 2.17%, during 1994 and approximately $415,000, or .53%, during 1993. The composition of deposits has changed from 1993 to 1994. Security Bank has seen an increase in non-interest-bearing demand accounts and time deposits. This change has caused savings, NOW and MMDA accounts to decrease slightly. - 54 - 61 The following table sets forth the distribution of Security Bank's deposit accounts at the dates indicated and the weighted-average nominal interest rates on each category of deposit.
DEPOSITS DECEMBER 31 -------------------------------------------------------------------- 1994 1993 ------------------------------- ------------------------------- PERCENT PERCENT OF OF AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE ------ -------- ---- ------ -------- ---- (dollars in thousands) Demand and NOW's $ 6,734 8.37% 1.71% $ 6,533 8.30% 1.80% Savings accounts 6,824 8.49 2.52 7,774 9.88 2.53 MMDA's 5,882 7.31 3.04 7,370 9.36 2.74 Time deposits 60,986 75.83 5.18 57,038 72.46 4.70 ------- ------ ---- ------- ------ ---- Total deposits $80,426 100.00% 4.51% $78,715 100.00% 4.06% ======= ====== ==== ======= ====== ====
The following table indicates, as of December 31, 1994, the amount of Security Bank's jumbo certificates of deposit by time remaining until maturity. Jumbo certificates of deposit require minimum deposits of $100,000.
AMOUNT AND MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE MATURITY PERIOD AMOUNT --------------- ------ (dollars in thousands) Three months or less $2,641 Over three months through six months 2,123 Over six months through twelve months 1,541 Over twelve months 2,998 ------ Total $9,303 ======
CAPITAL RESOURCES. Financial institutions are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board. These guidelines are commonly known as "Risk-Based Capital Guidelines" as they define the capital level requirements of financial institutions based upon the level of risk associated with the institution's various categories of assets. At December 31, 1994, Security Bank exceeded all capital requirements. At December 31, 1994 and 1993, Security Bank's capital ratios were as follows:
CAPITAL RATIOS 1994 1993 ---- ---- Core capital to adjusted total assets 8.05% 7.80% Tangible capital to adjusted total assets 8.05 7.80 Risk-based capital to risk-weighted assets 13.80 13.70
LIQUIDITY. Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds or additional capital. Additional sources of liquidity, including cash from earnings and receipts on loans and investments, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of core deposits, liquid assets and access to the - 55 - 62 money and capital markets. The funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate the organization. The ratio of temporary investments (those maturing within one year) to volatile liabilities (time deposits over $100,000) was 74.91% at December 31, 1994. Core deposits, defined as demand deposits, NOW accounts, MMDA accounts and total savings and certificates of deposit less than $100,000, were 86.89% and 90.91% of total deposits at December 31, 1994 and 1993, respectively. Regulations require Security Bank to maintain amounts equal to 5% of deposits (net of loans on deposits) and short-term borrowings in cash or U.S. government and/or other approved securities. Security Bank had a liquidity ratio of 24.1% at December 31, 1994. Security Bank had no short-term borrowings at December 31, 1994 or 1993. ASSET-LIABILITY MANAGEMENT. Security Bank actively manages its assets and liabilities through coordinating the levels of interest rate sensitive assets and liabilities to minimize changes in net interest income resulting from changes in market interest rates. Changes in net interest income occur when interest rates on loans and investments change in a different time period or by different amounts than that of changes in interest rates on liabilities, or when the mix and volume of interest-earning assets and interest-bearing liabilities change. The interest rate sensitivity gap represents the dollar amount of the difference between rate sensitive assets and rate sensitive liabilities within a given time period (GAP). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. Security Bank's strategy with respect to asset-liability management is to maximize net interest income while limiting Security Bank's exposure to risks associated with volatile interest rates. - 56 - 63 The following table sets forth Security Bank's interest rate sensitivity at December 31, 1994, based on contractual repricing dates of rate sensitive assets and liabilities.
INTEREST 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: Interest-bearing deposits $ 4,887 $ 198 $ -- $ -- $ 5,085 Investment securities 1,039 5,930 1,030 361 8,360 Banker's acceptances 489 485 -- -- 974 Federal funds sold 125 -- -- -- 125 Loans 10,635 13,795 46,649 3,003 74,082 -------- -------- ------- ------- -------- Total interest rate sensitive assets $ 17,175 $ 20,408 $47,679 $ 3,364 $ 88,626 ======== ======== ======= ======= ======== Interest-bearing liabilities: Demand and NOW deposits $ 6,734 $ -- $ -- $ -- $ 6,734 MMDA's 5,882 -- -- -- 5,882 Savings deposits 6,824 -- -- -- 6,824 Time deposits 11,264 27,229 20,687 1,806 60,986 FHLB advances -- -- -- 3,357 3,357 -------- -------- ------- ------- -------- Total rate sensitive liabilities $ 30,704 $ 27,229 $20,687 $ 5,163 $ 83,783 ======== ======== ======= ======= ======== Interest sensitivity GAP: Periodic $(13,529) $ (6,821) $26,992 $(1,799) $ 4,843 ======== ======== ======= ======= ======= Cumulative $(13,529) $(20,350) $ 6,642 $ 4,843 ======== ======== ======= ======= Cumulative GAP to total assets (14.68)% (22.09)% 7.21% 5.26% Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic 55.94% 74.95% 230.48% 65.16% Cumulative 55.94% 64.87% 108.45% 105.78%
EFFECTS OF INFLATION. The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. RESULTS OF OPERATION (NINE MONTH COMPARISON) NET INCOME. Net income through September 30, 1995 increased $149,110 to $833,473 as compared to $684,363 for the nine months ended September 30, 1994. This increase was primarily attributable to increases in net interest income, particularly loan fee income. NET INTEREST INCOME. Net interest income increased $212,025, or 9.83%, for the first nine months as compared to the same period in 1994. This increase was primarily attributable to increased - 57 - 64 interest and fee income on loans and was also accomplished through small, but consistent, reductions in interest paid on deposits. This reduction in deposit rates has been accomplished while remaining competitive and, in fact, achieving nominal growth in Security Bank's core deposits. NON-INTEREST INCOME. Non-interest income increased by 20.83% to $292,486 for the nine months ended September 30, 1995 over the same time period in 1994. This was directly related to increased fees implemented in late 1994 and loan fee income from the secondary mortgage department which was established in April, 1994. NON-INTEREST EXPENSE. Non-interest expensed increased 9.72% to $1,444,445 for the nine months ended September 30, 1995 over the same time period in 1994. This increase resulted from increases in occupancy, compensation and related expense. This increase was partially offset by a reduction in other operating expenses incurred during the 1994 period which were attributable to the conversion of Security Bank's computer system. TOTAL ASSETS. Total assets were $100,322,745 at September 30, 1995 as compared to $92,113,471 at December 31, 1994, representing an $8.2 million, or 8.91%, increase. Loans continue to represent the largest contributor to the growth in total assets. Investment securities have continued to decrease in order to accommodate the increased loan demand. This has resulted in a more profitable mix of assets. LOANS. Total loans were $75,338,125 at September 30, 1995, a 2.48% increase as compared to $73,515,590 at December 31, 1994. DEPOSITS. Total deposits were $87,758,300 at September 30, 1995, a 9.12% increase as compared to $80,425,305 at December 31, 1994. This growth has been influenced by the introduction of several new deposit products during 1995. LIQUIDITY AND CAPITAL RESOURCES (NINE MONTH COMPARISON) Liquid assets of Security Bank at September 30, 1995 consisted of total cash and cash equivalents and investment securities maturing in one year or less. These liquid assets totaled $21,069,114 at September 30, 1995, or 24.01% of total deposits. Shareholders' equity at September 30, 1995 was $8,598,362, an increase of $833,473, or 10.73%, since December 31, 1994. Security Bank currently exceeds all regulatory capital requirements as shown in the following table.
CAPITAL RATIOS 9/30/95 9/30/94 ------- ------- Core capital to adjusted total assets 8.58% 7.91% Tangible capital to adjusted total assets 8.58 7.91 Risk-based capital to risk-weighted assets 13.91 12.98
PENDING LEGISLATIVE PROPOSALS In July 1995, the FDIC announced a proposal to restructure the federal depository insurance funds. Among other considerations, the proposal provides for a special, one-time premium assessment on the insured deposits of thrift financial institutions such as Security Bank. While no action - 58 - 65 has been taken, the FDIC is seriously considering the proposal and similar alternatives. Although ultimate resolution is uncertain, management believes such an assessment is possible and, if enacted as currently proposed, would result in a one-time charge to income ranging approximately from $400,000 to $450,000 in the period in which the assessment is levied. See "SUPERVISION AND REGULATION - FDIC Insurance Assessments." In addition to the proposal discussed above, Congress is also considering legislation which could result in the tax recapture of certain loan loss reserves which previously had not been subject to tax. Although the ultimate outcome of this proposal is uncertain, if enacted as currently proposed, this legislation would result in a one-time charge to income of approximately $700,000 in the period in which the legislation is enacted. Based on the ranges of the potential financial impact of the matters discussed above, management believes the outcome of these matters will not impact the Bank's compliance with the applicable regulatory capital and liquidity requirements. PROPERTIES All of the real estate and buildings used in banking operations are owned by Security Bank, except for the banking facility located in Morrilton, Arkansas, which is rented. None of the properties owned are subject to any mortgages or material encumbrances. Security Bank believes that the facilities are adequate for its operations, both currently and in the near future. IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENT In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which Security Bank is required to adopt by 1996. When adopted, SFAS No. 122 will require Security Bank to recognize a portion of the cost of originating mortgage loans as a mortgage servicing right which will be amortized to expense over the estimated life of the servicing relationship. As Security Bank only services proprietary loans, under current accounting practice, such costs are deferred along with loan origination fees and amortized as an adjustment to yield. Therefore, management believes that adoption of this pronouncement will not have a material adverse impact on the operating results or financial condition of Security Bank. LEGAL PROCEEDINGS There were no known material legal proceedings pending against Security Bank as of September 30, 1995. - 59 - 66 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of the Record Date the number of shares of Security Bank Common Stock beneficially owned and the percentage of ownership of outstanding shares of Security Bank Common Stock by (a) each director of Security Bank, (b) each person who is known by Security Bank to own beneficially 5% or more of such stock and (c) all directors and executive officers of Security Bank as a group:
SHARES BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER OWNED CLASS - ------------------------ ------------ ----------- David L. Baker 666 6.45% Marvin C. Cantrell 10 Alison F. Crawford 724 7.00 Joe T. Ford 2,266 21.95 Scott T. Ford 724 7.00 Ritchie D. Howell 20 Bill F. Johnson 20 Charles F. Nabholz 230 2.23 Beverly W. Pascoe 1,465 14.20 Phillip T. Pascoe 48 S. T. Smith, Jr. 240 2.32 H. R. Wilbourn, III 1,843 17.85 All officers and directors as a group (9 persons) 4,224 40.91 - ------------------------------------ Indicates ownership of less than one percent of outstanding Security Bank Common Stock. Includes 268 shares owned of record by Alison F. Crawford and 456 shares owned by trusts for the benefit of Ms. Crawford's children, of which Ms. Crawford is trustee. Includes 604 shares owned of record by Joe T. Ford and 1,662 shares owned by the Ruby Ford Trust of which Mr. Ford is trustee. Includes 268 shares owned of record by Scott T. Ford and 456 shares owned by trusts for the benefit of Mr. Ford's children of which Mr. Ford is trustee. Indicated person is a director of Security Bank. Messrs. Johnson and Howell are the President and Executive Vice President of Security Bank, respectively.
For purposes of the above table, a person is deemed to be a beneficial owner of shares of Security Bank 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 and disclaims beneficial ownership in shares described in the footnotes as being "held by" other persons. All persons shown in the table have business addresses at Security Bank's principal executive offices. - 60 - 67 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. 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. PREEMPTIVE RIGHTS. The holders of MBI Common Stock have no preemptive right to acquire any additional unissued shares or treasury shares of MBI. - 61 - 68 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 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. - 62 - 69 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 Reorganization and who are deemed to be "affiliates" of Security Bank 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 Security Bank at the time the Reorganization is submitted to a vote of the shareholders of Security Bank. Each affiliate of Security Bank (generally any director or executive officer or shareholder of Security Bank who beneficially owns a substantial number of outstanding shares of Security Bank Common Stock) who desires to resell the MBI Common Stock received in the Reorganization 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 Reorganization 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 Security Bank may freely resell the stock received in the Reorganization without limitation. After three years from the issuance of the stock, if such person is not an affiliate of MBI at the time of sale and for at least three months prior to such sale, such person may freely resell such stock, without limitation, regardless of the status of MBI's required public filings. The shares of MBI Common Stock to be received by affiliates of Security Bank in the Reorganization will be legended as to the restrictions imposed upon resale of such stock. COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF MBI AND SECURITY BANK MBI is incorporated under the laws of the State of Missouri. Security Bank is organized under the laws of the United States of America. The rights of the shareholders of MBI are governed by its Restated Articles of Incorporation and By-Laws and The General and Business Corporation Law of Missouri (the "Missouri Act"). The rights of the shareholders of Security Bank are governed by its Charter and By-Laws and the HOLA. The rights of Security Bank shareholders who receive shares of MBI Common Stock in the Reorganization 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 Security Bank shareholders, are summarized below. 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. Security Bank 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 - 63 - 70 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 Security Bank's Charter nor Security Bank'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. Security Bank's Charter and By-Laws do not provide for cumulative voting. In contrast to cumulative voting, under non-cumulative voting, holders of a majority of outstanding shares of voting stock may elect the entire Board of Directors, thereby precluding the election of any directors by the holders of less than a majority of the outstanding shares of voting stock. 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. Security Bank also has a classified Board of Directors with three classes of directors. 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. - 64 - 71 During the initial five-year restricted period, no Business Combination may occur unless such Business Combination or the transaction in which an Interested Shareholder becomes "interested" is approved by the board of directors of the corporation. Business Combinations may occur during such five-year period if: (i) prior to the stock acquisition by the Interested Shareholder, the board of directors approves the transaction in which the Interested Shareholder became 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. Neither MBI's Restated Articles of Incorporation and By-Laws nor Security Bank's Articles of Incorporation and By-Laws "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%, (ii) 33% 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 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 "opt out" of the Control Share Acquisition Statute. DISSENTERS' RIGHTS. Under Section 351.455 of the Missouri Act, 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. Under Section 552.14, shareholders of Security Bank are entitled to dissenters' rights upon the consolidation or merger of Security Bank which are similar but not identical to those under the Missouri Act. Specifically, under Section 552.14, a shareholder of Security Bank does not have to make a written demand for the payment of the fair value of his or her shares after the vote of the shareholders in addition to filing a written objection prior to the vote of security holders. In addition, the procedures and the filing - 65 - 72 deadlines applicable to dissenters' rights under the Missouri Act are somewhat different than those applicable in appraisal rights proceedings under Section 552.14. SHAREHOLDERS' RIGHT TO INSPECT. Under Section 351.215 of the Missouri Act, any shareholder may inspect the corporation's books and records for any reasonable and proper purpose. Such inspection may be made at all proper times, subject to regulations as may be prescribed by the by-laws of the corporation. Under 12 C.F.R. Sec. 552.11, any shareholder or group of shareholders of Security Bank holding of record either (i) voting shares having a cost of not less than $100,000 or constituting not less than one percent of the total outstanding voting shares, provided in each case such shareholder or group of shareholders have held of record such voting shares for a period of at least six months, or (ii) not less than five percent of the total outstanding voting shares, upon making written demand stating a proper purpose, has the right to examine, in person or by agent or attorney, at any reasonable time the books and records of accounts, minutes and record of shareholders of Security Bank and to make extracts therefrom; provided, however, no shareholder or group of shareholders has the right to obtain, inspect or copy any portion of any books or records of Security Bank containing information with respect to depositors or borrowers of Security Bank. 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 17 members. Security Bank's Charter provides that the number of directors of the Board of Directors shall be as designated by the Board of Directors from time to time but shall not be fewer than seven nor more than fifteen except where a greater number is approved by the Board of Directors. Currently, Security Bank's By-Laws fix the number of directors at ten. 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. 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 and the - 66 - 73 Comptroller. In addition, there are numerous governmental requirements and regulations that affect the activities of MBI and its subsidiaries. CERTAIN TRANSACTIONS WITH AFFILIATES There are various legal restrictions on the extent to which a bank holding company 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 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. - 67 - 74 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 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 required 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, the 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 SIAF-insured deposits. - 68 - 75 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 SAIF-member institutions would be reduced to approximately $.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 Assessments"), 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 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. - 69 - 76 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. An association 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 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 Security Bank'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. - 70 - 77 THE INTERSTATE BANKING AND COMMUNITY DEVELOPMENT LEGISLATION In September 1994, legislation was enacted that is expected to 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, one year after enactment of the legislation, to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) 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 will be to permit MBI to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Missouri. Overall, this legislation is likely to have the effects of increasing competition and promoting geographic diversification in the banking industry. 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. 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. Arthur Andersen LLP served as Security Bank'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 financial accounting and reporting matters. LEGAL MATTERS ------------- Certain legal matters will be passed upon for MBI by Thompson & Mitchell, St. Louis, Missouri and for Security Bank by Rose Law Firm, Little Rock, Arkansas. - 71 - 78 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 Security Bank of Conway, F.S.B. as of December 31, 1994 and 1993 and for each of the years in the two-year period ended December 31, 1994 included herein have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto and are included herein in reliance and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Security Bank of Conway, F.S.B. (formerly known as Security Savings Bank, F.S.B.) at December 31, 1992, and for the year then ended included in this Proxy Statement, which is referred to and a part of the Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements incorporated in this Proxy Statement/Prospectus by reference 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 Security Bank, 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 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 Security Bank. SHAREHOLDER PROPOSALS --------------------- If the Reorganization is approved, the other conditions to the Reorganization are satisfied and the Reorganization is consummated, shareholders of Security Bank 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 Jon W. Bilstrom, General Counsel and Secretary, at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by November 25, 1995. - 72 - 79
CONSOLIDATED FINANCIAL STATEMENTS INDEX ------ Page ---- REPORT OF ARTHUR ANDERSEN LLP F-1 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1993 F-2 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 to F-18 REPORT OF ERNST & YOUNG LLP F-19 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1992 F-20 CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1992 F-21 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1992 F-22 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1992 F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-24 to F-32 CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1995 (UNAUDITED) F-33 CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) F-34 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) F-35 - 73 - 80 CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) F-36 NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS F-37
- 74 - 81 Report of Independent Public Accountants ---------------------------------------- To the Board of Directors and Stockholders of Security Bank of Conway, FSB: We have audited the accompanying consolidated balance sheets of Security Bank of Conway, FSB and subsidiaries (the "Company") as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Security Bank of Conway, FSB and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As explained in Notes 1 and 10 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /s/ Arthur Andersen LLP Little Rock, Arkansas, February 23, 1995 (except with respect to the matters discussed in Note 14 as to which the date is September 30, 1995). F - 1 82 SECURITY BANK OF CONWAY, FSB ---------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- AS OF DECEMBER 31 -----------------
Assets 1994 1993 ------ ----------- ----------- Cash, including interest bearing deposits of $4,887,204 in 1994 and $1,302,635 in 1993 $ 5,528,721 $ 2,111,094 Federal funds sold 125,000 1,365,000 ----------- ----------- Total cash and cash equivalents 5,653,721 3,476,094 Certificates of deposit 198,000 297,000 Banker's acceptances 973,198 1,968,999 Investment securities (estimated market value: $7,839,169 in 1994 and $13,752,249 in 1993) 7,960,135 13,683,186 Mortgage-backed securities (estimated market value: $400,563 in 1994 and $546,751 in 1993) 400,367 534,387 Loans, net 73,515,590 63,957,619 Loans held for sale 256,862 - Accrued interest receivable 332,886 320,575 Real estate acquired for development and sale 42,955 67,019 Federal Home Loan Bank stock, at cost 522,100 474,100 Income taxes receivable 61,931 17,710 Property and equipment, net 2,059,392 1,943,377 Other assets 136,334 83,724 ----------- ----------- $92,113,471 $86,823,790 =========== =========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits $80,425,305 $78,714,649 Advances from borrowers for taxes and insurance 184,466 175,909 Accrued expenses and other liabilities 78,875 49,909 Income taxes payable 16,306 - Advances from the Federal Home Loan Bank 3,356,891 687,533 Dividends payable 61,944 61,944 Deferred income taxes 224,795 158,774 ----------- ----------- Total liabilities 84,348,582 79,848,718 ----------- ----------- Commitments and contingencies (Notes 12 and 13) Stockholders' equity: Common stock, $100 par value; 1,000,000 shares authorized; 10,324 shares issued and outstanding 1,032,400 1,032,400 Additional paid-in capital 3,692 3,692 Retained earnings 6,728,797 5,938,980 ----------- ----------- Total stockholders' equity 7,764,889 6,975,072 ----------- ----------- $92,113,471 $86,823,790 =========== =========== The accompanying notes to financial statements are an integral part of these consolidated balance sheets.
F - 2 83 SECURITY BANK OF CONWAY, FSB ---------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- FOR THE YEARS ENDED DECEMBER 31 -------------------------------
1994 1993 ---------- ---------- Interest income: Loans, including fees $5,534,560 $4,915,767 Other 722,454 933,366 ---------- ---------- Total interest income 6,257,014 5,849,133 ---------- ---------- Interest expense: Deposits 3,310,923 3,298,613 Federal Home Loan Bank advances 175,911 10,265 ---------- ---------- Total interest expense 3,486,834 3,308,878 ---------- ---------- Net interest income 2,770,180 2,540,255 Provision for loan losses 60,000 60,000 ---------- ---------- Net interest income after provision for loan losses 2,710,180 2,480,255 ---------- ---------- Other income: Commission income 116,484 129,466 Service fees 195,449 111,703 Federal Home Loan Bank dividends 23,875 16,084 Gain on sale of real estate, net 17,101 2,316 Other 52,926 25,803 ---------- ---------- Total other income 405,835 285,372 ---------- ---------- Other expenses: Compensation and related expenses 726,737 558,682 Federal Deposit Insurance Corporation premiums 228,246 195,600 Occupancy and equipment 235,588 185,517 Other operating expenses 522,924 419,521 ---------- ---------- Total other expenses 1,713,495 1,359,320 ---------- ---------- Income before income taxes and cumulative effect of change in accounting principle 1,402,520 1,406,307 Provision for income taxes 550,759 517,390 ---------- ---------- Income before cumulative effect of change in accounting principle 851,761 888,917 Cumulative effect of change in accounting for income taxes - 112,000 ---------- ---------- Net income $ 851,761 $ 776,917 ========== ========== The accompanying notes to financial statements are an integral part of these consolidated statements.
F - 3 84 SECURITY BANK OF CONWAY, FSB ---------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 ----------------------------------------------
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ---------- ---------- ---------- ---------- Balance at December 31, 1992 $1,032,400 $3,692 $5,224,007 $6,260,099 Net income - - 776,917 776,917 Cash dividends declared - - (61,944) (61,944) ---------- ------ ---------- ---------- Balance at December 31, 1993 1,032,400 3,692 5,938,980 6,975,072 Net income - - 851,761 851,761 Cash dividends declared - - (61,944) (61,944) ---------- ------ ---------- ---------- Balance at December 31, 1994 $1,032,400 $3,692 $6,728,797 $7,764,889 ========== ====== ========== ========== The accompanying notes to financial statements are an integral part of these consolidated statements.
F - 4 85 SECURITY BANK OF CONWAY, FSB ---------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED DECEMBER 31 -------------------------------
1994 1993 ----------- ----------- Cash Flows From Operating Activities: Net income $ 851,761 $ 776,917 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 146,774 80,977 Provision for loan losses 60,000 60,000 Federal Home Loan Bank stock dividends (23,700) (15,900) Gain on sale of real estate, net (17,101) (2,316) Deferred income taxes 66,021 80,550 Net increase (decrease) in cash attributable to changes in: Accrued interest receivable (12,311) 25,550 Income taxes receivable (44,221) (17,710) Other assets (52,610) (17,760) Advances from borrowers for taxes and insurance 8,557 19,150 Accrued expenses and other liabilities 28,966 4,544 Income taxes payable 16,306 (64,297) ----------- ----------- Net cash provided by operating activities 1,028,442 929,705 ----------- ----------- Cash Flows From Investing Activities: Maturity of certificate of deposit 99,000 99,000 Purchases of banker's acceptances (1,954,555) (6,400,830) Maturities of banker's acceptances 2,950,356 12,244,257 Purchases of investment securities (1,946,733) (4,911,538) Proceeds from maturities of investment securities 7,669,784 192,392 Proceeds from repayments of mortgage-backed securities 134,020 377,922 Net increase in loans (9,874,833) (7,500,093) Development costs of real estate acquired for development (120,577) - Net proceeds from sales of real estate acquired for development 161,742 16,083 Proceeds from the sale of real estate owned - 5,984 Purchase of Federal Home Loan Bank stock (24,300) - Purchases of property and equipment (262,789) (397,257) Proceeds from the sale of property and equipment - 5,968 ----------- ----------- Net cash used in investing activities (3,168,885) (6,268,112) ----------- ----------- Cash Flows From Financing Activities: Net increase in deposit accounts 1,710,656 414,575 Federal Home Loan Bank advances 2,776,000 687,533 Repayments of Federal Home Loan Bank advances (106,642) - Dividends paid (61,944) (61,944) ----------- ----------- Net cash provided by financing activities 4,318,070 1,040,164 ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,177,627 (4,298,243) Cash and cash equivalents at beginning of year 3,476,094 7,774,337 ----------- ----------- Cash and cash equivalents at end of year $ 5,653,721 $ 3,476,094 =========== =========== Cash paid during the year for: Interest $ 3,323,245 $ 3,288,133 =========== =========== Taxes $ 507,775 $ 627,515 =========== =========== The accompanying notes to financial statements are an integral part of these consolidated statements.
F - 5 86 SECURITY BANK OF CONWAY, FSB ---------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 ---------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ----------------------------------------------------------- Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Security Bank of Conway, FSB (the "Bank") and its wholly-owned subsidiaries, Security Service Corporation ("SSC") and Security Investments of Conway, Inc. ("SIC"), collectively referred to as the "Company". All significant intercompany accounts and transactions have been eliminated in consolidation. Description of Business - ----------------------- The Bank is a federally insured depository and was organized in 1961 as a state chartered stock savings bank. In 1989, the Bank converted its charter to a Federal stock savings bank. SSC is engaged primarily in the development of residential property for sale. SIC is a broker/dealer of securities and is registered with the Securities and Exchange Commission and the National Association of Securities Dealers ("NASD"). Each of these entities' operations are conducted principally in Faulkner County, Arkansas, and the surrounding areas. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on hand, demand deposits held at the Federal Home Loan Bank ("FHLB"), amounts due from other depository institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Banker's Acceptances - -------------------- Banker's acceptances are carried at original cost and represent obligations of major money center banks. These instruments have contractual maturities extending through June 1995 and are actively traded in the secondary markets. The weighted average interest rates on these instruments were 5.9% and 3.3% at December 31, 1994 and 1993, respectively. F - 6 87 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------- (Continued): ----------- Investment Securities and Mortgage-Backed Securities - ---------------------------------------------------- Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which requires that the Company categorize securities as being held for 1) trading purposes, 2) long-term investment purposes or 3) available for sale. The accounting method used to record the Company's securities is determined by the category to which each security is assigned. The Company has the ability and intent to hold its investment securities and mortgage-backed securities for long-term investment purposes. Based on this classification, these investments are carried at amortized cost, adjusted for permanent impairments in value, if any. Premiums and discounts are amortized and accreted to interest income over the estimated remaining lives of the securities using a method which approximates the level yield method. Gains and losses on the sale of securities are determined using the specific identification method. Loans - ----- Loans are stated at the unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees. Loans held for sale are recorded at cost which approximated market value as of December 31, 1994. The allowance for loan losses is maintained at a level believed adequate by management to absorb losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio and other relevant factors. The allowance is increased by provisions for loan losses charged against income and decreased by charge-offs, net of recoveries. Interest on loans is credited to income as earned. The Bank provides an allowance for uncollectible interest on all accrued interest related to loans 90 days or more delinquent. Such interest, if collected, is credited to income in the period of recovery. Fees received for loan originations and commitments to make loans in the future, net of direct underwriting costs, are deferred and amortized into income over the estimated lives of the loans using a method which approximates the level yield method. Real Estate Acquired for Development and Sale - --------------------------------------------- SSC has an investment in a real estate project consisting of residential lots held for development and sale. Costs relating to development and improvement of real estate are capitalized and allocated to individual lots based upon each lot's estimated fair value. Holding costs are expensed as incurred. These investments are reviewed regularly to ensure that the recorded values do not exceed estimated fair value reduced for disposition costs. At December 31, 1994 and 1993 no valuation allowances related to these investments had been recorded. F - 7 88 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------- (Continued): ----------- Federal Home Loan Bank Stock - ---------------------------- The Bank is a member of the FHLB system. As a member of this system, the Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of outstanding home loans or 1/20 of outstanding advances from the FHLB. No ready market exists for such stock and it has no quoted market value. Property and Equipment - ---------------------- Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method for financial reporting purposes and the straight-line and accelerated methods for income tax purposes. Income Taxes - ------------ Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax balances at the end of each period be determined using the tax rate expected to be in effect when taxes are actually paid. Accordingly, under the new rules, income tax provisions will increase or decrease in the same period in which a change in tax rates is enacted. Previous rules required providing deferred taxes using rates in effect when the tax asset or liability was first recorded without subsequent adjustments solely for tax rate changes. Reclassifications - ----------------- Certain amounts in the 1993 consolidated financial statements have been reclassified to conform with the 1994 presentation. Adoption of Accounting Pronouncement - ------------------------------------ Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended. The adoption of this pronouncement did not have a significant impact on the Company's operating results or financial condition. F - 8 89 2. INVESTMENT AND MORTGAGE-BACKED SECURITIES: ----------------------------------------- The amortized cost and estimated market values of investment and mortgage-backed securities at December 31 were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- --------- 1994: - ---- Corporate debt securities $ 2,015,740 $ - $ 26,340 $ 1,989,400 U.S. Treasury securities 2,449,074 - 26,643 2,422,431 Obligations of U.S. Government corporations and agencies 3,495,321 - 67,983 3,427,338 Mortgage-backed securities 400,367 7,080 6,884 400,563 ----------- -------- -------- ----------- $ 8,360,502 $ 7,080 $127,850 $ 8,239,732 =========== ======== ======== =========== 1993: - ---- Corporate debt securities $ 4,065,352 $ 26,234 $ 3,386 $ 4,088,200 U.S. Treasury securities 3,935,227 25,246 2,785 3,957,688 Obligations of U.S. Government corporations and agencies 5,682,607 52,876 29,122 5,706,361 Mortgage-backed securities 534,387 12,364 - 546,751 ----------- -------- -------- ----------- $14,217,573 $116,720 $ 35,293 $14,299,000 =========== ======== ======== ===========
The amortized cost and estimated market value of investment and mortgage-backed securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Cost Market Value --------- ------------ Due in one year or less $6,968,828 $6,884,470 Due after one year through five years 1,030,271 993,750 Due after five years through ten years 53,287 53,287 Due after ten years 308,116 308,225 ---------- ---------- $8,360,502 $8,239,732 ========== ==========
Investment securities with par values of $1,000,000 and $1,500,000 were pledged to secure public deposits at December 31, 1994 and 1993, respectively. There were no sales of investment or mortgage-backed securities during the years ended December 31, 1994 or 1993. During the years ended December 31, 1994 and 1993 there were no investment or mortgage-backed securities held which had suffered a permanent impairment in value. F - 9 90 3. LOANS: ----- Loans consisted of the following at December 31:
1994 1993 ----------- ----------- Mortgage loans: Real estate $58,187,237 $57,638,865 Construction 15,772,873 8,018,581 Installment loans 6,268,791 4,018,200 Loans to depositors, secured by savings 816,300 915,598 ----------- ----------- Total loans 81,045,201 70,591,244 Less: Undisbursed portion of construction loans 7,219,743 6,354,361 Allowance for loan losses 243,010 200,599 Net deferred loan origination fees 66,858 78,665 ----------- ----------- $73,515,590 $63,957,619 =========== ===========
Activity in the allowance for loan losses for the years ended December 31 is summarized below:
1994 1993 -------- -------- Balance at beginning of year $200,599 $152,683 Provision for loan losses 60,000 60,000 Net charge-offs (17,589) (12,084) -------- -------- Balance at end of year $243,010 $200,599 ======== ========
Loans delinquent more than 90 days totaled $9,401 and $14,831 at December 31, 1994 and 1993, respectively. Interest income that would have been recorded under the original terms of these loans was not materially different than the amount which has been recognized in the accompanying financial statements. The Company did not have any significant loans that were restructured during the years ended December 31, 1994 or 1993. 4. ACCRUED INTEREST RECEIVABLE: --------------------------- Accrued interest receivable consisted of the following at December 31:
1994 1993 -------- -------- Certificates of deposit $ - $ 999 Banker's acceptances 8,893 20,715 Loans 213,870 124,135 Investment securities 108,944 172,617 Mortgage-backed securities 1,179 2,109 -------- -------- $332,886 $320,575 ======== ========
F - 10 91 5. REAL ESTATE ACQUIRED FOR DEVELOPMENT AND SALE: --------------------------------------------- The following is a summary of the activity in real estate acquired for development and sale during the year ended December 31, 1994: Balance at December 31, 1993 $ 67,019 Development and improvement costs 120,577 Sales (144,641) ---------- Balance at December 31, 1994 $ 42,955 ==========
6. PROPERTY AND EQUIPMENT: ---------------------- Property and equipment, at cost, consisted of the following at December 31:
1994 1993 ---------- ---------- Land $ 294,500 $ 294,500 Buildings and improvements 1,623,060 1,601,486 Furniture and equipment 787,632 555,960 ---------- ---------- 2,705,192 2,451,946 Less accumulated depreciation 645,800 508,569 ---------- ---------- $2,059,392 $1,943,377 ========== ==========
Estimated useful lives used in computing depreciation are as follows:
Years ----- Buildings 31-40 Improvements 5-25 Furniture 3-15 Equipment 5-15
F - 11 92 7. DEPOSITS: -------- Deposits at December 31 are summarized as follows:
Weighted 1994 1993 Average ---------------------------- --------------------------- Rate at Percent Percent December 31, of of 1994 Amount Total Amount Total ------------ ------------ ------- ----------- ------- Demand and NOW accounts, including non-interest-bearing deposits of $1,043,000 in 1994 and $761,774 in 1993 1.71% $ 6,733,932 8.4% $ 6,533,055 8.3% Money market 3.04 5,881,655 7.3 7,369,766 9.4 Savings 2.52 6,823,602 8.5 7,773,769 9.9 ----------- ----- ----------- ----- 19,439,189 24.2 21,676,590 27.6 Certificates of deposit: 0.00% to 3.99% 3.61 3,791,127 4.7 26,176,359 33.3 4.00% to 4.99% 4.26 18,197,743 22.6 5,227,705 6.6 5.00% to 5.99% 5.30 24,509,206 30.5 10,140,762 12.9 6.00% to 6.99% 6.33 10,494,482 13.0 8,942,919 11.4 7.00% to 8.50% 7.18 3,993,558 5.0 6,550,314 8.2 ---- ----------- ----- ----------- ----- 60,986,116 75.8 57,038,059 72.4 ----------- ----- ----------- ----- 4.51% $80,425,305 100.0% $78,714,649 100.0% ==== =========== ===== =========== =====
The aggregate amount of deposits with a minimum balance of $100,000 was approximately $10,541,000 and $7,152,000 at December 31, 1994 and 1993, respectively. At December 31, 1994, the scheduled maturities of certificates of deposits were as follows:
Year Ending December 31 ------------------------------------------------------------------------ 1995 1996 1997 1998 1999 Thereafter ----------- ---------- ---------- ---------- ---------- ---------- 0.00% to 3.99% $ 3,791,127 $ - $ - $ - $ - $ - 4.00% to 4.99% 14,557,249 3,471,895 159,453 9,146 - - 5.00% to 5.99% 16,063,273 1,402,885 3,513,968 1,227,389 1,533,180 768,511 6.00% to 6.99% 732,912 4,114,670 517,156 3,124,706 1,248,010 757,028 7.00% to 8.50% 3,348,077 10,578 208,044 100,000 45,711 281,148 ----------- ---------- ---------- ---------- ---------- ---------- $38,492,638 $9,000,028 $4,398,621 $4,461,241 $2,826,901 $1,806,687 =========== ========== ========== ========== ========== ========== F - 12 93 7. DEPOSITS (Continued): --------------------
Interest expense on deposits for the years ended December 31 was as follows:
1994 1993 ---------- ---------- Demand, NOW and Money Market accounts $ 305,523 $ 310,408 Savings accounts 188,853 197,707 Certificates of deposit 2,816,547 2,790,498 ---------- ---------- $3,310,923 $3,298,613 ========== ==========
8. ADVANCES FROM THE FHLB: ---------------------- The Bank had advances from the FHLB consisting of the following at December 31:
Maturity Interest Date Rate 1994 1993 ------------------ -------- ---------- ------- August 1, 2008 6.20% $ 283,130 $295,912 October 1, 2008 5.82% 373,172 391,621 January 1, 2009 7.07% 934,738 - March 1, 2009 6.37% 969,373 - April 1, 2010 6.65% 796,478 - ---------- -------- $3,356,891 $687,533 ========== ========
The advances are secured by qualifying first mortgage loans of the Bank. 9. PROFIT SHARING PLAN: ------------------- The Company maintains a non-contributory, defined contribution profit sharing plan in which employees who are at least 21 years of age and work at least 1,000 hours per year are eligible to participate after they complete one year of service. Contributions to the plan are made at the discretion of the Board of Directors. For the years ended December 31, 1994 and 1993, the Company's profit sharing plan contributions were $31,370 and $20,000, respectively. 10. INCOME TAXES: ------------ The Bank and its subsidiaries file consolidated Federal and state income tax returns. SSC and SIC remit or receive payments in lieu of taxes to or from the Bank pursuant to tax-sharing agreements which call for the determination of income tax related liabilities as if the Bank and subsidiaries filed separate tax returns. As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1, 1993. The cumulative effect of this change in accounting principle decreased consolidated net income by $112,000 as shown separately in the consolidated statement of income for the year ended December 31, 1993. F - 13 94 10. INCOME TAXES (Continued): ------------------------ Income tax expense for the years ended December 31 is summarized as follows:
1994 1993 -------- ---------- Federal: Current $410,432 $493,762 Deferred 29,757 (31,450) -------- -------- $440,189 $462,312 ======== ======== State: Current $ 74,306 $ 55,078 Deferred 36,264 - -------- -------- $110,570 $ 55,078 ======== ========
Total income tax expense differed from the amounts computed by applying the statutory Federal income tax rate of 34 percent to income before income taxes and cumulative effect of change in accounting principle as a result of the following:
1994 1993 -------- -------- Expected income tax expense at Federal tax rate $476,857 $478,144 State income taxes, net of Federal tax benefit 72,976 36,351 Other 926 2,895 -------- -------- $550,759 $517,390 ======== ========
Deferred income taxes reflected in the accompanying consolidated balance sheets result from temporary differences in the financial statement and tax reporting bases of certain assets. The items giving rise to deferred income taxes and the significant components of the recorded deferred income tax balances were as follows at December 31:
1994 1993 -------- --------- Allowance for loan losses $102,764 $ 78,943 FHLB stock 71,126 61,955 Accumulated depreciation 40,182 17,295 Other 10,723 581 -------- --------- $224,795 $158,774 ======== ========
F - 14 95 10. INCOME TAXES (Continued): ------------------------ Under the Internal Revenue Code, the Bank is allowed a special bad debt deduction related to additions to the tax bad debt reserve established for the purpose of absorbing loan losses. The applicable provisions of the law permit the Bank to deduct from taxable income an allowance for bad debts based upon the greater of a percentage of taxable income before such deduction, a percentage of the loan balances, or actual loss experience. The Bank has consistently used the percentage of taxable income method and anticipates using the same method in filing its 1994 tax returns. Use of this method results in a substantial excess of tax basis bad debt reserves over the reserves included in these financial statements. In December 1987, the Internal Revenue Code was revised to allocate all previously accumulated tax basis reserves as additions to the capitalization of the Bank and, therefore, these reserves no longer impede the reduction of taxable income through debt charge-offs. Because the Bank does not intend to use the reserve for purposes other than to absorb losses, deferred income taxes have not been provided on the exempted tax basis reserves of $1,744,261. In conjunction with the adoption of SFAS No. 109, deferred taxes have been provided for tax basis reserves in excess of this base year exemption. 11. REGULATORY RESTRICTIONS AND REQUIREMENTS: ---------------------------------------- Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and revisions included in the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Bank must have (i) core capital equal to 3.0% of adjusted total assets, (ii) tangible capital equal to 1.5% of adjusted total assets, and (iii) risk-based capital equal to 8.0% of risk-weighted assets. In the event the Bank's core capital ratio drops below 4.0% or its risk-based capital drops below 8.0%, the Prompt Corrective Action provisions of FDICIA will also subject the Bank to more stringent regulatory supervision. In measuring an institution's compliance with all three capital standards, savings institutions must deduct from their capital (with several exceptions, primarily mortgage banking subsidiaries and insured depository institution subsidiaries) their investments in and advances to subsidiaries engaged (as principal) in activities not permissible for national banks. In computing an institution's risk-based capital, similar deduction provisions apply to (i) other investments in equity securities (not meeting the definition of a subsidiary) and in real estate and (ii) that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio. Under these regulations, the Federal Deposit Insurance Corporation ("FDIC") may suspend deposit insurance for an institution that has no tangible capital. Failure by an institution to meet any of the capital requirements may also result in the imposition of significant operating restrictions by the FDIC. At December 31, 1994, the Bank had the following capital ratios (unaudited): Core capital to adjusted total assets 8.05% ===== Tangible capital to adjusted total assets 8.05% ===== Risk-based capital to risk-weighted assets 13.80% =====
F - 15 96 11. REGULATORY RESTRICTIONS AND REQUIREMENTS (Continued): ---------------------------------------------------- Management believes that, under current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. Adjustments have been made to the accounts of the Bank which have not been reflected in the records and reports filed with the Office of Thrift Supervision ("OTS") as of December 31, 1994. The adjustments and the effects on net income and total stockholders' equity are detailed below (dollar amounts in thousands).
Total Net Stockholders' Income Equity ------ ------------- As reported to the OTS $898 $7,801 Adjustments: Prior year audit adjustments booked in the current year - 10 Interest income 27 27 Depreciation (32) (32) Income taxes (29) (29) Other income (12) (12) ---- ------ As reported in the supplemental consolidating schedules $852 $7,765 ==== ======
Regulations also require the Bank to maintain amounts equal to 5.0% of deposits (net of loans on deposits) and short-term borrowings in cash or U.S. government and/or other approved securities. The Bank had a liquidity ratio of 24.1% at December 31, 1994. SIC is required to maintain minimum net capital as defined under the Uniform Net Capital Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Rule"). Prior to February 16, 1995, management believed that SIC's minimum net capital requirement was $5,000. On that date, the NASD concluded a routine examination which indicated that, on certain occasions, SIC had received customer securities which would subject SIC to a minimum net capital requirement of $50,000. At December 31, 1994, SIC's net capital, as defined in the Rule, was $14,159 which was $35,841 short of the required minimum net capital of $50,000. As of February 16, 1995, SIC implemented procedures to ensure that the future conduct of business will conform with the applicable regulatory requirements in order to reduce SIC's minimum net capital requirement to $5,000. F - 16 97 12. RELATED PARTY TRANSACTIONS: -------------------------- Certain of the directors and officers of the Bank and companies in which they have interests are customers of and have transactions with the Bank in the ordinary course of business. In the opinion of management, deposit transactions, loans and loan commitments (i) are made on substantially the same terms, including interest rates (subsequent to August 1989), repayment terms and collateral as those prevailing at the time for comparable transactions with other persons, (ii) do not involve more than a normal risk of collectibility, and (iii) do not involve any unusual or unfavorable features. Prior to August 1989, loans to officers and directors were made at an annual adjusted rate of one percent above the cost of funds to the Bank. The aggregate activity in loans to officers and directors was as follows for the years ended December 31:
1994 1993 ---------- ---------- Balance at beginning of year $1,549,166 $1,147,117 New loans 406,718 741,042 Repayments (586,064) (338,993) ---------- ---------- Balance at end of year $1,369,820 $1,549,166 ========== ==========
During 1993, the Bank completed construction of an approximately $1.2 million addition to its main office building. A member of the Board of Directors is affiliated with the general contractor for this addition. Also during 1993, the Bank entered into an agreement to purchase certain computer equipment and receive information services from a company with whom the Bank shares a common director. Payments related to this agreement totaled $118,000 for computer equipment and $51,000 for information services during 1994 and contractual obligations under this arrangement will approximate $45,000 annually from 1995 through 1998. There were no payments made related to this agreement in 1993. 13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK: --------------------------------------------- In the normal course of business, various commitments are made such as the extension of credit, including standby letters of credit to assure performance or to support debt obligations, which are not reflected in the accompanying financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. Collateral is obtained based on management's credit assessment of the customer. Collateral held consists primarily of the related project or dwelling unit and the loan-to-value ratios generally do not exceed 80%. Most of the Bank's real estate mortgage and real estate construction loans are to customers in Conway, Arkansas, and the surrounding area. Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. F - 17 98 13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued): --------------------------------------------------------- Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank's normal credit policies. The Bank's loan commitments at December 31, 1994 and 1993 were approximately $7,295,000 and $7,748,000, respectively. The Bank's outstanding standby letters of credit amounted to approximately $317,000 and $659,000 at December 31, 1994 and 1993, respectively. 14. SUBSEQUENT EVENTS: ----------------- On February 8, 1995, the Bank contributed an additional $50,000 to SIC. The increased investment in the subsidiary did not have a material impact on the Bank's compliance with regulatory capital requirements as discussed in Note 11. In July 1995, the FDIC announced a proposal to restructure the federal depository insurance funds. Among other considerations, the proposal provides for a special, one-time premium assessment on the insured deposits of thrift financial institutions such as the Bank. While no action has been taken, the FDIC is seriously considering the proposal and similar alternatives. Although ultimate resolution is uncertain, management believes such an assessment is possible and, if enacted as currently proposed, would result in a one-time charge to income ranging approximately from $400,000 to $450,000 in the period in which the assessment is levied. In addition to the proposal discussed above, Congress is also considering legislation which could result in the tax recapture of the previously exempted loan loss reserves discussed in Note 10. Although the ultimate outcome of this proposal is uncertain, if enacted as currently proposed, this legislation would result in a one-time charge to income of approximately $700,000 in the period in which the legislation is enacted. Based on the ranges of the potential financial impact of the matters discussed above, management believes the outcome of these matters will not impact the Bank's compliance with the applicable regulatory capital and liquidity requirements. F - 18 99 Report of Independent Auditors The Board of Directors and Shareholders Security Savings Bank, FSB We have audited the accompanying consolidated balance sheet of Security Savings Bank, FSB as of December 31, 1992, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Bank'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 consolidated 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 consolidated financial position of Security Savings Bank, FSB at December 31, 1992 , and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Little Rock, Arkansas January 28, 1993 F - 19 100 Security Savings Bank, FSB Consolidated Balance Sheet December 31, 1992
ASSETS Cash, including interest bearing deposits of $6,776,304 $ 7,226,337 Federal funds sold 548,000 ------------ Total cash and cash equivalents 7,774,337 Certificates of deposit 396,000 Investment securities (estimated market value: $8,258,481) 8,215,446 Mortgage-backed securities (estimated market value: $1,728,561) 1,660,903 Loans, net 64,329,952 Real estate acquired for development and sale 80,786 Real estate acquired in settlement of loans 25,398 Property and equipment, at cost, net of accumulated depreciation 1,613,651 Accrued interest receivable 346,125 Federal Home Loan Bank stock, at cost 458,200 Other assets 65,964 ------------ Total assets $ 84,966,762 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 78,300,074 Advances from borrowers for taxes and insurance 156,759 Accrued expenses and other liabilities 187,886 Dividends payable 61,944 ------------ Total liabilities 78,706,663 Stockholders' equity: Common stock, $100 par value; unlimited shares authorized; 10,324 shares issued and outstanding 1,032,400 Additional paid-in capital 3,692 Retained earnings 5,224,007 ------------ Total stockholders' equity 6,260,099 ------------ Total liabilities and stockholders' equity $ 84,966,762 ============ See accompanying notes.
F - 20 101 Security Savings Bank, FSB Consolidated Statement of Income Year ended December 31, 1992 Interest income: Loans, including fees $ 5,284,629 Investments and mortgage-backed securities 182,204 Other 675,547 ----------- Total interest income 6,142,380 Interest expense on deposits 3,873,556 ----------- Net interest income 2,268,824 Provision for loan losses 60,000 ----------- Net interest income after provision for loan losses 2,208,824 Other income: Service fees 97,039 FHLB dividends 17,212 Gain on sale of real estate, net 15,511 Gain (loss) on sale of investment securities 3,750 Other 39,087 ----------- Total other income 172,599 Other expenses: Compensation and related expenses 438,101 Occupancy and equipment 102,784 Federal insurance premiums 195,578 Other operating expenses 329,742 ----------- Total other expenses 1,066,205 ----------- Income before income taxes 1,315,218 Income taxes - current 459,226 ----------- Net income $ 855,992 =========== See accompanying notes.
F - 21 102 Security Savings Bank, FSB Consolidated Statement of Stockholders' Equity
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------------------------------------------------------ Balance at December 31, 1991 $1,032,400 $3,692 $4,429,959 $5,466,051 - ---------------------------- Net income -- -- 855,992 855,992 Cash dividends - $6 per share (payable January 1993) -- -- (61,944) (61,944) ------------------------------------------------------- Balance at December 31, 1992 $1,032,400 $3,692 $5,224,007 $6,260,099 ======================================================= See accompanying notes.
F - 22 103 Security Savings Bank, FSB Consolidated Statement of Cash Flows Year ended December 31, 1992 OPERATING ACTIVITIES Net income $855,992 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 95,482 Provision for loan losses 60,000 Gain on sale of real estate, net (15,511) Gain on sale of investment securities (3,750) Federal Home Loan Bank stock dividends (17,000) Increase in accrued interest receivable (43,679) Increase in other assets (13,454) Increase in advances from borrowers for taxes and insurance 7,226 Increase in accrued expenses and other liabilities 52,084 ------------ Net cash provided by operating activities 977,390 INVESTING ACTIVITIES Decrease in certificates of deposit 879,971 Purchase of investment securities (6,492,220) Proceeds from maturity/sale of investment securities 306,555 Purchase of mortgage-backed securities (748,594) Proceeds from repayments of mortgage-backed securities 387,823 Purchase of Federal Home Loan Bank stock (16,000) Increase in loans (7,772,092) Net proceeds from sale of real estate acquired for development 75,539 Proceeds from the sale of real estate owned 104,954 Purchase of property and equipment (1,083,143) ------------ Net cash used in investing activities (14,357,207) FINANCING ACTIVITIES Increase in time deposits 921,299 Net increase in deposit accounts, other than time deposits 3,849,971 Dividends paid (61,944) ------------ Net cash provided by financing activities 4,709,326 ------------ Net decrease in cash and cash equivalents (8,670,491) Cash and cash equivalents at beginning of year 16,444,828 ------------ Cash and cash equivalents at end of year $7,774,337 ============ See accompanying notes.
F - 23 104 Security Savings Bank, FSB Notes to Consolidated Financial Statements December 31, 1992 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Security Savings Bank, FSB (Bank) and its wholly owned subsidiaries, Security Service Corporation and Security Investments of Conway. All significant intercompany accounts and transactions have been eliminated in consolidation. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES Investment and mortgage-backed securities are carried at cost adjusted for premium amortization and discount accretion over the lives of the securities using a method which approximates the level yield method. Gains and losses on the sale of these securities are determined by the specific identification method. Management has the intent and the Bank has the ability to hold securities to maturity. Investment securities pledged as collateral to secure public funds totaled $1,500,000 at December 31, 1992. LOANS Loans are stated at the unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against income. Interest on loans is credited to income as earned. The Bank provides an allowance for uncollectible interest on all accrued interest related to loans 90 days or more delinquent. Such interest, if collected, is credited to income in the period of recovery. Fees received for loan originations and commitments to make loans in the future as well as direct underwriting costs are deferred and amortized into income and expense over the estimated lives of the loans using a method which approximates the level yield method. F - 24 105 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REAL ESTATE OWNED The Bank's wholly owned subsidiary, Security Service Corporation, has an investment in a real estate project consisting of undeveloped lots held for sale. Real estate acquired in settlement of loans is recorded at the lower of cost (loan balance) or estimated fair value at the date of foreclosure. Other investments in real estate, as well as real estate previously acquired in settlement of loans, are stated at the lower of cost or estimated net realizable value. Costs relating to development and improvement of property are capitalized, whereas holding costs are expensed. These investments are reviewed regularly and valuation allowances are established when recorded values exceed estimated net realizable values. Interest charges during the period of construction, if applicable, are capitalized. After construction is complete, interest charges are expensed as a period cost. DEPRECIATION Depreciation is provided by the straight-line method for financial reporting purposes and by the straight-line and accelerated methods for income tax purposes. Estimated useful lives are as follows:
YEAR ---------- Buildings and improvements 15 - 40 Furniture and equipment 3 - 12
INCOME TAXES Deferred income taxes are provided for timing differences in income recognition for financial statement and income tax reporting purposes. There were no significant timing differences in 1992. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". Statement 109 supersedes both FASB 96 and APB Opinion No. 11. Security Savings Bank must adopt the new rules by the first quarter of 1993. The adoption of Statement 109 is not expected to have a significant impact on the Bank's financial condition. F - 25 106 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS Cash equivalents include amounts due from depository institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Bank considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. 2. INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost and estimated market values of investments in debt securities at December 31, 1992 are as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------------------------------------------------------- U. S. Treasury securities $2,006,937 $ 9,353 $ -- $2,016,290 Mortgage-backed securities 1,660,903 67,658 -- 1,728,561 Securities of United States Government Agencies 2,380,640 7,030 -- 2,387,670 Corporate securities 3,827,869 26,652 -- 3,854,521 ----------------------------------------------------------- $9,876,349 $110,693 $ -- $9,987,042 ===========================================================
The amortized cost and estimated market value of investment securities at December 31, 1992, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED COST MARKET VALUE ------------------------------------------ Less than one year $ -- $ -- One to five year 8,215,446 8,258,481 Six to ten year -- -- Thereafter -- -- ------------------------------------------ 8,215,446 8,258,481 Mortgage-backed securities 1,660,903 1,728,561 ------------------------------------------ $ 9,876,349 $ 9,987,042 ==========================================
F - 26 107 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED) Realized gains and losses on sales of investment and mortgage-backed securities are summarized below for the year ended December 31, 1992: Realized gains $ 3,750 Realized losses -- ------------- Net gain (loss) $ 3,750 =============
3. LOANS Loans at December 31, 1992 consist of the following: Mortgage loans: Real estate $47,933,978 Construction 7,832,035 Bankers acceptances 7,812,426 Loans to depositors, secured by savings 767,540 Installment loans 3,347,537 ----------------- Total loans 67,693,516 Less: Allowance for loan losses 152,683 Loans in process 3,126,872 Net deferred loan origination fees 84,009 ----------------- $64,329,952 ================= Weighted average yield on loans 7.92% =================
Activity in the allowance for loan losses for the year ended December 31, 1992 is summarized below: Balance at beginning of period $107,022 Provision for loan losses 60,000 Net charge-offs (14,339) ------------- Balance at end of period $152,683 =============
Loans delinquent more than 90 days at December 31, 1992 totaled $48,719 and consist of conventional mortgage loans. F - 27 108 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1992 consists of the following: Land $294,500 Buildings and improvements 381,741 Furniture and equipment 347,356 Construction in progress 1,019,333 ---------------- 2,042,930 Less accumulated depreciation 429,279 ---------------- $1,613,651 ================
Construction in progress consists of architect fees and progress billings from the contractor for the addition to the main office building. 5. DEPOSITS Deposits at December 31, 1992 consist of the following:
RATES (%) BALANCE -------------------------------------- Passbook accounts 2.75 $6,260,707 90 day notice accounts 2.75 1,084,130 Money market deposit accounts 2.95 6,259,607 NOW accounts 2.75 - 2.95 6,102,529 6 month certificates 3.04 - 5.80 17,436,862 30 month certificates 3.30 - 6.71 9,917,259 Other certificates 2.80 - 8.60 31,100,586 ------------------ 78,161,680 Accrued interest payable 138,394 ------------------ $78,300,074 ================== Weighted average cost of deposits 4.49% ==================
Interest paid on deposits during 1992 was $3,949,773. F - 28 109 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 5. DEPOSITS (CONTINUED) Certificates of deposit outstanding at December 31, 1992 mature as follows: 1993 $39,208,762 1994 7,584,938 1995 5,830,458 1996 3,871,235 1997 -- Thereafter 1,959,314 ----------------- $58,454,707 =================
The aggregate amount of deposits with a minimum balance of $100,000 was approximately $6,118,000 at December 31, 1992. Interest expense (based on average interest rates) on deposits for the year ended December 31, 1992 approximates the following: Transaction accounts $313,938 Passbook accounts 192,226 Certificates of deposit 3,367,392 ----------------- $3,873,556 =================
6. REGULATORY RESTRICTIONS AND REQUIREMENTS In 1989 and again in 1991, Congress passed, and the President signed, legislation that substantially restructured the regulation and deposit insurance arrangements of savings institutions. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") was enacted in 1989. Significant requirements of FIRREA included minimum capital to asset ratios, a "risk-based" capital to "risk-weighted" asset ratio, and a new qualified thrift lender test that requires a thrift institution to maintain a minimum percentage of its assets (70%) in housing finance and related activities. FIRREA limited the aggregate amount of loans to one borrower (or a group of related borrowers) to 15% of unimpaired capital and surplus of the institution. FIRREA also limited loans and extensions of credit to affiliates to 10% of the institution's capital stock and surplus. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "Act") was signed into law on December 19, 1991. The Act lowered the minimum required level of qualified thrift investments from 70 percent (the FIRREA requirement) to 65 percent (based on monthly averages in 9 out of every 12 months) and liberalized the assets that can be counted as qualified thrift investments. The Act also increased the amount of permissible consumer lending for savings associations, and authorized the Office of Thrift Supervision to set the amount of purchased mortgage servicing rights that savings associations may include in regulatory capital, subject to the limitation that purchased mortgage servicing rights included in capital may not exceed 90% of fair market value, with fair value determined at least quarterly. F - 29 110 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 6. REGULATORY RESTRICTIONS AND REQUIREMENTS (CONTINUED) Under provisions of FIRREA and the Act, the Bank is required to meet certain tangible, core and risk-based capital requirements. Tangible capital generally consists of stockholders' equity minus certain intangible assets. Core capital generally consists of tangible capital plus qualifying supervisory goodwill. The risk-based capital requirements presently address credit risk related to both recorded assets and off-balance sheet commitments and obligations. An explicit interest-rate-risk component may be added pursuant to FIRREA which would require capital to be maintained to protect an institution from losses due to changes in interest rates. The amount of the interest-risk component would equal 50% of the estimated decline in the market value of portfolio equity after an immediate 200 basis point increase or decrease (whichever yields a larger decline) in market interest rates. The following table summarizes the Bank's capital and capital ratios and the ratios required by FIRREA and the Act at December 31, 1992.
REQUIRED CAPITAL ACTUAL RATIO RATIO -------------------------------------- Tangible capital $5,840,000 6.9% 1.5% Core capital 5,840,000 6.9 3.0 Risk-based capital 5,981,763 13.1 8.0
There is a regulatory proposal pending which would increase the required core capital ratio to 4.0 percent. At December 31, 1992, management believes the Bank was in substantial compliance with the current requirements of FIRREA and the Act. 7. INCOME TAXES The reasons for the difference between actual income taxes and the expected income taxes computed at the statutory federal income tax rate are as follows for the year ended December 31, 1992: Statutory rate 34.0% Effect of statutory loan loss deduction (1.5) State income taxes, net of federal income tax benefit 3.7 Other, net (1.3) ----------- 34.9% ===========
F - 30 111 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) Under the Internal Revenue Code, the Bank is allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing loan losses. The applicable provisions of the law permit the Bank to deduct from taxable income an allowance for bad debts based upon the greater of a percentage of taxable income before such deduction, a percentage of the loan balances, or actual loss experience. Because the Bank does not intend to use the reserve for purposes other than to absorb losses, deferred income taxes have not been provided on the reserve, which is approximately $2,060,000 at December 31, 1992. Cash paid during the year ended December 31, 1992 for income taxes was $371,500. 8. RECONCILIATION OF SUPERVISORY REPORTS TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A reconciliation of the Bank's stockholders' equity and net income as reported in the accompanying consolidated financial statements to the net worth and net income as reported to the Office of Thrift Supervision (OTS) at December 31, 1992 is as follows: Stockholders' equity per accompanying consolidated balance sheets $ 6,260,099 Other adjustments, net (99) ----------------- Net worth per report to OTS $ 6,260,000 Net income per accompanying consolidated statements of income $ 855,992 Other adjustments, net (992) ----------------- Net income per report to the OTS $ 855,000 =================
9. RELATED PARTY TRANSACTIONS Certain of the directors and officers of the Bank and companies in which they have interests are customers of and have transactions with the Bank in the ordinary course of business. In the opinion of management, deposit transactions, loans and loan commitments are made on substantially the same terms, including interest rates (subsequent to August 1989), repayment terms and collateral as those prevailing at the time for comparable transactions with other persons, do not involve more than a normal risk of collectibility, and do not involve any unusual or unfavorable features. Prior to August 1989, loans to officers and directors were made at an annually adjusted rate of one percent above the cost of funds to the Bank. The aggregate activity in loans to officers and directors is as follows for the year ended December 31, 1992: Balance at beginning of year $1,354,213 New loans 290,806 Repayments (639,806) ---------------- Balance at end of year $1,005,213 ================
F - 31 112 Security Savings Bank, FSB Notes to Consolidated Financial Statements (continued) 10. PROFIT SHARING PLAN The Bank maintains a profit sharing plan in which employees who are at least 21 year of age and work at least 1,000 hours per year are eligible to participate after they complete one year of service. Contributions to the plan are made at the discretion of the Board of Directors. For the year ended December 31, 1992 , the Bank's profit sharing plan contributions were $18,968. 11. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK In the normal course of business there are various commitments outstanding, such as commitments to extend credit, including standby letters of credit to assure performance or to support debt obligations, which are not reflected in the accompanying financial statements. Loan commitments are made to accommodate the financial needs of the Bank's customers. Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. Loan commitments and standby letters of credit are primarily issued to real estate developers in the Bank's market area. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank's normal credit policies. The Bank's maximum exposure to credit loss for loan commitments at December 31, 1992 was approximately $5,800,000. The Bank's outstanding commitments under standby letters of credit amounted to approximately $57,000 at December 31, 1992. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-base basis. Collateral is obtained based on management's credit assessment of the customer. Collateral held consists primarily of the related project or dwelling unit and the loan to value ratios generally do not exceed 80%. Most of the Bank's real estate mortgage and real estate construction loans are to customers in Conway, Arkansas and the surrounding area. F - 32 113 SECURITY BANK OF CONWAY, FSB AND SUBSIDIARIES Consolidated Balance Sheet as of September 30, 1995 (Unaudited) Assets - ------ Cash, including interest bearing deposits $ 15,043,297 Federal funds sold 125,000 ------------ Total cash and cash equivalents 15,168,297 ------------ Certificates of deposit 99,000 Banker's acceptances 1,945,538 Investment securities 3,981,208 Mortgage-backed securities 372,083 Loans, net 75,338,125 Loans held for sale 166,949 Accrued interest receivable 437,026 Real estate acquired for development and sale 28,795 FHLB stock, at cost 576,600 Income taxes receivable 61,931 Property and equipment, net 2,019,206 Other assets 127,987 ------------ Total Assets $100,322,745 ============ Liabilities - ----------- Deposits $ 87,758,300 Advances from borrowers for taxes and insurance 157,963 Accrued expenses and other liabilities 287,860 Income taxes payable 48,490 Advances from the FHLB 3,248,281 Deferred income taxes 223,489 ------------ Total Liabilities $ 91,724,383 ------------ Stockholders' equity: Common stock $ 1,032,400 Additional paid-in capital 3,692 Retained earnings 7,562,270 ------------ Total Stockholders' Equity 8,598,362 ------------ Total Liabilities and Stockholder's Equity $100,322,745 ============ See accompanying notes to consolidated financial statements.
F - 33 114 SECURITY BANK OF CONWAY, FSB AND SUBSIDIARIES Consolidated Statements of Income For the Periods Ending September 30, 1995 and 1994 (Unaudited)
1995 1994 ---- ---- Interest income: Loans, including fees $5,040,892 $4,257,898 Other 662,652 506,713 ---------- ---------- Total interest income 5,703,544 4,764,611 ---------- ---------- Interest expense 3,291,070 2,564,162 ---------- ---------- Net interest income 2,412,474 2,200,449 Provision for loan losses 45,000 45,000 ---------- ---------- Net interest income after provision for loan losses 2,367,474 2,155,449 ---------- ---------- Other income: Commission income 93,121 86,011 Service fees 137,739 88,738 FHLB dividends 26,623 16,376 Gain on sale of real estate 4,000 -- Other 31,003 50,938 ---------- ---------- Total other income 292,486 242,063 ---------- ---------- Other expense: Compensation and related expenses 682,009 584,629 FDIC premiums 157,556 157,500 Occupancy and equipment 242,520 190,512 Other operating expenses 362,360 383,872 ---------- ---------- Total other expenses 1,444,445 1,316,513 ---------- ---------- Income before income taxes 1,215,515 1,080,999 Provision for income taxes 382,042 396,636 ---------- ---------- Net income $ 833,473 $ 684,363 ========== ========== See accompanying notes to consolidated financial statements.
F- 34 115 SECURITY BANK OF CONWAY, FSB AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1994 and 1993 and the Period Ended September 30, 1995 (Unaudited)
Additional Common Paid-In Retained Stock Capital Earnings Total ----- ------- -------- ----- Balance at December 31, 1992 $1,032,400 $3,692 $5,224,007 $6,260,099 Net income 776,917 776,917 Cash dividends declared (61,944) (61,944) ---------- ------ ---------- ---------- Balance at December 31, 1993 1,032,400 3,692 5,938,980 6,975,072 Net income 851,761 851,761 Cash dividends declared (61,944) (61,944) ---------- ------ ---------- ---------- Balance at December 31, 1994 $1,032,400 $3,692 $6,728,797 $7,764,889 Net income 833,473 833,473 Cash dividends declared -- -- ---------- ------ ---------- ---------- Balance at September 30, 1995 $1,032,400 $3,692 $7,562,270 $8,598,362 ========== ====== ========== ========== See accompanying notes to consolidated financial statements.
F - 35 116 SECURITY BANK OF CONWAY, FSB AND SUBSIDIARIES Consolidated Statements of Cash Flow For the Nine Months Ended September 30, 1995 and 1994 (Unaudited)
1995 1994 ---- ---- Cash flows from operating activities: Net income $ 833,473 $ 684,363 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 115,812 82,205 Provision for loan losses 45,000 45,000 Federal Home Loan Bank stock dividends (26,623) (16,376) Gain on sale of real estate, net (4,000) -- Deferred income taxes 223,489 158,774 Other, net 3,458 (213,604) Net increase (decrease) in cash attributable to changes in: Accrued interest receivable (104,140) 28,204 Other assets (8,347) 10,898 Advances from borrowers for taxes and insurance 26,503 (24,759) Accrued expenses and liabilities 208,985 (12,186) Income taxes payable 32,184 10,915 ------------ ----------- Net cash provided by operating activities 1,345,794 753,434 ------------ ----------- Cash flows from investing activities: Maturity of certificates of deposit 198,000 297,000 Purchase of certificate of deposit (198,000) (198,000) Purchase of banker's acceptances (2,917,694) (1,469,940) Maturities of banker's acceptances 1,945,354 2,950,357 Purchases of investment securities (1,486,527) (952,933) Proceeds from maturities of investment securities 5,465,454 4,466,537 Proceeds from repayments of mortgage-backed securities 28,283 125,288 Net increase in loans (1,995,787) (8,404,087) Purchase of Federal Home Loan Bank stock (54,500) (40,600) Purchases of property and equipment (40,186) (133,931) ------------ ----------- Net cash provided by (used in) investing activities 944,397 (3,360,309) ------------ ----------- Cash flows from financing activities: Net increase in deposit accounts 7,332,995 1,495,519 Federal Home Loan Bank advances, net (108,610) 2,704,397 ------------ ----------- Net cash provided by financing activities 7,224,385 4,199,916 ------------ ----------- Net increase in cash and cash equivalents 9,514,576 1,593,041 Cash and cash equivalents at beginning of year 5,653,721 3,476,094 ------------ ----------- Cash and cash equivalents at September 30 $ 15,168,297 $ 5,069,135 ============ =========== Cash paid during the period for: Interest $ 2,870,391 $ 2,281,391 Taxes 361,952 376,775 See accompanying notes to consolidated financial statements.
F - 36 117 SECURITY BANK OF CONWAY, FSB AND SUBSIDIARIES Note to Consolidated Financial Statements September 30, 1995 (Unaudited) The information presented in the accompanying financial statements as of and for the period ended September 30, 1995 have been prepared on a basis consistent, in all material respects, with the 1994 financial statements. These financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows of Security Bank of Conway, FSB as of and for the period ended September 30, 1995. Furthermore, all such adjustments are of a normal and recurring nature. F - 37 118 ANNEX A ------- Following is the text of the statutory dissenters' rights as set forth in 12 C.F.R. Section 552.14: SECTION 552.14 DISSENTER AND APPRAISAL RIGHTS. (a) Right to demand payment of fair or appraised value. Except as provided in paragraph (b) of this section, any stockholder of a Federal stock association combining in accordance with Section 552.13 of this part shall have the right to demand payment of the fair or appraised value of his stock: Provided, That such stockholder has not voted in favor of the combination and complies with the provisions of paragraph (c) of this section. (b) Exceptions. No stockholder required to accept only qualified consideration for his or her stock shall have the right under this section to demand payment of the stock's fair or appraised value, if such stock was listed on a national securities exchange or quoted on the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the meeting at which the combination was acted upon or stockholder action is not required for a combination made pursuant to Section 552.13(h)(2) of this part. "Qualified consideration" means cash, shares of stock of any association or corporation which at the effective date of the combination will be listed on a national securities exchange or quoted on NASDAQ, or any combination of such shares of stock and cash. (c) Procedure. (1) Notice. Each constituent Federal stock association shall notify all stockholders entitled to rights under this section, not less than twenty days prior to the meeting at which the combination agreement is to be submitted for stockholder approval, of the right to demand payment of appraised value of shares, and shall include in such notice a copy of this section. Such written notice shall be mailed to stockholders of record and may be part of management's proxy solicitation for such meeting. (2) Demand for appraisal and payment. Each stockholder electing to make a demand under this section shall deliver to the Federal stock association, before voting on the combination, a writing identifying himself or herself and stating his or her intention thereby to demand appraisal of and payment for his or her shares. Such demand must be in addition to and separate from any proxy or vote against the combination by the stockholder. (3) Notification of effective date and written offer. Within ten days after the effective date of the combination, the resulting association shall: (i) Give written notice by mail to stockholders of constituent Federal stock associations who have complied with the provisions of paragraph (c)(2) of this section and have not voted in favor of the combination, of the effective date of the combination; (ii) Make a written offer to each stockholder to pay for dissenting shares at a specified price deemed by the resulting association to be the fair value thereof; and A - 1 119 (iii) Inform them that, within sixty days of such date, the respective requirements of paragraphs (c)(5) and (c)(6) of this section (set out in the notice) must be satisfied. The notice and offer shall be accompanied by a balance sheet and statement of income of the association the shares of which the dissenting stockholder holds, for a fiscal year ending not more than sixteen months before the date of notice and offer, together with the latest available interim financial statements. (4) Acceptance of offer. If within sixty days of the effective date of the combination the fair value is agreed upon between the resulting association and any stockholder who has complied with the provisions of paragraph (c)(2) of this section, payment therefor shall be made within ninety days of the effective date of the combination. (5) Petition to be filed if offer not accepted. If within sixty days of the effective date of the combination the resulting association and any stockholder who has complied with the provisions of paragraph (c)(2) of this section do not agree as to the fair value, then any such stockholder may file a petition with the Office, with a copy by registered or certified mail to the resulting association, demanding a determination of the fair market value of the stock of all such stockholders. A stockholder entitled to file a petition under this section who fails to file such petition within sixty days of the effective date of the combination shall be deemed to have accepted the terms offered under the combination. (6) Stock certificates to be noted. Within sixty days of the effective date of the combination, each stockholder demanding appraisal and payment under this section shall submit to the transfer agent his certificates of stock for notation thereon that an appraisal and payment have been demanded with respect to such stock and that appraisal proceedings are pending. Any stockholder who fails to submit his or her stock certificates for such notation shall no longer be entitled to appraisal rights under this section and shall be deemed to have accepted the terms offered under the combination. (7) Withdrawal of demand. Notwithstanding the foregoing, at any time within sixty days after the effective date of the combination, any stockholder shall have the right to withdraw his or her demand for appraisal and to accept the terms offered upon the combination. (8) Valuation and payment. The Director shall, as he or she may elect, either appoint one or more independent persons or direct appropriate staff of the Office to appraise the shares to determine their fair market value, as of the effective date of the combination, exclusive of any element of value arising from the accomplishment or expectation of the combination. Appropriate staff of the Office shall review and provide an opinion on appraisals prepared by independent persons as to the suitability of the appraisal methodology and the adequacy of the analysis and supportive data. The Director after consideration of the appraisal report and the advice of the appropriate staff shall, if he or she concurs in the valuation of the shares, direct payment by the resulting association of the apprised fair market value of the shares, upon surrender of the certificates representing such stock. Payment shall be made, together with interest from the effective date of the combination, at a rate deemed equitable by the Director. (9) Costs and expenses. The costs and expenses of any proceeding under this section may be apportioned and assessed by the Director as he or she may deem equitable against all or some of the parties. In making this determination the Director shall consider whether any party A - 2 120 has acted arbitrarily, vexatiously, or not in good faith in respect to the rights provided by this section. (10) Voting and distribution. Any stockholder who has demanded appraisal rights as provided in paragraph (c)(2) of this section shall thereafter neither be entitled to vote such stock for any purpose nor be entitled to the payment of dividends or other distributions on the stock (except dividends or other distribution payable to, or a vote to be taken by stockholders of record at a date which is on or prior to, the effective date of the combination): Provided, That if any stockholder becomes unentitled to appraisal and payment of appraised value with respect to such stock and accepts or is deemed to have accepted the terms offered upon the combination, such stockholder shall thereupon be entitled to vote and receive the distributions described above. (11) Status. Shares of the resulting association into which shares of the stockholders demanding appraisal rights would have been converted or exchanged, had they assented to the combination, shall have the status of authorized and unissued shares of the resulting association. A - 3 121 PROXY SECURITY BANK OF CONWAY, F.S.B. 1122 Van Ronkle Conway, Arkansas 72033 For the Special Meeting of Shareholders to be held January 16, 1996 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned shareholder(s) of SECURITY BANK OF CONWAY, F.S.B. ("Security Bank"), does hereby nominate, constitute and appoint - ---------------- and ----------------, or each of them (with full power to act alone), true and lawful attorney(s), 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, $100.00 par value, of Security Bank standing in the name of the undersigned on its books at the close of business on December 11, 1995 at the Special Meeting of Shareholders to be held at Security Bank, 1122 Van Ronkle, Conway, Arkansas, on Tuesday, January 16, 1996, at 4:30 p.m. Central Time, and at any adjournments or postponements thereof, with all the powers the undersigned would possess if personally present, as follows: 1. A proposal to approve the Amended and Restated Agreement and Plan of Reorganization dated as of September 18, 1995 (the "Reorganization Agreement"), which provides for (i) the sale by Security Bank of all of its assets and the assignment by Security Bank of all of its liabilities to Mercantile Bancorporation Inc. of Arkansas ("MBIA"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), in exchange for shares (collectively, the "Shares") of MBI common stock, (ii) the transfer by MBI (on behalf of MBIA) of the Shares to a qualified exchange agent (the "Exchange Agent"), on behalf of Security Bank, and (iii) upon consummation of (i) and (ii) above, (A) and upon the surrender by each Security Bank shareholder of his or her certificate(s) representing shares of Security Bank common stock, the distribution by the Exchange Agent of 31.189 shares of MBI common stock for each share of Security Bank common stock represented by a surrendered certificate, on behalf of Security Bank, as a liquidating distribution, and (B) the surrender by Security Bank of its charter to the Office of Thrift Supervision ((i) and (ii) are hereinafter referred to collectively as the "Purchase and Assumption"). Pursuant to the terms of the Reorganization Agreement, by way of those certain Assignment Agreements dated as of September 25, 1995, by and between (i) MBIA and The Twin City Bank, an Arkansas state-chartered bank and wholly owned subsidiary of MBIA ("TCB"), and (ii) MBIA and First National Bank of Conway County, a national banking association and wholly owned subsidiary of MBIA ("FNBCC") (effective October 2, 1995, FNBCC changed its name to Mercantile Bank of Conway County National Association ("MBCC")), MBIA has assigned its right to receive the assets and its obligation to assume the liabilities of Security Bank to TCB and MBCC, respectively. / / FOR / / AGAINST / / ABSTAIN 2. A proposal to approve the dissolution of Security Bank upon consummation of the Purchase and Assumption. / / FOR / / AGAINST / / ABSTAIN 3. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. (Continued on Reverse Side) 122 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" EACH OF THE PROPOSALS 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. 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 Regis- tration 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 November 2, 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 H. Beirise, 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, November 2, 1995 - ------------------------------------------------ President, Chief Executive Thomas H. Jacobsen Officer and Director Principal Executive Officer /s/ John Q. Arnold Senior Executive Vice President and November 2, 1995 - ------------------------------------------------ Chief Financial Officer John Q. Arnold Principal Financial Officer /s/ Michael T. Normile Senior Vice President - Finance November 2, 1995 - ------------------------------------------------ and Control Michael T. Normile Principal Accounting Officer II-4 127 Signature Title Date --------- ----- ---- /s/ Richard P. Conerly Director November 2, 1995 - ------------------------------------------------ Richard P. Conerly /s/ Harry M. Cornell, Jr. Director November 2, 1995 - ------------------------------------------------ Harry M. Cornell, Jr. /s/ Earl K. Dille Director November 2, 1995 - ------------------------------------------------ Earl K. Dille /s/ William A. Hall Director November 2, 1995 - ------------------------------------------------ William A. Hall /s/ Thomas A. Hays Director November 2, 1995 - ------------------------------------------------ Thomas A. Hays /s/ William G. Heckman Director November 2, 1995 - ------------------------------------------------ William G. Heckman /s/ Frank Lyon, Jr. Director November 2, 1995 - ------------------------------------------------ Frank Lyon, Jr. /s/ Charles H. Price, II Director November 2, 1995 - ------------------------------------------------ Charles H. Price II /s/ Harvey Saligman Director November 2, 1995 - ------------------------------------------------ Harvey Saligman Director November ---, 1995 - ------------------------------------------------ Craig D. Schnuck Director November ---, 1995 - ------------------------------------------------ Robert L. Stark II-5 128 Signature Title Date --------- ----- ---- /s/ Patrick T. Stokes Director November 2, 1995 - ------------------------------------------------ Patrick T. Stokes /s/ Francis A. Stroble Director November 2, 1995 - ------------------------------------------------ Francis A. Stroble /s/ John A. Wright Director November 2, 1995 - ------------------------------------------------ John A. Wright
II-6 129 EXHIBIT INDEX
Exhibit Number Description Page ------ ----------- ---- 2.1 Amended and Restated Agreement and Plan of Reorganization dated as of July 7, 1995, as amended and restated as of September 18, 1995, by and between MBI and MBIA, as Buyers, and Security Bank, as Seller. 2.2 Assignment Agreement dated as of September 25, 1995 by and between MBIA and TCB. 2.3 Assignment Agreement dated as of September 25, 1995 by and between MBIA and FNBCC. 2.4 Form of Voting Agreement dated as of July 7, 1995 by and between MBI and certain shareholders of Security Bank. 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. II-7 130 Exhibit Number Description Page ------ ----------- ---- 8.1 Opinion of Thompson & Mitchell regarding certain tax matters in the Reorganization. 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. 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. II-8 131 Exhibit Number Description Page ------ ----------- ---- 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. 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 August 4, 1995, by and between MBI and Hawkeye Bancorporation, Inc., 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 Arthur Andersen LLP with regard to the use of its reports on Security Bank's financial statements. 23.3 Consent of Ernst & Young LLP with regard to the use of its reports on Security Bank's financial statements. 23.4 Consent of Deloitte & Touche LLP with regard to the use of its reports on Hawkeye's financial statements. 23.5 Consent of Thompson & Mitchell (included in Exhibit 5.1). 24.1 Power of Attorney (included on signature page hereto).
II-9 EX-2.1 2 AGREEMENT AND PLAN OF REORGANIZATION 1 Exhibit 2.1 AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION between MERCANTILE BANCORPORATION INC. and MERCANTILE BANCORPORATION INC. OF ARKANSAS as Buyers and SECURITY BANK OF CONWAY, F.S.B. as Seller Dated July 7, 1995 Amended and Restated as of September 18, 1995 2 TABLE OF CONTENTS -----------------
Page ---- Recitals 1 ARTICLE I THE TRANSACTION 1.01 The Transaction 2 1.02 Closing 2 1.03 Effective Time 2 1.04 Additional Actions 2 1.05 Payment of Purchase Price 3 1.06 Exchange Procedures 3 1.07 Dissenting Shares 4 1.08 No Fractional Shares 4 1.09 Closing of Stock Transfer Books 4 1.10 Anti-Dilution Adjustments 4 1.11 Reservation of Right to Revise Transaction 5 1.12 Definitions 5 ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER 2.01 Organization and Authority 6 2.02 Subsidiaries 7 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 11 2.11 Loans, Commitments and Contracts 11 2.12 Absence of Defaults 14 2.13 Litigation and Other Proceedings 14 2.14 Directors' and Officers' Insurance 14 2.15 Compliance with Laws 14 2.16 Labor 16 2.17 Material Interests of Certain Persons 16 2.18 Allowance for Loan and Lease Losses; Non-Performing Assets 16 2.19 Employee Benefit Plans 17 2.20 Conduct of Seller to Date 18 2.21 Absence of Undisclosed Liabilities 19 - i - 3 2.22 Proxy Statement, Etc. 19 2.23 Registration Obligations 20 2.24 Tax and Regulatory Matters 20 2.25 Brokers and Finders 20 2.26 Interest Rate Risk Management Instruments 20 2.27 Accuracy of Information 20 ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYERS 3.01 Organization and Authority 20 3.02 Capitalization of Buyers 21 3.03 Authorization 21 3.04 Mercantile Financial Statements 22 3.05 Mercantile Reports 22 3.06 Material Adverse Change 23 3.07 Legal Proceedings or Other Adverse Facts 23 3.08 Registration Statement, Etc. 23 3.09 Brokers and Finders 23 3.10 Accuracy of Information 23 3.11 Tax and Regulatory Matters 23 3.12 Compliance with Laws 23 ARTICLE IV CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME 4.01 Conduct of Businesses Prior to the Effective Time 24 4.02 Forbearances of Seller 24 4.03 Forbearances of Buyers 26 ARTICLE V ADDITIONAL AGREEMENTS 5.01 Access and Information 27 5.02 Registration Statement; Regulatory Matters 27 5.03 Shareholder Approval 27 5.04 Current Information 28 5.05 Conforming Entries 28 5.06 Environmental Reports 29 5.07 Agreements of Affiliates 29 5.08 Expenses 30 5.09 Miscellaneous Agreements 30 5.10 Employee Agreements and Benefits 30 5.11 Press Releases 31 5.12 State Takeover Statutes 31 - ii - 4 5.13 Directors' and Officers' Indemnification 31 5.14 Tax Opinion Certificates 31 5.15 Best Efforts to Insure Pooling 31 5.16 Surrender of Charter 31 5.17 Escrow Account 32 ARTICLE VI CONDITIONS 6.01 Conditions to Each Party's Obligation To Effect the Transaction 32 6.02 Conditions to Obligations of Seller To Effect the Transaction 33 6.03 Conditions to Obligations of Buyers To Effect the Transaction 33 ARTICLE VII CLOSING 7.01 Closing 34 7.02 Deliveries at Closing 35 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.01 Termination 37 8.02 Effect of Termination 38 8.03 Amendment 38 8.04 Waiver 38 ARTICLE IX GENERAL PROVISIONS 9.01 Non-Survival of Representations, Warranties and Agreements 39 9.02 Indemnification 39 9.03 No Assignment; Successors and Assigns 39 9.04 No Implied Waiver 39 9.05 Headings 39 9.06 Entire Agreement 40 9.07 Counterparts 40 9.08 Notices 40 9.09 Severability 41 9.10 Governing Law 41 - iii - 5 AMENDED AND RESTATED -------------------- AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is dated July 7, 1995, and amended and restated as of September 18, 1995, by and among MERCANTILE BANCORPORATION INC., a Missouri corporation ("Mercantile"), MERCANTILE BANCORPORATION INC. OF ARKANSAS, an Arkansas corporation ("Mercantile-Arkansas" and, collectively with Mercantile, the "Buyers"), and SECURITY BANK OF CONWAY, F.S.B., a federally-chartered stock savings bank ("Seller"). W I T N E S S E T H: ------------------- WHEREAS, Mercantile is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA") and a registered savings and loan holding company under the Home Owners' Loan Act of 1933, as amended (the "HOLA"); and WHEREAS, Mercantile holds all of the issued and outstanding capital stock of Mercantile-Arkansas which, in turn, holds all of the issued and outstanding capital stock of certain state and national banks located in the State of Arkansas; and WHEREAS, Seller is a federally-chartered stock savings bank; and WHEREAS, the Board of Directors of Seller, the Board of Directors of Mercantile-Arkansas, and the Executive Committee of the Board of Directors of Mercantile have approved the purchase of all of the assets and the assumption of all of the liabilities of Seller by Mercantile-Arkansas (the "Transaction"); and WHEREAS, Seller acknowledges and agrees that Mercantile-Arkansas, in its sole and absolute discretion, may assign its right to receive the assets and its obligation to assume the liabilities of Seller to one or more Mercantile-Arkansas banking subsidiaries (each, an "Assignee") prior to the Effective Time, as defined in Section 1.03 hereof; and WHEREAS, Seller and Mercantile-Arkansas believe that the Transaction is desirable and in the best interests of their respective shareholders; and WHEREAS, Seller and Mercantile-Arkansas intend that the Transaction constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and that the purchase of all of the assets and the assumption of all of the liabilities of Seller by Mercantile-Arkansas for shares of Mercantile Common Stock (as defined in Section 1.01 hereof), and the subsequent distribution of the shares of Mercantile Common Stock to shareholders of Seller as a liquidating distribution, will not give rise to a gain or loss to the shareholders of Seller with respect to such liquidating distribution, except with respect to cash received in lieu of fractional shares; and WHEREAS, the parties desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the Transaction. NOW THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: 6 ARTICLE I THE TRANSACTION --------------- 1.01 The Transaction. Subject to the terms and conditions of this --------------- Agreement, Buyers and Seller shall effect the Transaction in accordance with Section 10(s) of the HOLA and Title 12 of the United States Code (the "United States Code" or "U.S.C.") and in accordance with all additional federal and state laws and regulations that may be applicable. The parties hereby acknowledge that Mercantile-Arkansas has the authority to assign its right to receive the assets, and its obligation to assume the liabilities, of Seller to an Assignee or Assignees at or prior to the Effective Time, as such term is defined in Section 1.03 hereof. As of the Effective Time, Seller shall deliver to Mercantile a certified list of all shareholders of Seller and report the number of shares of common stock, $100.00 par value, of Seller ("Seller Common Stock") held by each shareholder. The parties agree that prior to the Effective Time, Seller and Mercantile-Arkansas shall appoint KeyCorp Shareholder Services, Inc., as trustee and agent (the "Exchange Agent") for the purpose of receiving from Mercantile-Arkansas, on behalf of Seller, certificates of common stock, $5.00 par value, of Mercantile and the associated "Rights" under the "Rights Agreement," as those terms are defined in Section 3.02 hereof ("Mercantile Common Stock") and such amounts of cash as shall be required for payment in lieu of fractional shares of Mercantile Common Stock, all in consideration of and as full payment for the purchase of all of the assets and the assumption of all of the liabilities of Seller by Mercantile-Arkansas, such shares of Mercantile Common Stock to be issued in the name of the shareholders of Seller or their designees (the "Mercantile Certificates"). As soon as practicable after the Effective Time, the Exchange Agent shall deliver the Mercantile Certificates and such amounts of cash in lieu of fractional shares of Mercantile Common Stock to the shareholders of Seller, on behalf of Seller, as a liquidating distribution, and Seller shall surrender its charter to the Office of Thrift Supervision (the "OTS"). The number of shares of Mercantile Common Stock to be delivered to the Exchange Agent pursuant to the Transaction and pursuant to the terms of this Agreement shall be determined as set forth in Section 1.05 hereof. 1.02 Closing. The closing (the "Closing") of the Transaction shall ------- take place at 10:00 a.m., local time, on the date that the Effective Time occurs (the "Closing Date"), or at such other time, and at such place, as Buyers and Seller shall agree. 1.03 Effective Time. Subject to the terms and conditions of this -------------- Agreement, the Transaction shall become effective (the "Effective Time") on such date specified by Mercantile-Arkansas in writing to Seller (such notice to be at least five business days in advance of the Effective Time) but (i) not earlier than the satisfaction of all conditions set forth in Section 6.01(a) and 6.01(b) (the "Approval Date") and (ii) not later than the first business day of the first full calendar month commencing at least five business days after the Approval Date. 1.04 Additional Actions. If, at any time after the Effective Time, ------------------ Buyers or any Assignee 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 Mercantile-Arkansas or such Assignee the 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 and the Transaction, Seller and each of its officers and directors shall be deemed to have granted to Mercantile-Arkansas or such Assignee 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 Mercantile-Arkansas or such Assignee and otherwise to carry out the purposes of this Agreement and the Transaction, and the officers and directors of Mercantile-Arkansas or such Assignee are authorized in the name of Seller or otherwise to take any and all such action. - 2 - 7 1.05 Payment of Purchase Price. At the Effective Time, ------------------------- Mercantile-Arkansas shall deliver to the Exchange Agent, on behalf of the Seller, 31.189 shares (the "Distribution Ratio") of Mercantile Common Stock for each share of Seller Common Stock outstanding immediately prior to the Effective Time (collectively, the "Shares"). Mercantile-Arkansas shall also deliver to the Exchange Agent, on behalf of Seller, such amounts of cash as shall be required for payment in lieu of fractional shares of Mercantile Common Stock (collectively, the "Cash"). The delivery by Mercantile-Arkansas of the Shares and the Cash shall be in full payment for the purchase of all of the assets and the assumption of all of the liabilities of Seller by Mercantile-Arkansas or any Assignee. The Distribution Ratio was computed by dividing (i) the total number of shares of Seller Common Stock that were issued and outstanding on the date of this Agreement into (ii) 322,000, the aggregate number of shares of Mercantile Common Stock to be issued in the Transaction. Mercantile hereby undertakes to deliver or cause to be delivered to the Exchange Agent the Shares and the Cash. Any such delivery shall constitute delivery by Mercantile-Arkansas for purposes of this Agreement. 1.06 Exchange Procedures. ------------------- (a) At the Effective Time, holders of record of certificates representing shares of Seller Common Stock (the "Certificates") shall be instructed to tender such Certificates to the Exchange Agent pursuant to a letter of transmittal that Buyers shall deliver or cause to be delivered to such holders in a form substantially similar to that attached hereto as Exhibit A, it --------- being the intent of Buyers that such letters of transmittal shall be delivered as soon after the Effective Date as is reasonably practicable. (b) Subject to Section 1.09, after the Effective Time, each previous holder of a Certificate that surrenders such Certificate to the Exchange Agent, with a properly completed and executed letter of transmittal with respect to such Certificate, will be entitled to receive from the Exchange Agent, on behalf of Seller, as a liquidating distribution, (i) a Mercantile Certificate representing such number of whole shares of Mercantile Common Stock that shall equal the number of full shares of Seller Common Stock held by such shareholder multiplied by the Distribution Ratio without interest, and (ii) a cash payment for any fractional share interest to which such shareholder would have otherwise been entitled, computed pursuant to the provisions of Section 1.07 hereof. (c) Each outstanding Certificate shall until duly surrendered to the Exchange Agent be deemed to evidence the right to receive such shareholder's pro rata portion of the liquidating distribution. (d) After the Effective Time, holders of Certificates shall cease to have rights with respect to the stock represented by such Certificates, and their sole rights shall be to exchange such Certificates for their pro rata portion of the liquidating distribution as provided in Section 1.06(b) of this Agreement. After the Effective Time, 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 delivery of the pro rata portion of the liquidating distribution to which the stock represented by such Certificates are entitled as provided in Section 1.06(b) of this Agreement. The Exchange Agent shall not be obligated to deliver the liquidating distribution, on behalf of Seller, to any holder of Seller Common Stock until such holder surrenders the Certificates as provided herein. No dividends declared on the Mercantile Common Stock to be received in the liquidating distribution will be remitted to any person entitled to receive such 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 - 3 - 8 dividends shall be remitted to such person without interest and less any taxes that may have been imposed thereon. Certificates surrendered by an affiliate of Seller within the meaning of Rule 144(a)(1) of the Securities Act (as defined herein) shall not be exchanged for the Mercantile Common Stock, as a liquidating distribution 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 amount paid to a public official pursuant to applicable abandoned property, escheat or similar laws. Buyers shall be entitled to rely upon the stock transfer books of Seller to establish the identity of those persons entitled to receive the liquidating distribution specified in Section 1.06(b) of this Agreement, which books 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 the liquidating distribution represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto. 1.07 Dissenting Shares. ----------------- (a) "Dissenting Shares" means any shares held by any holder who becomes entitled to payment of the fair or appraised value of such shares under 12 C.F.R. Section 552.14. 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 shall be paid such consideration with funds provided by Seller, as provided in Section 5.17 hereof. (b) Each party hereto shall give the other prompt notice of any written demands for the payment of the fair or appraised value of any shares, withdrawals of such demands, and any other instruments served pursuant to the Code of Federal Regulations received by such party, and Seller shall give Buyers 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 the fair or appraised value and shall not, except with the prior written consent of Buyers, which consent shall not be unreasonably withheld, settle or offer to settle any such demands. 1.08 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 Transaction. 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 (the "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. 1.09 Closing of Stock Transfer Books. 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, as a liquidating distribution, 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. 1.10 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 - 4 - 9 Common Stock or a different class of shares by reason of reclassification, recapitalization, split-up, exchange of shares or readjustment (including a merger or consolidation involving Mercantile in which the holders of Mercantile Common Stock receive securities of another entity or other consideration), 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 Distribution Ratio such that each shareholder of Seller shall be entitled to receive such number of shares of Mercantile Common Stock or other securities as a liquidating distribution as such shareholder would have received pursuant to such reclassification, recapitalization, split-up, exchange of shares or readjustment (including a merger or consolidation involving Mercantile in which the holders of Mercantile Common Stock receive securities of another entity or other consideration) or as a result of such stock dividend had the record date therefor been immediately following the Effective Time. 1.11 Reservation of Right to Revise Transaction. Buyers may at any ------------------------------------------ time change the method of effecting the Transaction (including without limitation the provisions of this Article I) if and to the extent Buyers deems such change to be desirable, including without limitation to provide for (i) a merger, consolidation, purchase and assumption transaction, or otherwise of Seller with and into one or more affiliates of Buyers (including an Assignee) in which such one or more affiliates of Buyers is/are the surviving corporations; (ii) a merger, consolidation, purchase and assumption transaction, or otherwise of one or more affiliates of Buyers (including an Assignee) with and into Seller, in which Seller is the surviving corporation, or (iii) a conversion of Seller's charter to an alternative federal or state charter type; 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 Transaction as a liquidating distribution, (B) adversely affect, in the reasonable opinion of Seller, the tax treatment to Seller shareholders, as generally described in Section 6.01(e) hereof, as a result of receiving the Mercantile Common Stock as a liquidating distribution in the Transaction or (C) materially impede or delay receipt of any approvals, referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. 1.12 Definitions. For purposes of this Agreement, unless the context ----------- otherwise requires, the following terms will have the meanings applied to them in this Section 1.12 and will include the plural as well as the singular. Additional definitions may be found throughout this Agreement. "Bill of Sale" means the document executed by an authorized representative of Seller, by which Seller sells, assigns and conveys to Mercantile-Arkansas or an Assignee all rights, title, and interests of Seller in the Loans and other assets which are the subject of this Agreement. "Collateral" means the real or personal property, guaranty, pledge or other property, if any, securing a Loan. "Collateral Document" means any and all of the agreements, certificates, legal opinions or other documents or instruments in Seller's possession relating to, or evidencing the Loan or obligation as obtained at the time of its origination, if any, including, but not limited to, each deed of trust, mortgage, assignment of production, security agreement, collateral agreement, loan agreement, assumption agreement, modification agreement, appraisal, insurance certificate, financial or operating statement, credit report, lender's title insurance policy, engineering report, soil report, environmental audit report, architect's certificate or other agreement or document whether an original or copy or whether similar to those enumerated, securing the performance or payment of any promissory note evidencing a Loan included in this Transaction, and inuring to the benefit of the holder of the promissory note. - 5 - 10 "Credit File" means all documents, excluding the promissory note, renewals of the promissory note, and Collateral Documents, maintained by or in the possession of Seller pertaining to any Loan included in this Transaction. "Debtor" means any obligor, guarantor, or surety of, or any party liable for, the performance of a Loan. "Loans or Loans" means and includes (a) the obligations evidenced by each promissory note included in the Transaction, including any amendments and/or restatements thereof; (b) all rights, powers, liens or security interests of Seller in or under any Collateral Document; (c) any judgments founded upon a promissory note, to the extent attributable thereto, and any lien arising therefrom, and (d) the proprietary interest of Seller in any promissory note or the Collateral therefor, forming the subject matter of any litigation (including, without limitation, any foreclosure) or bankruptcy to which Seller is a party or claimant. "Property or Properties" means each real property set forth in Schedule -------- 2.08(a) and includes all interests relating to such real property as set - ------- forth in Section 7.02(d). "Schedule of Loans and Properties" means those documents containing a full and complete list of all Loans and Properties, delivered by Seller at the Closing, which sets forth the following concerning each Loan or Property, to the extent applicable to such Loan or Property: (a) Name of Debtor; (b) Control Number; (c) The unpaid principal balance of the Loan (exclusive of unpaid accrued interest and other charges) and the amount of any unfunded commitment as to a Loan; (d) Street address of the Property or real property serving as Collateral for a Loan (if applicable); (e) Whether a mortgage Loan or a business Loan; and (f) Whether, in the case of a mortgage Loan, the related mortgage is other than a first lien on the mortgaged Property, and in the case of a Property whether there are any liens on any such Property. ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER --------------------------------------------------- As an inducement to Buyers to enter into and perform their obligations under this Agreement, and notwithstanding any examination, inspection, audit or any other investigation made by Buyers, Seller (but not any officer, director or stockholder of Seller in his or her individual capacity) represents and warrants to and covenants with Buyers as follows: 2.01 Organization and Authority. Seller is a stock savings bank duly -------------------------- organized, validly existing and in good standing under the laws of the United States, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its - 6 - 11 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. The deposits of Seller are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC") through the Savings Association Insurance Fund ("SAIF"). True and complete copies of the Charter and Bylaws of Seller, each as in effect on the date of this Agreement, are attached hereto as Schedule 2.01. ------------- 2.02 Subsidiaries. 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"), and all outstanding Equity Securities (as defined in Section 2.03) of each, all 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 other entity 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 its ownership or leasing of property 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 and the Seller Subsidiaries, taken as a whole. Except as may be set forth on Schedule 2.02, and except for shares of stock of the Federal Home Loan Bank, - ------------- 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. 2.03 Capitalization. The authorized capital stock of Seller consists -------------- of 1,000,000 shares of Seller Common Stock of which, as of June 30, 1995, 10,324 shares were issued and outstanding. Since June 30, 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, understandings 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. Attached hereto as Schedule 2.03 is a current ------------- and accurate list of Seller's shareholders dated May 31, 1995. 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 (2/3) 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 - 7 - 12 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 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 charter, as the case may be, 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 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 United States Code and the rules and regulations thereunder, 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 HOLA, the Federal Deposit Insurance Act (the "FDI Act"), or any required approvals of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the OTS, the Office of the Comptroller of the Currency (the "OCC"), the FDIC, the Arkansas State Bank Commissioner (the "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) Consolidated balance sheets of Seller as of December 31, 1994 and 1993, related 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; - 8 - 13 (ii) Unaudited consolidated balance sheets of Seller as of June 30, 1995 and 1994 and related consolidated statements of income for the six-month period ended June 30, 1995; and (iii) The Consolidated Reports of Condition and Income of Seller as of and for the years ended December 31, 1994, 1993 and 1992, as filed by Seller with the OTS and 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 (i) generally accepted accounting principles ("GAAP") as to financial statements referenced in subsection (a)(i) above, (ii) GAAP (except for any footnotes which may otherwise be required thereunder) as to financial statements referenced in subsection (a)(ii) above, or (iii) regulatory accounting principles as to the financial statements referenced in subsection (a)(iii) above, consistently applied during the periods involved, and present fairly the consolidated financial position of Seller and the Seller Subsidiaries at the dates thereof and the consolidated results of operations, changes in shareholders' equity, and cash flows of Seller and the Seller Subsidiaries for the periods stated therein. (c) Seller and the Seller Subsidiaries have each prepared, kept and maintained through the date hereof true, materially 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 filed all material reports, registrations and statements, together with any required material 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 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 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" (which is the subject of Section 2.08 hereof), 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 (i) Lien, except for Liens for taxes, assessments or other governmental charges not yet delinquent or contested in good faith in appropriate proceedings and in respect of which adequate reserves have been established on the Seller Financial Statements and as set forth or described, in each case, in the Seller Financial Statements or any subsequent Seller Financial Statements delivered to Buyers prior to the Effective Time; and (ii) defects in title and liens, charges and encumbrances, if any, as do not materially interfere with the present or proposed use of the property or asset subject - 9 - 14 thereto or affected thereby, or as do not otherwise materially impair the business operations of Seller. (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 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 in all material respects with all applicable laws, ordinances and rules and regulations of any governmental authority having jurisdiction over such use. 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 dispute involving Seller or any of the Seller Subsidiaries as to the title of or the right to use any of the Real Property. (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. (d) To the best knowledge of Seller, 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 in all material respects located and constructed in conformity with all applicable zoning ordinances and building codes. (e) 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 there is no zoning ordinance, building code, use or occupancy restriction or condemnation action or proceeding pending, or, to the best knowledge of Seller, threatened, with respect to any such building, structure or improvement. The Owned Real Property is in generally good condition, ordinary wear and tear excepted, and has been maintained in accordance with reasonable and prudent business practices applicable to like facilities. - 10 - 15 (f) 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 ordinary and customary 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 file (including extensions) 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 adequate reserves on the most recent Seller Financial Statements for the payment 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 are known to the best knowledge of Seller to 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 Seller Subsidiaries is materially 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. The most recent federal and state income tax returns of Seller and the Seller Subsidiaries that have been audited by the Internal Revenue Service (the "IRS") or appropriate state tax authorities are the returns filed prior to 1975, which audits have been completed and settled. There is no present 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 Arkansas financial institutions generally. 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 necessary to identify any related group of entities. (b) 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: - 11 - 16 (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 capital to any Seller Subsidiary other than pursuant to Seller Employee Plans (as that 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 is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K as promulgated by the SEC to be performed after the date of this Agreement that has not been filed or incorporated by reference in the Seller Reports; (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 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; - 12 - 17 (xi) other agreement, contract, arrangement, 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 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, 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. (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 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 Seller Subsidiaries any oral notification of, or orally asserted 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) for - 13 - 18 which a reasonable doubt exists, in the reasonable judgment of Seller, 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) for which 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; and (vii) all 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. 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, whether entered into in the ordinary course of business or otherwise and whether written or oral; to the best knowledge of Seller, there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default, 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; and to the best knowledge of Seller, all such agreements, commitments, arrangements, leases, insurance policies and other instruments will not be terminable by the other party solely as a result of the consummation of the Transaction. 2.13 Litigation and Other Proceedings. 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, or which purports or seeks to enjoin or restrain the transactions contemplated by this Agreement. 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. 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 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. Set forth on Schedule 2.14 is a list of all insurance policies maintained ------------- by or for the benefit of Seller or the Seller Subsidiaries as of the date hereof for their directors, officers, employees or agents. 2.15 Compliance with Laws. -------------------- (a) To the best knowledge of Seller, Seller and each of the Seller Subsidiaries have all material 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 - 14 - 19 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 except for permits, licenses, authorizations, orders, approvals, filings, applications and registrations the failure to have (or have made) would not have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. (b)(i) 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 be reasonably expected to 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 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 be reasonably expected to have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. 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, could be reasonably expected to have a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole. "Property" shall include all property (real or personal, tangible or intangible) owned or controlled by Seller or any of the Seller Subsidiaries, including without limitation property under foreclosure. No claim, action, suit or proceeding is pending 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. (c) 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 - 15 - 20 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 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. (d) 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 affected by, any labor dispute, arbitration, lawsuit or administrative proceeding which reasonably could be expected to have a material 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. 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 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 six 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, in the aggregate, adequate in all material respects under the requirements of GAAP to provide for possible losses - 16 - 21 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 the Seller Subsidiaries on a consolidated basis does not exceed $400,000. "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 been classified "doubtful," "substandard," "loss," or the equivalent thereof by any Regulatory Agency, (D) where a reasonable doubt exists, in the reasonable judgment of Seller, 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) 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 (F) where a specific reserve allocation exists in connection therewith, and (ii) all assets classified by Seller as real estate acquired through foreclosure or repossession and 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, workers' compensation, 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"). Included in Schedule -------- 2.19(a) attached hereto with respect to each Seller Employee Plan ------- are: (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 or Form 5500-C (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 Code. All contributions required to be made to Seller Employee Plans 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 - 17 - 22 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)), ---------------- the value of the assets of the Pension Plan allocable to such vested 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, 1987; 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) 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 ensure that no amounts paid or payable by Seller, the Seller Subsidiaries, any Assignee 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 subjected to Lien any of its assets or properties other than in the ordinary course of business consistent with past practice; (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 properties or assets other than for a fair consideration in the ordinary course of business; (viii) except as required by contract or law, neither - 18 - 23 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 material 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, and whether or not covered by insurance; (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, liabilities or obligations equal to or exceeding $25,000 individually or $50,000 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 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, 1995, and since such date to the date hereof has become a party to, any contract or agreement 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 issued in the liquidating distribution 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 Transaction (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 in light of the circumstances in which they are made not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, - 19 - 24 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 Transaction 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 could be reasonably expected to (i) prevent the Transaction 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. 2.25 Brokers and Finders. 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. 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. 2.27 Accuracy of Information. The statements contained in this ----------------------- Agreement, the Schedules and any other written document executed and delivered by or on behalf of Seller pursuant to the terms of this Agreement are true and correct as of the date hereof or as of the date delivered in all material respects, and such statements and documents do not omit any material fact necessary to make the statements contained therein not misleading. 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 represent and warrant to and covenant with Seller as follows: 3.01 Organization and Authority. Mercantile and Mercantile-Arkansas -------------------------- each is a corporation duly organized, validly existing and in good standing under the laws of the State of Missouri and Arkansas, respectively, qualified to do business, and 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 each 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. Mercantile is registered as a savings and loan holding company with the OTS under the HOLA and is registered as a bank holding company with the Federal Reserve Board under the BHCA. Mercantile-Arkansas is registered as a bank holding - 20 - 25 company with the Federal Reserve Board under the BHCA. True and complete copies of the Articles of Incorporation and Bylaws of Mercantile and Mercantile-Arkansas, each in effect on the date of this Agreement, have been provided to Seller. 3.02 Capitalization of Buyers. The authorized capital stock of ------------------------ Mercantile consists of (i) 100,000,000 shares of Mercantile Common Stock, of which, as of August 31, 1995, 55,662,167 shares were 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 August 31, 1995, Mercantile had reserved (i) 4,366,230 shares of Mercantile Common Stock for issuance under the Mercantile stock option and incentive plans; (ii) 521,424 shares of Mercantile Common Stock for issuance upon the acquisition of First Sterling Bancorp, Inc ("First Sterling") pursuant to the Agreement and Plan of Merger dated July 24, 1995, by and between Mercantile, Mercantile Bancorporation Incorporated of Illinois ("Mercantile-Illinois"), and First Sterling; and (iii) 7,996,952 shares of Mercantile Common Stock for issuance upon the acquisition of Hawkeye Bancorporation ("Hawkeye") pursuant to Agreement and Plan of Merger dated as of August 4, 1995, by and between Mercantile and Hawkeye. From August 31, 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 anticipated consummation of the First Sterling, Metro, and Hawkeye acquisitions and any shares of Mercantile Common Stock which may have been issued under Mercantile stock option and incentive plans). The authorized capital stock of Mercantile-Arkansas consists of 30,000 shares of common stock, $1.00 par value, of which, as of June 30, 1995, 30,000 shares were issued and outstanding. 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 them 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 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 Buyers 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 Mercantile Common Stock to be issued in the Transaction 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. No demand or incidental registration rights exist, as of the date of this Agreement, that would delay the filing or effectiveness of the Registration Statement. 3.03 Authorization. ------------- (a) Buyers have the corporate power and authority to enter into this Agreement and to carry out their obligations hereunder. The execution, delivery and performance of this Agreement by Buyers and the consummation by Buyers of the transactions contemplated hereby have been duly authorized by all requisite corporate action of Buyers. Subject to the receipt of - 21 - 26 such approvals of the Regulatory Authorities as may be required by statute or regulation, this Agreement is a valid and binding obligation of Buyers enforceable against Buyers in accordance with its terms. (b) Neither the execution, delivery and performance by Buyers of this Agreement, nor the consummation by Buyers of the transactions contemplated hereby, nor compliance by Buyers 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 Buyers under any of the terms, conditions or provisions of (x) its Articles of Incorporation or Bylaws, or (y) any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Buyers, or either of them, is a party or by which they, or either them, may be bound, or to which Buyers 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 Buyers or any of their respective properties or assets; other than 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 Title 12 of the United States Code, 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 HOLA, 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 Buyers 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 June 30, 1995 and related consolidated statements of income and cash flows for the six-month period ended June 30, 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. 3.05 Mercantile Reports. Since January 1, 1992, each of Buyers and ------------------ their Subsidiaries has filed all 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 - 22 - 27 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 June 30, 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, or interpretations thereto, or changes in economic conditions, including interest rates, applicable to depository institutions generally. 3.07 Legal Proceedings or Other Adverse Facts. There is no legal ---------------------------------------- action or other governmental proceeding or investigation pending or, to the best knowledge of Buyers, threatened against Buyers or any of their Subsidiaries that could prevent or adversely affect in a material manner or seeks to prohibit the consummation of the transactions contemplated herein, nor are Buyers or any of their 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 prevent or adversely affect the consummation of the transactions contemplated herein. 3.08 Registration Statement, Etc. None of the information regarding ---------------------------- Buyers or any of their Subsidiaries to be supplied by Buyers for inclusion or included in (i) the Registration 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 Buyers are is responsible for filing with any Regulatory Authority in connection with the Transaction will comply as to form in all material respects with the provisions of applicable law. 3.09 Brokers and Finders. Neither Buyers 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 Buyers in connection with this Agreement or the transactions contemplated hereby. 3.10 Accuracy of Information. The statements contained in this ----------------------- Agreement, the Schedules and in any other written document executed and delivered by or on behalf of Buyers pursuant to the terms of this Agreement are true and correct in all material respects, and such statements and documents do not omit any material fact necessary to make the statements contained herein or therein not misleading. 3.11 Tax and Regulatory Matters. Neither Buyers nor any of their -------------------------- Subsidiaries have taken or agreed to take any action or has any knowledge of any fact or circumstance that would be reasonably expected to (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. 3.12 Compliance with Laws. To the best knowledge of Buyers, Buyers -------------------- and each of their Subsidiaries have all material 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 - 23 - 28 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 Buyers no suspension or cancellation of any of them is threatened; and all such filings, applications and registrations are current; in each case except for permits, licenses, authorizations, orders, approvals, filings, applications and registrations the failure to have (or have made) would not have a material adverse effect on the Condition of Mercantile nor any of its Subsidiaries, taken as a whole. 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 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. 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, 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 its regular annual cash dividends of not more than $6.00 per share on the Seller Common Stock. For any partial year after 1995, Seller shall be permitted to declare and pay dividends equal to $1.50 per share on the Seller Common Stock for each full calendar quarter ending prior to the Effective Time; (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 (including bonus payments) to employees consistent with past practice, (ii) as required by law or contract 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, any acquisition of a material amount of assets or securities, any disposition of a material amount of assets or securities (other than the Transaction) or any release or relinquishment of any material contract rights; (d) propose or adopt any amendments to its articles of incorporation, association or other charter document or bylaws; - 24 - 29 (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 Buyers, 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 $400,000 with respect to commercial transactions (including commercial construction transactions), $350,000 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 Buyers, Lend to any person or entity in an amount in excess of $500,000 or in any amount which, or 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 Seller's or Seller Subsidiaries' 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 or, with respect to loans described in clause (i) above, making such loans after consulting with Buyers. 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; (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 - 25 - 30 all inquiries, indications of interest and proposals which it may receive with respect to any Acquisition Transaction; (i) 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; (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; (l) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or intentionally take or omit to take any other act 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 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. Sec. 371c and 12 U.S.C. Sec. 371c-1, without first 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. Sec. 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 respective Subsidiaries to, without the prior written consent of Seller, agree in writing or otherwise engage in any activity, enter into any transaction or 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. - 26 - 31 ARTICLE V ADDITIONAL AGREEMENTS --------------------- 5.01 Access and Information. Buyers and Seller shall each afford to ---------------------- the other, and to the other's accountants, counsel and other representatives, full 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. 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 which is not otherwise public knowledge, (B) in the event of a termination of this Agreement, return all documents (including copies thereof) obtained hereunder from the other party or any of its Subsidiaries to it and (C) use their respective best efforts to cause all of such party's confidential information obtained pursuant to 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 unless such information becomes generally available to the public. 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 Transaction and shall use their best efforts to cause the Registration Statement to become effective as soon as reasonably practicable, consistent with the date of the meeting of the Seller's shareholder referenced in Section 5.03 hereof. Buyers shall prepare and, subject to the review and consent of Seller with respect to matters relating to Seller, file as soon as is reasonably practicable an application for approval of the Transaction with the Federal Reserve Board, the OCC, the OTS, FDIC, the Commissioner, and such other Regulatory Authorities as may be required by applicable law. Buyers shall also take any action required to be taken under any applicable state blue sky or securities laws in connection with the issuance of such shares, and Seller and the Seller Subsidiaries shall furnish Buyers all information concerning Seller and the Seller Subsidiaries and the shareholders thereof as Buyers may reasonably request in connection with any such action. As soon as is reasonably practicable under applicable regulations, Mercantile will apply to list on the NYSE the shares of Mercantile Common Stock to be issued in the Transaction. (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 Buyers, to consummate such other transactions by and among Buyers' Subsidiaries and the Seller or the Seller Subsidiaries concurrently with or following the Effective Time, provided that such actions do not materially -------- 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. 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 - 27 - 32 purpose of voting upon the Transaction. 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. 5.04 Current Information. During the period from the date of this ------------------- Agreement to the Effective Time, Mercantile and Seller 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. Mercantile and Seller 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, statement, report, notice, certificate or other writing furnished by such party to be untrue or misleading in any material respect, (b) any material adverse change in the Condition of it and its Subsidiaries, taken as a whole, (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. 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 Mercantile 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 Mercantile shall consult and cooperate in good faith with each other with respect to conforming the loan, accrual and reserve policies of Seller and the Seller Subsidiaries to those policies of Mercantile, 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 Mercantile shall consult and cooperate in good faith 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 Transaction, as specified in each case in writing to Seller, based upon such consultation and as hereinafter provided. (c) Seller and Mercantile shall consult and cooperate in good faith with each other with respect to determining, as specified in a written notice from Mercantile 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 Transaction and the restructuring charges related to or to be incurred in connection with the Transaction. (d) Subject to the language contained in the second sentence hereof, at the request of Mercantile-Arkansas, Seller shall (i) establish and take such reserves and accruals to conform Seller's loan, accrual and reserve policies to Mercantile's policies, and (ii) establish and - 28 - 33 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 Transaction and restructuring charges related to or to be incurred in connection with the Transaction, in each case at such times as are reasonably requested by Mercantile-Arkansas in a written notice to Seller. It is the objective of Mercantile-Arkansas 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-Arkansas shall certify to Seller on or prior to December 31, 1995 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 period associated therewith may then have commenced but not expired), 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. 5.06 Environmental Reports. Seller shall provide to Mercantile, as --------------------- soon as reasonably practical, but not later than sixty (60) days after the date hereof, a report of a phase one environmental investigation on all real property owned, leased or operated by Seller or any of Seller Subsidiaries as of the date hereof (but excluding space in retail and similar establishments leased by Seller 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) and within ten (10) days after the acquisition or lease of any real property acquired or leased by Seller or any of Seller Subsidiaries after the date hereof (but excluding space in retail and similar establishments leased by Seller for automatic teller machines or bank branch facilities where the space leased comprises less that 20% of the total space leased to all tenants of such property). If required by the phase one investigation, in Mercantile's reasonable opinion, Seller shall provide to Mercantile a report of a phase two investigation on properties requiring such additional study. Mercantile shall have fifteen (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. Should the cost of taking all remedial or other corrective actions and measures (i) required by applicable law, or (ii) recommended or suggested by such report or reports or prudent in light of serious life, health or safety concerns, in the aggregate, exceed the sum of $250,000, as reasonably estimated by an environmental expert retained for such purpose by Mercantile, or if the cost of such actions and measures cannot be so reasonably estimated by such expert to be such amount or less with any reasonable degree of certainty, Buyers, after providing written notice of its 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 Buyers, all such remedial or other corrective actions and measures (the cost of which shall not exceed $250,000), shall have the right pursuant to Section 8.01(f) hereof to terminate this Agreement, which shall be Buyers' 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 cause each person who is identified as an "affiliate" to deliver to Buyers, as of the date hereof, or as soon as practicable hereafter, a written agreement in substantially the form set forth as Exhibit D 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 Transaction except in compliance with the applicable provisions of the Securities Act 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, - 29 - 34 Seller shall amend and supplement Schedule 5.07 and use its best efforts to ------------- cause each 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 Transaction; provided, however, that any and all fees and -------- ------- expenses paid by Seller to the Rose Law Firm and/or other legal counsel representing Seller in the transactions contemplated by this Agreement shall not exceed in the aggregate the amount of $100,000; provided further, -------- ------- however that Mercantile-Arkansas 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 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. Each party shall, and shall cause each of its Subsidiaries to, use its best efforts to obtain consents of all third parties and Regulatory Authorities necessary or, in the opinion of Mercantile, desirable for the consummation of the transactions contemplated by this Agreement. (b) Seller, prior to the Effective Time, shall (i) consult and cooperate with Mercantile regarding the implementation of those policies and procedures established by Mercantile 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 Mercantile, conform Seller's existing policies and procedures in respect of such matters to Mercantile's policies and procedures or, in the absence of any existing Seller policy or procedure regarding any such function, introduce Mercantile's policies or procedures in respect thereof, 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. 5.10 Employee Agreements and Benefits. -------------------------------- (a) As soon as practicable following the Effective Time, Mercantile-Arkansas shall (i) afford to Seller's employees employee benefits substantially similar to those presently afforded the employees of Mercantile and its Subsidiaries who are similarly situated, and (ii) 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 other interest in respect of the Equity Securities of Seller or any of the Seller Subsidiaries shall be deleted and terminated as of the Effective Time. - 30 - 35 (c) Except as set forth in Section 5.10(b) hereof, the Seller Employee Plans shall not be terminated by reason of the Transaction but shall continue thereafter as plans of Mercantile-Arkansas 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 Transaction. Mercantile-Arkansas 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. Mercantile also shall execute the letter agreements listed on Schedule 5.10(c) hereof. ---------------- 5.11 Press Releases. Except as may be required by law, Seller and -------------- Buyers 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. 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. Buyers agree that the ---------------------------------------- Transaction 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 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 shall continue in full force and effect for so long as they would (but for the Transaction) otherwise survive and continue in full force and effect. 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 cause such of its ------------------------ executive officers, directors and/or holders of one percent (1%) or more of the Seller Common Stock (including shares beneficially held) 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 Transaction to qualify for pooling-of-interests accounting treatment. 5.16 Surrender of Charter. As soon as practicable following -------------------- consummation of the Transaction, an appropriate representative of Seller shall surrender the charter of Seller to the OTS. - 31 - 36 5.17 Escrow Account. Contemporaneously with the Closing, Seller -------------- shall deposit with an escrow agent (the "Escrow Agent"), which shall be selected by Mercantile, such funds as Mercantile shall reasonably determine are necessary to provide for (i) any payments to dissenters pursuant to Section 1.07 hereof and (ii) any and all claims incurred in connection with preparing for, entering into and carrying out this Agreement or the consummation of the Transaction (collectively, the "Obligations"). Upon payment of the Obligations, the Escrow Agent shall remit to Mercantile-Arkansas or an Assignee any funds remaining in the escrow account. Seller hereby agrees to execute an escrow agreement in a form approved by Buyers and that Seller, upon transfer of the funds to the Escrow Agent, shall have no further claim or right to or interest in such funds. ARTICLE VI CONDITIONS ---------- 6.01 Conditions to Each Party's Obligation To Effect the Transaction. --------------------------------------------------------------- The respective obligations of each party to effect the Transaction 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, and fewer than 8% of the total number of shares of Seller Common Stock that were issued and outstanding on the date of this Agreement shall have exercised their rights pursuant to 12 C.F.R. Section 552.14. (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 shall 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. The shares of Mercantile Common Stock to be issued in the Transaction shall have been listed 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 Transaction. (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 Transaction will constitute a reorganization within the meaning of Section 368 of the Code and to the effect that, as a result of the Transaction, except with respect to fractional share interests, holders of Seller Common Stock who receive Mercantile Common Stock in the Transaction 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. - 32 - 37 6.02 Conditions to Obligations of Seller To Effect the Transaction. ------------------------------------------------------------- The obligations of Seller to effect the Transaction 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 date of this Agreement and 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 (for purposes hereof changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates applicable to commercial banking institutions generally shall not be taken into account) and (iii) for the effect of transactions contemplated by this Agreement), and Seller shall have received a certificate of the Group President-Emerging Markets 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 the Group President-Emerging Markets 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 Transaction. (d) No Material Adverse Change. Since the -------------------------- date of this Agreement, there shall have been no material adverse change to the Condition of Mercantile and its Subsidiaries, taken as a whole, except as may have resulted from changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates, applicable to financial institutions generally. (e) Opinion of Counsel. Buyers shall have ------------------ delivered to Seller an opinion of Buyers' 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 Transaction. ------------------------------------------------------------- The obligations of Buyers to effect the Transaction 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 date of this Agreement and 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 or in respect of a specific period of time, as in the case of the representations and warranties contained in Sections 2.20 and 2.21 hereof, (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 reasonably likely to result, in a material adverse effect on the Condition of Seller and the Seller Subsidiaries, taken as a whole (for purposes hereof changes to laws and - 33 - 38 regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions (including interest rates) applicable to Arkansas financial institutions generally shall not be taken into account) 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. (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 Transaction. (d) No Material Adverse Change. Since the -------------------------- date of this Agreement, there shall have been no material adverse change to the Condition of Seller and the Seller Subsidiaries, taken as a whole, except as may have resulted from changes to laws and regulations, generally accepted or regulatory accounting principles, or interpretations thereof, or changes in economic conditions, including interest rates, applicable to financial institutions generally. (e) Opinion of Counsel. Seller shall have ------------------ delivered to Buyers an opinion of the Rose Law Firm, 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. (f) Opinion of KPMG Peat Marwick LLP. Buyers -------------------------------- shall have received an opinion of KPMG Peat Marwick LLP, satisfactory in form and substance to Buyers, that the Transaction will qualify for pooling of interests accounting treatment, which opinion shall not have been withdrawn at or prior to the Effective Time. (g) Affiliate Agreements. Buyers shall have --------------------- received from each of the affiliates of Seller an executed Affiliate Agreement substantially in the form set forth as Exhibit A to this Agreement. --------- (h) Other Documents. Buyers shall have ---------------- received from Seller all additional documents as shall be necessary, in the reasonable opinion of Buyers, to consummate the Transaction and carry out the intent and purposes of this Agreement, including, but not limited to, those additional documents specified in Article VII hereof. ARTICLE VII CLOSING ------- 7.01 Closing. Unless this Agreement shall have been terminated or ------- abandoned pursuant to the provisions of Section 8.01 hereof, the Closing shall be held at the time and the place set forth in Section 1.02 hereof, or such other place as Buyers and Seller shall agree. - 34 - 39 7.02 Deliveries at Closing. --------------------- (a) At the Closing, all documents and instruments to be executed and delivered hereunder by Buyers shall be duly and validly executed and delivered by Buyers to Seller. (b) At the Closing, Seller shall transfer and assign to Mercantile-Arkansas, and Mercantile-Arkansas or an Assignee shall purchase and assume, all of the assets, liabilities, obligations, responsibilities, duties, rights, properties, privileges, powers or franchises as referred to herein, and the other agreements to be executed and delivered hereunder by Seller shall be duly and validly executed and delivered by Seller to Mercantile-Arkansas or an Assignee. (c) At the Closing, Seller shall deliver to Mercantile-Arkansas or an Assignee, as Mercantile-Arkansas may direct, in form reasonably satisfactory to counsel for Mercantile-Arkansas: (i) a separate warranty deed for each of the owned bank premises being purchased hereunder; (ii) commitments for owners title insurance for the owned bank premises being purchased hereunder; (iii) a separate assignment of all leases, contracts and agreements relating to each Property; (iv) a separate assignment of each of the leased bank premises being assigned hereunder; (v) a Bill of Sale with respect to the fixtures, furniture and equipment being purchased hereunder; (vi) a Bill of Sale with respect to the promissory notes constituting a part of the Loans and of all liens and security interests securing such promissory notes; (vii) duly executed security agreements and such financing statements, deeds of trust, mortgages and such other documents as may be necessary or desirable for Mercantile-Arkansas or an Assignee to perfect any security interest being assigned hereunder; (viii) each note and known original Collateral Document in its possession affecting a Loan in the Transaction, together with the contents of each Credit File affecting a Loan in the Transaction; (ix) a separate endorsement thereon of each of the promissory notes constituting a part of the Loans and an assignment of all documents related to such assigned promissory notes and of all liens and security interests securing such promissory notes; (x) for each Loan, letters (or copies thereof) addressed to the Debtor, or its successors or assigns, duly executed, notifying them of the sale of such Loan to Mercantile-Arkansas or an Assignee and directing them to make all future payments - 35 - 40 thereunder and deliver any future notices to the order of Mercantile-Arkansas or an Assignee; (xi) for each Property, an assignment and assumption of leases, duly executed and acknowledged in recordable form, assigning to Mercantile-Arkansas or an Assignee all of Seller's right, title and interest in and to the applicable Lease and tenant deposits, whereunder Mercantile-Arkansas or an Assignee shall assume the liabilities and obligations of the landlord accruing after the Closing under such Leases and tenant deposits; (xii) for each Property, duly executed by Seller, assigning to Mercantile-Arkansas or an Assignee all of Seller's right, title and interest in and to the related contracts, permits, and other documents to be assigned by Seller in accordance with this Agreement, whereunder Mercantile-Arkansas or an Assignee shall assume the liabilities and obligations of Seller accruing after the Closing under such contracts and permits; (xiii) for each Property, to the extent in Seller's possession or control, originals (or copies to the extent originals are not in Seller's possession or control) of each Lease related thereto; (xiv) for each Property, to the extent in Seller's possession or control, originals (or copies to the extent originals are not in Seller's possession or control) of each Contract related thereof; (xv) for each Property, all keys to doors and locks in the related improvements and Personal Property to the extent such keys are in Seller's possession or control; (xvi) for each Property, to the extent in Seller's possession or control, an original (or a copy if the original is not Seller's possession or control) of all permits related to such Property; (xvii) for each Property, letters (or copies thereof) addressed to the tenants thereof, duly executed, notifying them of the sale of such Property to Mercantile-Arkansas or an Assignee and directing them to make all future payments of rent and deliver any future notices to Mercantile-Arkansas or an Assignee (or as Mercantile-Arkansas or an Assignee may direct in writing); (xviii) such other endorsements, assignments or other conveyances as may be appropriate or necessary to effect the transfer to Mercantile-Arkansas or an Assignee of the assets, rights, properties, privileges, powers or franchises as referred to herein; (xix) an assignment of all mortgage servicing rights; (xx) an assignment to Mercantile-Arkansas or an Assignee, as Mercantile-Arkansas may direct, of all rights, obligations, properties, assets, investments, deposits and agreements that Seller has as a corporate fiduciary; and - 36 - 41 (xxi) any other incidental documents required on the part of Seller, but not expressly provided for herein, reasonably required by Mercantile-Arkansas or an Assignee to consummate the transactions contemplated hereby. (d) The sale of the Property hereunder shall include Seller's right, title and interest in and to the following: (i) All easements, covenants and other rights pertinent to said Property, and all right and interest of Seller, if any, in and to any land lying in the bed of any street, road, avenue or alley, open or closed, in front of or adjoining said Property, and to the center line thereof; (ii) All furniture, fixtures, equipment and other personal property (except items owned by tenants or which are leased) which are now, or may hereafter prior to the Closing Date, be, placed in or attached to the Property; (iii) To the extent they may be transferred under applicable law, licenses, permits and authorizations presently issued in connection with the operation of all or any part of the Property are necessary to operate the Property as presented being operated; and (iv) All rights, privileges and appurtenances to each Property to which Mercantile-Arkansas or an Assignee may be entitled, including, but not limited to, utility capacity, utility reservation deposits and refunds in connection therewith. (e) After Closing, Seller shall, upon request, execute and deliver to Mercantile-Arkansas or the Assignee instruments reasonably necessary to transfer to Mercantile-Arkansas or the Assignee all of Seller's interest in the Loans, Collateral, Collateral Documents and Properties as herein provided. Unless otherwise specifically provided for herein, Mercantile-Arkansas or the Assignee shall, at its own expense, prepare and furnish Seller with such instruments, and Seller shall, within seven (7) days from receipt of such instruments, execute and return written objections to any instrument not so executed. Mercantile-Arkansas or the Assignee shall be responsible for the filing or recording of documents incident to this transaction and for any fees or expenses incident thereto. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER --------------------------------- 8.01 Termination. This Agreement may be terminated at any time prior ----------- to the Effective Time, whether before or after approval by Seller's shareholders: (a) by mutual consent by the Executive Committee of the Board of Directors of Mercantile, the Board of Directors of Mercantile-Arkansas, and by the Board of Directors of Seller; (b) by the Executive Committee of the Board of Directors of Mercantile, the Board of Directors of Mercantile-Arkansas or the Board of Directors of Seller at any time after June 30, 1996, if the Transaction shall not theretofore have been consummated (provided that the - 37 - 42 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, the Board of Directors of Mercantile-Arkansas or the Board of Directors of Seller if (i) the Federal Reserve Board 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 Transaction 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) [Intentionally Omitted]; (e) by the Executive Committee of the Board of Directors of Mercantile, the Board of Directors of Mercantile-Arkansas or by the Board of Directors of Seller in the event of a breach by the other party 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; (f) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Mercantile-Arkansas pursuant to and in accordance with the provisions of Section 5.06 hereof; or (g) [Intentionally Omitted]. 8.02 Effect of Termination. In the event of termination of this --------------------- Agreement as provided in Section 8.01 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 9.02, and except that no termination of this Agreement pursuant to Section 8.01(e) shall relieve the breaching party of any liability to the non-breaching party 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 8.01(e). 8.03 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, the Board of Directors of Mercantile-Arkansas, and the Board of Directors of 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 consideration to be received by holders of Seller Common Stock as provided in this Agreement or (b) adversely affect the tax treatment to Seller shareholders as a result of receiving the shares of Mercantile Common Stock in the Transaction. 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. 8.04 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. - 38 - 43 ARTICLE IX GENERAL PROVISIONS ------------------ 9.01 Non-Survival of Representations, Warranties and Agreements. 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 9.01, 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 Transaction, the agreements and representations contained in or referred to in Sections 5.02(b), 5.07, 5.08, 5.10, 5.11, 5.14, 5.16, 5.17 and 9.02 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, Section 5.08, Section 8.02 and Section 9.02 shall survive such termination. 9.02 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) arise primarily out of any information furnished to the Indemnified Party by the Indemnifying Party or are 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. 9.03 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. Except as otherwise provided in Section 1.01 hereof, 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 9.03 shall be void and of no effect. There shall not be any third party beneficiaries of any provisions hereof except for Sections 1.01, 1.06, 5.10, and 9.02, which may be enforced against Buyers or Seller by the parties therein identified. 9.04 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. 9.05 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. - 39 - 44 9.06 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, including, but not limited to, that certain Agreement and Plan of Reorganization by and between Buyers and Sellers, dated July 7, 1995. 9.07 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. 9.08 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 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 - 40 - 45 (ii) if to Seller: Security Bank of Conway, F.S.B. 1122 Von Ronkle Conway, Arkansas 72032-4394 Attention: Bill F. Johnson President and Chief Executive Officer Telephone: (501) 327-7771 Telecopy: (501) 327-0995 Copies to: Rose Law Firm 120 East Fourth Street Little Rock, Arkansas 72201 Attention:Richard N. Massey Telephone: (501) 375-9131 Telecopy: (501) 375-1309 9.09 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. 9.10 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. 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. OF ARKANSAS By: /s/ John W. McClure ----------------------------------------- John W. McClure President and Chairman Mercantile Bancorporation Inc. of Arkansas Attest: /s/ Jon W. Bilstrom - ------------------------------------------ Jon W. Bilstrom, Secretary Mercantile Bancorporation Inc. of Arkansas - 41 - 46 MERCANTILE BANCORPORATION INC. By: /s/ John W. Rowe ------------------------------------------ John W. Rowe Executive Vice President Mercantile Bank of St. Louis National Association Attest: /s/ Jon W. Bilstrom - -------------------------------------- Jon W. Bilstrom, General Counsel and Secretary Mercantile Bancorporation Inc. "SELLERS" SECURITY BANK OF CONWAY, F.S.B. By: /s/ Bill F. Johnson ------------------------------------- Bill F. Johnson President/CEO Security Bank of Conway, F.S.B. Attest: /s/ Phillip T. Pascoe - ------------------------------------ Phillip T. Pascoe Secretary Security Bank of Conway, F.S.B. - 42 -
EX-2.2 3 ASSIGNMENT AGREEMENT OF THE TWIN CITY BANK 1 Exhibit 2.2 ----------- ASSIGNMENT AGREEMENT -------------------- MERCANTILE BANCORPORATION INC. OF ARKANSAS, an Arkansas corporation ("Mercantile-Arkansas") hereby sells, assigns, transfers and sets over to THE TWIN CITY BANK, an Arkansas state bank ("TCB"), its successors and assigns Mercantile-Arkansas's right to receive the assets and its obligation to assume the liabilities associated with the 1122 Van Ronkle, Conway Arkansas, 72033, and the Highway 60 at Morningside Drive, Conway, Arkansas, 72033 branch offices (the "Conway Branch Offices") of Security Bank of Conway, F.S.B., a federally-chartered stock savings bank ("SBC"), pursuant to the terms of that certain Amended and Restated Agreement and Plan of Reorganization by and among Mercantile Bancorporation Inc, Mercantile-Arkansas, and SBC, dated July 7, 1995, as amended and restated September 18, 1995 (the "Agreement"). With respect to the assets and liabilities of the Conway Branch Offices, TCB shall have all rights held by Mercantile-Arkansas under the Agreement, on TCB's own behalf and in TCB's own name, to take any action permitted by and in connection with the Agreement. IN WITNESS WHEREOF, Mercantile-Arkansas has executed this Assignment Agreement this 27th day of September, 1995. MERCANTILE BANCORPORATION INC. OF ARKANSAS By: /s/ John W. McClure --------------------------------- John W. McClure President and Chairman ATTEST: /s/ Jon W. Bilstrom - ------------------------------------- Jon W. Bilstrom, Secretary This Assignment Agreement is accepted as of this 27th day of September, 1995, and TCB hereby agrees to accept and discharge Mercantile-Arkansas's right to receive the assets and its obligation to assume the liabilities of the Conway Branch Offices of SBC pursuant to the terms of the Agreement. THE TWIN CITY BANK By: /s/ Larry L. Gilb ----------------------------- Larry L. Gilb President and CEO ATTEST: /s/ Jay Morgan - ------------------------------------ EX-2.3 4 ASSIGNMENT AGREEMENT OF FIRST NATIONAL BANK OF CONWAY CTY 1 Exhibit 2.3 ----------- ASSIGNMENT AGREEMENT -------------------- MERCANTILE BANCORPORATION INC. OF ARKANSAS, an Arkansas corporation ("Mercantile-Arkansas") hereby sells, assigns, transfers and sets over to FIRST NATIONAL BANK OF CONWAY COUNTY, a national bank ("FNBC"), its successors and assigns Mercantile-Arkansas's right to receive the assets and its obligation to assume the liabilities associated with the 201 North Moose, Morrilton, Arkansas, 72110 branch office (the "Morrilton Branch Office") of Security Bank of Conway, F.S.B., a federally-chartered stock savings bank ("SBC"), pursuant to the terms of that certain Amended and Restated Agreement and Plan of Reorganization by and among Mercantile Bancorporation Inc, Mercantile-Arkansas, and SBC, dated July 7, 1995, as amended and restated as of September 18, 1995 (the "Agreement"). With respect to the assets and liabilities of the Morrilton Branch Office, FNBC shall have all rights held by Mercantile-Arkansas under the Agreement, on FNBC's own behalf and in FNBC's own name, to take any action permitted by and in connection with the Agreement. IN WITNESS WHEREOF, Mercantile-Arkansas has executed this Assignment Agreement this 27th day of September, 1995. MERCANTILE BANCORPORATION INC. OF ARKANSAS By: /s/ John W. McClure ------------------------------- John W. McClure President and Chairman ATTEST: /s/ Jon W. Bilstrom - ------------------------------------ Jon W. Bilstrom, Secretary This Assignment Agreement is accepted as of this 27th day of September, 1995, and FNBC hereby agrees to accept and discharge Mercantile-Arkansas's right to receive the assets and its obligation to assume the liabilities of the Morrilton Branch Office of SBC pursuant to the terms of the Agreement. FIRST NATIONAL BANK OF CONWAY COUNTY By: /s/ Charles Penick --------------------- Charles Penick President and CEO ATTEST: /s/ Suzanne Hartman - ------------------------------------- Suzanne Hartman, Secretary EX-2.4 5 VOTING AGREEMENT 1 Exhibit 2.4 ----------- VOTING AGREEMENT ---------------- This Voting Agreement dated as of ---------------, 1995 is entered into between Mercantile Bancorporation Inc. ("Mercantile") and the undersigned shareholder ("Shareholder") of Security Bank of Conway, F.S.B. ("SBC"). WHEREAS, SBC and Mercantile have proposed to enter into an Agreement and Plan of Reorganization (the "Agreement"), dated as of today, which contemplates the acquisition by Mercantile of 100% of the common stock of SBC (the "SBC Stock") by means of a merger between SBC and a wholly-owned subsidiary of Mercantile (the "Merger"); and WHEREAS, Mercantile is willing to expend the substantial time, effort and expense necessary to implement the Merger, only if Shareholder enters into this Voting Agreement; and WHEREAS, Shareholder believes that the Merger is in her best interest and the best interest of SBC; 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 SBC Stock she now or hereafter owns and over which she 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 SBC to be called for the purpose of approving the Merger (the "Meeting"). 2. No Competing Transaction. Shareholder shall not ------------------------ vote any of her shares of SBC Stock in favor of any other merger or sale of all or substantially all the assets of SBC 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 SBC and Mercantile, whichever occurs first. 3. Transfers Subject to Agreement. Shareholder shall ------------------------------ not transfer her shares of SBC 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 Mercantile. 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 SBC Stock. All rights, ownership and economic benefits of and relating to the shares of SBC Stock shall remain and belong to Shareholder, and Mercantile shall have no authority to manage, direct, superintend, restrict, regulate, govern or administer any of the policies or operations of SBC or exercise any power or authority to direct Shareholder in the voting of any of her shares of SBC Stock, except as otherwise expressly provided herein. 5. Evaluation of Investment. Shareholder, by reason of ------------------------ her knowledge and experience in financial and business matters, believes herself 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. 2 6. Documents Delivered. Shareholder acknowledges ------------------- having reviewed the Agreement and its attachments and that reports, proxy statements and other information with respect to Mercantile filed with the Securities and Exchange Commission (the "Commission") were, prior to its execution of this Voting Agreement, available for inspection and copying at the offices of the Commission and that Mercantile delivered the following such documents to SBC: (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/A filed on June 29, 1995. 7. Amendment and Modification. This Voting Agreement -------------------------- may be amended, modified or supplemented at any time by the written approval of such amendment, modification or supplement by Shareholder and Mercantile. 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 between SBC and Shareholder concerning the Merger, disposition or control of the SBC Stock. 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 the consummation of the Merger, the termination of the Agreement, or the abandonment of the Merger by the mutual agreement of SBC and Mercantile, whichever occurs first. 3 14. Successors. This Voting Agreement shall be binding ---------- upon and inure to the benefit of Mercantile and its successors, and Shareholder, such Shareholder's respective executors, personal representatives, administrators, heirs, legatees, guardians and other legal representatives. This 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" MERCANTILE BANCORPORATION INC. By: --------------------------- John W. Rowe Executive Vice President "SHAREHOLDER" By: --------------------------- EX-5.1 6 OPINION RE LEGALITY 1 Exhibit 5.1 [letterhead of Thompson & Mitchell] November 2, 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 November 2, 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 322,000 shares of the Company's common stock, $5.00 par value (the "Shares"), in connection with the purchase of all of the assets and the assumption of all of the liabilities of Security Bank of Conway, F.S.B. ("Security Bank") pursuant to the Agreement and Plan of Reorganization dated as of July 7, 1995, as amended and restated as of September 18, 1995 (the "Agreement"), by and among the Company, Security Bank and Mercantile Bancorporation Inc. of Arkansas, 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 proposed 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 2. The Shares to be sold by the Company, when issued as provided in the 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 7 OPINION RE TAX MATTERS 1 Exhibit 8.1 [letterhead of Thompson & Mitchell] November 2, 1995 Board of Directors Security Bank of Conway, F.S.B. 1122 Van Ronkle Conway, Arkansas 72033 Ladies and Gentlemen: You have requested our opinion with regard to certain federal income tax consequences of the proposed transaction (the "Acquisition") in which Mercantile Bancorporation Inc. of Arkansas, an Arkansas corporation ("MBI-Arkansas") which is a wholly owned subsidiary of Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), will purchase all of the assets of Security Bank of Conway, F.S.B., a federally-chartered stock savings bank ("Conway"), solely in exchange for MBI voting common stock, par value $5.00 per share ("MBI Common Stock") and the assumption by MBI-Arkansas of all of the liabilities of Conway. In connection with the Acquisition, Conway will distribute the MBI Common Stock received in complete liquidation and will dissolve. In connection with the preparation of our opinion, we have examined and have relied upon the following: (i) The Amended and Restated Agreement and Plan of Reorganization between MBI, MBI-Arkansas, and Conway dated July 7, 1995, and amended and restated as of September 18, 1995; (ii) MBI's Registration Statement on Form S-4, including the Proxy Statement/Prospectus contained therein, filed with the Securities and Exchange Commission on November 2,1995 (the "Registration Statement"); (iii) The representations and undertaking of MBI substantially in the form of Exhibit A hereto; (iv) The representations and undertakings of Conway and certain holders of Conway common stock, par value $100.00 per share ("Conway Common Stock"), substantially in the forms of Exhibit B and Exhibit C hereto; (v) The Assignment Agreement between MBI-Arkansas and The Twin City Bank, an Arkansas state bank, and the Assignment Agreement between MBI-Arkansas and First National Bank of Conway County, a national bank, each dated September 27, 1995; and (vi) The Rights Plan 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 2 Security Bank of Conway, F.S.B. November 2, 1995 Page 2 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. OPINION Subject to the foregoing, to the conditions and limitations expressed elsewhere herein, and assuming that the Acquisition is consummated in accordance with the Agreement, we are of the opinion that for federal income tax purposes: 1. Each shareholder of Conway who exchanges, in connection with the Acquisition, his or its shares of Conway 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 an aggregate 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 Conway 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 2, below) which includes the period during which the shares of Conway Common Stock surrendered were held, provided that the shares of Conway Common Stock surrendered were capital assets in the hands of such holder at the time of the Acquisition (Code section 1223(1)). 2. Each shareholder of Conway who receives, in the Acquisition, cash in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received in the Acquisition and then redeemed by MBI. Provided that the shares of Conway Common Stock surrendered were capital assets in the hands of such holder at the time of the Acquisition, 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 aggregate adjusted tax 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). * * * * * * * * * * * * We express no opinion with regard to (1) the federal income tax consequences of the Acquisition not addressed expressly by this opinion, including without limitation, (i) the tax consequences, if any, to those shareholders of Conway who acquired shares of Conway 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 3 Security Bank of Conway, F.S.B. November 2, 1995 Page 3 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 Internal Revenue Service or any court of competent jurisdiction will agree with this opinion. 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 4 EXHIBIT A --------- 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 Amended and Restated Agreement and Plan of Reorganization by and among MBI, Mercantile Bancorporation Inc. of Arkansas, an Arkansas corporation ("MBI-Arkansas"), and Security Bank of Conway, F.S.B., a federally-chartered stock savings bank ("Conway"), dated July 7, 1995, and amended and restated as of September 18, 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 and MBI-Arkansas, in rendering its opinion to Conway that the purchase of all of the assets and assumption of all of the liabilities of Conway by MBI-Arkansas (the "Acquisition") will constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Acquisition. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF MBI, that: (1) Neither MBI nor any other member of MBI's "affiliated group" (as the quoted term is defined in Code section 1504, the "MBI Affiliated Group") has owned, directly or indirectly, any stock of Conway within the last five years. (2) Before the Acquisition, MBI will own all of the issued and outstanding stock of MBI-Arkansas, and MBI-Arkansas will own all of the issued and outstanding stock of each of The Twin City Bank, an Arkansas state bank ("TCB"), and First National Bank of Conway County, a national bank ("FNBC"). (3) No indebtedness between Conway or any other member of Conway's "affiliated group" (as the quoted term is defined in Code section 1504, the "Conway Affiliated Group"), on the one hand, and MBI or any other member of the MBI Affiliated Group, on the other hand, exists or will exist prior to the Acquisition that (a) was issued or acquired at a discount, (b) will be settled, as a result of the Acquisition, 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 Conway, on the one hand, and MBI or MBI-Arkansas, on the other hand, exists or will exist prior to the Acquisition that will be extinguished as a result of the Acquisition. 5 (4) The fair market value of the MBI common stock, par value $5.00 per share ("MBI Common Stock"), to be received by each Conway shareholder as a liquidating distribution from Conway in connection with the Acquisition (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 Conway common stock, par value $100.00 per share ("Conway Common Stock"), held by each such shareholder at the time of the Acquisition. (5) 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 Conway Common Stock to sell, exchange or otherwise dispose of any of the MBI Common Stock to be received in connection with the Acquisition, with the exception of fractional shares of MBI Common Stock to be exchanged for cash pursuant to the Acquisition. (6) The payment of cash in lieu of fractional shares of MBI Common Stock in the Acquisition 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 Acquisition to the Conway 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 Conway shareholders in exchange for their shares of Conway Common Stock. The fractional share interests of each Conway shareholder will be aggregated, and no Conway 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. (7) MBI, MBI-Arkansas, TCB, FNBC, Conway, and the shareholders of Conway will each pay their respective expenses, if any, incurred in connection with the Acquisition; provided, however, that MBI-Arkansas (and not MBI) may pay and assume those types of expenses of Conway that are solely and directly related to the Acquisition in accordance with the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187. (8) Except with regard to Transaction Costs (as defined below), neither MBI nor any other member of the MBI Affiliated Group will pay (or lend) any amount or incur any liability to or for the benefit of, or assume or cancel any liability of, any shareholder of Conway in connection with the Acquisition, and no liability to which Conway Common Stock is subject will be extinguished as a result of the Acquisition. Prior to the Acquisition and except with regard to Transaction Costs, neither MBI nor any other member of the MBI Affiliated Group will pay (or lend) any amount or incur any liability to or for the benefit of, or assume or cancel any liability of, Conway or any other 6 member of the Conway Affiliated Group in connection with the Acquisition. No member of the MBI Affiliated Group other than MBI-Arkansas, TCB or FNBC will assume any liabilities of Conway or any other member of the Conway Affiliated Group in connection with the Acquisition. For purposes of this representation, any payment (or loan) to or for the benefit of a Conway shareholder (including without limitation, any payment from Conway in the form of a dividend, distribution, or redemption, or any payment to a dissenter) with cash or other property furnished (or reimbursed), directly or indirectly, by MBI or any other member of the MBI Affiliated Group will be treated as a payment by MBI to or for the benefit of a shareholder of Conway. For purposes of this representation, 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 Conway shareholder or to cause by other means the release of such guaranty). For purposes of this representation, the term "Transaction Costs" shall mean amounts paid or liabilities incurred in connection with the Acquisition (i) to Conway shareholders (on behalf of Conway) with respect to the MBI Common Stock (including cash in lieu of fractional shares thereof) to be delivered in the Acquisition, (ii) by MBI or any other member of the MBI Affiliated Group for legal, accounting, and investment banking and/or advisor services rendered to MBI or any other member of the MBI Affiliated Group, (iii) for those expenses payable or assumable by MBI-Arkansas in accordance with representation (7) above, and (iv) as compensation to any employee of MBI or of any other member of the MBI Affiliated Group for services rendered in the ordinary course of his or her employment. (9) All payments made to dissenters, if any, will be funded with Conway assets from an escrow to be established and funded before the Acquisition by Conway for that purpose, as described in Section 5.17 of the Agreement. (10) 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 Conway in the Acquisition. (11) After the Acquisition, (a) neither MBI- Arkansas, TCB nor FNBC will issue additional shares of its stock that would result in MBI's losing control of MBI-Arkansas within the meaning of section 368(c) of the Code, and (b) neither MBI- Arkansas, TCB, FNBC nor any other member of the MBI Affiliated Group will have outstanding any warrants, options, convertible 7 securities, or any other type of right (including any preemptive right) pursuant to which any person could acquire stock in MBI- Arkansas, TCB or FNBC. (12) Conway will be dissolved no later than three months after the Acquisition. (13) Neither MBI nor any other member of the MBI Affiliated Group has any plan or intention (a) to liquidate MBI- Arkansas, (b) to merge MBI-Arkansas with and into another corporation, or (c) to sell or otherwise dispose of (whether by dividend distribution or otherwise) the stock of MBI-Arkansas. (14) Pursuant to the Assignment Agreement between MBI-Arkansas and TCB and the Assignment Agreement between MBI- Arkansas and FNBC, each dated September 27, 1995 (the "Assignment Agreements"), all assets held by Conway at the time of the Acquisition (excluding those transferred to the escrow described in Section 5.17 of the Agreement, but including the stock of all subsidiaries of Conway) will be transferred either to TCB or FNBC. (15) Except for (i) transfers pursuant to the Assignment Agreements, (ii) dispositions made in the ordinary course of business, or (iii) dispositions expressly approved by Thompson & Mitchell, neither MBI nor any other member of the MBI Affiliated Group has any plan or intention to cause, suffer, or permit the disposition of (whether by dividend distribution or otherwise) (i) any assets of Conway (excluding any funds deposited in escrow that are paid to dissenters) or (ii) any assets of any other member of the Conway Affiliated Group. (16) After the Acquisition, MBI TCB and FNBC will continue the historic businesses of Conway and the other members of the Conway Affiliated Group, or will use a significant portion of the historic business assets of the members of the Conway Affiliated Group in a business (no stock of any member of the Conway Affiliated Group shall be treated as a business asset for purposes of this representation). (17) None of the compensation to be paid or accrued after the Acquisition to or for the benefit of any shareholder-employee of Conway will be separate consideration for, or allocable to, any of his or her shares of Conway Common Stock; none of the shares of MBI Common Stock received in the Acquisition by any Conway shareholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation to be paid or accrued after the Acquisition to or for the benefit of any Conway shareholder-employee will be for services actually 8 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. (18) With regard to the Rights Plan between MBI and Mercantile Bank of St. Louis 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 Acquisition will not cause the occurrence of a Distribution Date. (19) No terms of the Agreement (including the schedules and exhibits thereto) have been waived or modified. (20) Schedules 2.11(b), 2.18(c), 4.02, 5.10 and 5.10(c) to the Agreement were not prepared. Under the terms of the Agreement and with the exception of Schedule 5.10(c), no matters exist that are required to be reported on such Schedules. The only matters required to be reported on Schedule 5.10(c) are two employment agreements, one between MBI and Bill F. Johnson and the other between MBI and Ritchie D. Howell. 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 Acquisition. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of MBI this ----- day of ------------, 1995. -------------------------- 9 EXHIBIT B --------- The undersigned, -------------------, [Undersigned's Title] of Security Bank of Conway, F.S.B., a federally-chartered stock savings bank ("Conway"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Amended and Restated Agreement and Plan of Reorganization by and among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Mercantile Bancorporation Inc. of Arkansas, an Arkansas corporation ("MBI-Arkansas"), and Conway dated July 7, 1995, and amended and restated as of September 18, 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 and MBI-Arkansas, in rendering its opinion to Conway that the purchase of all of the assets and assumption of all of the liabilities of Conway by MBI-Arkansas (the "Acquisition") will constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Acquisition. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF Conway, that: (1) To the best knowledge of the undersigned, neither MBI nor any other member of MBI's "affiliated group" (as the quoted term is defined in Code section 1504, the "MBI Affiliated Group") has owned, directly or indirectly, any stock of Conway within the last five years. (2) No indebtedness between Conway or any other member of Conway's "affiliated group" (as the quoted term is defined in Code section 1504, the "Conway Affiliated Group"), on the one hand, and MBI or any other member of the MBI Affiliated Group, on the other hand, exists or will exist prior to the Acquisition that (a) was issued or acquired at a discount, (b) will be settled, as a result of the Acquisition, 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 Conway, on the one hand, and MBI or MBI-Arkansas, on the other hand, exists or will exist prior to the Acquisition that will be extinguished as a result of the Acquisition. (3) Before the Acquisition, Conway will not have outstanding any warrants, options, convertible securities, or any other type of right (including any preemptive right) pursuant to 10 which any person could acquire stock in Conway that, if exercised or converted after the Acquisition, would affect MBI's retention of control of MBI-Arkansas (within the meaning of section 368(c) of the Code). (4) At the time of the Acquisition and except with regard to Transaction Costs (as defined below), each liability of Conway and each liability to which an asset of Conway is subject will have been incurred by Conway in the ordinary course of business and no such liability will have been incurred in anticipation of the Acquisition. In addition, at the time of the Acquisition and except with regard to Transaction Costs, Conway 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 Conway shareholder in connection with the Acquisition. For purposes of this representation, (a) the term "Conway" shall be deemed also to refer to each other member of the Conway 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 Conway 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 Acquisition (i) to dissenters, if any, (ii) for legal, accounting, and investment banking and/or advisor services rendered to Conway or any other member of the Conway Affiliated Group, if any, and (iii) as compensation to any employee of Conway or of any other member of the Conway Affiliated Group for services rendered in the ordinary course of his or her employment. (5) None of the compensation paid or accrued before the Acquisition to or for the benefit of any Conway shareholder- employee will be separate consideration for, or allocable to, any of his or her shares of Conway Common Stock; none of the shares of MBI Common Stock received in the Acquisition by any Conway shareholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation paid or accrued before the Acquisition to or for the benefit of any Conway 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. 11 (6) The fair market value of the MBI common stock, par value $5.00 per share ("MBI Common Stock"), to be received by each Conway shareholder as a liquidating distribution from Conway in connection with the Acquisition (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 Conway common stock, par value $100.00 per share ("Conway Common Stock"), held by each such shareholder at the time of the Acquisition . (7) There is no plan, intention or other arrangement (including any option or pledge) on the part of the holders of 1% or more of the Conway Common Stock and, to the best knowledge of the undersigned, there is no plan, intention or other arrangement (including any option or pledge) on the part of the other holders of Conway Common Stock to sell, exchange or otherwise dispose of a number of shares of MBI Common Stock received by such holders in the Acquisition that would reduce such holders' aggregate ownership of MBI Common Stock to a number of shares having a value, as of the date on which the Acquisition is consummated (the "Effective Date"), of less than 50 percent of the value of all of the formerly outstanding Conway Common Stock as of the Effective Date. For purposes of this representation, shares of Conway Common Stock exchanged for cash or other property, surrendered by dissenters, or exchanged for cash in lieu of fractional shares of MBI Common Stock will be treated as outstanding as of the Effective Date. Moreover, all shares of Conway Common Stock and shares of MBI Common Stock held by Conway shareholders and otherwise sold, redeemed, or disposed of before or after the Effective Date will be taken into account in making this representation. (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 Acquisition to the Conway 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 Conway shareholders in exchange for their shares of Conway Common Stock. The fractional share interests of each Conway shareholder will be aggregated, and no Conway 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. 12 (9) Expenses, if any, that are incurred in connection with the Acquisition and are properly attributable to Conway's shareholders will be paid by those shareholders and not by Conway. With the exception of those printing, mailing and filing expenses described in Section 5.08 of the Agreement, Conway will pay its own expenses that are incurred in connection with the Acquisition. (10) All payments made to dissenters and all other payments made to holders of Conway Common Stock in connection with the Acquisition (excluding cash to be paid in lieu of fractional shares) will be funded by Conway. Conway has sufficient liquid assets to fund any such payments. All payments made to dissenters, if any, will be funded with Conway assets from an escrow to be established and funded before the Acquisition by Conway for that purpose, as described in Section 5.17 of the Agreement. (11) The assets held by Conway immediately prior to the Acquisition would be sufficient to enable Conway to continue all its operations at current levels of activity and in accordance with past practice, without resort to additional capital or borrowed funds. For purposes of this representation, Conway assets used to pay dissenters, to pay shareholders who receive cash, to pay expenses of the Acquisition or to fund the escrow account described in Section 5.17 of the Agreement shall not be treated as assets held by Conway immediately prior to the Acquisition. (12) In the Acquisition, Conway will transfer to MBI-Arkansas 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 Conway immediately prior to the Acquisition. For purposes of this representation, Conway assets used to pay dissenters or to pay shareholders who receive cash, and Conway assets used to pay expenses of the Acquisition or to fund any redemption or distribution within 24 months before the Acquisition (except for regular, normal dividends) shall be included as assets of Conway held immediately prior to the Acquisition. For purposes of this representation, any asset of Conway or any other member of the Conway Affiliated Group that is disposed of within 24 months before the Acquisition other than in the ordinary course of business also shall be included as an asset of Conway held immediately prior to the Acquisition. 13 (13) The total adjusted basis of the assets transferred to MBI-Arkansas will equal or exceed the sum of the liabilities assumed by MBI-Arkansas, plus the amount of liabilities, if any, to which the transferred assets are subject. (14) Conway will be dissolved no later than three months after the Acquisition. (15) No terms of the Agreement have been waived or modified. The undersigned HEREBY AGREES immediately to 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 Acquisition. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of Conway this ----- day of ---------------, 1995. ----------------------- 14 EXHIBIT C --------- The undersigned shareholder of Security Bank of Conway, F.S.B., a federally-chartered stock savings bank ("Conway"), [SHAREHOLDER'S NAME], a holder of * shares of Conway common - -------------------- ----- stock, par value $100.00 per share, HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Amended and Restated Agreement and Plan of Reorganization by and among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Mercantile Bancorporation Inc. of Arkansas, an Arkansas corporation ("MBI-Arkansas"), and Conway dated July 7, 1995, and amended and restated as of September 18, 1995, and (b) I am aware that (i) this Certificate will be relied on by Thompson & Mitchell, counsel for MBI and MBI-Arkansas, in rendering its opinion to Conway that the purchase of all of the assets and assumption of all of the liabilities of Conway by MBI-Arkansas (the "Acquisition") will constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended, and (ii) the representations and undertaking recited herein will survive the Acquisition. 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 connection with the Acquisition, with the exception of any fractional share of MBI Common Stock to be exchanged for cash pursuant to the Acquisition. The undersigned HEREBY AGREES immediately to 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 Acquisition. 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 8 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 November 2, 1995 EX-23.2 9 CONSENT OF EXPERT 1 Exhibit 23.2 Consent of Independent Accountants ---------------------------------- As independent public accountants, we hereby consent to the use of our report covering the financial statements of Security Bank of Conway as of and for the years ended December 31, 1994 and 1993 and to all references to our firm included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP Little Rock, Arkansas October 30, 1995 EX-23.3 10 CONSENT OF EXPERT 1 Exhibit 23.3 Consent of Independent Auditors ------------------------------- We consent to the reference of our firm under the caption "Experts" and to the use of our report dated January 28, 1993 with respect to the 1992 financial statements of Security Bank of Conway, FSB included in Proxy Statement of Security Bank of Conway, FSB, which is made a part of the Registration Statement (Form S-4) and Prospectus of Mercantile Bancorporation Inc. for the registration of 322,000 shares of its common stock. /s/ Ernst & Young LLP Little Rock, Arkansas October 30, 1995 EX-23.4 11 CONSENT OF EXPERT 1 Exhibit 23.4 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 November 2, 1995 -----END PRIVACY-ENHANCED MESSAGE-----