-----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, Ey6DhylSZH42U6UlrUXFPOVbYA+9HlM6EcX6+9f5nDnC7zUQb39LvX0yAG1aGAwm uvRaAzYqXQru/PIqzHYVJw== 0000950114-98-000316.txt : 19980701 0000950114-98-000316.hdr.sgml : 19980701 ACCESSION NUMBER: 0000950114-98-000316 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980630 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/A SEC ACT: SEC FILE NUMBER: 333-57345 FILM NUMBER: 98657424 BUSINESS ADDRESS: STREET 1: 7TH & WASHINGTON TRAM 19 1 STREET 2: ONE MERCANTILE CENTER STREET CITY: ST LOUIS STATE: MO ZIP: 63101-1643 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 S-4/A 1 MERCANTILE BANCORPORATION FORM S-4/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1998 Registration No. 333-57345 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- AMENDMENT NO. 1 TO 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 of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
P.O. Box 524 St. Louis, Missouri 63166-0524 (314) 418-2525 (Address, including ZIP code and telephone number, including area code, of registrant's principal executive offices) ------------------------ JON W. BILSTROM, ESQ. General Counsel and Secretary Mercantile Bancorporation Inc. P.O. Box 524 St. Louis, Missouri 63166-0524 (314) 418-2525 (Name, address, including ZIP code and telephone number, including area code, of agent for service) ------------------------ Copy to: JOHN Q. ARNOLD ROBERT M. LaROSE, ESQ. RICHARD G. CLEMENS, ESQ. Vice Chairman and Chief Financial Officer Thompson Coburn Sidley & Austin Mercantile Bancorporation Inc. One Mercantile Center One First National Plaza P.O. Box 524 St. Louis, Missouri 63101 Chicago, Illinois 60603 St. Louis, Missouri 63166-0524 (314) 552-6000 (312) 853-7642 (314) 418-2525
------------------------- 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. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / -------------------------- 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, $0.01 par value 3,194,844 shares $19.17 $61,273,000 $18,075.54 =========================================================================================================================== Includes one attached Preferred Share Purchase Right per share. Estimated solely for the purposes of computing the registration fee pursuant to the provisions of Rule 457(f), and based upon the $61,273,000 aggregate book value of the 3,553,717 shares of common stock, $1.25 par value, of First Financial Bancorporation issued and outstanding as of May 31, 1998. The entire registration fee was paid with the original filing on June 19,1998.
--------------------------- 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 [LETTERHEAD OF FIRST FINANCIAL BANCORPORATION] June 30, 1998 Dear Shareholder: The Board of Directors cordially invites you to attend a Special Meeting of Shareholders of First Financial Bancorporation ("First Financial") to be held at 4:30 p.m. Central Time, on Tuesday, August 25, 1998, at the Main Office of First National Bank Iowa, 204 East Washington Street, Iowa City, Iowa (the "Special Meeting"). At the Special Meeting, you will be asked to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of May 7, 1998 (the "Merger Agreement"), and each of the transactions contemplated thereby, pursuant to which First Financial will be merged (the "Merger") with and into Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"). Upon consummation of the Merger, each share of First Financial common stock will be converted into the right to receive 0.88 (the "Exchange Ratio") of a share of MBI common stock, all as more fully described in the accompanying Proxy Statement/Prospectus. Enclosed are the following items relating to the Special Meeting and the Merger: 1. Proxy Statement/Prospectus; 2. Proxy card; and 3. A pre-addressed return envelope for the proxy card. The Proxy Statement/Prospectus and related proxy materials set forth, or incorporate by reference, financial data and other important information relating to First Financial and MBI and describe the terms and conditions of the Merger. The Board of Directors requests that you carefully review these materials before completing the enclosed proxy card or attending the Special Meeting. THE BOARD OF DIRECTORS OF FIRST FINANCIAL CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST INTEREST OF FIRST FINANCIAL AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS OF FIRST FINANCIAL UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. --- The investment banking firm of ABN AMRO Incorporated has issued its written opinion, dated as of the date hereof, to your Board of Directors regarding the fairness from a financial point of view of the Exchange Ratio to be received by First Financial shareholders pursuant to the Merger Agreement. A copy of the opinion is attached as Annex A to the Proxy Statement/Prospectus. ------- APPROVAL OF THE MERGER AGREEMENT BY THE FIRST FINANCIAL SHAREHOLDERS IS A CONDITION TO THE CONSUMMATION OF THE MERGER. Accordingly, it is important that your shares be represented at the Special Meeting, whether or not you plan to attend the Special Meeting in person. Please complete, date and sign the enclosed proxy card and return it 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 3 Secretary of First Financial 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 Russ Schmeiser at (319) 356-9038 or me at (319) 356-9024. Sincerely, Robert M. Sierk President and Chief Executive Officer 4 FIRST FINANCIAL BANCORPORATION 204 EAST WASHINGTON STREET P.O. BOX 1880 IOWA CITY, IOWA 52244-1880 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST 25, 1998 TO THE SHAREHOLDERS OF FIRST FINANCIAL BANCORPORATION: Notice is hereby given that a special meeting (the "Special Meeting") of shareholders of FIRST FINANCIAL BANCORPORATION, an Iowa corporation ("First Financial"), will be held at the Main Office of First National Bank Iowa, 204 East Washington Street, Iowa City, Iowa on Tuesday, August 25, 1998, at 4:30 p.m. Central Time, for the following purposes: (1) To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of May 7, 1998 (the "Merger Agreement"), by and among Mercantile Bancorporation Inc. ("MBI"), Ameribanc, Inc., a wholly owned subsidiary of MBI ("Ameribanc"), and First Financial, pursuant to which First Financial will be merged (the "Merger") with and into Ameribanc, in a transaction that will result in the business and operations of First Financial being continued through Ameribanc, and whereby, upon consummation of the Merger, each outstanding share of First Financial common stock will be converted into the right to receive 0.88 of a share of MBI common stock, as set forth in detail in the attached Proxy Statement/Prospectus. (2) To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. The record date for determining the shareholders entitled to receive notice of, and to vote at, the Special Meeting or any adjournments or postponements thereof has been fixed as of the close of business on June 26, 1998. On the record date, First Financial had 3,553,717 shares of common stock issued, outstanding and entitled to vote. Such shares were held by approximately 877 holders of record. Each share will be entitled to one vote on each matter submitted to a vote at the Special Meeting. Pursuant to Division XIII of the Iowa Business Corporation Act, each holder of First Financial common stock will have the right to dissent from the Merger Agreement and to demand a determination of the fair value of such shareholder's shares in the event the Merger Agreement is approved and the Merger consummated. A copy of Division XIII of the Iowa Business Corporation Act is attached as Annex B to the Proxy Statement/Prospectus. ------- THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF THE OUTSTANDING SHARES OF FIRST FINANCIAL COMMON STOCK IS REQUIRED FOR APPROVAL OF THE MERGER AGREEMENT. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. 5 WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT THE SPECIAL MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. FAILURE TO RETURN THE ENCLOSED PROXY CARD OR TO VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. If the Merger Agreement is approved, you will be sent instructions regarding the mechanics of exchanging your existing First Financial common stock certificates for new certificates representing shares of MBI common stock. BY ORDER OF THE BOARD OF DIRECTORS Iowa City, Iowa A. Russell Schmeiser June 30, 1998 Executive Vice President, Chief Operating Officer and Secretary 6 MERCANTILE BANCORPORATION INC. PROSPECTUS ---------------- FIRST FINANCIAL BANCORPORATION PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 25, 1998 This Prospectus of Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), relates to up to 3,194,844 shares of common stock, $0.01 par value (the "Common Stock"), and attached Preferred Share Purchase Rights (the "Rights"), of MBI (the Common Stock and Rights are collectively referred to herein as "MBI Common Stock"), to be issued to the shareholders of First Financial Bancorporation, an Iowa corporation ("First Financial"), upon consummation of the proposed merger (the "Merger") of First Financial with and into Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of MBI ("Ameribanc"). Upon receipt of the requisite shareholder and regulatory approvals, and the satisfaction or waiver of certain conditions precedent, the Merger will be consummated pursuant to the terms of the Agreement and Plan of Merger, dated as of May 7, 1998 (the "Merger Agreement"), by and among MBI, Ameribanc and First Financial. This Prospectus also serves as the Proxy Statement of First Financial for use in connection with the Special Meeting of Shareholders of First Financial (the "Special Meeting"), which will be held on August 25, 1998, at the time and place and for the purposes stated in the Notice of Special Meeting of Shareholders accompanying this Proxy Statement/Prospectus. Pursuant to the Merger Agreement, MBI will issue up to an aggregate of 3,194,844 shares of MBI Common Stock. Upon consummation of the Merger, the business and operations of First Financial will be continued through Ameribanc and each share of common stock, $1.25 par value, of First Financial ("First Financial Common Stock") will be converted into the right to receive 0.88 of a share of MBI Common Stock (the "Exchange Ratio"). The fair market value of MBI Common Stock to be received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. See "TERMS OF THE PROPOSED MERGER - General Description of the Merger." No fractional shares of MBI Common Stock will be issued in the Merger, but cash will be paid in lieu of such fractional shares. See "TERMS OF THE PROPOSED MERGER - Fractional Shares." The Merger is intended to qualify as a reorganization under the Internal Revenue Code of 1986, as amended (the "Code"). The Merger generally is intended to achieve certain federal income tax deferral benefits for First Financial shareholders with respect to shares of MBI Common Stock received in the Merger. See "SUMMARY INFORMATION - Federal Income Tax Consequences in General" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." MBI Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "MTL." On June 26, 1998, the closing sale price for MBI Common Stock as reported on the NYSE Composite Tape was $50.625 per share. First Financial Common Stock is not actively traded. This Proxy Statement/Prospectus, the Notice of Special Meeting and the form of proxy are first being mailed to the shareholders of First Financial on or about June 30, 1998. 7 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 SHARES OF MBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF MBI AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER FEDERAL OR STATE GOVERNMENTAL AGENCY. All information contained in this Proxy Statement/Prospectus with respect to MBI has been supplied by MBI and all information with respect to First Financial has been supplied by First Financial. The date of this Proxy Statement/Prospectus is -------, 1998. -2- 8 AVAILABLE INFORMATION --------------------- MBI and First Financial are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, file with the Commission reports, proxy statements and other information. Such reports, proxy statements and other information filed with the Commission by MBI and First Financial can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Suite 1300, Seven World Trade Center, New York, New York 10048, and Room 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. The Commission maintains an Internet site on the World Wide Web containing reports, proxy and information statements and other information filed electronically by MBI and First Financial with the Commission. The address of the World Wide Web site maintained by the Commission is http://www.sec.gov. MBI Common Stock is listed on the NYSE, and such reports, proxy statements and other information concerning MBI also are available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. First Financial Common Stock is not actively traded. Reports, proxy statements and other information concerning First Financial are available from First Financial, without charge, upon written or oral request to A. Russell Schmeiser, Executive Vice President and Chief Operating Officer, First Financial Bancorporation, 204 East Washington Street, P.O. Box 1880, Iowa City, Iowa 52244-1880, telephone (319) 356-9038. This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement on Form S-4 and exhibits thereto (the "Registration Statement") covering the securities offered hereby which has been filed by MBI with the Commission. As permitted by the rules and regulations of the Commission, this Proxy Statement/Prospectus omits certain information contained or incorporated by reference in the Registration Statement. Statements contained in this Proxy Statement/Prospectus provide a summary of the contents of certain contracts or other documents referenced herein but are not necessarily complete and in each instance reference is made to the copy of each such contract or other document filed as an exhibit to the Registration Statement. For such further information, reference is made to the Registration Statement. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ------------------------------------------------- THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS RELATING TO MBI THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS, EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN, ARE AVAILABLE, WITHOUT CHARGE TO ANY PERSON, INCLUDING BENEFICIAL OWNERS OF FIRST FINANCIAL COMMON STOCK TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, 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) 418-2525. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY REQUEST SHOULD BE MADE BY AUGUST 18, 1998. -3- 9 The following documents filed with the Commission by MBI under the Exchange Act are incorporated herein by reference: (a) MBI's Annual Report on Form 10-K for the year ended December 31, 1997. (b) MBI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (c) MBI's Current Reports on Form 8-K dated January 10, 1998 and January 30, 1998. (d) The description of MBI's Common Stock set forth in Item 1 of MBI's Registration Statement on Form 8-A, dated March 5, 1993, and any amendment or report filed for the purpose of updating such description. (e) The description of MBI's Preferred Share Purchase Rights set forth in Item 1 of MBI's Registration Statement on Form 8-A dated May 27, 1998. Such incorporation by reference shall not be deemed to incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. All documents filed by MBI pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and until the date of the Special Meeting shall be deemed to be incorporated by reference herein and made a part hereof from the date any such document is filed. The information relating to MBI contained in this Proxy Statement/Prospectus does not purport to be complete and should be read together with the information in the documents incorporated by reference herein. Any statement contained herein or in a document incorporated herein by reference shall be deemed to be modified or superseded for purposes hereof to the extent that a subsequent statement contained herein or in any other subsequently filed document incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part hereof. Any statements contained in this Proxy Statement/Prospectus involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MBI OR FIRST FINANCIAL. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF MBI COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT HERETO SHALL IMPLY OR CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MBI OR FIRST FINANCIAL OR ANY OF THEIR SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE HEREOF. -4- 10 TABLE OF CONTENTS -----------------
Page ---- AVAILABLE INFORMATION 3 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 3 SUMMARY INFORMATION 8 Business of MBI 8 Business of Ameribanc 9 Business of First Financial 9 The Proposed Merger 9 Effect on First Financial Stock Plans and Employee Benefit Plans 10 Other Agreements 11 Interests of Certain Persons in the Merger 12 Special Meeting of First Financial Shareholders 12 Reasons for the Merger 12 Opinion of Financial Advisor to First Financial 13 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 20 General 20 Date, Time and Place 20 Record Date; Vote Required 20 Voting and Revocation of Proxies 21 Solicitation of Proxies 21 TERMS OF THE PROPOSED MERGER 23 General Description of the Merger 23 Effect on First Financial Stock Plans and Employee Benefit Plans 24 Other Agreements 25 Interests of Certain Persons in the Merger 27 Background of and Reasons for the Merger; Board Recommendations 27 Opinion of Financial Advisor to First Financial 31 Conditions of the Merger 37 Representations and Warranties 39 Termination, Waiver and Amendment of the Merger Agreement 40 Indemnification 41 Closing Date 41 Surrender of First Financial Stock Certificates and Receipt of MBI Common Stock 41 -5- 11 Fractional Shares 42 Regulatory Approval 42 Business Pending the Merger 43 Accounting Treatment 46 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 46 DISSENTERS' RIGHTS OF SHAREHOLDERS OF FIRST FINANCIAL 47 PRO FORMA FINANCIAL INFORMATION 50 Comparative Unaudited Per Share Data 50 Pro Forma Combined Consolidated Financial Statements (Unaudited) 52 INFORMATION REGARDING FIRST FINANCIAL 66 Business 66 Management's Discussion and Analysis of Financial Condition and Results of Operations 81 Legal Proceedings 89 Properties 89 Management's Discussion and Analysis of Financial Condition and Results of Operations (First Quarter Comparison) 90 Quantitative and Qualitative Disclosures About Market Risk 97 Ownership of Certain Beneficial Owners and Management 99 INFORMATION REGARDING MBI STOCK 101 Description of MBI Common Stock and Attached Preferred Share Purchase Rights 101 Restrictions on Resale of MBI Stock by Affiliates 103 Comparison of the Rights of Shareholders of MBI and First Financial 103 SUPERVISION AND REGULATION 107 General 107 Certain Transactions with Affiliates 108 Payment of Dividends 108 Capital Adequacy 108 Support of Subsidiary Banks 108 FIRREA and FDICIA 109 Depositor Preference Statute 110 FDIC Insurance Assessments 110 Interstate Banking and Other Recent Legislation 110 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS 111 LEGAL MATTERS 111 EXPERTS 111 OTHER MATTERS 112 SHAREHOLDER PROPOSALS 112 -6- 12 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 113 ANNEXES Annex A -- Opinion of ABN AMRO Incorporated A-1 Annex B -- Dissenters' Rights Provisions of the Iowa Business Corporation Act B-1
-7- 13 SUMMARY INFORMATION ------------------- The following is a summary of the important terms of the proposed Merger and related information discussed elsewhere in this Proxy Statement/Prospectus but does not purport to be complete and is qualified in its entirety by reference to the more detailed information that appears elsewhere in this Proxy Statement/Prospectus and the documents incorporated by reference herein. Shareholders of First Financial are urged to read this Proxy Statement/Prospectus in its entirety. All MBI per share data reflect three-for-two stock splits distributed in the form of dividends on each of April 11, 1994 and October 1, 1997. 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"). At March 31, 1998, MBI owned, directly or indirectly, all of the capital stock of Mercantile Bank National Association ("Mercantile Bank") and 19 other commercial banks, all of which operate from 557 banking offices and 544 Fingertip Banking automated teller machines, located throughout Missouri, Illinois, eastern Kansas, northern and central Arkansas and Iowa. MBI's services concentrate in three major lines of business: consumer; corporate; and trust and investment advisory services. MBI also operates non-banking subsidiaries that provide related financial services, including investment management, brokerage services and asset-based lending. As of March 31, 1998, MBI had 133,115,227 shares of its Common Stock outstanding and reported, on a consolidated basis, total assets of $31.8 billion, total deposits of $22.5 billion, total loans of $19.6 billion and shareholders' equity of $2.5 billion. On February 2, 1998, MBI completed the acquisition of Horizon Bancorp, Inc., an Arkansas corporation and a registered bank holding company under the BHCA ("Horizon"), headquartered in Arkadelphia, Arkansas. This acquisition was accounted for under the pooling-of-interests method of accounting, but due to the immateriality of Horizon's financial information to MBI's financial condition and results of operations, MBI's consolidated financial statements have not been restated for any dates or any periods prior to the acquisition date of Horizon. As of February 2, 1998, Horizon reported, on a consolidated basis, total assets of $537 million, total deposits of $454 million and shareholders' equity of $47 million. On March 2, 1998, MBI completed the acquisition of HomeCorp, Inc., a Delaware corporation and savings and loan holding company ("HomeCorp"), headquartered in Rockford, Illinois. This acquisition was accounted for under the pooling-of-interests method of accounting, but due to the immateriality of HomeCorp's financial information to MBI's financial condition and results of operation, MBI's consolidated financial statements have not been restated for any date or any period prior to the acquisition date of HomeCorp. As of March 2, 1998, HomeCorp reported, on a consolidated basis, total assets of $335 million, total deposits of $309 million and stockholders' equity of $21 million. On January 10, 1998, MBI entered into an agreement to acquire CBT Corporation, a Kentucky corporation and registered bank holding company under the BHCA ("CBT"), headquartered in Paducah, Kentucky. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of March 31, 1998, CBT reported, on a consolidated basis, total assets of $1.03 billion, total deposits of $715 million and shareholders' equity of $122 million. On February 2, 1998, MBI entered into an agreement to acquire Firstbank of Illinois Co., a Delaware corporation and registered bank holding company under the BHCA ("Firstbank"), -8- 14 headquartered in Springfield, Illinois. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of March 31, 1998, Firstbank reported, on a consolidated basis, total assets of $2.28 billion, total deposits of $2.00 billion and stockholders' equity of $238 million. On April 13, 1998, MBI entered into an agreement to acquire Financial Services Corporation of the Midwest, a Delaware corporation and registered bank holding company under the BHCA ("FSCM"), headquartered in Rock Island, Illinois. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of March 31, 1998, FSCM reported, on a consolidated basis, total assets of $518 million total deposits of $409 million and stockholders' equity of $34 million. MBI's principal executive offices are located at One Mercantile Center, St. Louis, Missouri 63101 and its telephone number is (314) 418-2525. Additional information concerning MBI is included in the documents incorporated by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." BUSINESS OF AMERIBANC Ameribanc, a Missouri corporation, is a wholly owned subsidiary of MBI that was organized in 1991. Ameribanc is a registered bank holding company under the BHCA. At March 31, 1998, Ameribanc owned all of the capital stock of 20 banks which operate from 557 locations in Missouri, Illinois, eastern Kansas, northern and central Arkansas and Iowa. Ameribanc, which will continue to be a subsidiary of MBI following the Merger, will be the surviving corporation upon consummation of the Merger. BUSINESS OF FIRST FINANCIAL First Financial, an Iowa corporation, was organized in 1985 and is a one-bank holding company registered under the BHCA. First Financial is the parent company of First National Bank Iowa ("FNBI"), a national banking association. As of March 31, 1998, 3,553,717 shares of First Financial Common Stock were issued and outstanding. As of March 31, 1998, First Financial reported, on a consolidated basis, total assets of $568 million, total deposits of $481 million and shareholders' equity of $60 million. First Financial's principal executive offices are located at 204 East Washington Street, P.O. Box 1880, Iowa City, Iowa 52244-1880 and its telephone number is (319) 356-9000. THE PROPOSED MERGER Subject to the satisfaction of the terms and conditions set forth in the Merger Agreement, First Financial will be merged with and into Ameribanc. Upon consummation of the Merger, First Financial's corporate existence will terminate and Ameribanc will continue as the surviving entity. Simultaneously with the effectiveness of the Merger, each outstanding share of First Financial Common Stock will be converted into the right to receive 0.88 of a share of MBI Common Stock. Such consideration is subject to certain anti-dilution protections, but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI or First Financial prior to the consummation of the Merger. The fair market value of MBI Common Stock to be received pursuant to -9- 15 the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. Harris Trust and Savings Bank, the transfer agent for MBI Common Stock, has been selected as the Exchange Agent (the "Exchange Agent") for purposes of effecting the conversion of First Financial Common Stock into MBI Common Stock upon consummation of the Merger. As soon as practicable after consummation of the Merger, a letter of transmittal (including instructions setting forth the procedures for exchanging certificates representing shares of First Financial Common Stock for the MBI Common Stock issuable to each holder thereof pursuant to the Merger Agreement) will be sent to each record holder of certificates formerly representing shares of First Financial Common Stock as of the Effective Time (as hereinafter defined). Upon surrender to the Exchange Agent of his or her certificate(s) representing shares of First Financial Common Stock, together with a duly completed and executed letter of transmittal, such holder will receive certificates representing that whole number of shares of MBI Common Stock to which such holder is entitled under the Merger Agreement. See "TERMS OF THE PROPOSED MERGER - Surrender of First Financial Stock Certificates and Receipt of MBI Common Stock." The Merger Agreement provides that the consummation of the Merger is subject to certain terms and conditions, including the approval of the Merger Agreement by the requisite vote of the holders of First Financial Common Stock, the receipt of the requisite regulatory approvals, a letter of KPMG Peat Marwick LLP to the effect that the Merger will qualify for pooling-of-interests accounting treatment and an opinion of counsel for MBI regarding certain federal income tax aspects of the transaction. For a discussion of each of the conditions to the Merger, see "TERMS OF THE PROPOSED MERGER - Conditions of the Merger." The Merger will be consummated and become effective (the "Effective Time") upon the later of (i) the issuance of a certificate of merger by the Office of the Secretary of State of the State of Missouri and (ii) the filing of articles of merger with the Office of the Secretary of State of the State of Iowa. Unless the parties otherwise agree, the date of the closing of the Merger (the "Closing Date") shall occur on such date as MBI shall notify First Financial in writing (such notice to be at least five business days in advance of the Effective Time) but (i) not earlier than the approval of the Merger Agreement by the requisite vote of the holders of First Financial Common Stock and the receipt of the requisite regulatory approvals (the "Approval Date") and (ii) not later than the first business day of the first full calendar month commencing at least five days after the Approval Date. The Merger Agreement may be terminated at any time prior to the Closing Date by the mutual consent of the parties or, unilaterally, by either party upon the occurrence of certain events or if the Merger is not consummated by May 1, 1999. See "TERMS OF THE PROPOSED MERGER - Conditions of the Merger" and "- Termination of the Merger Agreement." EFFECT ON FIRST FINANCIAL STOCK PLANS AND EMPLOYEE BENEFIT PLANS Upon consummation of the Merger, MBI will assume the First Financial Bancorporation 1997 Stock Compensation Plan and the First Financial Bancorporation Stock Option Plan (collectively, the "First Financial Stock Plans"), and all of the outstanding rights (whether or not then exercisable) with respect to First Financial Common Stock pursuant to the First Financial Stock Plan (collectively, the "First Financial Stock Options") will be converted into rights to purchase MBI Common Stock. As a result of such assumption: (i) each outstanding First Financial Stock Option will be exercisable solely for shares of MBI Common Stock; (ii) the number of shares of MBI Common Stock subject to the First Financial Stock Options will equal the number of shares of First Financial Common Stock immediately prior to the Effective Time multiplied by the Exchange Ratio; and -10- 16 (iii) the per share exercise price for each First Financial Stock Option will be adjusted by dividing such exercise price by the Exchange Ratio. In addition, upon consummation of the Merger, Ameribanc will honor all severance and other compensation contracts and provisions for vested benefits under the employee plans of First Financial and FNBI earned or accrued through the Effective Time. MBI will take such steps as are necessary to integrate the employees of First Financial and FNBI into MBI's employee benefit plans as soon as practicable after the Effective Time. See "TERMS OF THE PROPOSED MERGER - Effect on First Financial Stock Plans and Employee Benefit Plans." OTHER AGREEMENTS In addition to and contemporaneously with the Merger Agreement, MBI and First Financial executed a Stock Option Agreement (the "Option Agreement") and MBI and all of the directors of First Financial executed separate Voting Agreements (the "Voting Agreements"). The following is a summary of the material terms of the Option Agreement and the Voting Agreements. OPTION AGREEMENT. Pursuant to the Option Agreement, First Financial issued to MBI an option (the "Option") to purchase up to 707,189 shares of First Financial Common Stock at a price of $37.75 per share (the "Option Price"). The Option is exercisable upon the occurrence of certain events generally relating to the failure of First Financial to consummate the Merger because of a material change or potential material change in the ownership of First Financial, all as set forth in the Option Agreement. No such event has occurred as of the date hereof. First Financial granted to MBI the Option as a condition of and in consideration of MBI entering into the Merger Agreement. The Option is intended to increase the likelihood that the Merger will be consummated in accordance with the terms of the Merger Agreement. Consequently, the Option may have the effect of discouraging a person who might now or prior to the consummation of the Merger consider or propose the acquisition of First Financial (or a significant interest in First Financial), even if such person were prepared to pay a higher price per share for First Financial Common Stock than the price per share implicit in the Exchange Ratio. In the event MBI acquires shares of First Financial Common Stock pursuant to the Option, MBI could vote those shares in the election of First Financial directors and other matters requiring a shareholder vote, thereby potentially having a material impact on the outcome of such matters. See "TERMS OF THE PROPOSED MERGER - Other Agreements - Option Agreement." VOTING AGREEMENTS. Concurrent with the execution of the Merger Agreement, MBI and all of the directors of First Financial executed separate Voting Agreements (the "Voting Agreements") pursuant to which each such director agreed that he will vote all of the shares of First Financial Common Stock then owned, controlled or subsequently acquired in favor of the approval of the Merger Agreement at the Special Meeting. In addition, until the earliest to occur of the Closing Date or the termination of the Merger Agreement, each director further agreed he will not vote any such shares in favor of the approval of any other competing acquisition proposal involving First Financial and a third party. Each director also agreed that he will not transfer shares of First Financial Common Stock unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement and satisfactory to MBI. As of the Record Date (as defined below), the directors of First Financial who signed Voting Agreements owned beneficially, directly and indirectly, an aggregate of 254,078 shares (excluding 214,527 shares held in trust by Mary Lee Nagle Duda, the spouse of Fritz Duda, a director of First Financial) of First Financial Common Stock, or approximately 7.15% of the issued and outstanding shares. See "TERMS OF THE PROPOSED MERGER - Other Agreements - Voting Agreements." -11- 17 INTERESTS OF CERTAIN PERSONS IN THE MERGER MBI has agreed that the Merger will not diminish any indemnification obligations of First Financial or FNBI in favor of the employees, agents, directors or officers of First Financial or FNBI existing as of the Effective Time. In addition, to the extent that First Financial's existing directors' and officers' liability insurance policy provides coverage for the acts or omissions of the directors and officers of First Financial and FNBI prior to the Effective Time, First Financial has agreed to give to such insurance carrier and to MBI notice of any potential claims thereunder. On and after the Effective Time, MBI's directors' and officers' liability insurance policy will provide coverage for the prior acts of the directors and officers of First Financial and FNBI. See "TERMS OF THE PROPOSED MERGER - Interests of Certain Persons in the Merger." SPECIAL MEETING OF FIRST FINANCIAL SHAREHOLDERS The Special Meeting will be held on August 25, 1998, at 4:30 p.m. Central Time, at the Main Office of First National Bank Iowa. Approval by the First Financial shareholders of the Merger Agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of First Financial Common Stock. Only holders of record of First Financial Common Stock at the close of business on June 26, 1998 (the "Record Date") will be entitled to notice of, and to vote at, the Special Meeting. At such date, there were 3,553,717 shares of First Financial Common Stock outstanding. Each share of First Financial Common Stock is entitled to one vote on each matter submitted to a vote at the Special Meeting. As of the Record Date, directors and executive officers of First Financial and their affiliates owned beneficially, or controlled the voting of, an aggregate of 254,078 shares of First Financial Common Stock, or approximately 7.15% of the shares entitled to vote at the Special Meeting. Each of First Financial's directors and executive officers has indicated his or her intention to vote his or her shares (excluding the 214,527 shares held in trust by Mary Lee Nagle Duda, the spouse of Fritz Duda) for the approval of the Merger Agreement, which includes the eight directors of First Financial who, pursuant to the terms of their respective Voting Agreements, have committed to vote their shares of First Financial Common Stock for approval of the Merger Agreement. In addition, MBI and FSCM currently own 6,000 and 11,250 shares, respectively, of First Financial Common Stock, which shares will be voted for the approval of the Merger Agreement. THE BOARD OF DIRECTORS OF FIRST FINANCIAL CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST INTEREST OF FIRST FINANCIAL AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS OF FIRST FINANCIAL UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. --- REASONS FOR THE MERGER FIRST FINANCIAL. First Financial's Board of Directors believes that the Merger is in the best interests of First Financial and its shareholders. In reaching the decision to recommend the approval of the Merger Agreement to the shareholders, the Board of Directors, without assigning any relative or specific weights, considered a number of factors. For a discussion of such factors, see "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations." -12- 18 MBI. MBI's Board of Directors believes that the Merger will enable MBI to (i) expand MBI's presence in eastern Iowa through the acquisition of an established banking organization and (ii) enhance MBI's ability to compete in the increasingly competitive banking and financial services industry. See "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations." OPINION OF FINANCIAL ADVISOR TO FIRST FINANCIAL As of the date of hereof, ABN AMRO Incorporated ("ABN AMRO"), First Financial's financial advisor, rendered to the Board of Directors of First Financial a written opinion to the effect that, as of the date of such opinion, the Exchange Ratio to be received by the holders of First Financial Common Stock in the Merger is fair to them from a financial point of view. Attached to this Proxy Statement/Prospectus as Annex A is a copy of the ------- opinion of ABN AMRO, as of the date hereof, setting forth the procedures followed, assumptions made, matters considered and qualifications and limitations of the review undertaken by ABN AMRO in connection with rendering its opinion. Holders of First Financial Common Stock are urged to read ABN AMRO's opinion in its entirety. See "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations" and "- Opinion of Financial Advisor to First Financial." FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the shareholders of First Financial in connection with the Merger. Each holder of First Financial 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 on the Closing Date as reported in The Wall Street Journal. Cash received by First Financial shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." WAIVER AND AMENDMENT Any provision of the Merger Agreement, including, without limitation, the conditions to the consummation of the Merger and the restrictions described under the caption "TERMS OF THE PROPOSED MERGER - Business Pending the Merger," may be (i) waived in writing at any time by the party that is, or whose shareholders are, entitled to the benefits thereof or (ii) amended at any time by written agreement of the parties approved by or on behalf of their respective Boards of Directors, whether before or after the approval of the Merger Agreement by the shareholders of First Financial; provided, however, that after approval of the Merger Agreement by the shareholders of First Financial at the Special Meeting no such modification may (i) alter or change the amount or kind of the consideration to be received by the First Financial shareholders pursuant to the Merger Agreement or (ii) adversely affect the tax treatment to the First Financial shareholders as a result of receiving shares of MBI Common Stock in the Merger. FEDERAL INCOME TAX CONSEQUENCES IN GENERAL Thompson Coburn, MBI's legal counsel, has delivered its opinion to the effect that, assuming the Merger occurs in accordance with the Merger Agreement and conditioned on the accuracy -13- 19 of certain representations made by MBI and First Financial, the Merger will constitute a "reorganization" for federal income tax purposes and that, accordingly, assuming the First Financial Common Stock is a capital asset in the hands of the holder at the Effective Time, (i) no gain or loss will be recognized by First Financial shareholders who exchange their shares of First Financial Common Stock solely for shares of MBI Common Stock in the Merger, (ii) the basis of the MBI Common Stock will equal the basis of the First Financial Common Stock for which it is exchanged and (iii) the holding period of the MBI Common Stock will include the holding period of the First Financial Common Stock for which it is exchanged. However, cash received in lieu of fractional shares may give rise to taxable income. EACH FIRST FINANCIAL SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER, INCLUDING THE APPLICABILITY OF VARIOUS STATE, LOCAL AND FOREIGN TAX LAWS. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." REGULATORY APPROVAL The Merger is subject to prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and any other bank regulatory authority that may be necessary or appropriate (the Federal Reserve Board and any other bank regulatory authority that may be necessary or appropriate are collectively referred to herein as the "Regulatory Authorities" and, individually, as a "Regulatory Authority"). MBI will file the required applications regarding the Merger with the Federal Reserve Board. In reviewing the applications and the proposed Merger, the Federal Reserve Board will consider various factors, including possible anti-competitive effects of the Merger, and examine the financial and managerial resources and future prospects of the combined organization. There can be no assurance that the requisite regulatory approvals will be granted or as to the timing of such approvals. See "TERMS OF THE PROPOSED MERGER - Regulatory Approval" and "SUPERVISION AND REGULATION." ACCOUNTING TREATMENT It is intended that the Merger will be accounted for under the pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED MERGER - - Accounting Treatment." DISSENTERS' RIGHTS Pursuant to the Iowa Business Corporation Act (the "IBCA"), each holder of First Financial Common Stock will have the right to dissent from the Merger Agreement and to demand a determination of the fair value of such holder's shares and, if the Merger is consummated, receive payment of such fair value in cash by following the procedures set forth in Division XIII of the IBCA, the text of which is attached hereto as Annex B. Failure to ------- follow such procedures may result in a loss of such shareholder's dissenters' rights. Any First Financial shareholder returning a blank executed proxy card will be deemed to have approved the Merger Agreement, thereby waiving any such dissenters' rights. See "DISSENTERS' RIGHTS OF SHAREHOLDERS OF FIRST FINANCIAL." MARKETS AND MARKET PRICES MBI Common Stock is traded on the NYSE under the symbol "MTL." The closing per share sale price reported for MBI Common Stock on May 7, 1998, the last trading date preceding the public announcement of the Merger, was $52.8125. First Financial Common Stock is not actively -14- 20 traded, but there are regularly quoted bid and asked prices from eight brokerage firms that maintained public trading markets for First Financial Common Stock in 1997. The following table sets forth for the periods indicated the high and low prices per share of MBI Common Stock as reported on the NYSE and of First Financial Common Stock as known to management of First Financial, along with the quarterly cash dividends per share declared. The per share prices do not include adjustments for markups, markdowns or commissions.
MBI FIRST FINANCIAL ------------------------------------- ------------------------------------ SALES PRICE CASH SALES PRICE CASH ------------------ DIVIDEND ------------------ DIVIDEND HIGH LOW DECLARED HIGH LOW DECLARED ---- --- -------- ---- --- -------- 1996 - ---- First Quarter $31.0006 $27.6875 $.273 $18.25 $16.33 $.13 Second Quarter 31.9375 29.0000 .273 19.00 17.68 .13 Third Quarter 35.2500 28.9375 .273 20.17 18.42 .1467 Fourth Quarter 36.0000 32.6875 .273 20.17 19.33 .1467 1997 - ---- First Quarter $39.6880 $33.3125 $.287 $23.42 $20.08 $.1467 Second Quarter 41.6880 35.0000 .287 23.00 21.33 .1467 Third Quarter 53.5000 40.5000 .287 25.00 22.00 .17 Fourth Quarter 61.6250 45.5000 .287 29.50 24.25 .19 1998 - ---- First Quarter $61.2500 $49.5625 $ .31 $45.75 $29.13 $.19 Second Quarter 57.5000 49.8125 .31 47.50 36.13 .2725 (through June 26, 1998) - -------------------- For recent sale prices of MBI Common Stock, see the cover of this Proxy Statement/Prospectus. Shareholders are advised to obtain current market quotations for MBI Common Stock and First Financial Common Stock.
COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and First Financial and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Merger, as well as the pending acquisitions by MBI of FSCM, CBT and Firstbank, each of which will be accounted for under the pooling-of- interests method of accounting, and the acquisition by MBI of Roosevelt Financial Group, Inc. ("Roosevelt"), which was consummated on July 1, 1997 and accounted for under the purchase method of accounting. The data presented is based upon the consolidated financial statements and related notes of each of MBI and First Financial included herein 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 - Notes to Pro Forma Combined Consolidated Financial Statements." 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 proposed Merger, the pending acquisitions by MBI of FSCM, CBT and Firstbank and the completed acquisition of Roosevelt had been consummated prior to the periods indicated. -15- 21
MBI/ MBI/ MBI/ FIRST FIRST FINANCIAL FIRST FINANCIAL MBI/ALL ENTITIES ALL ENTITIES MBI FINANCIAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA REPORTED REPORTED COMBINED EQUIVALENT COMBINED EQUIVALENT -------- -------- ------------ -------------- ------------ -------------- Book Value per Share: March 31, 1998 $ 18.65 $ 16.96 $ 18.54 $ 16.32 $ 18.58 $ 16.35 December 31, 1997 18.47 16.50 18.33 16.13 17.58 15.47 Cash Dividends Declared per Share: Three Months ended March 31, 1998 $ .31 $ .19 $ .31 $ .27 $ .310 $ .27 Year ended December 31, 1997 1.148 .65 1.148 1.01 1.148 1.01 Year ended December 31, 1996 1.092 .55 1.092 .96 1.092 .96 Year ended December 31, 1995 .88 .51 .88 .77 .880 .77 Basic Earnings per Share: Three Months ended March 31, 1998 $ .78 $ .49 $ .78 $ .69 $ .76 $ .67 Year ended December 31, 1997 1.68 1.91 1.69 1.49 1.49 1.31 Year ended December 31, 1996 2.11 1.68 2.11 1.86 2.13 1.87 Year ended December 31, 1995 2.41 1.28 2.39 2.10 2.37 2.09 Diluted Earnings per Share: Three Months Ended March 31, 1998 $ .77 $ .49 $ .77 $ .68 $ .75 $ .66 Year ended December 31, 1997 1.65 1.90 1.66 1.46 1.45 1.28 Year ended December 31, 1996 2.08 1.67 2.08 1.83 2.09 1.84 Year ended December 31, 1995 2.37 1.27 2.35 2.07 2.31 2.03 Market Price per Share: At May 7, 1998 $52.8125 $38.000 $52.8125 $46.475 $52.8125 $46.475 At June 25, 1998 50.8125 43.375 50.8125 44.715 50.8125 44.715 - -------------------- Includes the effect of pro forma adjustments for First Financial, as appropriate. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." Based on the pro forma combined per share amounts multiplied by 0.88, the Exchange Ratio applicable to one share of First Financial Common Stock in the Merger. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to pro forma combined consolidated financial statements. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." Includes the effect of pro forma adjustments for First Financial, CBT, Firstbank, FSCM and Roosevelt, as appropriate. Due to the immateriality of the financial condition and results of operations of Horizon and HomeCorp to that of MBI, this table does not include the effect of pro forma adjustments for Horizon and HomeCorp. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." Based upon the following number of shares outstanding as of March 31, 1998: Shares of MBI Common Stock as reported 133,115,257 Number of Shares of MBI Common Stock, net of treasury shares, to be issued in the mergers of: FSCM 1,877,324 CBT 4,961,910 First Financial 2,875,360 Firstbank 12,511,135 ----------- MBI/All Entities Pro Forma Combined 155,340,956 =========== The market value of MBI Common Stock disclosed as of May 7, 1998, the last trading day preceding the public announcement of the Merger, and as of June 25, 1998, the last practicable date prior to the mailing of this Proxy Statement/Prospectus, is based on the last sale price as reported on the NYSE Composite Tape. The market value of First Financial Common Stock disclosed as of May 7, 1998, the last trading day preceding the public announcement of the Merger, and as of June 25, 1998, the last practicable date prior to the mailing of this Proxy Statement/Prospectus, is based on over-the-counter "bulletin board" closing prices.
SUMMARY FINANCIAL DATA The following table sets forth for the periods indicated certain summary historical consolidated financial information for MBI and First Financial. The balance sheet data and income -16- 22 statement data of MBI and First Financial included in the summary financial data as of and for the five years ended December 31, 1997, are taken from the audited consolidated financial statements of MBI and First Financial, respectively. The balance sheet data and income statement data of MBI and First Financial included in the summary financial data as of and for the three months ended March 31, 1998 and 1997 are taken from the unaudited consolidated financial statements of MBI and First Financial, respectively. These data include all adjustments which are, in the opinion of the respective managements of MBI and First Financial, necessary to present a fair statement of these periods and are of a normal recurring nature. Results for MBI and First Financial for the three months ended March 31, 1998 are not necessarily indicative of results for the entire year. The following information should be read in conjunction with the audited consolidated financial statements of each of MBI and First Financial 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." -17- 23 MERCANTILE BANCORPORATION INC. SUMMARY FINANCIAL DATA
ALL ENTITIES PRO FORMA COMBINED CONSOLIDATED AS OF OR FOR THE AS OF OR FOR THREE MONTHS THE THREE ENDED MONTHS ENDED MARCH 31, MARCH 31, -------------------------- 1998 1998 1997 ------------- -------- -------- PER SHARE DATA Basic earnings $ .76 $ .78 $ .65 Diluted earnings .75 .77 .64 Dividends declared .31 .31 .287 Book value at period end 18.54 18.65 16.50 EARNINGS (THOUSANDS) Interest income $611,817 $530,331 $398,462 Interest expense 330,187 290,026 186,501 -------- -------- -------- Net interest income 281,630 240,305 211,961 Provision for possible loan losses 9,387 6,606 18,443 Other income 140,747 127,193 88,100 Other expense 228,455 196,864 165,595 Income taxes 67,321 60,136 41,028 -------- -------- -------- Net income $117,214 $103,892 $ 74,995 ======== ======== ======== ENDING BALANCE SHEET (MILLIONS) Total assets $ 35,830 $ 31,802 $ 22,078 Earning assets 32,286 28,530 20,373 Investment securities 9,444 8,378 4,847 Loans and leases, net of unearned income 22,224 19,625 15,213 Deposits 25,830 22,528 17,354 Long-term debt 2,410 2,343 452 Shareholders' equity 2,885 2,483 1,882 Reserve for possible loan losses 316 264 231 SELECTED RATIOS Return on average assets 1.35% 1.35% 1.38% Return on average equity 16.29 16.57 15.63 Net interest rate margin 3.62 3.54 4.36 Equity to assets 8.05 7.81 8.52 Reserve for possible loan losses to Outstanding loans 1.42 1.34 1.52 Non-performing loans 232.41 231.39 273.18 Dividend payout ratio 41.33 40.26 44.84 As of or for the Year Ended December 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Per Share Data Basic earnings $ 1.68 $ 2.11 $ 2.41 $ 2.06 $ 1.81 Diluted earnings 1.65 2.08 2.37 2.02 1.77 Dividends declared 1.148 1.092 .88 .748 .66 Book value at period end 18.47 16.74 16.29 14.48 13.41 Earnings (Thousands) Interest income $1,878,194 $1,552,863 $1,516,156 $1,311,928 $1,269,680 Interest expense 957,690 724,910 715,466 521,542 508,469 ---------- ---------- ---------- ---------- ---------- Net interest income 920,504 827,953 800,690 790,386 761,211 Provision for possible loan losses 79,309 73,015 41,533 48,791 70,584 Other income 378,684 337,480 311,649 272,368 290,380 Other expense 894,780 718,668 640,519 645,011 666,067 Income taxes 120,506 128,535 149,898 135,896 114,768 ---------- ---------- ---------- ---------- ---------- Net income $ 204,593 $ 245,215 $ 280,389 $ 233,056 $ 200,172 ========== ========== ========== ========== ========== Ending Balance Sheet (Millions) Total assets $ 29,955 $ 22,030 $ 20,883 $ 19,397 $ 18,878 Earning assets 27,278 20,061 18,997 17,904 17,390 Investment securities 7,546 4,746 4,964 4,895 5,234 Loans and leases, net of unearned income 19,200 14,953 13,703 12,764 11,637 Deposits 22,080 17,336 16,172 15,137 15,435 Long-term debt 1,469 305 344 351 340 Shareholders' equity 2,410 1,946 1,915 1,643 1,510 Reserve for possible loan losses 255 230 232 245 233 Selected Ratios Return on average assets 0.79% 1.16% 1.39% 1.22% 1.08% Return on average equity 9.55 12.95 15.64 14.66 14.06 Net interest rate margin 3.93 4.34 4.38 4.61 4.58 Equity to assets 8.05 8.83 9.17 8.47 8.00 Reserve for possible loan losses to Outstanding loans 1.33 1.54 1.70 1.92 2.00 Non-performing loans 249.51 318.99 241.79 552.34 289.13 Dividend payout ratio 69.58 52.50 37.13 37.03 37.29 - -------------------- Includes the effect of pro forma adjustments for the pending acquisitions of First Financial, CBT, Firstbank and FSCM and the completed acquisition of Roosevelt, as appropriate. Due to the immateriality of the financial condition and results of operations of Horizon and HomeCorp to that of MBI, this table does not include the effect of pro forma adjustments for Horizon and HomeCorp. See "PRO FORMA FINANCIAL INFORMATION - Notes to Pro Forma Combined Consolidated Financial Statements." Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I. Taxable-equivalent basis. Includes tax-equivalent adjustments for MBI of $3,401,000, $3,857,000, $15,086,000, $16,353,000, $17,758,000, $17,962,000 and $18,598,000 for March 31, 1998 and 1997 and December 31, 1997, 1996, 1995, 1994 and 1993, respectively, and for all entities pro forma combined consolidated for March 31, 1998 of $4,644,000. These adjustments are based upon a federal tax rate of 35% for all periods. Based upon diluted earnings per share.
-18- 24 FIRST FINANCIAL BANCORPORATION SUMMARY FINANCIAL DATA
AS OF OR FOR THE THREE MONTHS AS OF OR FOR THE ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ---------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE DATA Basic earnings $ .49 $ .44 $ 1.91 $ 1.68 $ 1.28 $ 1.28 $ 1.45 Diluted earnings .49 .44 1.90 1.67 1.27 1.27 1.43 Dividends declared .19 .15 .65 .55 .51 .49 .47 Book value at period end 16.96 15.29 16.50 15.03 14.04 12.71 12.60 Average common shares outstanding 3,532,038 3,502,600 3,496,634 3,528,792 3,573,713 3,554,595 3,488,990 EARNINGS (THOUSANDS) Interest income $ 9,367 $ 8,363 $ 36,708 $ 33,268 $ 31,742 $ 29,205 $ 28,236 Interest expense 4,907 4,122 18,730 16,449 15,811 13,624 14,057 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income 4,460 4,241 17,978 16,819 15,931 15,581 14,179 Provision for credit losses 100 177 588 591 366 425 155 Other income 2,601 1,849 8,385 7,024 6,236 5,699 5,924 Other expense 4,491 3,702 16,183 14,802 15,480 14,532 13,041 Income taxes 736 664 2,909 2,534 1,751 1,760 1,852 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 1,734 $ 1,547 $ 6,683 $ 5,916 $ 4,570 $ 4,563 $ 5,055 ========== ========== ========== ========== ========== ========== ========== ENDING BALANCE SHEET (THOUSANDS) Total assets $ 568,442 $ 492,372 $ 550,053 $ 467,725 $ 457,236 $ 434,461 $ 434,081 Earning assets 516,152 459,290 504,981 428,541 421,640 404,536 406,243 Investments 119,254 102,694 112,755 97,802 123,886 109,229 134,511 Loans and leases 357,598 325,096 364,301 330,739 294,529 294,707 254,207 Deposits 480,461 419,165 458,815 395,407 385,055 362,263 363,580 Long-term debt 12,908 13,938 18,188 12,355 17,469 20,268 18,283 Shareholders' equity 60,267 53,585 57,580 52,576 50,207 45,245 43,993 Allowance for credit losses 4,499 3,896 4,589 3,788 3,602 3,354 3,101 SELECTED RATIOS Return on average assets 1.29% 1.33% 1.26% 1.26% 1.02% 1.03% 1.19% Return on average equity 12.09 11.76 11.53 11.51 9.65 10.10 12.07 Net interest rate margin 3.74 4.06 3.96 4.12 4.07 4.05 3.88 Equity to assets 10.60 10.88 10.47 11.24 10.98 10.41 10.13 Allowance for credit losses to: Outstanding loans 1.26 1.20 1.26 1.15 1.22 1.14 1.22 Non-performing loans 316 708 497 678 1334 305 243 Dividend payout ratio 38.78 34.09 34.16 32.89 39.63 37.98 32.23
-19- 25 INFORMATION REGARDING SPECIAL MEETING ------------------------------------- GENERAL This Proxy Statement/Prospectus is being furnished to holders of First Financial Common Stock in connection with the solicitation of proxies by the Board of Directors of First Financial for use at the Special Meeting and any adjournments or postponements thereof at which the shareholders of First Financial will consider and vote upon a proposal to approve the Merger Agreement and consider and vote upon any other business that may properly be brought before the Special Meeting or any adjournments or postponements thereof. Each copy of this Proxy Statement/Prospectus is accompanied by the Notice of Special Meeting of Shareholders of First Financial, a proxy card and a return envelope to First Financial for the proxy card. This Proxy Statement/Prospectus also is furnished by MBI to each holder of First Financial Common Stock as a prospectus in connection with the issuance by MBI of shares of MBI Common Stock upon the consummation of the Merger. This Proxy Statement/Prospectus, the Notice of Special Meeting and proxy card are being first mailed to shareholders of First Financial on June 30, 1998. DATE, TIME AND PLACE The Special Meeting will be held at the Main Office of First National Bank Iowa, Iowa City, Iowa on August 25, 1998, at 4:30 p.m. Central Time. RECORD DATE; VOTE REQUIRED On the Record Date, there were 3,553,717 shares of First Financial Common Stock outstanding and entitled to vote at the Special Meeting. Each such share is entitled to one vote on each matter properly brought before the Special Meeting. The affirmative vote of the holders of at least two-thirds of the outstanding shares of First Financial Common Stock is required to approve the Merger Agreement. As of the Record Date, directors and executive officers of First Financial and their affiliates owned beneficially, or controlled the voting of, an aggregate of 254,078 shares of First Financial Common Stock, or approximately 7.15% of the outstanding shares of First Financial Common Stock entitled to vote at the Special Meeting. Each of the directors and executive officers of First Financial has indicated his or her intention to vote his or her shares (excluding the 214,527 shares held in trust by Mary Lee Nagle Duda, the spouse of Fritz Duda) for the approval of the Merger Agreement at the Special Meeting, which includes the eight directors of First Financial who, pursuant to the terms of their respective Voting Agreements, have committed to vote their shares of First Financial Common Stock for approval of the Merger Agreement. In addition, MBI and FSCM currently own 6,000 and 11,250 shares, respectively, of First Financial Common Stock, which shares will be voted for the approval of the Merger Agreement. See "TERMS OF THE PROPOSED MERGER - Other Agreements - Voting Agreements." -20- 26 VOTING AND REVOCATION OF PROXIES Shares of First Financial Common Stock that 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 FIRST FINANCIAL SHAREHOLDER RETURNING AN EXECUTED PROXY CARD THAT DOES NOT PROVIDE INSTRUCTIONS TO VOTE AGAINST THE APPROVAL OF THE MERGER AGREEMENT WILL BE DEEMED TO HAVE VOTED IN FAVOR OF THE APPROVAL OF THE MERGER AGREEMENT. Failure to return a properly executed proxy card or to vote in person at the Special Meeting will have the practical effect of a vote against the approval of the Merger Agreement. Shares subject to abstentions will be treated as shares that are present and voting at the Special Meeting for purposes of determining the presence of a quorum. Because the affirmative vote of at least two-thirds of the outstanding shares of First Financial Common Stock is required for approval of the Merger Agreement, abstentions will have the effect of votes against the approval of the Merger Agreement. Broker "non-votes" (i.e., proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owners or other persons entitled to vote shares with respect to which the brokers or nominees do not have discretionary power to vote without such instructions) will not be considered as present for the purposes of determining the presence of a quorum. Because the affirmative vote of a majority of the outstanding shares of First Financial Common Stock is required for approval of the Merger Agreement, broker non-votes will have the effect of a vote against the approval of the Merger Agreement. Any First Financial shareholder returning an executed proxy card that does not provide instructions to abstain from, or to vote against the approval of, the Merger Agreement will be deemed to have approved the Merger Agreement. Any shareholder of First Financial giving a proxy may revoke it at any time prior to the vote at the Special Meeting. Shareholders of First Financial wishing to revoke a proxy prior to the vote may do so by delivering to the Secretary of First Financial, at 204 East Washington Street, P.O. Box 1880, Iowa City, Iowa 52244-1880, at or before the Special Meeting, a written notice of revocation bearing a later date than the proxy or a later dated proxy relating to the same shares, or by attending the Special Meeting and voting such shares in person. Attendance at the Special Meeting will not in itself constitute the revocation of a proxy. The Board of Directors of First Financial currently is not aware of any business to be brought before the Special Meeting other than that described herein. If, however, other matters are properly brought before such Special Meeting, or any adjournments or postponements thereof, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment as to the best interest of First Financial. SOLICITATION OF PROXIES First Financial will bear its own costs of soliciting proxies, except that MBI will pay printing and mailing expenses and registration fees incurred in connection with preparing this Proxy Statement/Prospectus. Proxies will initially be solicited by mail, but directors, officers and selected other employees of First Financial also may solicit proxies in person or by telephone. Directors, -21- 27 executive officers and any other employees of First Financial who solicit proxies will not be specially compensated for such services. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward proxy materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners. HOLDERS OF FIRST FINANCIAL COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. -22- 28 TERMS OF THE PROPOSED MERGER ---------------------------- The following is a summary of the material terms and conditions of the Merger Agreement, which document is incorporated by reference herein. This summary is qualified in its entirety by the full text of the Merger Agreement. MBI, upon written or oral request, will furnish a copy of the Merger Agreement, without charge, to any person who receives a copy of this Proxy Statement/Prospectus. Such 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) 418-2525. GENERAL DESCRIPTION OF THE MERGER Pursuant to the Merger Agreement, subject to satisfaction or waiver of certain conditions precedent, including receipt of all applicable regulatory approvals, First Financial will be merged on the Closing Date with and into Ameribanc. Upon consummation of the Merger, First Financial's corporate existence will terminate and Ameribanc will continue as the surviving entity. At the Effective Time, each share of First Financial Common Stock will be converted into the right to receive 0.88 of a share of MBI Common Stock. Such consideration is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI or First Financial prior to the consummation of the Merger. The fair market value of MBI Common Stock received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. The amount and nature of the consideration was established through arms'-length negotiations between MBI and First Financial and their respective advisors and reflects the balancing of a number of countervailing factors. The total amount of the consideration reflects a price both parties concluded was appropriate. See "-Background of and Reasons for the Merger; Board Recommendations." The fact that the consideration is payable in shares of MBI Common Stock reflects the desire of the parties to the Merger to have the favorable tax attributes of a "reorganization" for federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." NO ASSURANCE CAN BE GIVEN THAT THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF MBI COMMON STOCK ON THE DATE SUCH STOCK IS RECEIVED BY A FIRST FINANCIAL SHAREHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI COMMON STOCK RECEIVED BY A FIRST FINANCIAL SHAREHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK DUE TO NUMEROUS MARKET FACTORS. Following the Closing Date, each shareholder of First Financial (other than any shareholders exercising dissenters' rights pursuant to the IBCA) will be required to submit to the Exchange Agent a properly executed letter of transmittal and surrender to the Exchange Agent the stock certificate(s) formerly representing the shares of First Financial Common Stock in order to receive a new stock certificate(s) evidencing the shares of MBI Common Stock to which such shareholder is entitled. As soon as practicable following the Effective Time, the Exchange Agent will mail to each First Financial shareholder (other than any shareholders exercising dissenters' rights pursuant to the IBCA) a notice of consummation of the Merger and a form of letter of transmittal, together with instructions and a -23- 29 return envelope to facilitate the exchange of such holder's certificate(s) formerly representing First Financial Common Stock for certificate(s) evidencing MBI Common Stock. No dividends or other distributions will be paid to a former First Financial shareholder with respect to shares of MBI Common Stock until such shareholder's letter of transmittal and stock certificate(s) formerly representing First Financial Common Stock, or documentation reasonably acceptable to the Exchange Agent in lieu of lost or destroyed certificate(s), is delivered to the Exchange Agent. See "TERMS OF THE PROPOSED MERGER - Surrender of First Financial Stock Certificates and Receipt of MBI Common Stock." No fractional shares of MBI Common Stock will be issued in the Merger, but cash will be paid in lieu of such fractional shares, such cash being calculated by multiplying the holder's fractional share interest by the closing stock price of MBI Common Stock on the NYSE Composite Tape on the Closing Date of the Merger as reported in The Wall Street Journal. See "- Fractional Shares." The shares of MBI Common Stock to be issued pursuant to the Merger will be freely transferable except by certain shareholders of First Financial who are deemed to be "affiliates" of First Financial. 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." EFFECT ON FIRST FINANCIAL STOCK PLANS AND EMPLOYEE BENEFIT PLANS MBI has agreed to assume the First Financial Stock Options in accordance with the terms of the First Financial Stock Plans and, upon consummation of the Merger, all outstanding First Financial Stock Options will be converted into rights with respect to MBI Common Stock. Beginning at the Effective Time, (i) each First Financial Stock Option assumed by MBI will be exercisable solely for shares of MBI Common Stock, (ii) the number of shares of MBI Common Stock subject to each First Financial Stock Option will equal the number of shares of First Financial Common Stock subject to the First Financial Stock Options multiplied by the Exchange Ratio and (iii) the per share exercise price for each First Financial Stock Option will be adjusted by dividing such price by the Exchange Ratio, subject to adjustment as appropriate to reflect any stock split, stock dividend, capitalization or similar transaction subsequent to the Effective Time. MBI has agreed, at and after the Effective Time, to reserve sufficient shares of MBI Common Stock for issuance with respect to the First Financial Stock Options under the First Financial Stock Plans to be assumed by MBI. MBI will also file with the Commission, and obtain the effectiveness of, a registration statement with respect to the shares of MBI Common Stock issuable upon exercise of such options and list such shares on the NYSE. The Merger Agreement provides that Ameribanc will honor severance and other compensation contracts between First Financial or FNBI and any current or former director, officer, employee or agent thereof, along with all provisions for vested benefits or other vested amounts earned or accrued through the Effective Time under First Financial employee plans. The First Financial employee plans will continue as plans of Ameribanc until such time as the employees of First Financial and FNBI are integrated into MBI's employee benefit plans that are available to other employees of MBI and its subsidiaries. MBI will take such steps as are necessary or required to integrate the employees of First Financial and FNBI into MBI's employee benefit plans available to other employees of MBI and its subsidiaries as soon as practicable after the Effective Time, with (i) full credit for prior service with First Financial or FNBI for purposes of vesting and eligibility for participation and benefit allocation (but not benefit accruals under any defined benefit plan) and co-payments and deductibles, (ii) waiver of all waiting periods, evidence of insurability and pre-existing condition exclusions or penalties and (iii) full credit for claims arising prior to the Effective Time for purposes of deductibles, out-of-pocket -24- 30 maximums, benefit maximums and all other similar limitations for the applicable plan year in which the Merger is consummated. OTHER AGREEMENTS In addition to and contemporaneously with the Merger Agreement, MBI and First Financial executed the Option Agreement and MBI and all of the eight directors of First Financial executed separate Voting Agreements. The following is a summary of the material terms of the Option Agreement and the Voting Agreements. OPTION AGREEMENT. Under the terms of the Option Agreement, First Financial issued to MBI an option to purchase up to 707,189 shares of First Financial Common Stock at a price per share equal to $37.75. The Option was granted by First Financial to MBI as a condition to and in consideration of MBI entering into the Merger Agreement. The following description does not purport to be complete and is qualified in its entirety by reference to the Option Agreement, which is attached as an exhibit to the Registration Statement and is incorporated herein by reference. The Option is intended to increase the likelihood that the Merger will be consummated in accordance with the terms of the Merger Agreement. The occurrence of certain events described below could cause the Option to become exercisable and thereby significantly increase the cost of the acquisition of First Financial. Consequently, the Option may (i) have the effect of discouraging a person who might now or prior to the consummation of the Merger consider or propose the acquisition of First Financial (or a significant interest in First Financial), even if such a person were prepared to pay a higher price per share for First Financial Common Stock than the price per share implicit in the Exchange Ratio, (ii) result in the proposal by a potential acquiror of a lower per share price than such acquiror might otherwise have been willing to pay or (iii) prevent a potential acquiror from accounting for the acquisition of First Financial through the pooling-of-interests method of accounting for a period of two years and thereby discourage or preclude the acquisition of First Financial during such period. As of the Record Date, the maximum number of shares issuable pursuant to the Option (the "MBI Option Shares") represented approximately 19.9% of the issued and outstanding shares of First Financial Common Stock. The Option exercise price is $37.75 per share. In the event MBI acquires the MBI Option Shares, MBI could vote such shares in the election of First Financial directors and other matters requiring a shareholder vote, thereby potentially having a material impact on the outcome of such matters. If not then in material breach of the Merger Agreement, MBI may exercise the Option, in whole or in part, at any time or from time to time if a Purchase Event (as defined below) has occurred; provided, however, that: (i) to the extent the Option has not been exercised, it will terminate and be of no further force and effect upon the earlier to occur of (A) the Effective Time and (B) the termination of the Merger Agreement in accordance with its terms, provided that in the case of a termination of the Merger Agreement arising from the volitional breach by First Financial of any of its representations, warranties or covenants in the Merger Agreement, the Option will not terminate until the date that is 12 months following such termination; (ii) if the Option cannot be exercised on such day because of any injunction, order or similar restraint issued by a court of competent jurisdiction, the Option will expire on the thirtieth business day after such injunction, order or restraint has been dissolved or when such injunction, order or restraint has become permanent and is no longer subject to appeal, as the case may be; and (iii) any such exercise will be subject to compliance with applicable law, including the BHCA. -25- 31 A "Purchase Event" means any of the following events: (i) First Financial or any of its subsidiaries, without having received prior written consent from MBI, have entered into, authorized, recommended, proposed or publicly announced its intention to enter into, authorize, recommend or propose an agreement, arrangement or understanding with any person (other than MBI or any of its subsidiaries) to (A) effect a merger, consolidation or similar transaction involving First Financial or any of its subsidiaries, (B) purchase, lease or otherwise acquire 15% or more of the assets of First Financial or any of its subsidiaries or (C) purchase or otherwise acquire (including by way of merger, consolidation, share exchange or similar transaction) beneficial ownership of securities representing 15% or more of the voting power of First Financial or any of its subsidiaries; (ii) any person (other than MBI or any subsidiary of MBI, or First Financial or any subsidiary of First Financial in a fiduciary capacity) has acquired beneficial ownership or the right to acquire beneficial ownership of 15% or more of the voting power of First Financial; or (iii) the holders of First Financial Common Stock have not approved the Merger Agreement at the Special Meeting, the Special Meeting has not been held or is canceled prior to termination of the Merger Agreement in accordance with its terms or First Financial's Board of Directors has withdrawn or modified in a manner adverse to MBI the recommendation of First Financial's Board of Directors with respect to the Merger Agreement, in each case after an Extension Event (as defined below). An "Extension Event" means any of the following events: (i) a Purchase Event described in (i) or (ii) of the preceding paragraph; (ii) any person (other than MBI or any of its subsidiaries) has "commenced" (as such term is defined in Rule 14d-2 under the Exchange Act) or has filed a registration statement under the Securities Act with respect to a tender offer or exchange offer to purchase shares of First Financial Common Stock such that, upon consummation of such offer, such person would have beneficial ownership or the right to acquire beneficial ownership of 15% or more of the voting power of First Financial; or (iii) any person (other than MBI or any subsidiary of MBI, or First Financial or any subsidiary of First Financial in a fiduciary capacity) has publicly announced its willingness or a proposal or intention to make a proposal, (x) to make an offer described in clause (ii) above or (y) to engage in a transaction described in clause (i) above. Subject to regulatory approval, upon the occurrence of a Purchase Event and until 12 months thereafter (but not later than the termination of the Option pursuant to the terms of the Option Agreement), First Financial shall be required, upon MBI's request, to repurchase any shares of First Financial Common Stock purchased by MBI, at a price equal to the greater of the market price or the highest price per share at which a tender or exchange offer has been made for shares of First Financial Common Stock (the "Market Price"), or to purchase the Option for the amount by which the Market Price exceeds the Option Price. At the request of First Financial during the first six-month period commencing 12 months following the first occurrence of a Purchase Event, First Financial may repurchase from MBI, and MBI shall sell to First Financial, all (but not less than all) of the First Financial Common Stock acquired by MBI pursuant to the Option at a price per share equal to the greater of (i) Market Price or (ii) the sum of (A) the aggregate purchase price of such shares plus (B) interest on the aggregate purchase price paid for such shares from the date of purchase to the date of repurchase, less any dividends received on such shares. To the best of each of MBI's and First Financial's knowledge, no Purchase Event or Extension Event has occurred as of the date of this Proxy Statement/Prospectus. VOTING AGREEMENTS. MBI and all of the eight directors of First Financial executed a separate Voting Agreement pursuant to which each such director agreed that he will vote all of the shares -26- 32 of First Financial Common Stock that he then owned, controlled or subsequently acquires (excluding the 214,527 shares held in trust by Mary Lee Nagle Duda, the spouse of Fritz Duda) in favor of the approval of the Merger Agreement at the Special Meeting. In addition, until the earliest to occur of the Effective Time, the termination of the Voting Agreements or the abandonment of the Merger, each such director further agreed that he will not vote any such shares in favor of the approval of any other competing acquisition proposal involving First Financial and a third party. Each such director also agreed that he will not transfer shares of First Financial Common Stock unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement. As of the Record Date, such directors owned beneficially an aggregate of 254,078 shares (excluding the 214,527 shares held in trust by Mary Lee Nagle Duda, the spouse of Fritz Duda) of First Financial Common Stock, or approximately 7.15% of the issued and outstanding shares. INTERESTS OF CERTAIN PERSONS IN THE MERGER MBI has agreed that the Merger will not diminish any indemnification obligations of First Financial or FNBI in favor of the employees, agents, directors or officers of First Financial or FNBI existing as of the Effective Time by operation of law or by virtue of the Articles of Incorporation or other charter documents, by-laws, contracts, resolutions or other agreements or documents of First Financial or FNBI in effect as of the Effective Time. To the extent that First Financial's existing directors' and officers' liability insurance policy provides coverage for the acts or omissions of the directors and officers of First Financial and FNBI prior to the Effective Time, First Financial has agreed to give to such insurance carrier and to MBI notice of any potential claims thereunder. On and after the Effective Time, MBI's directors' and officers' liability insurance policy will provide coverage for the prior acts of the directors and officers of First Financial and FNBI. BACKGROUND OF AND REASONS FOR THE MERGER; BOARD RECOMMENDATIONS BACKGROUND OF THE MERGER. In late 1996 and early 1997 First Financial's Board and management began to analyze various strategic alternatives and develop a business plan. This process, which included hiring outside consultants and meeting with outside financial experts, was initiated for the purpose of determining a course of action for maximizing shareholder value. This review was made in light of general conditions in the banking industry, local competitive and economic conditions, the results of its operations and its future prospects, legislative changes and other developments affecting the banking industry generally and First Financial specifically. When no clear consensus as to the appropriate course of action was reached by the Board as a result of this review, in September 1997 the Board determined to retain an independent financial advisor to assist it in exploring alternative means of maximizing shareholder value. Accordingly, on November 6, 1997, First Financial engaged ABN AMRO Incorporated ("ABN AMRO") as financial advisor for that purpose. On November 20, 1997, ABN AMRO presented an analysis to First Financial's Board of Directors encompassing, among other things, (i) First Financial's financial condition relative to its peers, (ii) First Financial's prospects as an independent financial institution under various growth scenarios, (iii) the effect on First Financial of various alternatives for enhancing shareholder value, including a stock split or stock dividend, an increase in the cash dividend or a share repurchase program, (iv) First Financial's prospects for growth through acquisitions of other financial institutions, (v) the effect on First Financial of a merger of equals, (vi) an analysis of prospective merger-of-equals and acquisition candidates, (vii) an indication as to the reasonable range of values that could be expected in the event First Financial were acquired and (viii) an analysis of prospective acquirors. After consideration by First Financial's Board of Directors of the various alternatives for enhancing shareholder value presented by -27- 33 ABN AMRO, First Financial's Board of Directors decided to explore further the possibility of a strategic business combination. On November 20, 1997, First Financial's Board of Directors established a Special Committee comprised of three outside directors: Fritz L. Duda, Robert J. Latham and Larry D. Ward (the "Special Committee"). The Special Committee was established to review strategic options available to First Financial, including possible affiliation with another financial institution, and to negotiate and implement an agreement with an independent financial advisor for the provision of investment banking and advisory services to the Special Committee and First Financial's Board of Directors. By letter agreement dated January 9, 1998, First Financial retained ABN AMRO to provide such services. On January 19, 1998, ABN AMRO presented to the Special Committee an analysis of institutions identified by ABN AMRO as having the ability to consummate a transaction, with particular emphasis being placed on institutions that were the most likely to offer First Financial shareholders the greatest value in an acquisition. The Special Committee discussed other criteria that it would consider important in evaluating prospective acquiror institutions. The Special Committee authorized ABN AMRO to explore the interest of certain financial institutions in engaging in discussions concerning a possible business combination and, in conjunction therewith, to prepare and provide an information statement regarding First Financial (the "Information Statement") to interested institutions. Beginning on January 28, 1998, ABN AMRO began contacting the prospective acquirors which had been approved by the Special Committee. The Information Statement was sent to seven institutions that expressed an interest in conducting discussions with First Financial and that entered into a confidentiality agreement. Representatives from ABN AMRO also conducted follow-up meetings with representatives of certain institutions that received an Information Statement. ABN AMRO first contacted MBI by telephone on January 28, 1998, after which MBI executed a confidentiality agreement and received an Information Statement. Representatives of ABN AMRO met with MBI representatives in St. Louis on February 11, 1998 to discuss a potential combination of First Financial and MBI. On February 18, 1998, MBI submitted a written indication of interest in a merger with First Financial. MBI's indication and the responses from the other prospective acquirors were reviewed by the Special Committee at a meeting held on February 20, 1998. Based on MBI's indication of interest, the Special Committee invited MBI to conduct a due diligence review of First Financial, which was conducted from February 24 through February 27, 1998, in Chicago. The due diligence review included a review of certain documents of First Financial, as well as interviews with four members of the senior management of First Financial. Following its due diligence review, MBI submitted a revised written indication of interest on March 5, 1998. With the Special Committee's approval, ABN AMRO responded to MBI's revised expression of interest by a letter dated March 10, 1998, which letter affirmed First Financial's interest in pursuing a transaction with MBI subject to the further negotiation of certain business terms. On March 10, 1998, the Special Committee authorized ABN AMRO to contact by telephone, and send an Information Statement to, two additional potential acquirors that had previously not been approved by the Special Committee but which had previously expressed interest in a potential transaction with First Financial. Information Statements were sent to the two potential acquirors and indications of interest were received from them, in each case at a lower valuation than the valuation of -28- 34 First Financial contained in MBI's written expression of interest of March 5, 1998. Accordingly, the Special Committee determined not to pursue negotiations with either party. On March 12, 1998, the Special Committee and a representative of ABN AMRO met with First Financial's Board of Directors at the Board's regular meeting and provided a full report on discussions with MBI and the other prospective acquirors. Board members were given an opportunity to ask questions of the Special Committee and of the ABN AMRO representative. Following a conversation between a member of the Special Committee and an investment banker unaffiliated with ABN AMRO, ABN AMRO received a letter on March 12, 1998 from an Iowa-based community bank holding company that expressed an interest in pursuing a transaction with First Financial. On March 18, 1998, the same bank holding company sent a letter to ABN AMRO and each member of the Special Committee proposing a "merger-of-equals" with First Financial. After evaluating the expression of interest and comparing it with other proposed transactions, including the most recent expression of interest from MBI, the Special Committee concluded that in light of the fact that the proposed merger-of-equals transaction contained no premium and the combined entity would have limited stock liquidity, pursuing further discussions with such entity was not in the best interests of First Financial or its shareholders. On March 26, 1998, two members of the Special Committee and representatives from ABN AMRO met in Chicago with three representatives of senior management of MBI to learn more about MBI and its prospects for the future, as well as to better understand how First Financial would be integrated into MBI in the event a merger transaction were consummated. On April 10, 1998, a representative from ABN AMRO and a senior executive from First Financial met with representatives of MBI in St. Louis to update MBI on year-to-date results at First Financial and to discuss additional business terms of the proposed transaction. On April 20, 1998, a MBI representative contacted representatives of ABN AMRO by telephone regarding such additional business terms. Based upon such discussions with MBI, the Special Committee agreed to begin negotiating a definitive merger agreement, stock option agreement and related documentation for presentation to First Financial's Board of Directors. On April 30, 1998, two senior executives from First Financial and a representative from ABN AMRO met with senior management of MBI in St. Louis and continued their examination of MBI's operations. On May 4, 1998, the Special Committee held a meeting at which it reviewed the Merger Agreement, Stock Option Agreement and related documentation and voted to recommend approval of the Merger to the full Board of Directors of First Financial. A special meeting of the Board was conducted on the same day, at which meeting the Special Committee presented a discussion of the specifics of the proposed transaction with MBI and the negotiations which had transpired. Representatives of ABN AMRO and of Sidley & Austin, First Financial's legal counsel, were also available for questions. Following extensive discussion and questioning by First Financial's Board of Directors, the Board unanimously approved the Merger Agreement, the Stock Option Agreement and the related documents and authorized proper officers of First Financial to execute them. The Merger Agreement and Stock Option Agreement were executed and delivered by the parties after the close of business on May 7, 1998. FIRST FINANCIAL'S REASONS FOR THE MERGER AND BOARD RECOMMENDATION. First Financial's Board of Directors has determined that the terms of the proposed Merger are fair to, and in the best interests of, First Financial and its shareholders. In reaching its determination, First Financial's -29- 35 Board of Directors consulted with legal counsel with respect to (i) the legal duties of First Financial's Board of Directors, (ii) tax matters and (iii) the Merger Agreement, Stock Option Agreement and issues related thereto. First Financial's Board of Directors also consulted with ABN AMRO, its financial advisors, with respect to the financial aspects and fairness of the proposed Merger to the shareholders of First Financial. First Financial's Board of Directors considered a number of factors, which included: (i) Information concerning the business, earnings, operations, financial condition, prospects, capital levels and asset quality of MBI and First Financial, both individually and on a combined basis, including but not limited to, information with respect to the companies' respective recent and historic stock and earnings performance. First Financial's Board of Directors considered the detailed financial analyses and other information with respect to MBI and First Financial presented to First Financial's Board of Directors by ABN AMRO, as well as First Financial's Board of Directors' own knowledge of MBI, First Financial and their respective businesses; (ii) The current and prospective competitive and regulatory environments in which First Financial operates, including significant recent consolidations within the banking industry, both nationally and in the Midwestern United States; (iii) The challenges of remaining a smaller, community-based institution, including the following: (1) competition on the margins for loans and deposits from existing competitors and new competition from larger financial institutions; (2) technology costs to remain competitive as a smaller entity; (3) continued demands for growth; and (4) other risks; (iv) A review of the strategic options available to First Financial and indications of interest from other prospective acquirors; (v) The increase in service to customers and consolidation of back-office functions which will result from the increased product mix and technology created by the specific business synergies resulting from the combination with MBI; (vi) The financial advice provided by ABN AMRO and the opinion of ABN AMRO that the Exchange Ratio pursuant to the Merger Agreement is fair from a financial point of view to the holders of First Financial Common Stock; (vii) The terms, conditions and course of negotiations relating to the Merger Agreement; (viii) The availability of dissenters' rights; (ix) The terms, conditions and course of negotiations relating to, as well as the legal, accounting and other consequences of, the stock option granted to MBI under the Stock Option Agreement, as well as the fact that MBI required the stock option as a condition to entering into the Merger Agreement; -30- 36 (x) The expectation that the Merger will generally be a tax-free transaction to First Financial and its shareholders for federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER;" (xi) The likelihood that the proposed Merger would be consummated; (xii) The recommendations of First Financial's management with respect to the proposed Merger (which recommendations were considered in light of certain interests of management in the proposed merger; see "- Interests of Certain Persons in the Merger"); and (xiii) The effect of the proposed Merger on the employees of First Financial as well as its effect on First Financial's customers and the communities in which First Financial operates. First Financial's Board of Directors believes that the proposed Merger will benefit shareholders of First Financial by affording them the opportunity to participate in the future growth of a larger and more diversified bank holding company having greater financial resources, competitive strengths and business opportunities than would be possible for First Financial as a stand alone entity. In view of the wide variety of factors considered in connection with its evaluation of the proposed Merger, First Financial's Board of Directors did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in reaching its determination. In addition, individual members of First Financial's Board of Directors may have given different weights to different factors. FOR THE REASONS DESCRIBED ABOVE, FIRST FINANCIAL'S BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND BELIEVES THE MERGER IS FAIR TO, AND IS IN THE BEST INTERESTS OF, FIRST FINANCIAL'S SHAREHOLDERS. ACCORDINGLY, FIRST FINANCIAL'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF FIRST FINANCIAL COMMON STOCK VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. --- MBI'S REASONS AND BOARD RECOMMENDATIONS. The Executive Committee of the Board of Directors of MBI considered a number of factors, including, among other things, the financial condition of First Financial and projected synergies that are anticipated to result from the Merger. The Executive Committee concluded that the Merger presents a unique opportunity for MBI to (i) increase its presence in eastern Iowa through the acquisition of an established banking organization having operations in the targeted area and (ii) enhance MBI's ability to compete in the increasingly competitive banking and financial services industry. MBI's decision to pursue discussions with First Financial was primarily a result of MBI's assessment of the value of First Financial's banking franchise, its substantial asset base within that area and the compatibility of the businesses of the two banking organizations. -31- 37 OPINION OF FINANCIAL ADVISOR TO FIRST FINANCIAL First Financial retained ABN AMRO to provide financial advisory and investment banking services to First Financial and First Financial's Board of Directors in connection with the possible sale of First Financial. In connection with such engagement, ABN AMRO agreed, if requested by First Financial's Board of Directors, to render an opinion as to the fairness to First Financial's shareholders of the Exchange Ratio to be received in the Merger. First Financial imposed no limitations upon the scope of investigation or procedures followed by ABN AMRO in connection with its opinion, nor did First Financial give ABN AMRO any specific instructions in connection therewith. The Exchange Ratio, upon which the consideration to be received by First Financial shareholders pursuant to the Merger Agreement will be based, was determined through arms'-length negotiations between MBI and First Financial, although First Financial was advised during such negotiations by ABN AMRO. On May 7, 1998, in connection with the evaluation by First Financial's Board of Directors of the transaction proposed by MBI, ABN AMRO rendered an opinion that, as of such date, and subject to certain assumptions, factors and limitations set forth in such written opinion as described below, the Exchange Ratio to be received by First Financial shareholders is fair to such shareholders from a financial point of view. ABN AMRO has also delivered an updated opinion to the Board of Directors of First Financial dated as of the date of hereof (the "Opinion"). The Opinion is based upon a review of the financial and other information set forth in this Proxy Statement/Prospectus and the financial results for First Financial and MBI through May 7, 1998. THE FULL TEXT OF ABN AMRO'S OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX A TO THIS PROXY ------- STATEMENT/PROSPECTUS AND SHOULD BE READ IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO PROCEDURES FOLLOWED, ASSUMPTIONS MADE AND MATTERS CONSIDERED BY ABN AMRO IN RENDERING ITS OPINION. ABN AMRO'S OPINION WAS PREPARED FOR FIRST FINANCIAL'S BOARD OF DIRECTORS AND ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO TO THE HOLDERS OF FIRST FINANCIAL COMMON STOCK. THE ABN AMRO OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE PROPOSED MERGER AND DOES NOT CONSTITUTE AN OPINION AS TO WHAT THE VALUE OF MBI COMMON STOCK ACTUALLY WILL BE WHEN ISSUED TO FIRST FINANCIAL SHAREHOLDERS PURSUANT TO THE MERGER. THE SUMMARY OF THE ABN AMRO OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. In connection with its Opinion, ABN AMRO reviewed the Merger Agreement and certain related documents and held discussions with certain senior officers and directors of First Financial and certain senior officers of MBI concerning the businesses, operations and prospects of First Financial and MBI. ABN AMRO examined certain publicly available business and financial information relating to First Financial and MBI, as well as certain financial information and other data for First Financial and certain financial information and other data related to MBI which were provided to or otherwise discussed with ABN AMRO by the respective managements of First Financial and MBI. ABN AMRO reviewed the financial terms of the Merger as set forth in the Merger Agreement in relation to: (i) current and historical market prices and trading volumes of First Financial Common Stock and MBI Common Stock; (ii) the respective companies' financial and other operating data; and (iii) the capitalization and financial condition of First Financial and MBI. ABN AMRO also considered, to the extent publicly available, the financial terms of certain other banking-industry transactions recently effected, which ABN AMRO considered relevant in evaluating the Merger, and analyzed certain -32- 38 financial, stock market and other publicly available information relating to the businesses of other companies whose operations ABN AMRO considered relevant in evaluating those of First Financial and MBI. ABN AMRO held discussions with certain third parties to solicit indications of interest in a possible transaction with First Financial. In rendering its Opinion, ABN AMRO assumed and relied upon the accuracy and completeness of the financial and other information reviewed by it and it did not make or obtain or assume any responsibility for independent verification of such information. In addition, ABN AMRO did not make an independent evaluation or appraisal of the assets and liabilities of First Financial and MBI or any of their respective subsidiaries. The following is a summary of the financial analyses ABN AMRO employed and reviewed with First Financial's Board of Directors in connection with its Opinion: (a) STOCK TRADING HISTORIES. ABN AMRO reviewed the stock price history for First Financial Common Stock. This review showed that during the period from April 28, 1995 to April 28, 1998, the closing price of First Financial Common Stock ranged from $15.83 per share to $45.75 per share. ABN AMRO calculated the prices per share of First Financial Common Stock implied by multiplying each closing price per share of MBI Common Stock by the Exchange Ratio. Over the same time period, such implied prices per share of First Financial Common Stock ranged from approximately $21.27 to $54.12. ABN AMRO also examined the history of closing prices and trading volumes for shares of MBI Common Stock from April 28, 1997 to April 28, 1998. This examination showed that during this twelve-month period, the closing price of MBI Common Stock ranged from $38.33 per share to $61.50 per share and was $53.63 per share on April 28, 1998. This examination also showed that the average trading volume of MBI Common Stock was approximately 293,000 shares per day over the twelve-month period. (b) COMPARABLE GROUP ANALYSES. ABN AMRO compared selected historical financial and current trading-market data of First Financial and MBI to those of separate groups of comparable companies which ABN AMRO deemed to be reasonably similar to each of First Financial and MBI in size, financial and operating character and/or geographic market. Financial data were as of the most recently available financial statement date and for the twelve-month period then ended. Market price data were as of April 28, 1998. For each company in the comparable groups for First Financial and MBI, ABN AMRO calculated the multiples of each company's market price per share to: (i) latest twelve-month earnings per share ("LTM P/E"); (ii) latest twelve-month tangible core earnings per share ("LTM Core P/E"); (iii) the median estimated earnings per share for the current fiscal year ("Current-Year P/E"); and (iv) the median estimated earnings per share for the next fiscal year ("Next-Year P/E"). "Tangible core earnings" excludes intangible-asset amortization expense and non-recurring income and expense items. "Estimated earnings per share" figures are those prepared by securities analysts following each company. ABN AMRO also calculated the ratio of each company's market price per share to: (i) book value (shareholders' equity) per share ("P/BV"); and (ii) tangible book value (shareholders' equity less intangible assets) per share ("P/TBV"). -33- 39 The comparable companies for First Financial ("First Financial Comparable Group") consisted of selected publicly traded Midwestern commercial bank holding companies with total assets ranging from $350 million to $900 million. The First Financial Comparable Group included the following 17 companies: ANB Corp., Muncie, IN; Belmont Bancorp., Bridgeport, OH; Cass Commercial Corp., Bridgeton, MO; Capitol Bancorp Ltd., Lansing, MI; German American Bancorp, Jasper, IN; Lakeland Financial Corp., Warsaw, IN; Merchants Bancorp Inc., Aurora, IL; Ohio Valley Banc Corp., Gallipolis, OH; Peoples Bancorp Inc., Marietta, OH; Premier Financial Bancorp Inc., Georgetown, KY; Princeton National Bancorp, Princeton, IL; Peoples Bank of Indianapolis, Indianapolis, IN; Southside Bancshares Corp., St. Louis, MO; State Financial Services Corp., Hales Corner, WI; S.Y. Bancorp Inc., Louisville, KY; UnionBancorp Inc., Ottawa, IL; and Wayne Bancorp Inc., Wooster, OH. The analysis indicated that First Financial Common Stock traded at: (i) a 19.9x LTM P/E multiple compared to a median of 21.7x for the comparable companies; (ii) a 19.2x LTM Core P/E multiple compared to a median of 18.7x for the comparable companies; (iii) a 19.2x Current-Year P/E multiple compared to a median of 19.1x for the comparable companies; and (iv) a 17.1x Next-Year P/E multiple compared to a median of 17.2x for the comparable companies. The analysis also indicated that First Financial Common Stock traded at: (i) a 228.8% P/BV ratio compared to a median of 251.0% for the comparable companies; and (ii) a 240.5% P/TBV ratio compared to a median of 264.5% for the comparable companies. The comparable companies for MBI ("MBI Comparable Group") consisted of selected Midwestern and Southeast commercial bank holding companies with total assets ranging from $10 billion to $100 billion. The MBI Comparable Group included the following 14 companies: AmSouth Bancorp., Birmingham, AL; BB&T Corp., Winston-Salem, NC; Commerce Bancshares Inc., Kansas City, MO; Crestar Financial Corp., Richmond, VA; Comerica Inc., Detroit, MI; Fifth Third Bancorp, Cincinnati, OH; Firstar Corp., Milwaukee, WI; First Tennessee National Corp., Memphis, TN; Huntington Bancshares Inc., Columbus, OH; Marshall & Ilsley Corp., Milwaukee, WI; Norwest Corp., Minneapolis, MN; Regions Financial Corp., Birmingham, AL; Union Planters Corp., Memphis, TN; and U.S. Bancorp, Minneapolis, MN. The analysis indicated that MBI Common Stock traded at: (i) a 31.1x LTM P/E multiple compared to a median of 21.7x for the comparable companies; (ii) a 20.6x LTM Core P/E multiple compared to a median of 20.5x for the comparable companies; (iii) a 19.5x Current-Year P/E multiple compared to a median of 19.6x for the comparable companies; and (iv) a 17.4x Next-Year P/E multiple compared to a median of 17.2x for the comparable companies. The analysis also indicated that MBI Common Stock traded at: (i) a 298.6% P/BV ratio compared to a median of 339.8% for the comparable companies; and (ii) a 438.5% P/TBV ratio compared to a median of 401.8% for the comparable companies. (c) DISCOUNTED CASH FLOW ANALYSES. ABN AMRO prepared a discounted cash flow ("DCF") analysis of First Financial on a "stand-alone" basis (i.e., without giving effect to the proposed transaction). In preparing the DCF analysis, ABN AMRO studied the historical earnings and growth patterns of First Financial and then projected -34- 40 income statements and balance sheets for a five-year period using a series of assumptions pertaining to growth, interest margins, loan losses, non-interest income and expenses, income taxes and cash dividends. Prior to its completion, ABN AMRO reviewed and discussed with First Financial's management the financial projections. The DCF analysis yielded imputed values ranging from $24.56 to $39.34 per share of First Financial Common Stock under varied assumptions for growth and alternative financial strategies. (d) COMPARABLE TRANSACTIONS ANALYSIS. ABN AMRO reviewed the financial terms of (i) recently announced banking-industry merger and acquisition transactions in which the acquired company was headquartered in the Midwest and had total assets ranging from $300 million to $800 million and (ii) recently announced banking-industry merger and acquisition transactions in which MBI was the acquiring company. Financial data for each acquired company and First Financial were as of the most recent financial statement date available at the date the transaction was announced and for the twelve-month period then ended. Merger prices and related multiples and ratios were as of the respective transaction-announcement dates. The 13 comparable transactions included (the acquiror is the first name and is in italics followed by the seller): MBI, St. Louis, MO-Financial Services Corporation of the Midwest, Rock Island, IL; Union Planters Corporation, Memphis, TN-AMBANC Corp, Vincennes, IN; St. Paul Bancorp, Chicago, IL-Beverly Bancorp., Tinley Park, IL; MBI, St. Louis, MO-Firstbank of Illinois Co., Springfield, IL; MBI, St. Louis, MO-CBT Corporation, Paducah, KY; F&M Bancorporation, Kaukauna, WI-BancSecurity Corp., Marshalltown, IA; FBOP Corporation, Oak Park, IL-P.N.B. Financial, Chicago, IL; FirstMerit Corp., Akron, OH-CoBancorp, Inc., Elyria, OH; U.S. Bancorp, Minneapolis, MN-Zappco, Inc., St. Cloud, MN; Commercial Federal, Omaha, NE-Liberty Financial, West Des Moines, IA; First Midwest Bancorp, Naperville, IL-SparBank, Inc., McHenry, IL; Area Bancshares Corp, Owensboro, KY-Cardinal Bancshares, Lexington, KY; and Citizens Banking Corp, Flint, MI-CB Financial Corp, Jackson, MI. ABN AMRO calculated several merger-pricing multiples and ratios based upon the Exchange Ratio and price of MBI Common Stock, which together implied a merger price of $46.48 per share of First Financial Common Stock. With respect to the aggregate price for all of First Financial's outstanding Common Stock and options to purchase First Financial Common Stock, the proposed transaction with MBI represented: (i) a 25.0x multiple of First Financial's earnings compared to a median of 21.4x for the comparable transactions; (ii) a 24.6x multiple of First Financial's tangible earnings compared to a median of 22.3x for the comparable transactions; (iii) a 22.5x multiple of First Financial's estimated earnings for the current fiscal year compared to a median of 20.2x for the comparable transactions; (iv) 290.3% of First Financial's book value compared to a median of 238.9% for the comparable transactions; (v) 305.0% of First Financial's tangible book value compared to a median of 245.1% for the comparable transactions; (vi) 395.6% of First Financial's adjusted tangible book value compared to a median of 327.6% for the comparable transactions; and (vii) premiums of 22.3% over First Financial's previous day's market price, 25.6% over First Financial's one-month-earlier market price and 108.1% over First Financial's one-year-earlier market price, compared to medians of 10.6%, 23.0% and 53.0%, respectively, for the comparable transactions. The ratio of transaction value to "adjusted book value" adjusts both -35- 41 transaction value and book value for the "excess" capital of each acquired company relative to a 7% tangible equity-to-assets ratio. (e) PRO FORMA ANALYSIS. ABN AMRO prepared a pro forma merger analysis illustrating the estimated effects on selected historical and projected financial data of First Financial using projected financial data for First Financial derived from the DCF analyses described previously and projected financial data for MBI based upon the consensus growth rate estimates of securities analysts that follow MBI, giving effect to the Exchange Ratio and to certain estimated after-tax merger benefits. This analysis indicated that, as compared to First Financial's stand-alone historical and projected financial data, the proposed transaction with MBI: (i) would have increased First Financial's historical diluted earnings per share by 27.8% and could affect First Financial's projected diluted earnings per share in a range of 26.3% to 35.5%; (ii) would have diluted First Financial's historical book value per share by 1.5% and could increase First Financial's projected book value per share in a range of 3.5% to 7.7%; and (iii) would have increased First Financial's historical cash dividend per share by 32.9% and could increase First Financial's projected cash dividend per share in a range of 42.5% to 53.3%. (f) CONTRIBUTION ANALYSIS. ABN AMRO prepared a contribution analysis displaying selected financial data of First Financial and MBI along with the percentages these financial data for each of First Financial and MBI would represent of the combined company on a pro forma basis. Using recent historical financial data, ABN AMRO calculated that, of the combined company on a pro forma basis, First Financial would have contributed: (i) 1.80% of total assets; (ii) 1.86% of net loans receivable; (iii) 2.04% of total deposits; (iv) 2.33% of common equity; (v) 1.87% of net income to common; and (vi) 1.86% of market capitalization. Based on the Exchange Ratio, First Financial shareholders would have owned 2.39% of the pro forma number of shares of MBI Common Stock outstanding. (g) COMPARATIVE RETURN-TO-INVESTOR ANALYSIS. Using projected financial data derived from the First Financial DCF analysis and the MBI projection analysis Described previously and the certain assumptions regarding future potential merger prices for each of First Financial and MBI, ABN AMRO calculated the hypothetical investment returns First Financial shareholders could achieve over a five-year period under a number of scenarios. This analysis indicated hypothetical compound annual rates of return to First Financial shareholders of: (i) 9.4% assuming First Financial would remain indefinitely an independent company; (ii) 14.9% assuming First Financial would remain independent and then merge at the end of the five-year analysis period; (iii) 17.5% assuming First Financial would consummate the proposed transaction with MBI upon the Exchange Ratio and MBI would remain indefinitely an independent company; and (iv) 23.6% assuming First Financial would consummate the proposed transaction with MBI upon the Exchange Ratio and MBI would merge at the end of the five-year analysis period. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view -36- 42 of the process underlying ABN AMRO's Opinion. In arriving at its fairness determination, ABN AMRO considered the results of all of such analyses. No company or transaction used in the above analyses as a comparison is identical to First Financial or MBI or the Merger. The analyses were prepared solely for purposes of ABN AMRO's Opinion provided to First Financial's Board of Directors as to the fairness of the Exchange Ratio to be received by the shareholders of First Financial pursuant to the Merger and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon projections of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or ABN AMRO, none of First Financial, ABN AMRO or any other person assumes responsibility if future results are materially different from those projected. ABN AMRO, as part of its investment banking business, is continually engaged in the valuation of businesses in connection with mergers and acquisitions, as well as initial and secondary offerings of securities and valuations for other purposes. First Financial selected ABN AMRO as its financial advisor because ABN AMRO is a nationally recognized investment banking firm that has substantial experience in transactions similar to the Merger. In the ordinary course of ABN AMRO's business, ABN AMRO and its affiliates may actively trade securities of First Financial and MBI for their own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. First Financial retained ABN AMRO as its financial advisor by letter agreement dated January 9, 1998 ("Engagement Letter"). Pursuant to the terms of the Engagement Letter, upon delivery of ABN AMRO's Opinion, First Financial paid ABN AMRO an Opinion Fee (as defined in the Engagement Letter) of $100,000. Pursuant to the terms of the Engagement Letter, upon closing of the Merger, First Financial will pay ABN AMRO a cash financial advisory fee based on a percentage of transaction value, as defined in the Engagement Letter, reduced by the Opinion Fee previously paid. Based upon the closing price of MBI Common Stock of $50.0625 per share on June 25, 1998, the balance of the financial advisory fee payable by First Financial to ABN AMRO upon closing of the Merger would be approximately $1,136,366. Further, in the Engagement Letter, First Financial agreed to reimburse ABN AMRO for its reasonable out-of-pocket expenses incurred in connection with its engagement and to indemnify ABN AMRO against certain liabilities, including liabilities under securities laws. CONDITIONS OF THE MERGER The respective obligations of MBI, Ameribanc and First Financial to consummate the Merger are subject to the satisfaction of certain mutual conditions, including the following: (1) The Merger Agreement shall be approved by the requisite vote of holders of First Financial Common Stock at the Special Meeting. (2) The Merger Agreement and the transactions contemplated therein shall have been approved by the Federal Reserve Board and any other federal and/or state regulatory agency whose approval is required for the consummation of the transactions contemplated therein and all waiting periods after such approvals required by law or regulation shall have expired. -37- 43 (3) The Registration Statement, of which this Proxy Statement/Prospectus is a part, registering shares of MBI Common Stock to be issued in the Merger, shall have been declared effective and not be subject to a stop order or any threatened stop order. (4) None of First Financial, MBI or Ameribanc shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the Merger. (5) First Financial, MBI and Ameribanc each shall have received from Thompson Coburn 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 (i) the Merger will constitute a reorganization within the meaning of Section 368 of the Code and (ii) as a result of the Merger, except with respect to cash received in lieu of fractional share interests, and assuming that the MBI Common Stock is a capital asset in the hands of the holder thereof at the effective time (A) holders of First Financial Common Stock who receive MBI Common Stock in the Merger will not recognize gain or loss for federal income tax purposes, (B) the basis of such MBI Common Stock will equal the basis of the First Financial Common Stock for which it is exchanged and (C) the holding period of such MBI Common Stock will include the holding period of the First Financial Common Stock for which it is exchanged. The obligation of MBI and Ameribanc to consummate the Merger is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of First Financial made in the Merger Agreement shall be true and correct in all material respects as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date or period, (ii) where the facts that 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 (financial or otherwise), properties, business or results of operations (a "Material Adverse Effect") on First Financial and its subsidiary, taken as a whole and (iii) for the effect of transactions contemplated by the Merger Agreement and all obligations required to be performed by First Financial prior to the Effective Time shall have been performed in all material respects, and MBI shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of First Financial to that effect. (2) First Financial shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of First Financial for the lawful consummation by First Financial of the Merger. (3) MBI and Ameribanc shall have received a letter from KPMG Peat Marwick LLP, reasonably satisfactory in form and substance to MBI and Ameribanc, to the effect that the Merger will qualify for pooling-of-interests accounting treatment, which letter shall not have been withdrawn at or prior to the Effective Time. -38- 44 (4) Since May 7, 1998, there shall have been no Material Adverse Effect on First Financial and its subsidiary, taken as a whole. (5) Sidley & Austin, counsel to First Financial, shall have delivered to MBI an opinion dated as of the Closing Date or a mutually agreeable earlier date regarding certain legal matters. First Financial's obligation to consummate the Merger is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of MBI and Ameribanc made in the Merger Agreement shall be true and correct, in all material respects, as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date or period, (ii) where the facts that 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 MBI and its subsidiaries, taken as a whole and (iii) for the effect of transactions contemplated by the Merger Agreement and all obligations required to be performed by MBI and Ameribanc prior to the Effective Time shall have been performed in all material respects, and First Financial shall have received a certificate from any Executive Vice President of MBI to that effect. (2) MBI and Ameribanc shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of MBI or Ameribanc for the lawful consummation of the Merger. (3) Since May 7, 1998, there shall have been no Material Adverse Effect on MBI and its subsidiaries, taken as a whole. (4) Thompson Coburn, counsel to MBI, shall have delivered to First Financial an opinion dated as of the Closing Date or a mutually agreeable earlier date regarding certain legal matters. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains extensive representations and warranties by First Financial, MBI and Ameribanc. These include, among other things, representations and warranties of First Financial as to (i) the organization and good standing of First Financial and its subsidiary, (ii) First Financial's capital structure, (iii) First Financial's authority relative to the execution and delivery of, and performance of its obligations under, the Merger Agreement, (iv) the documents, including financial statements and other reports, filed by First Financial with the applicable regulatory authorities, (v) title to and condition of assets, (vi) real property, (vii) taxes, (viii) the absence of material adverse changes since December 31, 1997, (ix) loans, commitments and contracts, (x) the absence of material conflicts between its obligations under the Merger Agreement and its charter documents and material contracts to which it is a party or by which it is bound, (xi) litigation, (xii) directors' and officers' insurance, (xiii) compliance with laws, (xiv) labor, (xv) the existence of certain material interests of certain persons, (xvi) allowance for loan and lease losses and non-performing assets, (xvii) employee benefit plans and related matters, (xviii) the conduct of First Financial and its subsidiary from and after December 31, 1997, (xix) the absence of undisclosed liabilities, (xx) the accuracy of the information supplied by First Financial for -39- 45 inclusion in this Proxy Statement/Prospectus and related documents, (xxi) the absence of registration obligations with respect to First Financial Common Stock, (xxii) the absence of actions that would jeopardize the qualification of the transactions contemplated by the Merger Agreement as a reorganization or for pooling-of-interests accounting treatment or jeopardize the receipt of certain regulatory approvals, (xxiii) obligations to brokers and finders, (xxiv) interest rate management instruments, (xxv) the accuracy of the statements contained in the Merger Agreement and related documents and (xxvi) Year 2000 compliance for all computer software and hardware. MBI's and Ameribanc's representations and warranties include, among other things, those as to (i) MBI's and Ameribanc's respective organization and good standing, (ii) the capital structure of MBI, (iii) MBI's and Ameribanc's authority relative to the execution and delivery of, and performance of their respective obligations under, the Merger Agreement, (iv) the documents, including financial statements and other reports, filed by MBI with applicable regulatory authorities, (v) the absence of material adverse changes since December 31, 1997, (vi) the accuracy of the information supplied by MBI or Ameribanc for inclusion in this Proxy Statement/Prospectus and related documents, (vii) the absence of obligations to brokers and finders and (viii) the accuracy of the statements contained in the Merger Agreement and related documents. TERMINATION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT The Merger Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the shareholders of First Financial, (i) by mutual consent of the Executive Committee of the Board of Directors of MBI and the Board of Directors of First Financial or (ii) unilaterally by the Executive Committee of the Board of Directors of MBI or the Board of Directors of First Financial: (A) at any time after May 1, 1999, if the Merger has not been consummated by such date (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement); (B) if the Federal Reserve Board or any other Regulatory Authority whose approval is required for consummation of the Merger shall have issued a final non-appealable denial of such approval; (C) if the shareholders of First Financial shall not have approved the Merger Agreement at the Special Meeting; or (D) in the event of a material volitional breach by the other party of any representation, warranty or agreement contained in the Merger Agreement, which breach is not cured within 30 days after written notice thereof is given to the party committing such breach or is not waived by such other party. In addition, the Executive Committee of the Board of Directors of MBI may terminate the Merger Agreement in certain circumstances if environmental investigations of all real property owned, leased or operated by First Financial as of May 7, 1998 indicate that the estimated cost of corrective or remedial action with regard to such properties would exceed $500,000 in the aggregate. No assurance can be given that the Merger will be consummated on or before May 1, 1999 or that MBI or First Financial will not elect to terminate the Merger Agreement if the Merger has not been consummated on or before such date. In the event of the termination of the Merger Agreement, it shall become void and there shall be no liability on the part of any party or their respective officers and directors, except that (i) confidentiality and indemnification obligations shall survive termination, (ii) MBI shall pay all printing, mailing and filing expenses with respect to the Registration Statement and this Proxy Statement/Prospectus and (iii) in the case of termination due to continued material volitional breach after notice and opportunity to cure, the breaching party shall not be relieved of liability to the non-breaching party arising from the intentional, deliberate or willful breach of any representation, warranty, covenant or agreement contained in the Merger Agreement. -40- 46 Any provision of the Merger Agreement, including, without limitation, the conditions to the consummation of the Merger and the restrictions described under "- Business Pending the Merger," may be (i) waived in writing at any time by the party that is or whose shareholders are entitled to the benefits thereof or (ii) amended at any time by written agreement of the parties approved by or on behalf of their respective Boards of Directors or Executive Committees, whether before or after the Special Meeting; provided, however, that after approval of the Merger Agreement by the shareholders of First Financial at the Special Meeting, no such modification may (i) alter or change the amount or kind of consideration to be received by the First Financial shareholders pursuant to the Merger or (ii) adversely affect the tax treatment to First Financial shareholders as a result of receiving the shares of MBI Common Stock in the Merger. INDEMNIFICATION First Financial, MBI and Ameribanc have agreed to indemnify each other and the officers, directors and controlling persons of each other against any losses, claims, damages or liabilities to which any such party may become subject under federal or state laws or regulations, to the extent that such loss, claim, damage or liability is based primarily upon information furnished to the party subject to such liability by the other party, or out of an omission by such other party to state a necessary or material fact in the Registration Statement of which this Proxy Statement/Prospectus is a part. CLOSING DATE The Merger will be consummated and become effective upon the later of (i) the issuance of a Certificate of Merger by the Office of the Secretary of State of the State of Missouri and (ii) the filing of Articles of Merger with the Office of the Secretary of State of the State of Iowa. Under the Merger Agreement, unless otherwise agreed to by the parties, the Closing Date shall occur on such date as MBI shall notify First Financial in writing (such notice to be at least five business days in advance of the Effective Time) but: (i) not earlier than the Approval Date, which shall occur upon (a) the receipt of the requisite approval of the Merger Agreement by the shareholders of First Financial and (b) the approval of the Merger by the Federal Reserve Board and any other Regulatory Authority whose approval is required and the satisfaction of all waiting periods for such approvals; and (ii) not later than the first business day of the first full calendar month beginning at least five business days after the Approval Date. SURRENDER OF FIRST FINANCIAL STOCK CERTIFICATES AND RECEIPT OF MBI COMMON STOCK At the Effective Time, each outstanding share of First Financial Common Stock (other than any shares held by shareholders exercising dissenters' rights pursuant to the IBCA) will be converted into the right to receive 0.88 of a share of MBI Common Stock. See "- General Description of the Merger." Each holder of First Financial Common Stock, upon submission to the Exchange Agent of a properly executed letter of transmittal and surrender to the Exchange Agent of the stock certificate(s) formerly representing shares of First Financial Common Stock, will be entitled to receive a stock certificate(s) evidencing the shares of MBI Common Stock to which such shareholder is entitled. As soon as practicable following the Effective Time, the Exchange Agent will mail to each First Financial shareholder of record as of the Effective Time notification of the effectiveness of the Merger. The Exchange Agent also will provide a letter of transmittal and instructions as to the procedure -41- 47 for the surrender of the stock certificates evidencing the First Financial Common Stock and the receipt of shares of MBI Common Stock. It will be the responsibility of each holder of First Financial shares to submit all certificates formerly evidencing such holder's shares of First Financial Common Stock to the Exchange Agent. No dividends or other distributions will be paid to a former First Financial shareholder with respect to shares of MBI Common Stock until such shareholder's properly completed letter of transmittal and stock certificates formerly representing First Financial 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, are delivered to the Exchange Agent. All dividends or other distributions on the MBI Common Stock declared between the Closing Date and the date of the surrender of a First Financial stock certificate will be held for the benefit of the shareholder and will be paid to the shareholder, without interest thereon, upon the surrender of such stock certificate(s) or documentation and/or insurance bond in lieu thereof. FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the former shareholders of First Financial in connection with the Merger. Each holder of First Financial 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 on the Closing Date as reported in The Wall Street Journal. Cash received by First Financial shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." REGULATORY APPROVAL In addition to the approval of the Merger Agreement by the First Financial shareholders, the obligations of the parties to effect the Merger are subject to prior approval of the Federal Reserve Board. As a bank holding company, MBI is subject to regulation under the BHCA. MBI will file all required applications seeking approval of the Merger with the Regulatory Authorities. Under the BHCA, the Federal Reserve Board can withhold approval of the Merger if, among other things, it determines that the effect of the Merger would be to substantially lessen competition in the relevant market. In addition, the Federal Reserve Board is required to consider whether the combined organization meets the requirements of the Community Reinvestment Act of 1977, as amended, by assessing the involved entities' respective records of meeting the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions. In its review, the Federal Reserve Board also is required to examine the financial and managerial resources and future prospects of the combined organization and analyze the capital structure and soundness of the resulting entity. The Federal Reserve Board has the authority to deny an application if it concludes that the combined organization would have inadequate capital. The Merger cannot be consummated prior to receipt of all required approvals. There can be no assurance that required regulatory approvals for the Merger will be obtained and, if the Merger is approved, as to the date of such approvals or whether the approvals will contain any unacceptable conditions. There can likewise be no assurance that the United States Department of Justice will not challenge the Merger during the waiting period set aside for such challenges after receipt of approval from the Federal Reserve Board. See "SUPERVISION AND REGULATION." -42- 48 MBI and First Financial are not aware of any governmental approvals or actions that may be required for consummation of the Merger other than as described above. Should any other approval or action be required, it is presently contemplated that such approval or action would be sought. There can be no assurance that any necessary regulatory approvals or actions will be timely received or taken, that no action will be brought challenging such approval or action or, if such a challenge is brought, as to the result thereof, or that any such approval or action will not be conditioned in a manner that would cause the parties to abandon the Merger. See "SUPERVISION AND REGULATION." BUSINESS PENDING THE MERGER The Merger Agreement provides that, during the period from May 7, 1998 to the Effective Time, First Financial and its subsidiary will conduct their respective businesses according to the ordinary and usual course consistent with past practices and use their best efforts to maintain and preserve their respective business organizations, employees and advantageous business relationships and retain the services of their officers and key employees. Furthermore, from May 7, 1998 to the Effective Time, except as provided in the Merger Agreement, First Financial will not, and will not permit its subsidiary to, without the prior written consent of MBI and Ameribanc: (1) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock (other than dividends from the First Financial subsidiary to First Financial), except that First Financial may declare and pay regular quarterly cash dividends of not more than $0.2725 per share; provided, however, that First Financial may not declare or pay a quarterly dividend for any quarter in which First Financial shareholders will be entitled to receive a regular quarterly dividend on the shares of MBI Common Stock to be issued in the Merger; (2) enter into or amend any employment, severance or similar agreement or arrangement with any director, officer or employee, or materially modify any of the First Financial employee plans or grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except normal individual increases in compensation to employees consistent with past practice, or as required by law or contract, and except for such increases of which First Financial notifies MBI and Ameribanc in writing and which MBI and Ameribanc do not disapprove within ten days of the receipt of such notice; (3) authorize, recommend, propose or announce an intention to authorize, recommend or propose, or enter into an agreement in principle with respect to, any merger, consolidation or business combination (other than the Merger), any acquisition of a material amount of assets or securities, any disposition of a material amount of assets or securities or any release or relinquishment of any material contract rights; (4) propose or adopt any amendments to its Articles of Incorporation or other charter document or by-laws; -43- 49 (5) issue, sell, grant, confer or award any capital stock, options, warrants, conversion rights or other rights, except First Financial may issue shares of First Financial Common Stock upon exercise of First Financial Stock Options outstanding on May 7, 1998 and pursuant to the Option, or effect any stock split or adjust, combine, reclassify or otherwise change its capitalization as it existed on May 7, 1998; (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 and obtaining the written consent of MBI, cause or permit FNBI to 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 $1,000,000 or in any amount which, when aggregated with any and all loans or credit commitments of First Financial and its subsidiary to such person or entity, would be equal to or in excess of $1,000,000; provided, however, that First Financial or its subsidiary may make any such loan or credit commitment in the event (A) First Financial or its subsidiary has delivered to MBI and Ameribanc or their designated representative a notice of its intention to make such loan and such information as MBI and Ameribanc or their designated representative may reasonably require in respect thereof and (B) MBI and Ameribanc or their designated representative shall not have reasonably objected to such loan by giving written or facsimile notice of such objection within two (2) business days following the delivery to MBI and Ameribanc or their designated representative of the notice of intention and information as aforesaid; provided further, however, that nothing shall prohibit First Financial or its subsidiary from honoring any contractual obligation in existence on the date of the Merger Agreement. Notwithstanding the above, First Financial shall be authorized, without first consulting with MBI and Ameribanc or obtaining MBI's and Ameribanc's 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 ten percent (10%) of such Pre-Existing Facilities or $50,000; (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 or Ameribanc) relating to the disposition of any significant portion of the business or assets of First Financial or its subsidiary or the acquisition of the capital stock (or rights or options exercisable for, or securities convertible or exchangeable into, capital stock) of First Financial or its subsidiary or the merger of First Financial or its subsidiary with any person (other than MBI or Ameribanc) or any similar transaction (each such transaction being referred to herein as an "Acquisition Transaction"); or -44- 50 (ii) provide any third party with information or assistance or negotiate with any third party with respect to an Acquisition Transaction, and First Financial shall promptly notify MBI and Ameribanc orally of all the relevant details relating to all inquiries, indications of interest and proposals which it or its subsidiary may receive with respect to any Acquisition Transaction; (9) take any action that would (i) prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code, (ii) materially impede or delay the consummation of the transactions contemplated by the Merger Agreement or the ability of MBI and Ameribanc or First Financial to obtain any approval of any Regulatory Authority required for the transactions contemplated by the Merger Agreement or to perform its covenants and agreements under the Merger Agreement or (iii) prevent the Merger from qualifying for pooling-of-interests accounting treatment; (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, or execute individual investment transactions for its own account of greater than $1,000,000 for U.S. Treasury or Federal Agency Securities and $250,000 for all other investment instruments; (12) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or knowingly take or omit to take any other action which would make any of First Financial's representations and warranties in the Merger Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other act; or (13) enter into, increase or renew any loan or credit commitment (including standby letters of credit) to any executive officer or director of First Financial or any subsidiary of First Financial, any holder of 10% or more of the outstanding shares of First Financial Common Stock, 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 Ameribanc, which consent shall not be unreasonably withheld. The Merger Agreement also provides that during the period from May 7, 1998 to the Effective Time, MBI and Ameribanc shall not, and shall not permit any of their subsidiaries to, without the prior written consent of First Financial, agree in writing or otherwise take any action that is prohibited of First Financial by subsections (9) and (12) above. -45- 51 ACCOUNTING TREATMENT The Merger is intended to be accounted for under the pooling-of-interests method of accounting. It is a condition to MBI's and Ameribanc's consummation of the Merger, unless otherwise waived, that KPMG Peat Marwick LLP, MBI's independent accountants, deliver to MBI and Ameribanc a letter stating that the Merger will qualify for pooling-of-interests accounting treatment. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ----------------------------------------------------- The following discussion is based upon an opinion of Thompson Coburn, counsel to MBI ("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 Merger to certain First Financial 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 Merger. The discussion does not address all aspects of federal income taxation that may be applicable to First Financial shareholders in light of their status or personal investment circumstances, nor does it address the federal income tax consequences of the Merger that are applicable to First Financial shareholders subject to special federal income tax treatment, including (without limitation) foreign persons, insurance companies, tax-exempt entities, retirement plans, dealers in securities, persons who acquired their First Financial Common Stock pursuant to the exercise of employee stock options or otherwise as compensation and persons who hold their First Financial Common Stock as part of a "straddle," "hedge" or "conversion transaction." Each shareholder's individual circumstances may affect the tax consequences of the Merger 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 FIRST FINANCIAL SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. The discussion assumes that shares of First Financial Common Stock are held as capital assets (within the meaning of Section 1221 of the Code) at the Effective Time. First Financial has received an opinion from Counsel to the effect that, assuming the Merger occurs in accordance with the Merger Agreement, the Merger will constitute a "reorganization" for federal income tax purposes with the following federal income tax consequences: (1) First Financial shareholders will recognize no gain or loss as a result of the exchange of their First Financial Common Stock solely for shares of MBI Common Stock pursuant to the Merger, except with respect to cash received in lieu of fractional shares, if any, as discussed below. (2) The aggregate adjusted tax basis of the shares of MBI Common Stock received by each First Financial shareholder in the Merger (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 4 below) will be equal to the aggregate adjusted tax basis of the shares of First Financial Common Stock surrendered. (3) The holding period of the shares of MBI Common Stock received by each First Financial shareholder in the Merger (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 4 below) will include the holding period of the shares of First Financial Common Stock exchanged therefor. -46- 52 (4) A First Financial shareholder who receives cash in the Merger in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received by such shareholder in the Merger and then redeemed by MBI in return for the cash. The receipt of such cash will cause the recipient to recognize capital gain or loss equal to the difference between the amount of cash received and the portion of such holder's adjusted tax basis in the shares of MBI Common Stock allocable to the fractional share. Counsel's opinion is subject to the conditions and assumptions stated therein and relies upon various representations made by MBI and First Financial. If any of these representations or assumptions is inaccurate, the tax consequences of the Merger could differ from those described herein. Counsel's opinion also is based upon the Code, regulations proposed or promulgated thereunder, judicial precedent relating thereto and current administrative rulings and practice, 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 Closing Date is a condition to the consummation of the Merger. 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 First Financial has requested an advance ruling as to the federal income tax consequences of the Merger, 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 MERGER TO CERTAIN FIRST FINANCIAL SHAREHOLDERS AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH FIRST FINANCIAL SHAREHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EACH FIRST FINANCIAL SHAREHOLDER. ACCORDINGLY, EACH FIRST FINANCIAL SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS. DISSENTERS' RIGHTS OF SHAREHOLDERS OF FIRST FINANCIAL ----------------------------------------------------- Each shareholder of First Financial has the right to demand to be paid the fair value of his or her shares of First Financial Common Stock in cash upon consummation of the Merger if the shareholder follows the dissenters' rights procedures set forth in Division XIII of the IBCA. "Fair value" is defined in the IBCA as the value of the subject shares immediately prior to the consummation of the Merger, excluding any appreciation or depreciation in anticipation of the Merger unless such an exclusion would be inequitable. Under the IBCA, a shareholder of First Financial may dissent from the Merger and obtain the fair value of the shares owned by such shareholder with such fair value to be paid in cash if the -47- 53 Merger is consummated. Any shareholder of First Financial who wishes to assert his or her dissenters' rights must do each of the following: (i) deliver to First Financial before the vote on the Merger Agreement is taken a written notice of such shareholder's intent to demand payment for his or her shares if the Merger is effected and (ii) not vote such shares in favor of the approval of the Merger Agreement at the Special Meeting. A VOTE AGAINST THE APPROVAL OF THE MERGER AGREEMENT WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN NOTICE OF A SHAREHOLDER'S INTENT TO ASSERT DISSENTERS' RIGHTS. If the Merger Agreement is approved at the Special Meeting, First Financial shall deliver a written notice to each person who asserted dissenters' rights as described above. The notice must be sent by First Financial no later than 10 days after the Special Meeting and must contain the following information: (i) a statement as to where a demand for payment must be sent by the dissenting shareholder and where and when the certificates evidencing shares of First Financial Common Stock owned by such shareholders must be deposited, (ii) a form with which dissenting shareholders may make their demands for payment, which form will include the date of the first public announcement of the proposed Merger and a requirement that all dissenting shareholders certify as to whether or not he or she had acquired beneficial ownership of the shares subject to the dissenters' rights demand prior to the date of the first public announcement of the proposed Merger, (iii) a statement as to the date by which First Financial must receive the demand for payment from the dissenting shareholder, such date to be not fewer than 30 nor more than 60 days after the date of First Financial's notice to dissenting shareholders and (iv) a copy of Division XIII of the IBCA. A dissenting shareholder must demand payment for his or her shares, certify as to whether the acquisition date of such shares was prior to or after the public announcement of the proposed Merger and deposit the certificates evidencing such shares prior to the date set in the notice sent by First Financial to the dissenting shareholders. A shareholder who does not demand payment or deposit certificates for such shares by the date or in the manner set forth in the notice to dissenting shareholders sent by First Financial will be deemed to have waived his or her dissenters' rights and will not be entitled to payment of the fair value of his or her shares under Division XIII of the IBCA. First Financial (or Ameribanc, as the surviving corporation in the Merger) must make a cash payment to each dissenting shareholder who files a demand for payment as described above equal to First Financial's (or Ameribanc's) estimate of the fair value of the shares of First Financial Common Stock owned by such shareholders, plus accrued interest on such payment from the Closing Date. Such payment must be made upon the later of: (i) the time the Merger is consummated or (ii) the receipt of the demand for payment from the dissenting shareholder. If the Merger is not consummated within 60 days of the date set by First Financial for receipt of the dissenting shareholders' demands for payment and deposits of stock certificates, First Financial must return the deposited certificates and send a new notice to dissenting shareholders when the Merger is actually consummated. The payment must be accompanied by the following: (i) First Financial's balance sheet as of the end of its most recently completed fiscal year, an income statement and a statement of changes in shareholders' equity as of the most recently completed fiscal year and interim financial statements of First Financial as of and for the most recent date or period available, (ii) a statement of First Financial's (or Ameribanc's) estimate of fair value of the First Financial shares, (iii) an explanation as to how the interest payment was computed, (iv) a statement of the dissenting shareholder's right to demand a greater payment than First Financial's estimate as described below and (v) a copy of Division XIII of the IBCA. -48- 54 First Financial may elect to withhold payment from those dissenting shareholders who do not certify in their demand for payment that they owned the shares subject to the dissenters' rights demand prior to the public announcement of the proposed Merger. To the extent that First Financial elects to withhold payment from such dissenting shareholders, First Financial shall estimate the fair value of the shares owned by such holders and accrued interest thereon and offer to pay the same to each such dissenting shareholder who agrees to accept it in full satisfaction of his or her demand. The offer to such shareholders must be accompanied by: (i) a statement of First Financial's estimate of fair value, (ii) an explanation as to how the interest payment was computed and (iii) a statement of the dissenting shareholder's right to demand a greater payment than First Financial's estimate as described below. After receipt of First Financial's (or Ameribanc's) estimate of fair value in either of the above cases, the dissenting shareholder may deliver notice to First Financial (or Ameribanc) of his or her own estimate of fair value for the shares and the amount of interest due and demand payment of the difference in amount, if any, previously paid by First Financial (or Ameribanc) to such shareholder and the amount of the shareholder's estimate. In order to make such a demand: (i) the dissenting shareholder must believe that the amount paid or offered by First Financial (or Ameribanc) is less than the fair value of the shares or the interest is incorrectly calculated; or (ii) First Financial (or Ameribanc) has not made payment for the shares within 60 days after the date set by First Financial (or Ameribanc) as the last day that First Financial (or Ameribanc) set for accepting demands for payment; or (iii) the Merger has not been consummated within the 60-day period after the last date that First Financial (or Ameribanc) set for accepting demands for payment and First Financial has not returned the stock certificates deposited by the dissenting shareholder. A dissenting shareholder will waive his or her right to seek a greater payment than First Financial's estimate of fair value and accrued interest unless such shareholder notifies First Financial (or Ameribanc) in writing of the same within 30 days of the receipt of First Financial's (or Ameribanc's) payment or offer of payment for the shares. If, within 60 days of receiving the dissenting shareholder's notice of a demand for increased payment, the demand remains unsettled, First Financial (or Ameribanc) must commence proceedings in the district court of Johnson County, Iowa petitioning the court to determine the fair value and accrued interest of such shares. If First Financial (or Ameribanc) fail to start such proceedings within the 60-day period, First Financial (or Ameribanc) must pay each dissenting shareholder whose demand remains unsettled the amount that such shareholder has demanded. All dissenting shareholders with claims remaining unsettled will be made parties to the proceedings and the court may appoint one or more appraisers to receive evidence and recommend the fair value of the shares. The court will find either (i) that the fair value and accrued interest already paid by First Financial (or Ameribanc) equals or exceeds the amount determined by the court, in which case the shareholder will be entitled to no additional payment from First Financial (or Ameribanc) or (ii) First Financial (or Ameribanc) must pay an additional amount equal to the difference between the court's determination of fair value and accrued interest and the amount already paid by First Financial (or Ameribanc) to the shareholder. The court shall also determine all costs of the proceedings, including the reasonable compensation and expenses of the appraisers and shall assess such costs to First Financial (or Ameribanc) unless the court finds that such an assessment would be inequitable because the dissenting shareholders had acted arbitrarily, vexatiously or not in good faith. Fees of legal counsel will generally be borne by each of the parties except that the attorneys' fees of the dissenting shareholders will be assessed to First Financial (or Ameribanc) to the extent that the court finds it did not substantially comply with the procedures set forth in Division XIII of the IBCA or to either party in favor of the other party to the extent that the court finds that the assessed party acted arbitrarily, vexatiously or not in good -49- 55 faith. To the extent that counsel for one dissenting shareholder is found by the court to have provided a substantial benefit to other dissenting shareholders, the court may order that the fees of such counsel be paid out of the amounts awarded to the dissenting shareholders who have been benefited. THE PRECEDING DISCUSSION IS A SUMMARY OF THE PROVISIONS REGARDING DISSENTERS' RIGHTS UNDER THE IBCA AND IS QUALIFIED IN ITS ENTIRETY BY THE TEXT OF DIVISION XIII OF THE IBCA WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX B. FIRST FINANCIAL SHAREHOLDERS WHO ARE ------- INTERESTED IN ASSERTING DISSENTERS' RIGHTS PURSUANT TO THE IBCA IN CONNECTION WITH THE MERGER MAY WISH TO CONSULT WITH THEIR COUNSEL FOR ADVICE AS TO THE PROCEDURES REQUIRED TO BE FOLLOWED. PRO FORMA FINANCIAL INFORMATION ------------------------------- COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and First Financial and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Merger, the pending acquisitions by MBI of FSCM, CBT and Firstbank, each of which will be accounted for under the pooling-of-interests method of accounting, and the acquisition of Roosevelt, which was consummated on July 1, 1997 and accounted for under the purchase method of accounting. The data presented is based upon the consolidated financial statements and related notes of MBI and First Financial included herein 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. 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 proposed Merger, the pending acquisitions by MBI of FSCM, CBT and Firstbank and the completed acquisition of Roosevelt had been consummated prior to the periods indicated. -50- 56
MBI/ MBI/ MBI/ MBI/ FIRST FIRST FINANCIAL FIRST FINANCIAL ALL ENTITIES ALL ENTITIES MBI FINANCIAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA REPORTED REPORTED COMBINED EQUIVALENT COMBINED EQUIVALENT -------- -------- ------------ -------------- ------------ -------------- Book Value per Share: March 31, 1998 $ 18.65 $ 16.96 $ 18.54 $ 16.32 $ 18.58 $ 16.35 December 31, 1997 18.47 16.50 18.33 16.13 17.58 15.47 Cash Dividends Declared per Share: Three Months ended March 31, 1998 $ .31 $ .19 $ .31 $ .27 $ .310 $ .27 Year ended December 31, 1997 1.148 .65 1.148 1.01 1.148 1.01 Year ended December 31, 1996 1.092 .55 1.092 .96 1.092 .96 Year ended December 31, 1995 .88 .51 .88 .77 .880 .77 Basic Earnings per Share: Three Months ended March 31, 1998 $ .78 $ .49 $ .78 $ .69 $ .76 $ .67 Year ended December 31, 1997 1.68 1.91 1.69 1.49 1.49 1.31 Year ended December 31, 1996 2.11 1.68 2.11 1.86 2.13 1.87 Year ended December 31, 1995 2.41 1.28 2.39 2.10 2.37 2.09 Diluted Earnings per Share: Three Months Ended March 31, 1998 $ .77 $ .49 $ .77 $ .68 $ .75 $ .66 Year ended December 31, 1997 1.65 1.90 1.66 1.46 1.45 1.28 Year ended December 31, 1996 2.08 1.67 2.08 1.83 2.09 1.84 Year ended December 31, 1995 2.37 1.27 2.35 2.07 2.31 2.03 Market Price per Share: At May 7, 1998 $52.8125 $38.000 $52.8125 $46.475 $52.8125 $46.475 At June 25, 1998 50.8125 43.375 50.8125 44.715 50.8125 44.715 - --------------- Includes the effect of pro forma adjustments for First Financial, as appropriate. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." Based on the pro forma combined per share amounts multiplied by 0.88, the Exchange Ratio applicable to one share of First Financial Common Stock in the Merger. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to pro forma combined consolidated financial statements. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." Includes the effect of pro forma adjustments for First Financial, CBT, Firstbank, FSCM and Roosevelt, as appropriate. Due to the immateriality of the financial condition and results of operations of Horizon and HomeCorp to that of MBI, this table does not include the effect of pro forma adjustments for Horizon and HomeCorp. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." Based upon the following number of shares outstanding as of March 31, 1998: Shares of MBI Common Stock as reported 133,115,257 Number of Shares of MBI Common Stock, net of treasury shares, to be issued in the mergers of: FSCM 1,877,324 CBT 4,961,910 First Financial 2,875,360 Firstbank 12,511,135 ----------- MBI/All Entities Pro Forma Combined 155,340,956 =========== The market value of MBI Common Stock disclosed as of May 7, 1998, the last trading day preceding the public announcement of the Merger, and as of June 25, 1998, the last practicable date prior to the mailing of this Proxy Statement/Prospectus, is based on the last sale price as reported on the NYSE Composite Tape. The market value of First Financial Common Stock disclosed as of May 7, 1998, the last trading day preceding the public announcement of the Merger, and as of June 26, 1998, the last practicable date prior to the mailing of this Proxy Statement/Prospectus, is based on over-the-counter "bulletin board" closing prices.
-51- 57 PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) RECENT ACQUISITIONS. MBI has completed or announced a number of acquisitions during the years covered by the pro forma financial statements that follow. Set forth below is a table that summarizes such completed and pending acquisitions, including the name of the acquired entity, the date of consummation of the acquisition, the assets and deposits of the acquired entities at the date of consummation for the completed acquisitions, the consideration paid in cash and/or shares of MBI Common Stock and the accounting method utilized. ACQUISITIONS COMPLETED BY MBI (1995-PRESENT)
CONSIDERATION ---------------------- GROSS NUMBER ACCOUNTING NAME DATE ASSETS DEPOSITS CASH OF SHARES METHOD - ---- ---- ------ ------- ---- --------- ------ (DOLLARS IN THOUSANDS) HomeCorp, Inc. Mar. 2 1998 $ 335,137 $ 309,157 $ 14 854,760 Pooling Horizon Bancorp, Inc.. Feb. 2, 1998 536,507 454,230 2 2,549,970 Pooling Roosevelt Financial Group, Inc. July 1, 1997 7,251,985 5,317,514 374,477 18,948,884 Purchase Mark Twain Bancshares, Inc. Apr. 25, 1997 3,227,972 2,519,474 73 24,088,713 Pooling Regional Bancshares, Inc. Mar. 5, 1997 171,979 135,954 12,300 900,625 Purchase TODAY'S Bancorp, Inc. Nov. 7, 1996 501,418 432,104 34,912 1,690,587 Purchase First Financial Corporation of America Nov. 1, 1996 87,649 76,791 3,253 388,113 Purchase Peoples State Bank Aug. 22, 1996 95,657 75,149 - 488,756 Purchase Metro Savings Bank, F.S.B. Mar. 7, 1996 80,857 73,843 5 296,853 Purchase Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 89,697 1 482,946 Purchase Hawkeye Bancorporation Jan. 2, 1996 1,978,540 1,739,811 80 11,838,294 Pooling First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 147,588 1 782,126 Pooling Southwest Bancshares, Inc. Aug. 1, 1995 187,701 155,628 1 1,012,463 Pooling AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 130,179 1 992,034 Pooling Plains Spirit Financial Corporation July 7, 1995 400,754 276,887 6,697 1,951,770 Purchase TCBankshares, Inc. May 1, 1995 1,422,798 1,217,740 - 7,124,999 Pooling Central Mortgage Bancshares, Inc. May 1, 1995 654,584 571,105 8 3,806,585 Pooling UNSL Financial Corp. Jan. 3, 1995 508,346 380,716 11 2,367,161 Pooling Wedge Bank Jan. 3, 1995 195,716 152,865 1 1,454,931 Pooling PENDING ACQUISITIONS BY MBI Financial Services Corporation of the Midwest 3rd Qtr. 1998 $ 518,046 $ 408,995 - 2,077,000 Pooling CBT Corporation. 3rd Qtr. 1998 1,030,998 714,686 - 5,398,785 Pooling Firstbank of Illinois Co. 3rd Qtr. 1998 2,283,670 2,000,539 - 13,786,135 Pooling First Financial Bancorporation 3rd Qtr. 1998 568,442 480,461 - 3,194,844 Pooling - ---------------------- The historical financial statements of MBI were not restated for the acquisition due to the immateriality of the acquiree's financial condition and results of operations to those of MBI. In addition to MBI Common Stock issued, MBI assumed, through an exchange, the outstanding, non-convertible preferred stock of TCBankshares, Inc. Such preferred stock was redeemed in the first quarter of 1996. Estimated number of shares to be issued in acquisition.
-52- 58 PRO FORMA FINANCIAL STATEMENTS. The following unaudited pro forma combined consolidated balance sheet gives effect to the Merger as if it were consummated on March 31, 1998. The pro forma combined consolidated income statements for the three months ended March 31, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995 set forth the results of operations of MBI combined with the results of operations of First Financial, CBT, FSCM and Firstbank as if the respective mergers had occurred as of the first day of the period presented. Such income statements also give effect to the divestiture by MBI of Duchesne Bank and Colonial Bank, each a wholly owned subsidiary of Firstbank, which divestitures are required due to deposit limitations imposed by the statutes of the State of Missouri. Due to the immateriality of the results of operations of Horizon and HomeCorp to that of MBI, individually and in the aggregate, the unaudited pro forma combined consolidated financial statements contained herein do not reflect the completed acquisitions of Horizon and HomeCorp for any period prior to the acquisition date of such entities. MBI acquired Roosevelt on July 1, 1997, 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 Roosevelt from July 1, 1997 forward. Consistent with the Commission's rules regarding the treatment of acquisitions accounted for as purchases in pro forma presentations, the pro forma combined consolidated income statements for the three months ended March 31, 1998 and March 31, 1997 and the year ended December 31, 1997 include the results of operations of Roosevelt but the pro forma combined consolidated income statements for the years ended December 31, 1996 and 1995 do not. 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 and First Financial. 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. -53- 59 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (THOUSANDS) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED CBT/ MBI FINANCIAL ADJUSTMENTS CONSOLIDATED FSCM ------- --------- ----------- ------------ ---- ASSETS Cash and due from banks $ 1,193,064 $ 23,575 $(16,873) $ 1,192,366 $ 63,013 (7,400) Due from banks - interest bearing 269,342 0 269,342 11,759 Federal funds sold and repurchase agreements 258,295 39,300 297,595 30,130 Investments in debt and equity securities Trading 125,634 0 125,634 0 Available-for-sale 8,027,916 119,254 8,147,170 275,694 Held-to-maturity 224,125 0 224,125 92,803 ----------- -------- -------- ----------- ---------- Total 8,377,675 119,254 8,496,929 368,497 Loans and leases 19,625,022 357,598 19,982,620 1,038,269 Reserve for possible loan losses (263,511) (4,499) (1,500) (269,510) (16,729) ----------- -------- -------- ----------- ---------- Net Loans and Leases 19,361,511 353,099 (1,500) 19,713,110 1,021,540 Intangible assets 792,626 2,695 795,321 5,677 Other assets 1,549,209 30,519 60,267 1,579,728 48,428 (60,267) ----------- -------- -------- ----------- ---------- Total Assets $31,801,722 $568,442 $(25,773) $32,344,391 $1,549,044 =========== ======== ======== =========== ========== LIABILITIES Deposits Non-interest bearing $ 3,487,875 $ 60,913 $ 3,548,788 $ 123,211 Interest bearing 18,576,440 419,548 18,995,988 1,000,470 Foreign 463,426 0 463,426 0 ----------- -------- -------- ----------- ---------- Total Deposits 22,527,741 480,461 0 23,008,202 1,123,681 Short-term borrowings 3,596,915 14,417 3,611,332 192,499 Bank notes 25,000 0 25,000 0 Long-term debt 2,193,061 7,958 2,201,019 58,964 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 0 150,000 0 Other liabilities 825,839 5,339 (3,204) 827,974 17,488 ----------- -------- -------- ----------- ---------- Total Liabilities 29,318,556 508,175 (3,204) 29,823,527 1,392,632 COLONIAL CBT/ BANK AND ALL ENTITIES FSCM/ DUCHESNE PRO FORMA FIRSTBANK BANK COMBINED FIRSTBANK ADJUSTMENTS DIVESTITURES CONSOLIDATED --------- ----------- ------------ ------------ ASSETS Cash and due from banks $ 96,021 $ (57,025) $ 45,916 $ 1,329,234 (11,057) Due from banks - interest bearing 1,782 (197) 282,686 Federal funds sold and repurchase agreements 19,250 (11,875) 335,100 Investments in debt and equity securities Trading 46 0 125,680 Available-for-sale 627,548 (69,551) 8,980,861 Held-to-maturity 24,404 (4,051) 337,281 ---------- --------- --------- ----------- Total 651,998 0 (73,602) 9,443,822 Loans and leases 1,425,133 (221,552) 22,224,470 Reserve for possible loan losses (20,285) (12,100) 3,094 (315,530) ---------- --------- --------- ----------- Net Loans and Leases 1,404,848 (12,100) (218,458) 21,908,940 Intangible assets 24,270 0 825,268 Other assets 85,501 122,031 (8,883) 1,704,774 (122,031) 34,381 (34,381) 238,489 (238,489) ---------- --------- --------- ----------- Total Assets $2,283,670 $ (80,182) $(267,099) $35,829,824 ========== ========= ========= =========== LIABILITIES Deposits Non-interest bearing $ 288,895 $ (54,857) $ 3,906,037 Interest bearing 1,711,644 (247,581) 21,460,521 Foreign 0 0 463,426 ---------- --------- --------- ----------- Total Deposits 2,000,539 0 (302,438) 25,829,984 Short-term borrowings 18,604 (1,119) 3,821,316 Bank notes 0 0 25,000 Long-term debt 0 0 2,259,983 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 0 0 150,000 Other liabilities 26,038 (24,885) 11,458 858,073 ---------- --------- --------- ----------- Total Liabilities 2,045,181 (24,885) (292,099) 32,944,356
-54- 60 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (CONTINUED) (THOUSANDS) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED CBT/ MBI FINANCIAL ADJUSTMENTS CONSOLIDATED FSCM ------- --------- ----------- ------------ ---- SHAREHOLDERS' EQUITY Preferred stock 0 0 0 5,000 Common stock 1,351 4,442 29 1,380 4,270 (4,442) Capital surplus 986,393 3,635 (8,825) 977,568 18,668 (3,635) Retained earnings 1,592,681 52,190 52,190 1,639,175 131,125 (52,190) (5,696) Treasury stock (97,259) 0 16,873 (97,259) (2,651) (16,873) ----------- -------- -------- ----------- ---------- Total Shareholders' Equity 2,483,166 60,267 (22,569) 2,520,864 156,412 ----------- -------- -------- ----------- ---------- Total Liabilities and Shareholders' Equity $31,801,722 $568,442 $(25,773) $32,344,391 $1,549,044 =========== ======== ======== =========== ========== COLONIAL CBT/ BANK AND ALL ENTITIES FSCM/ DUCHESNE PRO FORMA FIRSTBANK BANK COMBINED FIRSTBANK ADJUSTMENTS DIVESTITURES CONSOLIDATED --------- ----------- ------------ ------------ SHAREHOLDERS' EQUITY Preferred stock (5,000) Common stock 15,941 50 1,574 (4,100) 19 (170) 125 (15,941) Capital surplus 42,976 (2,925) 25,000 988,088 (16,070) (5,959) (2,598) (5,596) (42,976) Retained earnings 179,572 (44,240) 1,905,632 101,861 (101,861) 29,264 (29,264) 179,572 (179,572) Treasury stock 0 (11,057) (9,826) 11,057 2,651 23,045 64,388 ---------- --------- --------- ----------- Total Shareholders' Equity 238,489 (55,297) 25,000 2,885,468 ---------- --------- --------- ----------- Total Liabilities and Shareholders' Equity $2,283,670 $ (80,182) $(267,099) $35,829,824 ========== ========= ========= =========== See Notes to Pro Forma Combined Consolidated Financial Statements.
-55- 61 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1998 (THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED MBI FINANCIAL ADJUSTMENTS CONSOLIDATED ------- --------- ----------- ------------ Interest Income $530,331 $9,367 $(211) $539,487 Interest Expense 290,026 4,907 294,933 -------- ------ ----- -------- Net Interest Income 240,305 4,460 (211) 244,554 Provision for Possible Loan Losses 6,606 100 6,706 -------- ------ ----- -------- Net Interest Income after Provision for Possible Loan Losses 233,699 4,360 (211) 237,848 Other Income Trust 25,886 938 26,824 Service charges 25,576 511 26,087 Credit card fees 3,284 0 3,284 Securities gains 4,263 154 4,417 Other 68,184 998 69,182 -------- ------ ----- -------- Total Other Income 127,193 2,601 0 129,794 Other Expense Salaries and employee benefits 111,575 2,164 113,739 Net occupancy and equipment 33,655 723 34,378 Other 51,634 1,604 53,238 -------- ------ ----- -------- Total Other Expense 196,864 4,491 0 201,355 -------- ------ ----- -------- Income Before Income Taxes 164,028 2,470 (211) 166,287 Income Taxes 60,136 736 (76) 60,796 -------- ------ ----- -------- Net Income $103,892 $1,734 $(135) $105,491 ======== ====== ===== ======== Per Share Data : Basic Earnings per Share $ 0.78 $ 0.78 Diluted Earnings per Share 0.77 0.77 MBI/ALL ENTITIES FIRSTBANK/ PRO FORMA CBT/ CBT/FSCM COMBINED FSCM FIRSTBANK ADJUSTMENTS CONSOLIDATED ---- --------- ----------- ------------ Interest Income $31,962 $41,598 $ (288) $611,817 (138) (804) Interest Expense 15,727 19,527 330,187 ------- ------- ------- -------- Net Interest Income 16,235 22,071 (1,230) 281,630 Provision for Possible Loan Losses 1,919 762 9,387 ------- ------- ------- -------- Net Interest Income after Provision for Possible Loan Losses 14,316 21,309 (1,230) 272,243 Other Income Trust 459 1,513 28,796 Service charges 1,552 1,945 29,584 Credit card fees 0 0 3,284 Securities gains 166 71 4,654 Other 1,998 3,249 74,429 ------- ------- ------- -------- Total Other Income 4,175 6,778 0 140,747 Other Expense Salaries and employee benefits 5,915 9,133 128,787 Net occupancy and equipment 1,107 2,606 38,091 Other 4,152 4,187 61,577 ------- ------- ------- -------- Total Other Expense 11,174 15,926 228,455 ------- ------- ------- -------- Income Before Income Taxes 7,317 12,161 (1,230) 184,535 Income Taxes 2,574 4,395 (104) 67,321 (50) (290) ------- ------- ------- -------- Net Income $ 4,743 $ 7,766 $ (786) $117,214 ======= ======= ======= ======== Per Share Data : Basic Earnings per Share $ 0.76 Diluted Earnings per Share 0.75 See Notes to Pro Forma Combined Consolidated Financial Statements.
-56- 62 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1997 (THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED CBT/ MBI FINANCIAL ADJUSTMENTS CONSOLIDATED FSCM ------- --------- ----------- ------------ ---- Interest Income $398,462 $8,363 $(211) $406,614 $28,803 Interest Expense 186,501 4,122 0 190,623 14,148 -------- ------ ----- -------- ------- Net Interest Income 211,961 4,241 (211) 215,991 14,655 Provision for Possible Loan Losses 18,443 177 0 18,620 1,560 -------- ------ ----- -------- ------- Net Interest Income after Provision for Possible Loan Losses 193,518 4,064 (211) 197,371 13,095 Other Income Trust 22,801 832 23,633 398 Service charges 22,798 445 23,243 1,495 Credit card fees 5,399 0 5,399 0 Net gain from financial instruments 0 0 0 0 Securities gains (losses) 1,049 44 1,093 0 Other 36,053 528 36,581 1,520 -------- ------ ----- -------- ------- Total Other Income 88,100 1,849 0 89,949 3,413 Other Expense Salaries and employee benefits 97,722 1,801 99,523 5,436 Net occupancy and equipment 26,528 655 27,183 1,366 Other 41,345 1,246 42,591 3,210 -------- ------ ----- -------- ------- Total Other Expense 165,595 3,702 0 169,297 10,012 -------- ------ ----- -------- ------- Income Before Income Taxes 116,023 2,211 (211) 118,023 6,496 Income Taxes 41,028 664 (76) 41,616 2,040 -------- ------ ----- -------- ------- Net Income $ 74,995 $1,547 $(135) $ 76,407 $ 4,456 ======== ====== ===== ======== ======= Per Share Data : Basic Earnings per Share $ .65 $ .65 Diluted Earnings per Share .64 .64 ROOSEVELT FOR ROOSEVELT/ MBI/ALL ENTITIES THE THREE FIRSTBANK/ PRO FORMA MONTHS ENDED CBT/FSCM COMBINED FIRSTBANK MARCH 31, 1997 ADJUSTMENTS CONSOLIDATED --------- -------------- ---------------- ------------ Interest Income $36,611 $140,012 $ (288) $610,810 (138) (804) Interest Expense 16,317 90,590 858 321,380 8,844 ------- -------- -------- -------- Net Interest Income 20,294 49,422 (10,932) 289,430 Provision for Possible Loan Losses 717 640 21,537 ------- -------- -------- -------- Net Interest Income after Provision for Possible Loan Losses 19,577 48,782 (10,932) 267,893 Other Income Trust 1,156 0 25,187 Service charges 1,611 5,979 32,328 Credit card fees 0 0 5,399 Net gain from financial instruments 0 392 392 Securities gains (losses) (4) 0 1,089 Other 2,676 5,981 46,758 ------- -------- -------- -------- Total Other Income 5,439 12,352 0 111,153 Other Expense Salaries and employee benefits 7,973 11,160 124,092 Net occupancy and equipment 2,439 4,811 35,799 Other 3,478 9,467 10,135 68,881 ------- -------- -------- -------- Total Other Expense 13,890 25,438 10,135 228,772 ------- -------- -------- -------- Income Before Income Taxes 11,126 35,696 (21,067) 150,274 Income Taxes 3,941 13,605 (104) 57,266 (50) (290) (3,492) ------- -------- -------- -------- Net Income $ 7,185 $ 22,091 $(17,131) $ 93,008 ======= ======== ======== ======== Per Share Data : Basic Earnings per Share $ .60 Diluted Earnings per Share .59 See Notes to Pro Forma Combined Consolidated Financial Statements
-57- 63 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997 (THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED CBT/ MBI FINANCIAL ADJUSTMENTS CONSOLIDATED FSCM ------- --------- ----------- ------------ ---- Interest Income $1,878,194 $36,708 $(844) $1,914,058 $121,890 Interest Expense 957,690 18,730 0 976,420 60,619 ---------- ------- ----- ---------- -------- Net Interest Income 920,504 17,978 (844) 937,638 61,271 Provision for Possible Loan Losses 79,309 588 0 79,897 7,470 ---------- ------- ----- ---------- -------- Net Interest Income after Provision for Possible Loan Losses 841,195 17,390 (844) 857,741 53,801 Other Income Trust 96,055 3,289 99,344 2,799 Service charges 98,733 2,058 100,791 6,281 Credit card fees 20,480 0 20,480 0 Net loss from financial instruments 0 0 0 0 Securities gains 6,985 395 7,380 157 Other 156,431 2,643 159,074 4,941 ---------- ------- ----- ---------- -------- Total Other Income 378,684 8,385 0 387,069 14,178 Other Expense Salaries and employee benefits 414,882 7,758 422,640 22,090 Net occupancy and equipment 118,758 2,755 121,513 5,864 Loss on the sale of credit card loans 50,000 0 50,000 0 Other 311,140 5,670 316,810 13,977 ---------- ------- ----- ---------- -------- Total Other Expense 894,780 16,183 0 910,963 41,931 ---------- ------- ----- ---------- -------- Income Before Income Taxes 325,099 9,592 (844) 333,847 26,048 Income Taxes 120,506 2,909 (304) 123,111 7,859 ---------- ------- ----- ---------- -------- Net Income $ 204,593 $ 6,683 $(540) $ 210,736 $ 18,189 ========== ======= ===== ========== ======== Per Share Data : Basic Earnings per Share $ 1.68 $ 1.69 Diluted Earnings per Share 1.65 1.66 ROOSEVELT ROOSEVELT/ MBI/ALL ENTITIES FOR THE SIX FIRSTBANK/ PRO FORMA MONTHS ENDED CBT/FSCM COMBINED FIRSTBANK JUNE 30, 1997 ADJUSTMENTS CONSOLIDATED --------- ------------- ---------------- ------------ Interest Income $157,373 $272,169 $ (1,152) $2,460,566 (553) (3,219) Interest Expense 71,472 178,306 858 1,303,397 15,722 -------- -------- -------- ---------- Net Interest Income 85,901 93,863 (21,504) 1,157,169 Provision for Possible Loan Losses 2,958 3,474 93,799 -------- -------- -------- ---------- Net Interest Income after Provision for Possible Loan Losses 82,943 90,389 (21,504) 1,063,370 Other Income Trust 5,010 0 107,153 Service charges 7,441 13,018 127,531 Credit card fees 0 0 20,480 Net loss from financial instruments 0 (35,630) (35,630) Securities gains 636 0 8,173 Other 11,531 10,038 185,584 -------- -------- -------- ---------- Total Other Income 24,618 (12,574) 413,291 Other Expense Salaries and employee benefits 35,009 23,717 503,456 Net occupancy and equipment 10,082 9,291 146,750 Loss on the sale of credit card loans 0 0 50,000 Other 16,030 36,555 20,269 403,641 -------- -------- -------- ---------- Total Other Expense 61,121 69,563 20,269 1,103,847 -------- -------- -------- ---------- Income Before Income Taxes 46,440 8,252 (41,773) 372,814 Income Taxes 16,796 7,630 (415) 147,654 (199) (1,159) (5,969) -------- -------- -------- ---------- Net Income $ 29,644 $ 622 $(34,031) $ 225,160 ======== ======== ======== ========== Per Share Data : Basic Earnings per Share $ 1.49 Diluted Earnings per Share 1.45 See Notes to Pro Forma Combined Consolidated Financial Statements
-58- 64 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED MBI FINANCIAL ADJUSTMENTS CONSOLIDATED ------- --------- ----------- ------------ Interest Income $1,552,863 $33,268 $(844) $1,585,287 Interest Expense 724,910 16,449 0 741,359 ---------- ------- ----- ---------- Net Interest Income 827,953 16,819 (844) 843,928 Provision for Possible Loan Losses 73,015 591 0 73,606 ---------- ------- ----- ---------- Net Interest Income after Provision for Possible Loan Losses 754,938 16,228 (844) 770,322 Other Income Trust 86,616 2,998 89,614 Service charges 88,916 1,825 90,741 Credit card fees 27,962 0 27,962 Securities gains (losses) (83) (160) (243) Other 134,069 2,361 136,430 ---------- ------- ----- ---------- Total Other Income 337,480 7,024 0 344,504 Other Expense Salaries and employee benefits 365,729 6,696 372,425 Net occupancy and equipment 103,715 2,624 106,339 Other 249,224 5,482 254,706 ---------- ------- ----- ---------- Total Other Expense 718,668 14,802 0 733,470 ---------- ------- ----- ---------- Income Before Income Taxes 373,750 8,450 (844) 381,356 Income Taxes 128,535 2,534 (304) 130,765 ---------- ------- ----- ---------- Net Income $ 245,215 $ 5,916 $(540) $ 250,591 ========== ======= ===== ========== Per Share Data : Basic Earnings per Share $ 2.11 $ 2.11 Diluted Earnings per Share 2.08 2.08 MBI/ALL ENTITIES FIRSTBANK/ PRO FORMA CBT/ CBT/FSCM COMBINED FSCM FIRSTBANK ADJUSTMENTS CONSOLIDATED ---- --------- ----------- ------------ Interest Income $111,242 $140,611 $(1,152) $1,832,216 (553) (3,219) Interest Expense 53,454 61,005 855,818 -------- -------- ------- ---------- Net Interest Income 57,788 79,606 (4,924) 976,398 Provision for Possible Loan Losses 5,408 2,868 81,882 -------- -------- ------- ---------- Net Interest Income after Provision for Possible Loan Losses 52,380 76,738 (4,924) 894,516 Other Income Trust 2,544 4,292 96,450 Service charges 5,870 6,651 103,262 Credit card fees 0 0 27,962 Securities gains (losses) 35 340 132 Other 3,896 10,515 150,841 -------- -------- ------- ---------- Total Other Income 12,345 21,798 0 378,647 Other Expense Salaries and employee benefits 21,876 31,919 426,220 Net occupancy and equipment 5,443 9,259 121,041 Other 15,094 13,959 283,759 -------- -------- ------- ---------- Total Other Expense 42,413 55,137 0 831,020 -------- -------- ------- ---------- Income Before Income Taxes 22,312 43,399 (4,924) 442,143 Income Taxes 6,845 15,526 (415) 151,363 (199) (1,159) -------- -------- ------- ---------- Net Income $ 15,467 $ 27,873 $(3,151) $ 290,780 ======== ======== ======= ========== Per Share Data : Basic Earnings per Share $ 2.13 Diluted Earnings per Share 2.09 See Notes to Pro Forma Combined Consolidated Financial Statements.
-59- 65 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 (THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/FIRST FINANCIAL FIRST PRO FORMA FIRST FINANCIAL COMBINED MBI FINANCIAL ADJUSTMENTS CONSOLIDATED ------- --------- ----------- ------------ Interest Income $1,516,156 $31,742 $(844) $1,547,054 Interest Expense 715,466 15,811 0 731,277 ---------- ------- ----- ---------- Net Interest Income 800,690 15,931 (844) 815,777 Provision for Possible Loan Losses 41,533 366 0 41,899 ---------- ------- ----- ---------- Net Interest Income after Provision for Possible Loan Losses 759,157 15,565 (844) 773,878 Other Income Trust 77,115 2,763 79,878 Service charges 82,459 1,470 83,929 Credit card fees 20,366 0 20,366 Securities gains 4,338 0 4,338 Other 127,371 2,003 129,374 ---------- ------- ----- ---------- Total Other Income 311,649 6,236 0 317,885 Other Expense Salaries and employee benefits 346,156 7,677 353,833 Net occupancy and equipment 95,896 2,726 98,622 Other 198,467 5,077 203,544 ---------- ------- ----- ---------- Total Other Expense 640,519 15,480 0 655,999 ---------- ------- ----- ---------- Income Before Income Taxes 430,287 6,321 (844) 435,764 Income Taxes 149,898 1,751 (304) 151,345 ---------- ------- ----- ---------- Net Income $ 280,389 $ 4,570 $(540) $ 284,419 ========== ======= ===== ========== Per Share Data : Basic Earnings per Share $ 2.41 $ 2.39 Diluted Earnings per Share 2.37 2.35 MBI/ALL ENTITIES FIRSTBANK/ PRO FORMA CBT/ CBT/FSCM COMBINED FSCM FIRSTBANK ADJUSTMENTS CONSOLIDATED ---- --------- ----------- ------------ Interest Income $104,420 $134,401 $(1,152) $1,780,951 (553) (3,219) Interest Expense 50,217 57,486 838,980 -------- -------- ------- ---------- Net Interest Income 54,203 76,915 (4,924) 941,971 Provision for Possible Loan Losses 2,736 2,313 46,948 -------- -------- ------- ---------- Net Interest Income after Provision for Possible Loan Losses 51,467 74,602 (4,924) 895,023 Other Income Trust 1,803 5,986 87,667 Service charges 5,971 5,836 95,736 Credit card fees 0 0 20,366 Securities gains 279 28 4,645 Other 3,361 8,318 141,053 -------- -------- ------- ---------- Total Other Income 11,414 20,168 0 349,467 Other Expense Salaries and employee benefits 21,526 30,882 406,241 Net occupancy and equipment 4,712 9,215 112,549 Other 14,664 14,824 233,032 -------- -------- ------- ---------- Total Other Expense 40,902 54,921 0 751,822 -------- -------- ------- ---------- Income Before Income Taxes 21,979 39,849 (4,924) 492,668 Income Taxes 6,460 14,107 (415) 170,139 (199) (1,159) -------- -------- ------- ---------- Net Income $ 15,519 $ 25,742 $(3,151) $ 322,529 ======== ======== ======= ========== Per Share Data : Basic Earnings per Share $ 2.37 Diluted Earnings per Share 2.31 See Notes to Pro Forma Combined Consolidated Financial Statements.
-60- 66 MERCANTILE BANCORPORATION INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Represents MBI restated historical consolidated financial statements reflecting the acquisition of Mark Twain Bancshares, Inc. effective April 25, 1997, which was accounted for as a pooling-of-interests. The recently completed acquisitions of Horizon and HomeCorp also were accounted for as poolings-of-interests; however, due to the immateriality of the financial condition and results of operations of Horizon and HomeCorp to that of MBI, the historical financial statements of MBI were not restated. Regional Bancshares, Inc. was accounted for as a purchase and is included in these pro forma financial statements only from its acquisition date forward. The full impact of this acquisition is immaterial to the Pro Forma Combined Consolidated Financial Statements. MBI completed its acquisition of Roosevelt on July 1, 1997. The acquisition of Roosevelt was accounted for as a purchase; as such, historical financial statements were not restated. The estimated full impact of the Roosevelt acquisition is included in the pro forma combined consolidated income statement for the year ended December 31, 1997 and the three months ended March 31, 1997. All per share data reflects the 3-for-2 stock split declared by MBI on July 16, 1997 that was distributed on October 1, 1997. (2) In conjunction with the proposed acquisition of First Financial, MBI plans to repurchase up to 319,484 shares of MBI Common Stock in the open market. The assumed repurchase price per share is $52.8125, the closing price of MBI Common Stock on May 7, 1998, the last trading date preceding the announcement of the Merger Agreement. (3) Acquisition of First Financial with 3,194,844 shares of issued MBI Common Stock, including up to 319,484 reissued treasury shares, based on the exchange ratio of 0.88 of a share of MBI Common Stock per share of First Financial Common Stock. The number of shares of MBI Common Stock, which represents the aggregate number of shares to be issued in the Merger, was calculated as follows: Shares of First Financial Common Stock outstanding 3,553,717 Maximum number of shares of First Financial Common Stock which could be issued pursuant to First Financial's stock option plans 76,788 --------- Maximum number of shares of First Financial Common Stock to be canceled in the Merger 3,630,505 Exchange Ratio x 0.88 --------- Aggregate number of shares of MBI Common Stock to be issued in the Merger 3,194,844 =========
(4) Elimination of MBI's investment in First Financial. (5) Balance sheet impact of adjustments related to the mergers with FSCM, CBT, First Financial and Firstbank (see footnote 26). These adjustments will be initially recorded as a credit to accrued liabilities and the reserve for possible loan losses. Because the credit to accrued liabilities will be -61- 67 paid out in cash within an estimated 18-month period following the mergers, the Pro Forma Combined Consolidated Financial Statements reflect the cash outlay. An income tax benefit at an effective tax rate of 36% is included in these adjustments. (6) Acquisition of CBT with 5,398,785 shares of issued MBI Common Stock, including up to 436,875 reissued treasury shares, based on the exchange ratio of 0.6513 of a share of MBI Common Stock per share of CBT Common Stock. The number of shares of MBI Common Stock, which represents the aggregate number of shares to be issued in the merger, was calculated as follows: Shares of CBT Common Stock 7,863,792 Maximum number of shares of CBT Common Stock which could be issued pursuant to CBT's stock option plans 425,453 --------- Maximum number of shares of CBT Common Stock to be canceled in the merger 8,289,245 Exchange Ratio x 0.6513 --------- Aggregate number of shares of MBI Common Stock to be issued in the merger 5,398,785 =========
(7) Elimination of MBI's investment in CBT. (8) In conjunction with the proposed acquisition of FSCM, MBI plans to repurchase up to 199,676 shares of MBI Common Stock in the open market. The assumed repurchase price per share is $55.375, the closing price of MBI Common Stock on April 9, 1998, the last trading date preceding the announcement of the merger agreement between MBI and FSCM. (9) Acquisition of FSCM with 2,077,000 shares of issued MBI Common Stock, including up to 199,676 reissued treasury shares, based on the exchange ratio of 6.8573 shares of MBI Common Stock per share of FSCM Common Stock. The number of shares of MBI Common Stock, which represents the aggregate number of shares to be issued in the merger, was calculated as follows: Shares of FSCM Common Stock outstanding 260,424 Maximum number of shares of FSCM Common Stock which could be issued: Pursuant to FSCM's stock option plans 800 Conversion of FSCM preferred stock 41,666 --------- Maximum number of shares of FSCM Common Stock to be canceled in the Merger 302,890 Exchange Ratio x 6.8573 --------- Aggregate number of shares of MBI Common Stock to be issued in the merger 2,077,000 =========
(10) Elimination of MBI's investment in FSCM. (11) Acquisition of Firstbank with 13,786,135 shares of issued MBI Common Stock, including up to 1,275,000 reissued treasury shares, based on the exchange ratio of 0.8308 of a share of MBI Common Stock per share of Firstbank Common Stock. The number of shares of MBI Common Stock, which represents the aggregate number of shares to be issued in the merger, was calculated as follows: -62- 68 Shares of Firstbank Common Stock 15,941,350 Maximum number of shares of Firstbank Common Stock which could be issued pursuant to Firstbank's stock option plans 652,457 Maximum number of shares of Firstbank Common Stock to be canceled in the merger 16,593,807 Exchange Ratio x 0.8308 ---------- Aggregate number of shares of MBI Common Stock to be issued in the merger 13,786,135 ==========
(12) Elimination of MBI's investment in Firstbank. (13) Interest income foregone as a result of MBI repurchasing 319,484 treasury shares in conjunction with the acquisition of First Financial by MBI. The assumed interest rate is 5%. (14) Income tax benefit associated with interest income foregone as the result of repurchasing shares in conjunction of First Financial by MBI. The assumed effective tax rate is 36%. (15) Interest income foregone as a result of MBI repurchasing 436,875 treasury shares in conjunction with the acquisition of CBT by MBI. The assumed interest rate is 5%. (16) Income tax benefit associated with interest income foregone as the result of repurchasing shares in conjunction with the acquisition of CBT by MBI. These shares were repurchased by MBI in March 1998. The assumed effective tax is 36%. (17) Interest income foregone as a result of MBI repurchasing 199,676 treasury shares in conjunction with the acquisition of FSCM by MBI. The assumed interest rate is 5%. (18) Income tax benefit associated with interest income foregone as the result of repurchasing shares in conjunction with the acquisition of FSCM by MBI. The assumed effective tax rate is 36%. (19) Interest income foregone as a result of MBI repurchasing 1,275,000 treasury shares in conjunction with the acquisition of Firstbank by MBI. These shares were repurchased by MBI in March 1998. The assumed interest rate is 5%. (20) Income tax benefit associated with interest income foregone as the result of repurchasing shares in conjunction with the acquisition of Firstbank by MBI. The assumed effective tax rate is 36%. (21) The acquisition of Roosevelt was accounted for as a purchase transaction. Included herein is the amortization of goodwill over a 15-year period (see footnote 24 below) and interest expense related to the issuance of subordinated debt securities and notes as described in footnotes 22 and 23 below. The impact of interest income lost on the cash consideration and stock buybacks is immaterial to the Pro Forma Combined Consolidated Financial Statements. The income tax benefit associated with taxable income statement adjustments is computed at an effective tax rate of 36%. (22) On January 29, 1997, MBI issued $150,000,000 of subordinated debt securities, which were issued at a floating rate equal to the three-month LIBOR plus 85 basis points. The rate assumed in -63- 69 calculating the expense from January 1 through January 29, 1997 for the Pro Forma Combined Consolidated Financial Statements is 6.86%. (23) On June 11, 1997, MBI issued $200,000,000 of 7.3% subordinated notes due 2007, $150,000,000 of 6.8% senior notes due 2001 and $150,000,000 of 7.05% senior notes due 2004. This is the pro forma impact of interest expense on such notes. (24) The pro forma excess of cost over fair value of net assets acquired was $608,076,000 for Roosevelt as of December 31, 1997. Given a 15-year amortization period, the pro forma income statement reflects one-quarter and one-half the annual amount of goodwill amortization for the three months ended March 31, 1997 and the year ended December 31, 1997, respectively. (25) Income tax benefit associated with interest expense on debt issues (see footnotes 22 and 23 above). The assumed effective tax rate is 36%. (26) Upon consummation of the mergers with FSCM and First Financial, MBI expects to record certain adjustments related to the mergers with an approximate pre-tax total of between $18,000,000 and $22,000,000. Upon consummation of the acquisition of Firstbank, MBI expects to record certain adjustments related to the merger with an approximate pre-tax total between $25,000,000 and $40,000,000. Upon consummation of the merger with CBT, MBI expects to record certain adjustments related to the merger with an approximate pre-tax total between $15,000,000 and $25,000,000. The provision for possible loan losses in the following table is to substantially conform the accounting and credit policies of the acquirees to those of MBI. The pre-tax adjustments for First Financial, FSCM, Firstbank and CBT are estimated as follows:
First Financial FSCM Firstbank CBT --------- ---- --------- ------- (in thousands) Contract penalties, equipment abandonment costs and transition and duplicative costs related to system standardization and signage $3,600 $3,500 $14,250 $ 9,700 Provision for possible loan losses 1,500 2,000 5,000 5,100 Accruals for severance and change of control payments 1,900 2,900 10,600 3,500 Investment banking, legal and accounting fees 1,900 725 8,600 3,250 ------ ------ ------- ------- Total $8,900 $9,125 $38,450 $21,550 ====== ====== ======= =======
-64- 70 (27) Earnings per share was based upon the average shares listed below:
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31, --------------------------- ---------------------------------------- 1998 1997 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- MBI average shares as reported 132,778,433 114,862,128 121,933,113 115,938,311 115,754,877 MBI equivalent shares for the following acquisitions, net of treasury share repurchases: FSCM 1,586,129 1,012,304 1,032,759 1,008,923 1,001,113 CBT 4,684,324 4,661,176 4,684,198 4,690,928 4,726,732 First Financial 2,788,709 2,762,804 2,757,554 2,785,853 2,825,383 Firstbank 11,888,331 11,555,805 11,685,124 11,584,583 11,604,514 Shares of MBI Common Stock issued in the Roosevelt acquisition 18,948,884 18,948,884 Less effect of MBI shares issued in the Roosevelt acquisition during the second half of 1997 (9,474,442) ----------- ----------- ----------- ----------- ----------- Average shares outstanding for basic earnings per share 153,725,926 153,803,101 151,567,190 136,008,598 135,912,619 Effect of MBI dilutive stock options and convertible notes 2,471,850 1,969,592 2,405,301 1,851,462 2,304,336 MBI equivalent average shares of dilutive stock options for: FSCM 286,457 1,011,513 911,952 1,044,600 1,109,141 CBT 95,365 170,558 40,918 33,418 34,236 First Financial 25,626 16,877 26,499 16,254 14,349 Firstbank 261,926 219,577 246,677 185,452 178,084 ----------- ----------- ----------- ----------- ----------- Average shares outstanding for dilutive earnings per share 156,867,150 157,191,218 155,198,537 139,139,784 139,552,765 =========== =========== =========== =========== ===========
-65- 71 ] INFORMATION REGARDING FIRST FINANCIAL ------------------------------------- BUSINESS ORGANIZATIONAL STRUCTURE AND HISTORY First Financial is an Iowa business corporation engaged in retail and commercial banking, trust and asset management, and related lines of business through its wholly owned subsidiary, FNBI. Both First Financial and FNBI are based in Iowa City, Iowa. FNBI is a national banking association which is chartered and incorporated in and which operates under the laws of the United States. FNBI has trust powers and is a member of the Federal Reserve System, the Federal Deposit Insurance Corporation (the "FDIC") and the Federal Home Loan Bank System. First Financial was organized on October 8, 1985, under the IBCA. On December 31, 1985, it became operational as a one-bank holding company through the acquisition of First National Bank, Iowa City, Iowa, an institution which was founded in 1932 and which, at the date of acquisition, enjoyed a strong and positive presence in the community as well as a significant share of the local banking market. On February 1, 1991, First Financial became a multi-bank holding organization through the chartering of a second subsidiary bank, First National Bank, Cedar Rapids, Iowa. On February 8, 1991, this operating unit became a fully functioning commercial bank through the acquisition of certain assets, liabilities and the Cedar Rapids branch office facility of the failed American Federal Savings Association from the Resolution Trust Corporation. At the time of acquisition, total assets were approximately $45 million, which represented a relatively small share of the Cedar Rapids market. In December 1994, First National Bank, Cedar Rapids, opened a second banking location in downtown Cedar Rapids. In December 1994, First National Bank, Iowa City, established a fifth banking location in North Liberty, Iowa, and in January 1995 established a sixth location in southwest Iowa City. On November 1, 1996, First Financial made application to the Office of the Comptroller of the Currency (the "OCC") to merge First National Bank, Iowa City, and First National Bank, Cedar Rapids, into a single entity named First National Bank Iowa. Regulatory approval was subsequently granted, and the merger was consummated March 15, 1997. During the fourth quarter of 1996, First Financial entered into an agreement to acquire West Branch Bancorp, Inc., West Branch, Iowa, and its wholly owned subsidiary, West Branch State Bank. This bank, which was founded in 1875, was the only financial institution with a physical presence in the community. Regulatory approval was granted for the transaction which was completed on April 8, 1997. At the time of the acquisition, the assets of West Branch State Bank were approximately $40 million. On September 9, 1997, a filing was made with the State of Iowa to dissolve West Branch Bancorp, Inc. -66- 72 In November 1997, FNBI opened a ninth banking location at its Center Point Road facility in Cedar Rapids. In December 1997, after securing the required regulatory approval, First Financial merged West Branch State Bank into FNBI. Today, FNBI is one of the largest community banking organizations in the state with ten banking locations, $550 million in assets and in excess of $750 million in trust assets. Its organizational structure, which is laid out along functional lines, consists of four major divisions: Trust and Asset Management; Commercial Banking; Retail Banking; and Administration. Each division is managed by a Senior Vice President, who in turn is a member of FNBI's senior management team. This team is led by the President and CEO and includes the area President for Cedar Rapids. Direction and oversight are provided by a 13-member Board of Directors. In addition, input and support are provided by a 7-member Advisory Board representing the greater Cedar Rapids area. The parent company of FNBI is managed by two executive officers: the President and Chief Executive Officer, and the Executive Vice President and Chief Operating Officer. It is governed by an 8-member Board of Directors. MARKET AREA First Financial's primary market area consists of Johnson and Linn Counties in east-central Iowa, known as the "Iowa City/Cedar Rapids Corridor" (the "Corridor"). Although it has a strong agricultural base, the general economic character and climate of the Corridor is atypical of the rural Midwest. The economy is significantly more diversified than that of the region in general. Noteworthy features include strong manufacturing and retail sectors, a growing regional transportation and distribution industry, the presence of The University of Iowa and other seats of post-secondary education and a significant medical and health care infrastructure. The Corridor also benefits from the lower median age, higher income and education levels, a higher rate of population growth, a greater population turnover rate and a stronger residential real estate market than the regional norms, all of which are conducive to successful community banking. These general conditions and trends are expected to continue in the future. NATURE OF BUSINESS Within the framework provided for by regulation, FNBI provides a comprehensive range of financial products and services. They fall into four broad classifications which follow the divisional lines of FNBI's organizational structure. Trust and Asset Management: -------------------------- FNBI's Trust and Asset Management division is among the largest in the state and represents a significant source of fee income to First Financial. Its services are comprehensive in scope, and geared primarily toward fulfilling the needs of individuals, families, businesses and private and public sector entities which populate the Corridor. Primary functions include the administration of estates, personal trusts, conservatorships, and pension and profit sharing plans, as well as providing property management, asset management, investment advisory and investment management services. -67- 73 Retail brokerage products such as mutual funds, stocks, bonds and annuities are provided through First Financial Services, an affiliate of Des Moines, Iowa-based Broker Dealer Financial Services, Inc., which maintains an office in FNBI and utilizes its network of retail banking offices as a primary distribution channel. Commercial Banking: ------------------ The Commercial Banking division provides a wide range of products to meet the needs of the private sector businesses and their public-sector governmental counterparts in the Corridor. Deposit products include commercial CDs and demand deposit, savings, money market and cash management accounts. Core commercial credit products include: conventional and SBA-guaranteed loans for the acquisition, operation and expansion of businesses; commercial real estate loans; indirect automobile financing and dealer floorplanning; commercial lines and letters of credit; and MasterCard(R) commercial credit program. Access to allied services such as pension and employee benefit plans, 401(k) and Keogh plans, and business succession and estate planning, are provided via referral to FNBI's Trust and Asset Management division. Retail Banking: -------------- The Retail Banking division provides a wide range of deposits, loans and ancillary services designed to meet the needs of individuals and families. Core deposit products consists of CDs, IRAs, and checking, savings and money market accounts which are supported by a full complement of ancillary services including ATM and debit cards, direct deposit and 24-hour telephone banking. Primary retail credit products include personal loans and lines of credit, auto loans, Visa(R), MasterCard(R), Visa Gold(R) and gold MasterCard(R) credit cards, fixed installment and revolving credit lines, home equity loans and home improvement loans. Fixed and adjustable rate residential mortgage loans, originated both for secondary market sale and for portfolio purposes, represent an important line of business. Administration: -------------- Although the primary mission of the Administration division is to provide the necessary infrastructure and supporting mechanisms vital to the ongoing operation of FNBI, it also provides several types of services which are usually delivered indirectly to consumers through the three other divisions. These include ATM services, merchant credit card processing, direct deposit, wire and electronic funds transfers and correspondent banking services. DELIVERY SYSTEM The foundation of First Financial's delivery system is FNBI's network of conventional "brick-and-mortar" retail banking facilities. This network is further supported by electronics and alternative means of responding to the needs of the market. As of December 31, 1997, FNBI had ten retail banking facilities: four in Iowa City; three in Cedar Rapids; and one each in Coralville, North Liberty and West Branch. This is one of the strongest physical delivery and distribution channels in the market area. Beyond representing more Corridor banking locations than that of any other financial institution, it also reflects FNBI's status as the -68- 74 only institution with full-service, freestanding facilities at both ends of the Corridor as well as in the majority of its largest communities. This network is augmented by a series of automated teller machines (ATMs) and electronic point-of-sale (POS) terminals, as well as TeleFirst(SM), a 24-hour touchtone telephone banking service. Customers can also access their accounts via ATM and debit cards on a statewide basis through the Shazam(R) network, and nationwide through the Cirrus(R), PLUS(R) and affiliated electronic funds transfer and ATM networks. Additional delivery and support mechanisms are provided via FNBI's membership in the National Automated Clearing House Association (NACHA) for the processing of electronic ACH funds transfers and the Federal Reserve FEDLINE(R) system for the direct processing of electronic wire transfers. Data processing requirements for core banking operations and for trust services are provided via two in-house computer systems which are owned and operated by FNBI. Data processing support for credit card, merchant processing and retail brokerage are provided by outside service bureaus. Because FNBI relies heavily on both in-house and nonproprietary data processing hardware and software as an integral part of its delivery systems and channels, the "Year 2000" issue is one of critical importance. Technology experts believe that many data processing application systems could fail or improperly perform as a result of erroneous calculations or data integrity problems if they are unable to correctly process date information beyond the turn of the century. FNBI has taken a proactive approach toward addressing this issue, and is currently in the process of assessing its information systems, testing and validating in-house systems, and obtaining validation and certification of outside systems in an effort to ensure that all potential problem areas are identified and corrected in advance of the year 2000. COMPETITION First Financial's primary competitors are other commercial banks, thrift institutions such as savings banks and savings and loan associations, and credit unions, all of which are represented by a physical presence in the Corridor. Secondary competitors, which are far more numerous and not necessarily represented by local facilities, vary widely depending on the product or service in question and include non-traditional providers. In the case of deposits, investments and asset management services, they include stockbrokers, money market and mutual fund companies, insurance companies and out-of-market financial institutions. In the area of loans, they include mortgage brokers, the financing arm of automobile manufacturers, nationwide credit card issuers, and in some cases, agencies of the federal government. On a Corridor-wide basis, the largest share of the market is held by commercial banks. Thrifts and credit unions also hold significant but smaller portions of the market. At the south end of the Corridor, FNBI enjoys a significant share of the deposit and lending market, due in large measure to its 60+ year presence in the community. Conversely, FNBI has a comparatively smaller share of the north Corridor market, a situation which is attributable to the fact that it is a relative newcomer. The Cedar Rapids and Iowa City ends of the markets do differ in the respect that the former, aside from being much larger in size in terms of total deposits and total loans, is dominated by the branches of several large -69- 75 multi-state banking companies, while the overwhelming share of the latter market is held by locally owned, independent financial institutions. The demographics which make the market so conducive to successful banking also carry with them a downside which is manifested in the form of intense competitive pressures. In recent years, while the nationwide trend in banking has generally been one of consolidation and a corresponding reduction in traditional competition, banking in the Corridor has become increasingly competitive in nature, particularly in terms of rate, price and new entrants to the market. The greater Iowa City area is a case in point. The number of ATMs has tripled since 1988. Three new financial institutions have entered the market and the overall number of banking offices has increased by 30% within the past three years. It is not unusual to find local deposit yields which are comparable to those touted as "highest in the country" in nationwide surveys, and for competitors to attempt to "buy" existing deposit and loan business from one another primarily on the basis of rate and price rather than through utilization of sound banking principles and underwriting practices. In the Corridor as a whole, there are currently over 125 offices of banks, thrifts and credit unions. These highly competitive local market trends are expected to continue in the foreseeable future. CAPITAL REQUIREMENTS First Financial is regulated by the Federal Reserve Board while FNBI is under the regulatory jurisdiction of the OCC. One of the functions of the OCC is to evaluate capital adequacy maintained by each national bank. To determine the capital adequacy of national banks, the OCC has established a risk-based capital ratio derived from guidelines sensitive to the credit risk associated with various bank activities. This risk-based capital ratio is intended to more accurately assess capital adequacy than is a capital ratio which is based solely on total assets of banks. See "Supervision and Regulation - FIRREA and FDICIA." A comparison of FNBI's capital as of December 31, 1997, with minimum requirements, is presented below:
Minimum Actual Requirements ------ ------------ Total risk-based capital 14.42% 8% Tier I risk-based capital 3.17 4 Leverage ratio 8.88 4
At December 31, 1997, FNBI was categorized as a well-capitalized definition and substantially exceeded the regulatory minimum capital levels. -70- 76 As of December 31, 1997 and 1996, First Financial's Tier I capital to risk-weighted asset ratios, total capital risk-weighted asset ratios (Tier I capital plus Tier II capital) and leverage capital ratios were as follows:
Actual ------------------------ Minimum 1997 1996 Requirements ---- ---- ------------- Total risk-based capital 17.23% 18.75% 8% Tier 1 risk-based capital 15.98 17.50 4 Leverage ratio 10.59 11.73 4
The following consolidated statistical information reflects selected balances and operations of First Financial and FNBI for the periods indicated. AVERAGE BALANCES AND INTEREST RATES AND INTEREST DIFFERENTIAL The following tables show the average balance for the period for the major categories of assets, liabilities and stockholders' equity, average balances during the period, interest earned or paid and average yields. (Yields on nontaxable securities are computed on a tax equivalent basis). Changes in interest earned and paid for the years ended December 31, 1997 and 1996, are analyzed showing the effects of changes in volume and rates: -71- 77 AVERAGE BALANCES (DAILY AVERAGE BASIS):
(In Thousands) Year Ended December 31, -------------------------------------------------------- 1997 1996 1995 -------- -------- -------- ASSETS Taxable securities $ 73,800 $ 87,414 $ 88,064 Nontaxable securities 34,526 27,384 23,726 Federal funds sold 23,673 8,136 11,181 Loans, net of unearned income 348,511 310,956 294,649 -------- -------- -------- Total interest-earning assets 480,510 433,890 417,620 Less allowance for loan losses (4,482) (3,625) (3,512) Cash and due from banks 18,270 15,905 14,312 Property and equipment, net 12,353 12,357 11,693 Other assets 12,429 9,600 9,278 -------- -------- -------- Total assets $519,080 $468,127 $449,391 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-paying demand deposits $ 62,019 $ 58,696 $ 58,357 Savings deposits 111,557 102,185 89,436 Time deposits 212,183 189,227 188,135 Federal funds purchased and securities sold under agreements to repurchase 3,701 1,068 237 Federal Home Loan Bank advances 14,818 16,246 19,857 Other long-term borrowings 4,090 -- 13 -------- -------- -------- Total interest-paying liabilities 408,368 367,422 356,035 Noninterest-paying demand deposits 50,387 44,692 42,331 Other liabilities 5,051 4,629 3,644 Stockholders' equity 55,274 51,384 47,381 -------- -------- -------- Total liabilities and stockholders' equity $519,080 $468,127 $449,391 ======== ======== ======== -72- 78 INTEREST INCOME AND EXPENSE: (In Thousands) Year Ended December 31, ------------------------------------------------------- 1997 1996 1995 ------- ------- ------- INCOME Taxable securities $ 4,496 $ 5,316 $ 5,251 Nontaxable securities 2,489 2,188 2,044 Federal funds sold 1,309 430 658 Loans 29,466 26,376 24,843 ------- ------- ------- Total interest income $37,760 $34,310 $32,796 ------- ------- ------- EXPENSE Interest-paying demand deposits $ 1,236 $ 1,184 $ 1,253 Savings deposits 3,945 3,568 2,870 Time deposits 12,190 10,642 10,475 Federal funds purchased and securities sold under agreements to repurchase 189 60 14 Federal Home Loan Bank advances 910 995 1,199 Other long-term borrowings 260 -- -- ------- ------- ------- Total interest expense 18,730 16,449 15,811 ------- ------- ------- Net interest income $19,030 $17,861 $16,985 ======= ======= ======= -73- 79 Interest Rates And Interest Differential Average yields: Taxable securities 6.24% 6.08% 5.96% Nontaxable securities 6.86 7.99 8.62 Federal funds sold 5.53 5.29 5.88 Loans 8.45 8.48 8.43 Interest-paying demand deposits 1.99 2.02 2.15 Savings deposits 3.54 3.49 3.21 Time deposits 5.74 5.62 5.57 Federal funds purchased and securities sold under agreements to repurchase 5.10 5.62 5.91 Federal Home Loan Bank advances 6.14 6.12 6.04 Other long-term borrowings 6.36 -- -- Yield on average interest earning assets 7.86 7.91 7.85 Yield on average interest- paying liabilities 4.59 4.48 4.44 Net interest yield 3.27 3.43 3.41 Net interest margin 3.96 4.12 4.07 Nonaccruing loans are not material and have been included in the average loan balances for purposes of this computation. - -------------------- Net interest yield is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal tax rate of 34% and a state tax rate of 5% for the three years presented. Net interest margin is net interest income, on a tax-equivalent basis, divided by average interest earning assets.
-74- 80 CHANGE IN INTEREST INCOME AND EXPENSE:
(In Thousands of Dollars) Year Ended December 31, 1997 Change Change Due To Due To Total Volume Rates Change ------ ----- ------ Change in interest income: Taxable securities $ (941) $ 121 $ (820) Nontaxable securities 596 (295) 301 Federal funds sold 858 21 879 Loans 3,183 (93) 3,090 ------ ----- ------ $3,696 $(246) $3,450 ------ ----- ------ Change in interest expense: Interest-paying demand deposits $ 69 $ (17) $ 52 Savings deposits 326 51 377 Time deposits 1,316 232 1,548 Federal funds purchased and securities sold under agreements to repurchase 136 (7) 129 Federal Home Loan Advances (88) 3 (85) Other long-term borrowings 260 -- 260 ------ ----- ------ 2,019 262 2,281 ------ ----- ------ Net change in net interest income $1,677 $(508) $1,169 ====== ===== ====== -75- 81 (In Thousands of Dollars) Year Ended December 31, 1997 ------------------------------------------ Change in interest income: Taxable securities $ (40) $ 105 $ 65 Nontaxable securities 300 (156) 144 Federal funds sold (167) (61) (228) Loans 1,385 148 1,533 ------ ----- ------ 1,478 36 1,514 ------ ----- ------ Change in interest expense: Interest-paying demand deposits 7 (76) (69) Savings deposits 433 265 698 Time deposits 66 101 167 Federal funds purchased and securities sold under agreements to repurchase 47 (1) 46 Federal Home Loan Bank advances (220) 16 (204) ------ ----- ------ 333 305 638 ------ ----- ------ Net change in net interest income $1,145 $(269) $ 876 ====== ===== ====== Loan fees included in interest income are not material. Interest on non-taxable securities and loans is shown on a tax equivalent basis using a federal tax rate of 34% and a state tax rate of 5% for 1996 and 1997.
The rate/volume variances were allocated on a pro rata basis between rate and volume variances using absolute values. -76- 82 INVESTMENT SECURITIES The following tables show the carrying values of investment securities as of December 31, 1997, 1996 and 1995, and the maturities and yields of the investment securities as of December 31, 1997:
(In Thousands of Dollars) December 31, -------------------------------------------- 1997 1996 1995 -------- ------- -------- Carrying values: U.S. Treasury securities $ 21,521 $20,933 $ 32,027 Obligations of other U.S. Government agencies and corporations 43,666 44,526 63,231 Obligations of states and political subdivisions 39,603 29,588 26,403 Marketable equity securities 5,339 475 -- Federal Reserve Bank stock 568 339 336 Federal Home Loan Bank stock 2,058 1,941 1,889 -------- ------- -------- $112,755 $97,802 $123,886 ======== ======= ========
-77- 83
December 31, 1997 Weighted Fair Average Value Yield -------- --------- Type and maturity groupings: U.S. Treasury maturities: Within 1 year $ 10,887 5.92% From 1 to 5 years 10,634 6.22 -------- Total 21,521 -------- Obligations of other U.S. Government agencies and corporations maturities: Within 1 year 11,700 6.30% From 1 to 5 years 29,020 6.45 From 5 to 10 years 2,946 6.32 -------- Total 43,666 -------- Obligations of states and political subdivisions maturities: Within 1 year 6,303 8.39% From 1 to 5 years 16,843 7.15 From 5 to 10 years 15,971 7.06 Over 10 years 486 8.08 -------- Total 39,603 -------- Marketable equity securities 5,339 2.75% Federal Reserve Bank stock 568 6.00 Federal Home Loan Bank stock 2,058 7.00 -------- Total 7,965 -------- Total $112,755 ======== - -------------------- The yields are computed on a tax equivalent basis using a federal tax rate of 34% and a state tax rate of 5% for 1997 based on fair value.
As of December 31, 1997, there were no investment securities of any issuer, other than securities of the U.S. Government and U.S. Government agencies and corporations, exceeding 10% of stockholders' equity. -78- 84 LOANS The following table shows the composition of loans as of December 31, 1997, 1996, 1995, 1994 and 1993:
(In Thousands) December 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Commercial, financial and agricultural $ 38,349 $ 32,361 $ 30,128 $ 31,800 $ 30,036 Real estate, construction 19,009 16,440 10,914 16,590 13,662 Real estate, mortgage 252,271 230,534 206,869 194,261 159,349 Loans to individuals 52,638 49,386 43,572 50,123 49,571 All other 2,034 2,018 3,046 1,933 1,589 -------- -------- -------- -------- -------- Total $364,301 $330,739 $294,529 $294,707 $254,207 ======== ======== ======== ======== ========
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table shows the scheduled distribution of future principal repayment of loans (in thousands) as of December 31, 1997:
One to Over Non- Amount One Year Five Five Accrual of Loans or Less Years Years Loans -------- -------- -------- ------- ----- Commercial, financial and agricultural $ 38,349 $ 25,464 $ 11,446 $ 1,334 $105 Real estate, construction 19,009 3,276 11,496 4,237 -- Real estate, mortgage 252,271 71,722 162,738 17,158 653 Loans to individuals 52,638 28,211 22,523 1,738 166 All other 2,034 301 1,443 290 -- -------- -------- -------- ------- ---- Total $364,301 $128,974 $209,646 $24,757 $924 ======== ======== ======== ======= ==== - -------------------- Before deducting reserve for possible loan losses. Approximately $16,793,000 or nearly 44% of these loans are adjustable rate loans. Approximately $140,309,000 or nearly 56% of these loans are adjustable rate loans. Approximately $15,249,000 or nearly 29% of these loans are adjustable rate loans.
-79- 85 NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The following table summarizes First Financial's nonaccrual, past due 90 days or more and restructured loans as of December 31 for each of the years presented:
(In Thousands of Dollars) 1997 1996 1995 1994 1993 ------ ---- ---- ------ ------ Nonaccrual loans $ 924 $559 $270 $1,100 $1,274 Accruing loans past due 90 days or more 1,090 381 273 60 68 Restructured loans 11 16 None None None
As of December 31, 1997, total nonaccrual loans were comprised primarily of loans collateralized by real estate. Nonaccrual of interest may occur on any loan whenever one or more of the following criteria is evident: (a) there is substantial deterioration in the financial position of the borrower; (b) the full payment of interest and principal can no longer be reasonably expected; or (c) the principal or interest on the loan has been in default for a period of 90 days. In all cases, loans must be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed to interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are reasonably assured of repayment within a reasonable time frame and when the borrower has demonstrated payment performance of cash or cash equivalents. Given the number of nonaccrual loans and related underlying collateral, management does not anticipate any significant impact to earnings. First Financial does not have a significant amount of loans which are past due less than 90 days on which there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms. First Financial has no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. First Financial has no other interest-bearing assets, other than loans, that meet the nonaccrual, past due, restructured or potential problem loan criteria. First Financial has no foreign loans outstanding. First Financial adopted Statement of Financial Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (the "SFAS 114") in the second quarter of 1995. Under the new standard, a loan is considered impaired, based on current information and events, if it is probable that First Financial will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Nonaccrual loans are the only impaired loans. A loan is considered restructured when First Financial allows certain concessions to a financially troubled debtor that would not normally be considered. There were no material troubled debt restructuring loans for the reporting periods. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective rate, except that all collateral dependent loans are measured for impairment based on the fair value of the collateral. -80- 86 SFAS 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under troubled debt restructuring. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, residential real estate loans and credit card loans, and are not included in the data that follows: The following table summarizes impaired loan information:
(In Thousands) As of December 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- Impaired loans $924 $559 $270 Impaired loans with related reserve for loan losses calculated under SFAS 114 924 559 164 Impaired loans with no related reserve for loan losses calculated under SFAS 114 -- -- 106 Amount of reserve for loan losses allocated to the impaired loan balance 162 88 43
The adoption of SFAS 114 did not result in additional provisions for loan losses primarily because the majority of impaired loan valuations continue to be based on the fair market value of collateral and because the existing provision evaluations methods had included impaired loans as defined by SFAS 114. Impairment losses are included in the provision for loan losses.
(In Thousands) For the Year Ended December 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- Average impaired loans $509 $317 $682 Interest income recognized 20 62 59
Interest payments on impaired loans are typically applied to principal unless future collectability of the recorded loan balance is expected, in which case interest income is recognized on a cash basis. -81- 87 SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes First Financial's loan loss experience for each of the years ended December 31, 1997, 1996, 1995, 1994 and 1993:
(In Thousands) Year Ended December 31, ---------------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Balance of loan loss allowance at beginning of period $3,788 $3,602 $3,354 $3,101 $3,006 ------ ------ ------ ------ ------ Allowance related to acquired bank 671 -- -- -- -- ------ ------ ------ ------ ------ Charge-offs: Commercial, financial and agricultural 262 31 21 3 32 Real estate mortgage 47 76 -- 4 53 Loans to individuals 500 370 254 249 148 ------ ------ ------ ------ ------ 809 477 275 256 233 ------ ------ ------ ------ ------ Recoveries: Commercial, financial and agricultural 38 13 37 34 27 Real estate, mortgage 220 4 5 6 87 Loans to individuals 93 55 115 44 59 ------ ------ ------ ------ ------ 351 72 157 84 173 ------ ------ ------ ------ ------ Net charge-offs 458 405 118 172 60 ------ ------ ------ ------ ------ Provision for loan losses 588 591 366 425 155 ------ ------ ------ ------ ------ Balance of loan loss allowance at end of period $4,589 $3,788 $3,602 $3,354 $3,101 ====== ====== ====== ====== ====== Percentage of net charge- offs during period to average net loans outstanding .13% .13% .04% .06% .03% - -------------------- Management regularly reviews the loan portfolio and determines a provision for loan losses based upon the impact of economic conditions on the borrower's ability to repay, past collection experience, the risk characteristics of the loan portfolio and such other factors which deserve current recognition.
-82- 88 The December 31, 1997, 1996, 1995, 1994 and 1993 allowance for loan losses were allocated as follows:
(In Thousands Except Percentages) As of December 31, ----------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------- ---------------- ---------------- ---------------- -------------- $(-) %(-) $ % $ % $ % $ % ------ ---- ------ ----- ------ ----- ------ ----- ------ ----- December 31 balance applicable to: Allocated: Commercial, financial and agricultural $1,535 11 $ 807 10 $ 490 10 $1,013 11 $ 973 12 Real estate 2,120 74 2,572 75 2,781 74 1,696 71 1,462 68 Installment loans to individuals 934 15 409 15 256 15 579 17 430 19 Unallocated -- -- -- -- 75 1 66 1 236 - ------ --- ------ --- ------ --- ------ --- ------ --- $4,589 100 $3,788 100 $3,602 100 $3,354 100 $3,101 100 ------ --- ------ --- ------ --- ------ --- ------ --- - -------------------- Allocation of allowance amount by category. Percent of outstanding loan balances in each category.
Management regularly reviews the loan portfolio and does not expect any unusual material amount to be charged-off during the next year that would be significantly different than the above years. DEPOSITS The following tables show the average deposit balances and rates paid on such deposits for the years ended December 31, 1997, 1996 and 1995 and the composition of the certificates issued in excess of $100,000 as of December 31, 1997:
(In Thousands) December 31, ----------------------------------------------------------------- 1997 1996 1995 ------------------ ----------------- ----------------- $ Rate $ Rate $ Rate -------- ---- -------- ---- -------- ---- Average non-interest- paying deposits $ 50,387 --% $ 44,692 --% $ 42,331 --% Average interest-paying demand deposits 62,019 1.99 58,696 2.02 58,357 2.15 Average savings deposits 111,557 3.54 102,185 3.49 89,436 3.21 Average time deposits 212,183 5.74 189,227 5.62 188,135 5.57 -------- -------- -------- $436,146 $394,800 $378,259 ======== ======== ======== -83- 89 Amount Rate ------- ---- Time certificates in amounts of $100,000 or more as of December 31, 1997 with maturity in: 3 months or less $ 9,045 5.56% 3 through 12 months 12,314 5.69 1 year through 3 years 8,915 6.57 Over 3 years 100 6.25 ------- $30,374 =======
There were no material deposits by foreign investors. RETURN ON STOCKHOLDERS' EQUITY AND ASSETS The following table presents the return on average stockholders' equity and average assets, dividend payout percentage and stockholders' equity to assets percentage for the years ended December 31, 1997, 1996 and 1995:
December 31, ------------------------------------------ 1997 1996 1995 ------ ------ ------ Return on average total assets 1.29% 1.26% 1.02% Return on average stockholders' equity 12.09 11.51 9.65 Dividend payout percentage on average outstanding common shares 34.16 32.89 39.63 Average stockholders' equity to average total assets percentage 10.65 10.98 10.54
SHORT-TERM BORROWINGS The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of securities sold under agreements to repurchase and other short-term borrowings during 1997, 1996 and 1995:
(In Thousands of Dollars, Except for Interest Rate Percentage) ------------------------------------------- 1997 1996 1995 ------- ------ ------ Outstanding as of December 31 $10,028 $3,146 $ 67 Weighted average interest rate at year end 5.10% 5.61% -- Maximum month-end balance $10,028 $9,700 $1,575 Average month-end balance 3,894 2,217 131 Weighted average interest rate for the year 5.10% 5.62% 5.91%
-84- 90 FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of Federal Home Loan Bank advances and other borrowings during 1997, 1996 and 1995:
(In Thousands of Dollars, Except for Interest Rate Percentage) ------------------------------------------- 1997 1996 1995 ------- ------- ------- Outstanding as of December 31 $18,188 $12,355 $17,469 Weighted average interest rate at year end 6.22% 6.01% 6.01% Maximum month-end balance $22,379 $17,264 $20,524 Average month-end balance 18,628 16,126 19,772 Weighted average interest rate for the year 6.19% 6.12% 6.04%
-85- 91 INTEREST RATE SENSITIVITY AND LIQUIDITY ANALYSIS The following table summarizes the repricing dates of First Financial's earning assets and interest-paying liabilities as of December 31, 1997:
(Dollars in Thousands) December 31, 1997 ---------------------------------------------------------------------- After Three After One Within Through Through Non- Three Months Twelve Months Five Years sensitive Total ------------ ------------- ---------- --------- -------- Earning assets Federal funds sold $ 27,925 $ -- $ -- $ -- $ 27,925 Investment securities available for sale 6,972 24,616 56,497 24,670 112,755 Loans 51,897 71,657 216,414 24,333 364,301 -------- ------- -------- ------- -------- Total earning assets 86,794 96,273 272,911 49,003 504,981 -------- ------- -------- ------- -------- Interest-paying liabilities Deposits 93,168 95,041 90,030 121,332 399,571 Federal funds purchased and securities sold under agreement to repurchase 10,028 -- -- -- 10,028 Other borrowings 5,380 2,908 9,850 50 18,188 -------- ------- -------- ------- -------- Total interest-paying liabilities 108,576 97,949 99,880 121,382 427,787 -------- ------- -------- ------- -------- Net noninterest-paying liabilities Noninterest paying deposits net of cash and due from banks -- -- -- 37,795 37,795 Other assets, liabilities and equity net -- -- -- 39,399 39,399 ------- -------- Total noninterest paying liabilities -- -- -- 77,194 77,194 ------- -------- Interest sensitivity gap (21,782) (1,676) 173,031 (149,573) -- Cumulative gap (21,782) (23,458) 149,573 -- Cumulative percentage of interest sensitive assets to interest sensitive liabilities 80% 89% 149% - -------------------- Based on an historical analysis of NOW, SuperNow, Savings and Money Market account balances, a percentage of these deposit balances has been determined to be sensitive to changes in interest rates. Approximately 30%, 50%, 30% and 25% of these deposit balances, respectively, were determined to be interest rate sensitive. As a result, these percentages of interest rate sensitive deposit balances, respectively were classified in the first column titled "Within Three Months." The remainder of the balances were classified as noninterest rate sensitive deposit balances and placed in the last column titled "Non-sensitive." Of the $364,301,000 of total loans, $191,950,000 have fixed rates while $172,351,000 have variable rates. -86- 92 Certificates of deposit comprise $230,835,000 of total interest-paying deposits, while interest-paying demand deposits and savings deposit balances accounted for $168,736,000 of this total. -86- 93 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS The discussion following and elsewhere in this Proxy Statement/Prospectus contains certain forward looking statements with respect to the financial condition, results of operations and business of First Financial. These statements involve certain risks and uncertainties which are often inherent in the ongoing operation of a financial institution such as FBNI. For example, a financial institution may accept deposits at fixed interest rates at different times and for different terms, and lend funds at fixed interest rates at different times and at different terms. In doing so, it accepts the risk that its cost of funds may rise while the use of those funds may be at a fixed rate. Similarly, although market rates of interest may decline, the financial institution may have committed, by virtue of the term of deposit, to pay what essentially becomes an above-market rate. Loans, and the reserve for loan losses, carry the risk that borrowers will not repay all funds in a timely manner, as well as the risk of total loss. The collateral pledged as security for loans may or may not have the value which has been attributed to it. The loan loss reserve, while believed to be adequate, may prove inadequate if one or more large-balance borrowers, or numerous mid-balance borrowers, or a combination of both, experience financial difficulty for a variety of reasons. These reasons may relate to the financial circumstances of an individual borrower, or may be caused by negative economic circumstances at the local, regional, national or international level which are beyond the control of the borrowers or lender. Because the business of banking is of a highly regulated nature, the decisions of governmental entities can have a major effect on operating results. All of these uncertainties, as well as others, are present in the operations of a financial institution, and stockholders are cautioned that management's view of the future, which serves as a basis for both the ongoing operation of First Financial and the forward looking statements included in this report, may prove to be other than anticipated. EARNINGS PERFORMANCE Consolidated net income increased $767,000, or 13%, to $6,683,000 for the year ended December 31, 1997, when compared to the $5,916,000 recorded in 1996. 1996 net income had increased by $1,346,000, or 29.5%, over 1995 net income of $4,570,000. 1997 earnings are the highest on record for First Financial, surpassing 1996's record earnings year. First Financial's net income for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 was $6,683,000, $5,916,000, $4,570,000, $4,563,000 and $5,055,000, respectively. -87- 94 NET INTEREST INCOME For the year ended December 31, 1997, net interest income, on a fully tax equivalent basis, totaled $19,030,000 and represented an increase of $1,169,000, or 6.5%, above the $17,861,000 of net interest income reported in 1996, which was $876,000, or 5.2%, higher than the $16,985,000 recorded in 1995. Increased average earning asset balances, in particular loan growth through acquisition, accounted for the increase in net interest income. Average earning assets increased $56,493,000, or 13%, in 1997, to $490,383,000, compared to an increase of $16,270,000, or 3.9%, to $433,890,000 in 1996. As of December 31, 1997, the net interest margin was 3.96%, a decrease of .16% or 3.9% when compared to the 4.12% reported as of December 31, 1996. This decrease was due to the acquired assets and liabilities of West Branch State Bank and competition for loan and deposit balances. It is anticipated that the current level of competitive pressures will continue in the foreseeable future, as financial and nonfinancial entities compete for core deposits and loans in the local markets. This competition will continue to negatively impact the net interest margin, forcing financial institutions to seek non-traditional funding sources and alternative sources of noninterest income. The yield on average earning assets, the interest cost of funds for assets and the resulting net interest income, as a percentage of average earning assets, for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 are presented in the table below.
1997 1996 1995 1994 1993 ---------------------------------------------------- Yield on average earning assets 7.86% 7.91% 7.85% 7.37% 7.43% Interest expense to average earning assets 3.90 3.48 3.78 3.32 3.55 Net interest margin 3.96 4.12 4.07 4.05 3.88
DIVIDEND HISTORY First Financial paid cash dividends totaling $2,283,000 in 1997, $1,946,000 in 1996 and $1,877,000 in 1995. Cash dividends have increased $337,000, or 17.3%, in 1997, $135,000, or 7.5%, in 1996 and $78,000, or 4.5%, in 1995. The dividend payout percentage for 1997, 1996 and 1995 was 34.16%, 32.89% and 39.63%, respectively. This pay-out percentage is indicative of First Financial's efforts to shares its profits and provide an acceptable return to its shareholders. ALLOWANCE AND PROVISION FOR LOAN LOSSES The adequacy of the allowance for loan losses is determined based on historical loss experience, projected loan losses and other factors. The allowance for loan losses is an estimate of the anticipated losses in the loan portfolio. As of December 31, 1997, the allowance for loan losses was $4,589,000, an increase of $801,000, or 21.1%, over the 1996 year-end balance of $3,788,000. Included in this increase was the acquired reserve for loan losses of the West Branch State Bank which totaled $671,000 as of April 1997. Net charge-offs in 1997 totaled $458,000 compared to net charge-offs of $405,000 and $118,000 for 1996 and 1995, respectively. The majority of these loan charge-offs were consumer and credit card charge-offs. As of December 31, 1997, 1996 and 1995, the loan loss reserve balances were 1.26%, 1.15% and 1.22% of total outstanding loan balances, respectively. -88- 95 For 1997, the provision for loan losses totaled $588,000, which decreased $3,000, or .5%, from the $591,000 recorded in 1996, and which increased $225,000, or 61.5%, from the $366,000 recorded in 1995. There are no trends or uncertainties which management expects to materially impact the adequacy of the allowance for loan losses or provision expense in the foreseeable future. NONINTEREST INCOME Noninterest income, excluding security gains and losses, for the year ended December 31, 1997, increased $806,000, or 11.2%, to $7,990,000, compared to an increase of $948,000, or 15.4%, to $7,184,000 in 1996 and a increase of $537,000, or 9.4%, to $6,236,000 in 1995. Noninterest income, excluding security gains and losses, as a percentage of total assets was 1.51% as of December 31, 1997, which is a decrease from the 1.53% for the year ended December 31, 1996 and an increase over the 1.39% reported for 1995. A five year comparison of the major components of noninterest income is provided for the years 1997, 1996, 1995, 1994 and 1993.
(Amounts in Thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------ Investment and OREO gains, net $ 395 $ (160) $ -- $ -- $ -- Service charges on deposit accounts 2,058 1,825 1,470 1,327 1,310 Trust department fees 3,289 2,998 2,763 2,594 2,416 Other service charges and fees 2,643 2,361 2,003 1,778 2,198
A significant source of noninterest income in 1997 was trust fees. Trust fees increased $291,000, or 9.7%, to $3,289,000 in 1997, compared to an increase of $235,000 in 1996 and an increase of $169,000 in 1995. An increase in trust asset balances and number of trust accounts, combined with the rising stock market, were responsible for this improved level of earnings. Other service charges, commissions and fees increased $282,000, or 11.9%, to $2,643,000 in 1997, $358,000, or 17.9%, to $2,361,000 in 1996 and $225,000, or 12.7%, to $2,003,000 in 1995. Secondary market mortgage loan fees are a direct function of the volume of loans originated for sale in the secondary market, which is driven by changes in market interest rates. Merchant program fees, which also contributed to the increase in 1997, increased $185,000, or 30.1%, to $800,000 as a result of increased transaction volume. Management is constantly reviewing alternative products and services to offer to the general public and to cross-sell to existing customers to provide additional sources of noninterest income. NONINTEREST EXPENSES Noninterest expenses increased $1,381,000, or 9.3%, to $16,183,000 in 1997, compared to a decrease of $678,000, or 4.4%, in 1996 and an increase of $948,000, or 6.5%, to $15,480,000 in 1995. As a percentage of average total assets, noninterest expenses decreased to 3.1% in 1997, which compares favorably to 1996's 3.2% and 1995's 3.4%. -89- 96 A five year comparison of the major components of noninterest expense is provided for the years 1997, 1996, 1995, 1994 and 1993.
(Amounts in Thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------ Supplies and postage and data processing $2,558 $2,377 $2,180 $1,770 $1,628 Occupancy and bank premise 2,755 2,624 2,726 2,515 2,212 Other expenses 3,112 3,105 2,897 3,176 2,998 Salaries and employee benefits 7,758 6,696 7,677 7,071 6,203
Salaries and employee benefit expenses increased $1,062,000, or 15.9%, to $7,758,000 in 1997, decreased $981,000, or 12.8%, to $6,696,000 in 1996 and increased $606,000, or 8.6%, to $7,677,000 in 1995. The increase in expense in 1997 is due to the added staff of the West Branch State Bank, the staffing of a new branch in Cedar Rapids and normal salary adjustments. The reduction in expense in 1996 was the result of staff reductions associated with attrition and the Voluntary Severance Program ("VSP") initiated in 1995. In the past three years, the number of full-time equivalent ("FTE") employees has varied from 221 as of December 31, 1995 to 205 as of December 31, 1996 to 239 as of December 31, 1997. As part of First Financial's restructuring initiative, the VSP was offered to employees in 1995, resulting in $354,000 of severance benefits being expensed in the fourth quarter of 1995. Occupancy, furniture and equipment expenses were $2,755,000 as of December 31, 1997, an increase of $131,000, or 5%, when compared to 1996 totals. 1996 expenses totaled $2,624,000 and decreased $102,000, or 3.7%, to the $2,726,000 recorded in 1995. The increase reported in 1997 was due to the acquisition of West Branch State Bank and the new Cedar Rapids branch. Reduced depreciation expense accounted for the majority of the decrease in 1996. Data processing expenses increased $279,000, or 21.8%, $127,000, or 11%, and $229,000, or 24.7%, to $1,561,000, $1,282,000 and $1,155,000, respectively, for 1997, 1996 and 1995. These increases are due to increased merchant programming expenses, credit card processing and electronic banking system expenses which are volume driven. Other expenses totaled $3,112,000, $3,105,000 and $2,897,000 for the years ended December 31, 1997, 1996 and 1995, respectively. A special Savings Association Insurance Fund ("SAIF") recapitalization assessment had a negative impact in 1996, while a retroactive reduction in the FDIC premium assessment rate had a positive impact on 1995. Consulting and professional fees increased $58,000, or 8.2%, to $767,000 in 1997, compared to an increase of $123,000, or 21%, in 1996 to $709,000, and an increase of $7,000, or 1.2%, to $586,000 in 1995. Increased advertising and promotional expense accounted for the remaining increase for this category, reflecting an increase of $107,000, or 17.4%, in 1997 to $722,000, compared to an increase of $126,000, or 25.8%, in 1996 to $615,000. -90- 97 BALANCE SHEET ANALYSIS Total Assets: ------------ Total assets of First Financial were $550,053,000 as of December 31, 1997, which represented an increase of $82,328,000 ($39,354,000 of which represented the assets of West Branch State Bank at the time of acquisition) or 17.6% over total assets of $467,725,000 as of December 31, 1996. Average total assets for 1997 were $519,080,000 which is an increase of $50,953,000, or 10.9%, over 1996 average total assets of $468,127,000 which was a $18,736,000, or 4.2%, increase over 1995 average total assets of $449,391,000. The funding for this asset growth was provided by average deposit growth of $41,346,000, or 10.5%, to $436,146,000 in 1997 and $16,541,000, or 4.4%, to $394,800,000 in 1996. In addition, average stockholders' equity balances increased $3,890,000, or 7.6%, in 1997 and $4,003,000, or 8.4%, in 1996, primarily through the retention of earnings. Notes payable, issued for the acquisition of West Branch Bancorp, Inc., averaged $4,090,000 for the year and provided another source of funds for asset growth. A five year comparison of the major components of average total consolidated assets for 1997, 1996, 1995, 1994 and 1993 are listed in the following table:
(Amounts in Thousands) 1997 1996 1995 1994 1993 -------------------------------------------------------- Federal funds sold $ 23,700 $ 8,100 $ 11,200 $ 5,800 $ 16,600 Other assets 43,100 37,900 35,300 33,600 33,200 Investment securities 108,300 114,800 111,800 127,700 141,400 Net loans 344,000 307,300 291,100 273,900 234,600
Investments: ----------- First Financial's average investment portfolio balances for 1997 were $108,326,000, which decreased $6,472,000, or 5.6%, from 1996 average investments of $114,798,000. Average federal funds sold balances were $23,673,000 in 1997, $15,537,000, or 191%, more than 1996's average balance of $8,136,000. The increase in federal fund sold balances was due to increases in short-term deposit balances and future liquidity needs. As of December 31, 1997, United States Treasury securities comprised 19.1% of the investment portfolio compared to 21.4% as of the end of 1996. Loan Balances: ------------- As of December 31, 1997, total loan balances increased $33,562,000, or 10.1%, to $364,301,000 when compared to total loan balances of $330,739,000 as of December 31, 1996. Average loan balances increased by $37,555,000, or 12.1%, in 1997 to $348,511,000 compared to average loan balances of $310,956,000 for 1996. First Financial experienced the majority of its 1997 loan growth from the acquisition of West Branch State Bank and from increased real estate loan volume caused by construction activity and housing turnover in the local market. Real estate loan -91- 98 balances increased $53,079,000, or 21.5%, to $300,053,000 as of December 31, 1997 compared to the balance of $246,974,000 as of December 31, 1996. Average total net loans for the years 1997, 1996, 1995, 1994 and 1993 were $349,700,000, $307,300,000, $291,100,000, $273,900,000 and $234,600,000, respectively. Deposits: -------- Total deposits increased $63,408,000, or 16%, to $458,815,000 in 1997 compared to total deposits of $395,407,000 as of December 31, 1996. Throughout 1997, average deposit balances totaled $444,052,000, an increase of $49,252,000, or 12.5%, over the average total deposit balances of $394,800,000 in 1996. Approximately $32,789,000 of 1997's deposit growth came from the acquisition of West Branch State Bank. A five-year comparison of the noninterest bearing and interest bearing balances of average total deposits for 1997, 1996, 1995, 1994 and 1993 are listed in the following table:
(Amounts in Thousands) 1997 1996 1995 1994 1993 -------------------------------------------------------- Noninterest bearing $ 50,400 $ 44,700 $ 42,400 $ 42,700 $ 40,300 Interest bearing 385,700 350,100 335,900 327,700 322,800
Liquidity And Capital Resources: ------------------------------- On an unconsolidated basis, First Financial had cash balances of $10,742,000 as of December 31, 1997. In 1997, First Financial received dividends of $15,329,000 from FNBI and used those funds to provide a partial payment of $2,100,000 on the acquisition of West Branch Bancorp, Inc., make net purchases of marketable equity securities of $4,950,000, pay dividends to its stockholders of $2,283,000 and increase its cash position by $6,721,000. FNBI is subject to certain regulatory limitations relative to its ability to pay dividends to First Financial. Management believes that First Financial will not be adversely affected by these dividend regulations and that projected dividends from FNBI will be sufficient to meet First Financial's liquidity needs and pay consistent dividends. The soundness, safety and stability of a financial institution is very important to customers and shareholders when establishing a business relationship or when purchasing stock of a financial institution. Management realizes that this is essential for First Financial's continued growth and profitability. As such, management places great emphasis in maintaining a strong capital position. A strong capital position is beneficial to First Financial, enabling it to withstand significant long-term adverse economic conditions and to take advantage of opportunities for future development and profitability. As of December 31, 1997 and 1996, total stockholders' equity was $57,580,000 and $52,576,000, respectively. As of December 31, 1997 and 1996, First Financial's Tier 1 capital percentage was 15.98% and 17.50%, respectively, and its total risk adjusted capital percentage (Tier 1 capital plus Tier -92- 99 2 capital) was 17.23% and 18.75%, respectively. All of these ratios substantially exceeded the regulatory minimums of 4.00% and 8.00%, respectively. First Financial's leverage capital ratio was 10.59% as of December 31, 1997, compared to 11.73% as of December 31, 1996, also considerably higher than the 4.00% floor. As of December 31, 1997, the lower capital percentages are primarily due to the acquisition of West Branch Bancorp, Inc. in 1997 and do not represent a trend or uncertainty that is likely to have a material effect on liquidity and capital resources. On a consolidated basis, 1997 net cash flows from operations provided $6,525,000 and another $37,501,000 was provided by net increases in deposits and repurchase agreements. These cash flows were invested in net loans of $12,273,000 and federal funds sold of $26,225,000. In addition, First Financial acquired approximately $41,800,000 of assets offset by deposits, notes payable and other liabilities totaling $39,600,000 in conjunction with the acquisition of West Branch Bancorp, Inc. At December 31, 1997, First Financial had total outstanding loan commitments of approximately $9,450,000 and a total of $64,805,000 of loan commitments and unfunded or unused lines of credit. Management believes that its liquidity levels are appropriate and that it has borrowing capacity from the Federal Home Loan Bank and other sources. INTEREST RATE SENSITIVE ASSETS AND LIABILITIES AND LIQUIDITY Average Interest-Earning Assets: ------------------------------- In 1997, average interest-earning assets (consisting primarily of loans and investment securities) totaled $490,383,000 and represented 92.5% of total average asset balances. This is an increase of $56,493,000, or 13%, over 1996 average interest-earning asset balances of $433,890,000. The majority of this increase was in loans. Average loan balances increased $43,431,000, or 14%, to $354,387,000 in 1997. Average Interest-Paying Liabilities: ----------------------------------- Average interest-paying liabilities increased $44,830,000, or 12.2%, in 1997 and $11,387,000, or 3.2%, in 1996, to $412,252,000 and $367,422,000, respectively. Average savings deposit balances increased $10,427,000, or 10.2%, to $112,612,000 in 1997 and $12,749,000, or 14.3%, in 1996. Average time deposit balances increased $28,873,000, or 15.3%, to $218,000,000 in 1997 and $1,092,000, or .6%, to $189,227,000 in 1996. The 1997 increase includes the acquisition of West Branch State Bank. Material Uncertainties: ---------------------- First Financial continues to challenge all systems and vendors in reaching a compliance standard with the Year 2000 issue. It has utilized diligence in selecting partners which provide information systems support for hardware applications and operating systems software. As a matter of policy, First Financial reviews any potential partners' financial condition in the selection process for software and hardware for its critical systems. This process is repeated annually in evaluating partners' ability to provide continued quality and support. At the present time, all major system vendors have conducted comprehensive testing of their systems with regard to the Year 2000 issue and have communicated these results to First Financial. Based on these policies, procedures and actions, First Financial has determined that a majority of its systems will be compliant with Year 2000 standards before the end of 1998. First Financial has incurred, and expects to incur, internal staff costs as well as -93- 100 consulting and other expenses related to the assessment and testing of its systems. Capital expenditures for hardware purchases will be incurred in the normal course of business which will also prepare the systems for the Year 2000. These costs are not expected to significantly impact liquidity or future earnings of First Financial. Management expects to complete its Year 2000 plan during 1998, and the remainder of the costs to be incurred are not expected to be significant to the financial position of First Financial. Effects of Inflation: -------------------- Although it has not been an important factor in recent years, the rate of inflation can have a significant impact on the balance sheet and income statement of First Financial. In addition to the establishment of ALCO, management has instituted effective cost and purchasing controls and has established ongoing mechanisms for adjusting product and service pricing to minimize the potential impact of inflation. Recently Issued Accounting Standards: ------------------------------------ The adoption of recently issued accounting standards is not expected to have a material effect on First Financial's financial statements. LEGAL PROCEEDINGS Neither First Financial nor FNBI is involved in any material legal proceedings, other than routine proceedings incidental to the operation of FNBI. Such proceedings are not expected to result in any materially adverse effect on the operations or earnings of FNBI. Neither First Financial nor FNBI is involved in any proceedings to which any director, principal officer, or affiliate of such persons, or persons who own of record or beneficially 5% or more of the outstanding shares of First Financial, or any associate of the foregoing persons, is a party adverse to First Financial or FNBI. PROPERTIES First Financial's office and the main office of FNBI is located in Iowa City, Iowa. As of December 31, 1997, FNBI had ten retail banking offices: four Iowa City locations; one North Liberty location; one Coralville location; one West Branch location; and three Cedar Rapids locations (see chart below). -94- 101 First Financial Bancorporation's Retail Banking Locations
Established ----------- Iowa City Locations Main Bank - 204 East Washington Street, Downtown Iowa City 1932 Drive-In - 21 South Linn Street, Downtown Iowa City 1962 Towncrest - 1117 William Street, Iowa City's East Side 1968 Southwest - 2312 Mormon Trek Boulevard, Southwest Iowa City 1995 North Liberty Locations North Liberty - 580 West Cherry Street, North Liberty, Iowa 1994 Coralville Locations Coralville - 506 10th Avenue, Coralville, Iowa 1979 West Branch Locations West Branch Banking Center - 127 West Main Street, West Branch, Iowa 52317 1997 Cedar Rapids Locations Main Bank - 200 First Street SW, Cedar Rapids 1991 Downtown - 240 Third Avenue SE, in the Armstrong Centre, Cedar Rapids 1994 Center Point Road - 5012 Center Point Road NE, Cedar Rapids, Iowa 52402 1997 This space is being rented for a five-year period from December 1, 1994, to December 1, 1999, with three five-year options to renew. During the first five years, annual rent is $37,206 through December 1, 1996, $39,840 through December 1, 1998, and $40,068 to December 1, 1999. First Financial has free and clear title to the remaining branch locations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (FIRST QUARTER COMPARISON) EARNINGS PERFORMANCE Net income increased $187,000, or 12.1%, to $1,734,000 for the quarter ended March 31, 1998 when compared to net income of $1,547,000 for the first quarter of 1997. Basic earnings per share increased from $.44 in the first quarter of 1997 to $.49 in the first quarter of 1998, an increase of 11.4%. DIVIDEND INFORMATION In the first quarter of 1998, First Financial paid cash dividends of $.19 per outstanding share of common stock which totaled $675,000, compared to $.1467 per share and $514,000 in total dividends for the same period in 1997. This represented an increase of $.0433, or 29.5%, per outstanding share of common stock and $161,000, or 31.3%, in total cash dividends paid. The ability of First Financial to pay dividends to its shareholders is dependent on the profitability of FNBI and to what prudent and sound banking principles will permit. The payment of the dividends (i) is not permitted without the approval of the OCC except to the extent of net profits of the current fiscal year and retained net profits of the two preceding fiscal years, and (ii) is not permitted -95- 102 if the payment of a dividend would reduce the capital of a bank below required levels. Given FNBI's current capital position, the OCC minimum capital criteria are not restrictive. NET INTEREST INCOME Net interest income after provision for loan losses increased $296,000, or 7.3%, to $4,360,000 at the end of the first quarter of 1998 when compared to 1997 period totals. The primary factor contributing to this increase in net interest income was the acquisition of West Branch Bancorp, Inc. in April 1997. Net interest income, on a fully tax equivalent basis, for the first quarter of 1998 totaled $4,746,000, which is up $246,000, or 5.5%, over the $4,500,000 reported for the same period in 1997. The increase in fully taxable equivalent net interest income is also attributed to the acquisition. The consolidated net interest spreads and margins are presented in the following table for the first quarter of 1998 and 1997. ANALYSIS OF INTEREST RATE SPREAD AND MARGIN
Three Months Ended --------------------------------------------- March 31, 1998 March 31, 1997 --------------------- --------------------- (Fully taxable-equivalent basis) Average Average Average Average (Dollars In Thousands) Balance Rates Balance Rates --------- ------- --------- ------- Interest earning assets $504,140 7.68% $440,549 7.85% Interest paying liabilities 429,681 4.63 370,764 4.51 Net interest spread 3.05 3.34 Net interest margin 3.74 4.06
PROVISION AND ALLOWANCE FOR LOAN LOSSES As of March 31, 1998, the allowance for possible loan losses was 1.26% of total outstanding loans compared to the same percentage as of December 31, 1997 and 1.20% as of March 31, 1997. During the first quarter of 1998, First Financial recorded net charged-off loans totaling $190,000 compared to $69,000 for the first quarter of 1997. The dollar amount of nonaccrual loans increased from $550,000 as of March 31, 1997 to $1,425,000 as of March 31, 1998. Year-to-date provision decreased $77,000, or 43.5%, to $100,000 as of March 31, 1998 when compared to March 31, 1997. The provision was decreased primarily due to the improvement of the credit quality of the loan portfolio. There are no trends or uncertainties which management expects to materially impact the adequacy of the allowance for loan losses or provision expense in the foreseeable future. -96- 103 SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes First Financial's loan loss experience for the three month periods ended March 31, 1998 and 1997:
(In Thousands) ------------------------------ Three Months Ended March 31, 1998 1997 ------ ------ Balance of loan loss allowance at beginning of period $4,589 $3,788 ------ ------ Charge-offs: Commercial, financial and agricultural 30 3 Real estate, mortgage -- 35 Loans to individuals 195 87 ------ ------ 225 125 ------ ------ Recoveries: Commercial, financial and agricultural 13 6 Real estate, mortgage -- 26 Loans to individuals 22 24 ------ ------ 35 56 ------ ------ Net charge-offs 190 69 ------ ------ Provision for loan losses 100 177 ------ ------ Balance of loan loss allowance at end of period $4,499 $3,896 ====== ====== Percentage of net charge-offs during period to average net loans outstanding .05% .02% For financial reporting purposes, management regularly reviews the loan portfolio and determines a provision for loan losses based upon the impact of economic conditions on the borrower's ability to repay, past collection experience, the risk characteristics of the loan portfolio and such other factors which deserve current recognition.
-97- 104 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The March 31, 1998 and 1997 allowance for loan losses have been allocated as follows:
(In Thousands, Except for Percentages) March 31, 1998 March 31, 1997 ----------------------- ----------------------- Allocation Allocation of Percentage of Percentage Allowance of Loans Allowance of Loans Amount by in Amount by in Category Category Category Category -------- -------- -------- -------- Balance applicable to: Allocated: Commercial, financial and agricultural $1,047 11% $ 849 9% Real estate 2,329 74 2,648 76 Installment loans to individuals 1,123 14 399 14 Unallocated: -- 1 -- 1 ------ --- ------ --- $4,499 100% $3,896 100% ====== === ====== ===
Management regularly reviews the loan portfolio and does not expect any unusual material amount to be charged off in the future which would be significantly different than the above historical experience. NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The following table summarizes First Financial's nonaccrual, past due 90 days or more and restructured loans as to interest or principal payments as of March 31, 1998 and 1997:
(In Thousands) --------------------------------------- March 31, 1998 March 31, 1997 -------------- -------------- Nonaccrual loans $1,425 $550 Accruing loans past due 90 days or more 783 735 Restructured loans 118 18
As of March 31, 1998 and March 31, 1997, total nonaccrual loans were comprised primarily of loans collateralized by real estate. Non-accrual of interest may occur on any loan whenever one or more of the following criteria is evident: (a) there is substantial deterioration in the financial position of the borrower; (b) the full payment of interest and principal can no longer be reasonably expected; or (c) the principal or interest on the loan has been in default for a period of 90 days. In all cases, loans must be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed to interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are reasonably assured of repayment within a reasonable time frame and when the borrower has demonstrated payment performance of cash or cash equivalents. Given the number of nonaccrual loans and related underlying collateral, management does not anticipate any significant impact to earnings. -98- 105 As of March 31, 1998, First Financial did not have a significant amount of loans which were past due less than 90 days on which there were serious doubts as to the ability of the borrowers to comply with the loan repayment terms. As of March 31, 1998, First Financial had no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. As of such date, First Financial had no other interest-bearing assets, other than loans, that meet the nonaccrual, past due, restructured or potential problem loan criteria, and First Financial had no foreign loans outstanding. A loan is considered restructured when First Financial allows certain concessions to financially troubled debtor that would not normally be considered. As of March 31, 1998 and 1997 there were no trouble debt restructuring loans. NONINTEREST INCOME Noninterest income for the quarter ending March 31, 1998 totaled $2,447,000 (when excluding security gains), which is an increase of $642,000, or 35.6%, when compared to the $1,805,000 of noninterest income reported for the quarter ending March 31, 1997. Trust fees increased $106,000, or 12.7%, to $938,000 during the first quarter of 1998 when compared to the same period during 1997. Other service charges, commissions and fees on increased $470,000, or 89%, to $938,000 in the first quarter of 1998, compared to $528,000 as of March 31, 1997. Secondary market loan fees accounted for the majority of this increase, totaling $448,000 as of March 31, 1998, an increase of $346,000, or 339.2%, over 1997. The acquisition of West Branch Bancorp, Inc. accounted for the remaining increase. Investment security gains of $154,000 were realized in the first three months of 1998 compared to $44,000 during the same period in 1997. NONINTEREST EXPENSES Noninterest expenses totaled $4,491,000 as of March 31, 1998. This represented an increase of $789,000, or 21.3%, over the $3,702,000 of noninterest expense recorded for 1997. TOTAL ASSETS As of March 31, 1998, First Financial's assets totaled $568,442,000 representing a $18,389,000, or 3.3%, increase over December 31, 1997 assets of $550,053,000. The majority of this asset growth was funded by approximately $17,000,000 of seasonal short-term deposits. Average total assets for the first quarter of 1998 were $549,949,000 compared to $473,882,000 for 1997, an increase of $76,067,000, or 16.1%, reflecting the acquired assets of West Branch Bancorp, Inc. and deposit growth previously noted. TOTAL LOAN BALANCES Total loan balances decreased by $6,703,000, or 18.4%, to $357,598,000 in the first quarter of 1998 when compared to year-end loan balances of $364,301,000. Increased secondary market mortgage refinancing resulted in a higher volume of in-house real estate loans being sold to the secondary market. Average loan balances for the first quarter of 1998 increased $33,446,000, or 10.2%, -99- 106 to $359,807,000 when compared to the $326,361,000 in average loan balances reported for the first quarter of 1997. Again, the majority of this increase was through acquisition. TOTAL DEPOSITS Since December 31, 1997, total deposits increased $21,646,000, or 4.7%, to $480,461,000 as of March 31, 1998. The majority of this increase was due to seasonal short-term deposits. Average total deposits for the first quarter of 1998 were $461,362,000, an increase of $58,796,000, or 14.6%, over first quarter 1997 average deposits of $402,566,000 as a result of seasonal deposits and acquired deposits. CAPITAL POSITION The strength and soundness of a company is reflected in the adequacy of its capital position. Total capital as of March 31, 1998 was $64,766,000 which is an increase of $2,597,000, or 4.2%, from total capital of $62,169,000 as of December 31, 1997. The ratio of total capital to total assets as of March 31, 1998 was 11.4%, which was down 0.2% from the December 31, 1997 ratio of 11.6%. Stockholders' equity increased 4.7% compared to asset growth of 3.3%, resulting in the lower total capital-to-total asset ratio. This ratio is substantially higher than the current Federal Reserve Board guideline of 6.0%. As of March 31, 1998, First Financial's Tier I capital ratio was 16.31% and its total risk adjusted capital ratio (Tier I plus Tier II) was 17.56% compared to 15.98% and 17.23%, respectively, as of December 31, 1997. Both of these ratios exceeded the regulatory minimums of 4.0% for Tier I and 8% for total risk adjusted capital. First Financial's leverage capital was 11.08% as of March 31, 1998, compared to 10.59% at December 31, 1997, substantially higher than the 4% regulatory floor. CAPITAL EXPENDITURES Through March 31, 1998, First Financial recorded year-to-date capital expenditures totaling approximately $205,000, relating to standard expenditures necessary to conduct its banking business. Cash flow provided by maturing investment securities funded these capital outlays. INTEREST RATE SENSITIVITY AND LIQUIDITY ANALYSIS The following table summarizes various repricing periods of First Financial's interest-earning assets and interest-paying liabilities as of March 31, 1998. This table indicates that First -100- 107 Financial is slightly liability sensitive over the next twelve-month timeframe. If interest rates increase in the next year, net interest income may decrease. If rates would decrease, net interest income may increase. To offset the effects of decreasing market rates and reduce the exposure of the positive gap, management could shorten the maturities of investment securities and could lengthen the maturities of deposits in conjunction with increasing the interest rates paid on long-term time deposits.
(Dollars in Thousands) March 31, 1998 ---------------------------------------------------------------------- After Three After One Within Through Through Non- Three Months Twelve Months Five Years sensitive Total ------------ ------------- ---------- --------- -------- Interest earning assets: Federal funds sold $ 39,300 $ -- $ -- $ -- $ 39,300 Investment securities 8,977 20,758 62,741 26,778 119,254 Loans 45,019 76,485 217,686 18,408 357,598 -------- ------- -------- ------- -------- Total interest earning assets 93,296 97,243 280,427 45,186 516,152 -------- ------- -------- ------- -------- Interest paying liabilities: Securities sold under agreement to repurchase 9,467 -- -- -- 9,467 Deposits 101,958 77,458 102,689 137,443 419,548 Long-term debt 2,250 4,512 5,996 150 12,908 -------- ------- -------- ------- -------- Total interest paying liabilities 113,675 81,970 108,685 137,593 441,923 -------- ------- -------- ------- -------- Net noninterest paying liabilities Noninterest paying deposits net of cash and due from banks -- -- -- 37,338 37,338 Other assets, liabilities and equity net -- -- -- 36,891 36,891 ------- -------- Total noninterest rate sensitive assets and liabilities -- -- -- 74,229 74,229 ------- -------- Interest sensitive gap (20,379) 15,273 171,742 (166,636) -- Cumulative gap (20,379) (5,106) 166,636 -- -- Cumulative % of sensitive assets to liabilities 82% 97% 155% -- -- - -------------------- Based on an historical analysis of NOW, SuperNow, Savings and Money Market account balances, a percentage of these deposit balances has been determined to be sensitive to changes in interest rates. Approximately 30%, 50%, 30% and 25% of these deposit balances, respectively, were determined to be interest rate sensitive. As such, these percentages of interest rate sensitive deposit balances were classified in the first column titled "Within Three Months." The remainder of the balances were classified as noninterest rate sensitive deposit balances and placed in the last column titled "Non-sensitive." -101- 108 Of the $357,598,000 of total loans, $191,822,000 have fixed rates, while $165,776,000 have variable rates. Certificates of deposit comprise $229,892,000 of total deposits, while interest-paying demand deposits and savings deposit balances accounted for $189,656,000 of this total.
Market Risk Analysis at March 31, 1998 Dollar Amounts Expressed in Thousands (Expected Maturity Date, Period Ended March 31, 1998)
1999 2000 2001 2002 2003 Thereafter Total Fair Value ----------------------------------------------------------------------------------------- ASSETS Fixed rate loans: Balance $ 50,906 $31,396 $26,727 $32,448 $33,762 $16,583 $191,822 $190,335 Average interest rate 8.19% 8.48% 8.46% 8.45% 8.25% 6.77% 8.21% Variable rate loans: Balance $ 70,598 $39,550 $34,140 $ 6,346 $13,316 $ 1,826 $165,776 $165,776 Average interest rate 8.53% 8.15% 8.02% 7.85% 7.86% 7.64% 8.25% Investments: Balance $ 69,034 $26,141 $20,320 $11,560 $ 4,720 $26,779 $158,554 $158,554 Average interest rate 6.14% 6.47% 6.42% 6.62% 6.74% 5.51% 6.28% LIABILITIES Liquid deposits: Balance $189,656 -- -- -- -- -- $189,656 $189,656 Average interest rate 2.80% -- -- -- -- -- 2.80% Fixed-rate time deposits: Balance $123,622 $64,182 $29,389 $ 2,459 $ 4,181 $ 30 $223,863 $226,022 Average interest rate 5.66% 6.19% 5.89% 5.53% 5.59% 6.62% 5.84% Variable-rate time deposits: Balance $ 3,551 $ 2,473 $ 5 -- -- -- $ 6,029 $ 6,029 Average interest rate 5.72% 5.90% 5.05% -- -- -- 5.79% FHLB advances and notes payable: Balance $ 6,762 $ 3,673 $ 2,273 $ 50 -- $ 150 $ 12,908 $ 12,914 Average interest rate 5.98% 6.47% 6.02% 6.45% -- 2.30% 6.13% Securities sold under agreement to repurchase: Balance $ 9,467 -- -- -- -- -- $ 9,467 $ 9,467 Average interest rate 2.53% -- -- -- -- -- 2.53% - -------------------- Investments include federal funds sold and available for sale securities. Liquid deposits include interest-earning checking accounts, savings accounts and money market deposit accounts.
Quantitative and Qualitative Disclosures About Market Risks Market Risk Exposure First Financial's primary market risk exposure is to changes in interest rates. First Financial's asset/liability management, or its management of interest rate risk, is focused primarily on evaluating and managing net interest income given various risk criteria. Factors beyond First Financial's control, such as market interest rates and competition, may also have an impact on First Financial's interest income and interest expense. In the absence of other factors, First Financial's overall yield on interest-earning assets will increase as will its cost of funds in its interest-bearing liabilities when market rates increase over an extended period of time. Conversely, First Financial's yields and cost of funds will decrease when market rates decline. First Financial is able to manage these swings to some extent by attempting to control the maturity or rate adjustments of its interest-earning assets and interest-bearing liabilities over given periods of time. In order to effectively manage market risk exposure and insure adequate liquidity, First Financial, at the level of FNBI, has established a standing Asset Liability Management Committee ("ALCO"). Under the auspices of ALCO, the Company has undertaken an analysis of the potential market risk of both increased and decreased levels of interest rates projected into both the immediate and longer-term future. Based on the following data, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally during periods of increasing interest rates, First Financial's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets causing a decline in First Financial's interest rate spread and margin. This would result from an increase in First Financial's cost of funds that would not be immediately offset by an increase in its yield on earning assets. An increase in the cost of funds would have a negative effect on First Financial's net interest income without equivalent increase in the yield on earning assets. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to minimize the potential effects of decreases in market interest rates to net interest income. First Financial has an asset/liability management program in place which is designed to mitigate interest rate sensitivity. The program emphasizes the origination of adjustable rate loans, which are held in portfolio, the investment of excess cash in short or intermediate term interest earning assets and the solicitation of regular savings and transaction deposit accounts which are less sensitive to changes in interest rates and can be repriced rapidly. The table presented on the next page provides quantitative information with respect to interest sensitive assets and liabilities. Market Risk Analysis at December 31, 1997 Dollar Amounts Expressed in Thousands (Expected Maturity Date, Year Ended December 31, 1997)
1998 1999 2000 2001 2002 Thereafter Total Fair Value ASSETS Fixed rate loans: Balance $ 51,929 $32,589 $26,629 $30,105 $27,773 $22,655 $191,950 $198,123 Average interest rate 8.53% 8.46% 8.52% 8.47% 8.33% 8.11% 8.44% Variable rate loans: Balance $ 71,627 $42,934 $38,229 $ 6,292 $11,591 $ 1,678 $172,351 $172,351 Average interest rate 8.67% 8.60% 8.19% 7.92% 8.19% 7.41% 8.48% Investments: Balance $ 56,815 $20,861 $13,373 $18,033 $ 4,410 $27,386 $140,680 $140,680 Average interest rate 6.32% 6.50% 6.70% 6.59% 6.97% 6.04% 6.38% LIABILITIES Liquid deposits: Balance $168,736 -- -- -- -- -- $168,736 $168,736 Average interest rate 2.90% -- -- -- -- -- 2.90% Fixed-rate time deposits: Balance $134,727 $54,390 $29,034 $ 3,888 $ 2,671 $ 47 $224,757 $222,728 Average interest rate 5.72% 6.16% 6.06% 5.49% 5.73% 6.38% 5.87% Variable-rate time deposits: Balance $ 572 $ 5,432 $ 74 -- -- -- $ 6,078 $ 6,078 Average interest rate 4.55% 6.00% 3.85% -- -- -- 5.85% FHLB advances and notes payable: Balance $ 8,288 $ 6,544 $ 2,500 $ 786 $ 50 $ 50 $ 18,188 $ 18,245 Average interest rate 5.91% 6.31% 6.12% 6.50% 6.45% 6.60% 6.11%
-102- 109 OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of June 24, 1998 the number of shares of First Financial Common Stock beneficially owned and the percentage of ownership of outstanding shares of First Financial Common Stock by (a) each director and executive officer of First Financial, (b) each person who is known by First Financial to own beneficially more than 5% of First Financial Common Stock and (c) all directors and executive officers of First Financial as a group:
NUMBER OF SHARES PERCENT OF OUTSTANDING NAME AND ADDRESS BENEFICIALLY OWNED COMMON STOCK -------------------- ------------------ ---------------------- John R. Balmer 10,311 % Fritz L. Duda 150 % Mary Lee Nagle Duda 214,527 6.04 Robert J. Latham 54,016 1.51 Ralph J. Russell 1,200 A. Russell Schmeiser 73,350 2.07 Robert M. Sierk 42,750 1.20 Larry D. Ward 61,801 1.74 Stephen H. Wolken 18,750 Directors and Executive Officers as a Group (8 persons) 262,328 7.36 - ---------- Less than one percent. The percentage calculations for beneficial ownership are based upon 3,553,717 shares of First Financial Common Stock that were issued and outstanding as of May 31, 1998. The address for each person is 204 East Washington Street, P.O. Box 1880, Iowa City, Iowa 52244-1880. Mr. Balmer owns 9,771 shares of record and possesses sole voting power over those shares. In addition, Mr. Balmer possesses shared voting power over 240 shares held of record jointly with his wife, Penny M. Balmer. Mr. Balmer also possesses sole voting power over 150 shares held as Custodian for his son David R. Balmer and 150 shares held as Custodian for his daughter Elizabeth N. Balmer. Mr. Duda owns 150 shares of record. Mr. Duda disclaims beneficial ownership of 214,527 shares owned of record by Mary Lee Nagle Duda, as Trustee of MLND Interests U/T/D November 17, 1981. Mary Lee Nagle Duda holds 214,527 shares of record as Trustee of MLND Interests U/T/D November 17, 1981. Mr. Latham owns 46,319 shares of record and possesses sole voting power over those shares. In addition, Mr. Latham possesses sole investment and voting power over 6,435 shares held of record in the name of Firnaticia as the nominee of FNBI, as trustee of the Robert J. Latham Individual Retirement Account Trust, and possesses shared voting power over 1,262 shares held of record in the name of Firnaticia as the nominee of FNBI, as trustee of the Sue B. Latham Individual Retirement Account Trust. Mr. Russell owns 1,200 shares of record and possesses sole voting power over those shares. Mr. Schmeiser owns 55,100 shares of record and possesses shared voting power over 750 shares held of record jointly with his wife, Cynthia B. Schmeiser. In addition, Mr. Schmeiser possesses shared voting power, to the extent of his pro-rata-one-third interest, over 4,500 shares held of record by Burr Oak Farm, a general partnership, and he possesses sole investment power over 3,625 shares held of record by Firnaticia as the nominee of FNBI, as the trustee of the A. Russell Schmeiser Individual Retirement Account Trust, as to 1,750 shares held of record by A. Russell -103- 110 Schmeiser as Custodian for Allyson Schmeiser (the minor daughter of Mr. Schmeiser and Cynthia B. Schmeiser) under the Iowa Uniform Transfer to Minors Act, and as to 1,750 shares held of record by A. Russell Schmeiser as Custodian for Peter Schmeiser (the minor son of Mr. Schmeiser and Cynthia B. Schmeiser) under the Iowa Uniform Transfer to Minors Act. Mr. Schmeiser also possesses shared voting power as to 1,500 shares held of record by his wife, Cynthia B. Schmeiser, and as to 3,625 shares held of record by Firnaticia as the nominee of the FNBI, as trustee of the Cynthia B. Schmeiser Individual Retirement Account Trust. The total also includes 3,750 shares that Mr. Schmeiser has the right to purchase pursuant to stock options currently or within 60 days after June 24, 1998. Director Sierk owns 34,755 shares of record and possesses shared voting power over 3,495 shares owned of record by his wife, Bonnie J. Sierk. The total also includes 4,500 shares that Mr. Sierk has the right to purchase pursuant to stock options currently or within 60 days after June 24, 1998. Mr. Ward owns 48,181 shares of record and possesses sole voting power over those shares. In addition, Mr. Ward possesses both investment power and voting power over 3,180 shares held as Custodian for his son Jeffrey G. Ward; 7,050 shares held of record in the name of Firnaticia as the nominee of the FNBI, as trustee of the Larry D. Ward Money Purchase Pension Plan; and 3,390 shares held of record in the name of Firnaticia as the nominee of the FNBI, as trustee of the Larry D. Ward Individual Retirement Account Trust. Mr. Wolken owns 17,850 shares of record and possesses sole voting power over those shares. In addition, Mr. Wolken possesses shared voting power over 900 shares held of record by his wife, Sue C. Wolken. Includes shares held directly, including restricted shares, held in retirement accounts, held by certain family members or held by trusts of which the director or officer is a trustee or substantial beneficiary, over which shares the respective directors or officers may be deemed to have sole or shared voting or investment power. Also includes 8,250 shares that the directors and executive officers have the right to purchase pursuant to stock options currently or within 60 days after June 24, 1998.
-104- 111 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 400,000,000 shares of MBI Common Stock, $0.01 par value. At March 31, 1998, MBI had no shares of MBI Preferred Stock issued or outstanding and 134,960,625 shares of MBI Common Stock issued and 133,115,227 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 current designation and reservation of Series B Junior Participating Preferred Stock pursuant to MBI's Preferred Share Purchase Rights Plan, 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, as amended, 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 that entitle each such shareholder to the number of votes that 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. -105- 112 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 is attached to each share of MBI Common Stock. The MBI 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 MBI Right will entitle the holder to buy 1/100 of a share of MBI Series B Junior Participating Preferred Stock at an exercise price of $212 per MBI Right. In the event a person or group acquires beneficial ownership of 20% or more of MBI Common Stock, holders of MBI 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 MBI Right. If MBI is acquired by any person or group after the Rights become exercisable, each MBI Right will entitle its holder to purchase stock of the acquiring company having a market value of twice the current exercise price of each MBI Right. The MBI Rights are designed to protect the interests of MBI and its shareholders against coercive takeover tactics. The purpose of the MBI 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 MBI Rights may deter certain takeover proposals. The MBI Rights, which can be redeemed by MBI's Board of Directors in certain circumstances, expire by their terms on June 3, 2008. 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 also may 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, as amended, and by-laws also contain provisions that: (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 -106- 113 amendment, alteration, change or repeal. Such provisions may be deemed to have an anti-takeover effect. RESTRICTIONS ON RESALE OF MBI STOCK BY AFFILIATES Under Rule 145 of the Securities Act of 1933, as amended (the "Securities Act"), certain persons who receive MBI Common Stock pursuant to the Merger and who are deemed to be "affiliates" of First Financial will be limited in their right to resell the stock so received. The term "affiliate" is defined to include any person who, directly or indirectly, controls, or is controlled by, or is under common control with First Financial at the time the Merger is submitted to a vote of the shareholders of First Financial. Each affiliate of First Financial (generally any director or executive officer of First Financial or any shareholder of First Financial who beneficially owns a substantial number of outstanding shares of First Financial Common Stock) who desires to resell the MBI Common Stock received in the Merger must sell such stock either pursuant to an effective registration statement or in accordance with an applicable exemption, such as the applicable provisions of Rule 145(d) under the Securities Act. Rule 145(d) provides that persons deemed to be affiliates may resell their stock received in the Merger pursuant to certain of the requirements of Rule 144 under the Securities Act if such stock is sold within the first year after the receipt thereof. After one year if such person is not an affiliate of MBI and if MBI is current with respect to its required public filings, a former affiliate of First Financial may resell the stock received in the Merger without limitation. After two years from the issuance of the stock, if such person is not an affiliate of MBI at the time of sale and for at least three months prior to such sale, such person may resell such stock, without limitation, regardless of the status of MBI's required public filings. First Financial has agreed to provide MBI with a list of those persons who may be deemed to be affiliates of First Financial at the time of the Special Meeting. First Financial has agreed to use all reasonable efforts to cause each such person to deliver to MBI prior to the Effective Time a written agreement to the effect that no sale will be made of any shares of MBI Common Stock received in the Merger by an affiliate of First Financial except in accordance with the Securities Act and until such time as MBI shall first publish the financial results of at least 30 days of post-Merger combined operations of First Financial and MBI. The certificates of MBI Common Stock issued to affiliates of First Financial in the Merger may contain an appropriate restrictive legend, and appropriate stop transfer orders may be given to the transfer agent for such certificates. COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF MBI AND FIRST FINANCIAL MBI is incorporated under the laws of the State of Missouri, while First Financial is incorporated under the laws of the State of Iowa. The rights of the shareholders of MBI are governed by MBI's Restated Articles of Incorporation, as amended, and by-laws and Chapter 351 of the Missouri Revised Statutes (the "Missouri Act"). The rights of First Financial shareholders are governed by First Financial's Articles of Incorporation and by-laws, both as amended, and by the IBCA. The rights of First Financial shareholders who receive shares of MBI Common Stock in the Merger will thereafter be governed by MBI's Restated Articles of Incorporation, as amended, and by-laws and by the Missouri Act. The material rights of such shareholders and, where applicable, the differences between the rights of MBI shareholders and First Financial shareholders, are summarized below. -107- 114 PREFERRED SHARE PURCHASE RIGHTS PLAN. As described above under "- Preferred Share Purchase Rights Plan," MBI Common Stock has attached Rights, which may deter certain takeover proposals. First Financial does not have a rights plan. SUPERMAJORITY PROVISIONS. MBI's Restated Articles of Incorporation, as amended, 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 of Incorporation, as amended, 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 of Incorporation, as amended, or by-laws relating to (i) the number or qualification of directors; (ii) the classification of the Board of Directors; (iii) the filling of vacancies on the Board of Directors; or (iv) the removal of directors, requires the affirmative vote of not less than 75% of the total votes of MBI's then outstanding shares of capital stock entitled to vote, voting together as a single class, unless such amendment has previously been expressly approved by at least two-thirds of the Board of Directors. The Restated Articles of Incorporation, as amended, 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. First Financial's Articles of Incorporation and by-laws, both as amended, contain provisions requiring a vote of at least two-thirds of the shareholders to approve certain proposals. Under First Financial's Articles of Incorporation, as amended, approval of a merger or consolidation with any other corporation, the sale of substantially all of the assets of First Financial or any amendment, alteration or repeal of such provisions of the Articles of Incorporation requires the prior affirmative vote of at least two-thirds of the then outstanding shares of stock of First Financial. 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. -108- 115 First Financial's Articles of Incorporation do not provide for cumulative voting in the election of directors. CLASSIFIED BOARD. As described under "- Classification of Board of Directors," the Board of Directors of MBI is divided into three classes of directors, with each class being elected to a staggered three-year term. By reducing the number of directors to be elected in any given year, the existence of a classified Board diminishes the benefits of the cumulative voting rights to minority shareholders. First Financial does not have a classified Board of Directors. Each of its directors is elected annually. ANTI-TAKEOVER STATUTES. The Missouri Act contains certain provisions applicable to Missouri corporations such as MBI which may be deemed to have an anti-takeover effect. Such provisions include Missouri's business combination statute and the control share acquisition statute. The Missouri business combination statute protects domestic corporations after hostile takeovers by prohibiting certain transactions once an acquiror has gained control. The statute restricts certain "Business Combinations" between a corporation and an "Interested Shareholder" or affiliates of the Interested Shareholder for a period of five years unless certain conditions are met. A "Business Combination" includes a merger or consolidation, certain sales, leases, exchanges, pledges and similar dispositions of corporate assets or stock and certain reclassifications and recapitalizations. An "Interested Shareholder" includes any person or entity which beneficially owns or controls 20% or more of the outstanding voting shares of the corporation. During the initial five-year restricted period, no Business Combination may occur unless such Business Combination or the transaction in which an Interested Shareholder becomes "interested" (the "Acquisition Transaction") was approved by the board of directors of the corporation on or before the date of the Acquisition Transaction. Business Combinations may occur after the five-year period following the Acquisition Transaction only if: (i) prior to the stock acquisition by the Interested Shareholder, the board of directors approves the transaction in which the Interested Shareholder became an Interested Shareholder or approves the Business Combination in question; (ii) the holders of a majority of the outstanding voting stock, other than stock owned by the Interested Shareholder, approve the Business Combination; or (iii) the Business Combination satisfies certain detailed fairness and procedural requirements. The Missouri Act exempts from the provisions of the business combination statute: (i) corporations not having a class of voting stock registered under Section 12 of the Exchange Act; (ii) corporations which adopt provisions in their articles of incorporation or by-laws expressly electing not to be covered by the statute; and (iii) certain circumstances in which a shareholder inadvertently becomes an Interested Shareholder. MBI's Restated Articles of Incorporation and by-laws do not contain an election to "opt out" of the Missouri business combination statute. The Missouri Act also contains a "Control Share Acquisition Statute" which provides that an "Acquiring Person" who after any acquisition of shares of a publicly traded corporation has the voting power, when added to all shares of the same corporation previously owned or controlled by the Acquiring Person, to exercise or direct the exercise of: (i) 20% but less than 33 1/3%, (ii) 33 1/3% or more but less than a majority or (iii) a majority, of the voting power of outstanding stock of such corporation, must obtain shareholder approval for the purchase of the "Control Shares." If approval is not given, the Acquiring Person's shares lose the right to vote. The statute prohibits an Acquiring Person -109- 116 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 by-laws expressly electing not to be covered by the statute. MBI's Restated Articles of Incorporation and by-laws do not contain an election to "opt out" of the Control Share Acquisition Statute. The IBCA applicable to First Financial contains a business combination statute similar to that contained in the Missouri Act. Like the Missouri business combination statute, the Iowa business combination statute generally prohibits a domestic corporation from engaging in mergers or other business combinations with Interested Shareholders (as defined in the IBCA) for a statutory time period. The prohibition can be avoided if (i) the business combination is approved by the board of directors prior to the date on which the Interested Shareholder acquires the requisite percentage of stock or (ii) the business combination is approved by the board of directors and authorized at an annual or special meeting of shareholders by the affirmative vote or at least sixty-six and two-thirds percent of the outstanding voting stock which is not owned by the Interested Shareholder. The Missouri Act imposes a longer prohibition period on transactions with Interested Shareholders (five years) than the IBCA (three years), thereby potentially increasing the period during which a hostile takeover may be frustrated. In addition, the IBCA, unlike its Missouri counterpart, does not apply if the Interested Shareholder obtains at least 85% of the corporation's voting stock upon consummation of the transactions which resulted in the shareholder becoming an Interested Shareholder. Thus, a person acquiring at least 85% of the corporation's voting stock could circumvent the defensive provisions of the IBCA while being unable to do so under the Missouri Act. The IBCA does not contain a control share acquisition statute similar to that contained in the Missouri Act. 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 the IBCA, shareholders of First Financial are entitled to dissenters' rights upon the consolidation or merger of First Financial which are similar but not identical to those under the Missouri Act. Specifically, the procedures and the filing deadlines applicable to dissenters' rights under the Missouri Act are somewhat different than those applicable in dissenters' rights proceedings under the IBCA. For example, the Missouri Act does not require payment to be made by the surviving company to the merger until the end of the dissenters' rights proceedings. The IBCA requires a payment of an -110- 117 amount equal to the surviving corporation's estimate of fair value for the dissenting shareholder's shares prior to the final determination of fair value. SHAREHOLDERS' RIGHT TO INSPECT. Under the IBCA, any shareholder may inspect the corporation's stock ledger, shareholder list and other books and records if the shareholder's demand for inspection is made in good faith and for a proper purpose. The IBCA specifically provides that a shareholder may appoint an agent for the purpose of examining the books and records of the corporation. The right of shareholders to inspect under the Missouri Act is generally similar to that of shareholders under the IBCA. Neither the Missouri Act nor Missouri case law, however, provides any specific guidance as to whether a shareholder may appoint an agent for the purpose of examining books and records or the extent to which a shareholder must have a "proper purpose." Accordingly, in comparison with the IBCA, in a given situation a Missouri shareholder may be provided with less guidance as to the scope of his or her ability to inspect the books and records of the corporation. 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 12 members. Similarly to the Missouri Act, the IBCA provides that a corporation may fix the number of directors in its Articles of Incorporation or by-laws. The number of directors on the Board of Directors of First Financial is set forth in First Financial's by-laws, which provide that the number of directors may be fixed from time to time at not less than 5 and not more than 15 directors by resolution adopted by a majority of the full Board of Directors. 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. 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 Federal Deposit Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency (the "Comptroller") and -111- 118 various state financial institution regulatory agencies. 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 the holding company or any one of such nonbank subsidiaries, to 10% of the lending institution'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 financial institutions and other subsidiaries. The principal source of MBI's revenues is dividends from its financial institution subsidiaries. Various federal and state statutory provisions limit the amount of dividends an affiliate financial institution can pay to MBI without regulatory approval. The approval of federal and state bank regulatory agencies, as appropriate, is required for any dividend if the total of all dividends declared in any calendar year would exceed the total of the institution's 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 financial institution subsidiary also may be affected by other factors, such as the maintenance of adequate capital. 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 financial institutions and financial institution holding companies to maintain certain capital levels 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. MBI and each of its subsidiary financial institutions exceed all applicable capital adequacy standards. 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 -112- 119 subsidiaries also would 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, as amended ("FIRREA"), contains a cross-guarantee provision that could result in insured depository institutions owned by MBI being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by MBI. Under FIRREA, failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("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 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. 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 I capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier I 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 I capital to risk-adjusted assets of 4% or greater; and (iii) had a ratio of Tier I 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). All MBI subsidiary financial institutions as of March 31, 1998 were categorized as "well capitalized." -113- 120 Banking agencies have recently adopted final regulations that mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as part of the institution's regular safety and soundness examination. Banking agencies also have recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank's capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. After gaining experience with the proposed measurement process, these banking agencies intend to propose further regulations to establish an explicit risk-based capital charge for interest rate risk. 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 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. FDIC INSURANCE ASSESSMENTS The subsidiary depository institutions of MBI are subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-based premium schedule. 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." INTERSTATE BANKING AND OTHER RECENT LEGISLATION The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), enacted in 1994, facilitates the interstate expansion and consolidation of banking organizations by permitting (i) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks, except for banks located in Montana and Texas, which states enacted legislation to "opt out" of this authority, (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 Riegle-Neal is to permit MBI to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Missouri. -114- 121 There also have been a number of recent legislative and regulatory proposals designed to strengthen the federal deposit insurance system and to improve the overall financial stability of the United States banking system and to provide for other changes in the bank regulatory structure, including proposals to reduce regulatory burdens on banking organizations and to expand the nature of products and services banks and bank holding companies may offer. It is not possible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on MBI. RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS ----------------------------------------- KPMG Peat Marwick LLP served as MBI's independent accountants for the year ended December 31, 1997 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements, review and consultation regarding filings with the Commission and other regulatory authorities and consultation on financial accounting and reporting matters. McGladrey & Pullen, LLP served as First Financial's independent accountants for the year ended December 31, 1997 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements and consultation on financial accounting and reporting matters. McGladrey & Pullen, LLP intends to have a representative present at the Special Meeting to answer relevant questions regarding the Merger. LEGAL MATTERS ------------- Certain legal matters will be passed upon for MBI by Thompson Coburn, St. Louis, Missouri and for First Financial by Sidley & Austin, Chicago, Illinois. EXPERTS ------- The consolidated financial statements of MBI as of December 31, 1997, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1997, incorporated by reference in MBI's Annual Report on Form 10-K have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, whose report is incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated balance sheets of First Financial and its subsidiary at December 31, 1997 and 1996 and the consolidated statements of income, stockholders' equity and cash flows for each of the three years in the three-year period ended December 31, 1997, included herein, have been included herein in reliance upon the report of McGladrey & Pullen, LLP, independent auditors, whose report is included herein, and upon the authority of such firm as experts in accounting and auditing. -115- 122 OTHER MATTERS ------------- The Board of Directors of First Financial, 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 First Financial. SHAREHOLDER PROPOSALS --------------------- If the Merger is approved, the other conditions to the Merger are satisfied and the Merger is consummated, shareholders of First Financial will become shareholders of MBI at the Effective Time. MBI shareholders may submit to MBI proposals for formal consideration at the 1999 Annual Meeting of MBI's shareholders and inclusion in MBI's proxy statement and proxy for such meeting. All such proposals for the 1999 Annual Meeting of MBI's shareholders must be received in writing by the Corporate Secretary at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by November 16, 1998. -116- 123 FIRST FINANCIAL BANCORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX -----
Page ---- INDEPENDENT AUDITOR'S REPORT F-1 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 F-2 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (UNAUDITED) F-25 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) F-26 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) F-27 NOTE TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS F-28
-117- 124 [Letterhead of McGladrey & Pullen, LLP] INDEPENDENT AUDITOR'S REPORT To the Board of Directors First Financial Bancorporation Iowa City, Iowa We have audited the accompanying consolidated balance sheets of First Financial Bancorporation and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Bancorporation and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Iowa City, Iowa February 17, 1998 F-1 125 FIRST FINANCIAL BANCORPORATION CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
December 31, ----------------------- 1997 1996 ---- ---- ASSETS Cash and due from banks (Note 11) $ 21,449 $ 20,949 Available for sale securities (amortized cost 1997 $110,891; 1996 $97,431) (Note 2) 112,755 97,802 Federal funds sold 27,925 -- Loans, net (Notes 3, 6 and 10) 359,712 326,951 Bank premises and equipment, net (Note 4) 12,885 12,082 Accrued interest receivable 3,730 3,179 Intangible assets 2,775 624 Prepaid pension cost (Note 8) 3,718 3,240 Other assets 5,104 2,898 -------- -------- $550,053 $467,725 ======== ======== LIABILITIES Noninterest-bearing deposits $ 59,244 $ 47,603 Interest-bearing deposits 399,571 347,804 -------- -------- Total deposits (Note 5) $458,815 $395,407 Federal funds purchased and securities sold under agreements to repurchase 10,028 3,146 Federal Home Loan Bank advances (Note 6) 12,735 12,355 Notes Payable 5,453 -- Accrued interest payable 2,153 1,516 Accounts payable and other accrued expenses 2,617 2,503 Current and deferred income taxes (Note 7) 672 222 -------- -------- $492,473 $415,149 ======== ======== COMMITMENTS AND CONTINGENCIES (Note 13) STOCKHOLDERS' EQUITY (Notes 8 and 11) Capital stock, common, $1.25 par value; authorized 5,000,000 shares; (issued 1997 3,488,680 shares; 1996 3,497,118 shares) $ 4,361 $ 2,914 Additional paid-in capital 2,284 2,606 Retained earnings 49,766 46,824 Unrealized gains on debt securities, net 1,169 232 -------- -------- $ 57,580 $ 52,576 -------- -------- $550,053 $467,725 ======== ======== See Notes to Financial Statements.
F-2 126 FIRST FINANCIAL BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- INTEREST INCOME: Interest and fees on loans $29,182 $26,037 $24,449 Interest on investment securities: Taxable 4,496 5,316 5,251 Non-taxable 1,721 1,485 1,384 Interest on federal funds sold 1,309 430 658 ------- ------- ------- Total interest income $36,708 $33,268 $31,742 ------- ------- ------- INTEREST EXPENSE: Interest on deposits $17,371 $15,394 $14,598 Interest on federal funds purchased and securities sold under agreements to repurchase 189 60 14 Interest on Federal Home Loan Bank advances 910 995 1,199 Interest on other borrowings 260 -- -- ------- ------- ------- Total interest expense $18,730 $16,449 $15,811 ------- ------- ------- Net interest income $17,978 $16,819 $15,931 Provision for loan losses (Note 3) 588 591 366 ------- ------- ------- Net interest income after provision for loan losses $17,390 $16,228 $15,565 ------- ------- ------- NONINTEREST INCOME: Trust fees $ 3,289 $ 2,998 $ 2,763 Services charges and fees on deposit accounts 2,058 1,825 1,470 Other service charges, commissions and fees 2,643 2,361 2,003 Investment (losses), net (Note 2) 395 (160) -- ------- ------- ------- Total noninterest income $ 8,385 $ 7,024 $ 6,236 ------- ------- ------- NONINTEREST EXPENSES: Salaries and employee benefits (Note 8) $ 7,758 $ 6,696 $ 7,677 Occupancy, furniture and equipment 2,755 2,624 2,726 Data processing 1,561 1,282 1,155 Office supplies and postage 997 1,095 1,025 Other expenses 3,112 3,105 2,897 ------- ------- ------- Total noninterest expenses $16,183 $14,802 $15,480 ------- ------- ------- Income before income taxes $ 9,592 $ 8,450 $ 6,321 Federal and state income taxes (Note 7) 2,909 2,534 1,751 ------- ------- ------- Net income $ 6,683 $ 5,916 $ 4,570 ------- ------- ------- Earnings per share: Basic $ 1.91 $ 1.68 $ 1.28 Diluted $ 1.90 $ 1.67 $ 1.27 See Notes to Financial Statements.
F-3 127 FIRST FINANCIAL BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Common Stock Additional Unrealized Gains Years Ended December 31, $1.25 Par Value Paid-in Retained (Losses) on Debt 1997, 1996 and 1995 Number Amount Capital Earnings Securities, Net Total - ------------------- ------ ------ ------- -------- --------------- ----- BALANCE, DECEMBER 31, 1994 $3,561 $2,967 $ 3,928 $40,095 $(1,745) $45,245 Net income -- -- -- 4,570 -- 4,570 Cash dividends ($.51 per share) -- -- -- (1,811) -- (1,811) Stock options exercised for 18,131 shares (Note 8) 18 15 233 -- -- 248 Redemption of 4,158 shares of common stock (4) (3) (66) -- -- (69) Unrealized gains on debt securities, net of deferred tax effect -- -- -- -- 2,024 2,024 ------ ------ ------- ------- ------- ------- BALANCE, DECEMBER 31, 1995 $3,575 $2,979 $ 4,095 $42,854 $ 279 $50,207 Net income -- -- -- 5,916 -- 5,916 Cash dividends ($.55 per share) -- -- -- (1,946) -- (1,946) Stock options exercised for 31,800 shares (Note 8) 32 26 345 -- -- 371 Redemption of 109,544 shares of common stock (110) (91) (1,834) -- -- (1,925) Unrealized gains on debt securities net of deferred tax effect -- -- -- -- (47) (47) ------ ------ ------- ------- ------- ------- BALANCE, DECEMBER 31, 1996 $3,497 $2,914 $ 2,606 $46,824 $ 232 $52,576 Net income -- -- -- 6,683 -- 6,683 3-for-2 stock split effected in the form of a stock dividend -- 1,456 -- (1,456) -- -- Cash dividends ($.65 per share) -- -- -- (2,283) -- (2,283) Stock options exercised for 25,800 shares (Note 8) 26 22 320 -- -- 342 Redemption of 34,182 shares of common stock (34) (31) (642) -- -- (673) Redemption of 56 fractional shares -- -- -- (2) -- (2) Unrealized (losses) on debt securities, net of deferred tax effect -- -- -- -- -- 937 ------ ------ ------- ------- ------- ------- BALANCE, DECEMBER 31, 1997 $3,489 $4,361 $ 2,284 $49,766 $ 1,169 $57,580 ====== ====== ======= ======= ======= ======= See Notes to Financial Statements.
F-4 128 FIRST FINANCIAL BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 6,683 $ 5,916 $ 4,570 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,084 1,116 1,246 Amortization 274 155 166 Provision for loan losses 588 591 366 Deferred income taxes -- 93 139 Amortization on investment securities 167 140 28 (Increase) decrease in accrued interest receivable (61) 188 (192) (Increase) decrease in other assets (2,574) (239) (2,251) Increase (decrease) in accrued interest and other liabilities 384 (351) 1,406 Change in accrued income taxes (20) 309 (94) -------- -------- -------- Net cash provided by operating activities $ 6,525 $ 7,918 $ 5,384 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Available for sale securities: Maturities $ 29,769 $ 21,038 $ 38,063 Sales 19,973 26,747 -- Purchases (48,692) (21,914) (46,511) Purchases of held to maturity securities -- -- (3,009) Federal funds sold, net (26,225) 3,225 (2,625) Net increase (decrease) in loan balances outstanding (12,273) (36,615) 60 Purchase of bank premises and equipment (1,614) (710) (2,822) Purchase of stock of West Branch Bancorp, Inc. net of cash received (Note 9) (1,155) -- -- -------- -------- -------- Net cash (used in) investing activities $(40,217) $ (8,229) $(16,844) -------- -------- -------- F-5 129 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit balances $ 30,619 $ 10,352 $ 22,792 Federal funds purchased and securities sold under agreements to repurchase 6,882 3,146 (3,200) Repayment of note principal -- -- (161) Federal Home Loan Bank advances (620) (5,114) (3,159) Other borrowings -- (67) 67 Dividends paid (2,283) (1,946) (1,811) Stock options exercised 342 371 248 Common stock redeemed (748) (1,925) (69) -------- -------- -------- Net cash provided by financing activities $ 34,192 $ 4,817 $ 14,707 -------- -------- -------- Increase in cash and due from banks $ 500 $ 4,506 $ 3,247 CASH AND DUE FROM BANKS Beginning balance 20,949 16,443 13,196 -------- -------- -------- Ending balance $ 21,449 $ 20,949 $ 16,443 -------- -------- -------- Supplemental Disclosures (Note 12) See Notes to Financial Statements.
F-6 130 FIRST FINANCIAL BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Business: First Financial Bancorporation (the "Company") is a bank holding company which owns 100% of the outstanding common stock of First National Bank Iowa ("the Bank"). The Bank is engaged in many areas of commercial banking, including deposits, lending and a variety of customer services. The Trust and Asset Management division of the Bank administers fiduciary and agency accounts and provides the Bank with a significant source of fee income. Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiary, First National Bank Iowa, which is wholly-owned. All material intercompany accounts and transactions have been eliminated in consolidation. Trust Assets: Trust accounts (other than cash deposits) held by the Bank in a fiduciary or agency capacity for its customers are not included in the accompanying financial statements because such items are not assets of the Bank. Presentation of Cash Flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks. Cash flows from deposits, federal funds purchased, federal funds sold and loan balances are treated as net increases or decreases. Investments in Debt and Equity Securities: Securities available for sale are accounted for at fair value and the unrealized holding gains or losses are presented as a separate component of stockholders' equity, net of their deferred income tax effect. Gains and losses on sale of investment securities are based on the cost or amortized cost of the specific securities sold. F-7 131 Loans: Loans are stated at the amount of unpaid principal, reduced by the allowance for loan losses. The allowance for loan losses is established through a provision loan losses charged to expense. Loans are charged against the allowance when management believes the collectibility of principal is unlikely. The allowance for possible loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The Bank makes continuous credit reviews of the loan portfolios and will consider current economic conditions, historical loan loss experience, review of specific problem loans, and other factors in determining the adequacy of the allowance. Loans are considered impaired when, based on all current information and events, it is probable that the Bank will not be able to collect all amounts due. The portion of allowance for loan losses applicable to impaired loans has been computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Interest income on impaired loans is recognized on the cash basis. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as an adjustment of the related yield of the loans. The deferred amounts are amortized over the estimated life of the loans, anticipating prepayments. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over estimated useful lives of 15-39 years for buildings and 3-15 years for furniture and equipment. Intangible Assets: Intangible assets consist primarily of goodwill which represents the excess of cost over fair value of net assets acquired in business combinations accounted for under the purchase method. Goodwill is amortized on a straight-line basis over 15 years. The carrying value of goodwill is reviewed periodically for impairment. Goodwill totaled $2,304,000, net of accumulated amortization of $122,000, as of December 31, 1997. Income Taxes: Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, F-8 132 in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Employee Benefit Plans: Annual expense of the Company's defined benefit pension plan includes service cost (measured by the projected unit credit method), interest on the projected benefit obligation, actual return on plan assets and other amortization and deferral amounts specified by FASB Statement No. 87. Deferred benefits under a salary continuation plan are charged to expense during the period the respective employee attains full eligibility. The Banks does not provide any other post-employment benefits. Compensation expense for stock issued through a stock option plan is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation is measured as the difference between the estimated market value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over periods of service. Earnings Per Common Share: In July 1997, the Board of Directors approved a three-for-two stock split effected in the form of a stock dividend and an additional 1,165,022 shares of common stock were issued to stockholders. As a result, fractional shares of stock totaling 56 shares were redeemed. Information with respect to the common stock outstanding, earnings per common share and other stock information has been retroactively adjusted to give effect to the stock split. The FASB has issued Statement No. 128, Earnings Per Share, which supersedes APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per share by all entities that have common stock or potential common stock, such as options, warrants and convertible securities outstanding that trade in a public market. Basic per-share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per-share amounts assume the conversion, exercise or issuance of all potential common stock unless the effect is to reduce the loss or increase the income per common share from continuing operations. Statement No. 128 has been applied for annual and interim periods ending after December 15, 1997, and earnings per share for prior periods have been retroactively restated, which had no effect on reported earnings per share. Following is a reconciliation of the denominator:
Years Ended December 31, 1997 1996 1995 ------------------------ ---- ---- ---- Weighted average number of shares 3,496,634 3,528,792 3,573,713 Potential number of dilutive shares 30,112 18,470 16,306 --------- --------- --------- Total shares to compute diluted earnings per share 3,526,746 3,547,262 3,590,019 ========= ========= =========
F-9 133 Fair Value of Financial Instruments: The fair values are based on quoted market prices or, if not available, on estimates using present value or other techniques. These assumptions are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In this regard, fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement. Some financial instruments and all-nonfinancial instruments are excluded from the disclosures. The aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Bank in estimating the fair value of its financial instruments: Cash and Due from Banks: Cash and due from banks represent short-term instruments and fair value is equal to the carrying amounts of the accounts. Investment Securities: Investment securities are valued based upon quoted market prices. Loans: For variable-rate loans, fair values are based on carrying values. The fair values for other loans are estimated based upon discounted cash flows, using current interest rates for similar loans to borrowers with similar credit. The carrying value of accrued interest approximates fair value. Deposits: The fair value of demand deposits and variable rate money market and fixed-term deposits is the carrying value of the deposits. Fair values for fixed rate certificates is based upon discounted cash flows at current interest rates. The carrying value of accrued interest payable approximates its current value. Other Borrowings: For other borrowings, fair value is based upon discounted cash flows using the Banks' current incremental borrowing rates for similar borrowing arrangements. Off-Balance-Sheet Financial Instruments: Off-balance-sheet instruments are valued based upon the current fee structure for outstanding letters of credit, which is not significant. Unfunded loan commitments are not valued since the loans are generally priced at market at the time of funding. F-10 134 Recently Issued Accounting Standards: SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Statement does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. The Statement requires that an enterprise: a) classify items of other comprehensive income by their nature in a financial statement; and b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial position. It is not expected that this Statement will materially affect the presentation of the Company's comprehensive income. NOTE 2. INVESTMENT SECURITIES The amortized cost and fair value of debt securities available for sale are as follows:
(Amounts in Thousands) Cost or Gross Gross Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains (Losses) Value - ----------------- --------- ---------- ---------- -------- U.S. Treasury $ 21,410 $ 113 $ (2) $21,521 U.S. Government agencies and corporations 43,570 191 (95) 43,666 States and political subdivisions 39,058 583 (38) 39,603 Other debt securities 2,626 -- -- 2,626 Marketable equity securities 4,227 1,124 (12) 5,339 -------- ------ ----- -------- Total $110,891 $2,011 $(147) $112,755 ======== ====== ===== ======== December 31, 1996 - ----------------- U.S. Treasury $ 20,886 $ 59 $ (12) $ 20,933 U.S. Government agencies and corporations 44,511 206 (191) 44,526 States and political subdivisions 29,367 330 (109) 29,588 Other debt securities 2,280 -- -- 2,755 Marketable equity securities 387 88 -- 475 -------- ------ ----- -------- Total $ 97,431 $ 683 $(715) $ 97,802 ======== ====== ===== ========
F-11 135 The contractual maturity distribution of investment securities is summarized as follows:
(Amounts in Thousands) ----------------------- Amortized Fair December 31, 1997 Cost Value - ----------------- --------- -------- Due in one year or less $ 23,554 $ 23,628 Due after one year through five years 30,916 31,255 Due after five years through ten years 15,961 16,220 Due after ten years 469 485 Mortgage-backed securities 33,138 33,202 Other 2,626 2,626 -------- -------- Total $106,664 $107,416 ======== ========
The Company's wholly-owned subsidiary Bank is required to pledge assets to secure repurchase agreements and public deposits as permitted or required by law. As of December 31, 1997, $29,847,000 of U. S. Treasury and Government agency securities were pledged against these deposits. For the years ended December 31, 1997, 1996 and 1995, net gains or losses from the sale of investment securities were as follows:
(Amounts in Thousands) Years ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Gross gains $403 $ 30 $-- Gross (losses) (8) (190) -- ---- ----- --- Net gains (losses) $395 $(160) $-- ==== ===== ===
NOTE 3. LOANS The composition of loans is as follows:
(Amounts in Thousands) As of December 31, 1997 1996 - ------------------ ---- ---- Commercial, financial and agricultural $ 38,349 $ 32,361 Real estate, construction 19,009 16,440 Real estate, mortgage 252,271 230,534 Loans to individuals 52,638 49,386 All others 2,034 2,018 -------- -------- $364,301 $330,739 Less allowance for loan losses (4,589) (3,788) -------- -------- Net loans $359,712 $326,951 ======== ========
F-12 136 Changes in the allowance for loan losses are as follows:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Balance, beginning $3,788 $3,602 $3,354 Allowance related to acquired bank 671 -- -- Provision charged to operating income 588 591 366 Recoveries 351 72 157 Loans charged off (809) (477) (275) ------ ------ ------ Balance, ending $4,589 $3,788 $3,602 ====== ====== ======
Information for impaired loans as of and for the year ended December 31, 1997, is as follows:
(Amounts in Thousands) 1997 1996 ---- ---- Loan receivable for which there is a related allowance for credit losses $924 $559 Loan receivable for which there is no related allowance for credit losses -- -- ---- ---- Total impaired loans $924 $559 ==== ==== Related allowance for credit losses $162 $ 88 Average balance (based on month-end balances) 509 317 Interest income recognized 20 62
NOTE 4. BANK PREMISES AND EQUIPMENT Bank premises and equipment are as follows:
(Amounts in Thousands) As of December 31, 1997 1996 - ------------------ ---- ---- Land $ 1,927 $ 1,881 Buildings 12,408 11,212 Furniture and equipment 7,071 6,118 ------- ------- $21,406 $19,211 Accumulated depreciation (8,521) (7,129) ------- ------- $12,885 $12,082 ======= =======
F-13 137 NOTE 5. DEPOSITS A summary of deposits is as follows:
(Amounts in Thousands) As of December 31, 1997 1996 - ------------------ ---- ---- Demand $ 59,244 $ 47,603 Interest-bearing transaction accounts 63,038 56,762 Savings 105,697 100,738 Time deposits of less than $100,000 200,462 163,886 Time deposits of $100,000 or more 30,374 26,418 -------- -------- $458,815 $395,407 ======== ========
NOTE 6. FEDERAL HOME LOAN BANK ADVANCES AND NOTE PAYABLE The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As of December 31, 1997, the Bank held $2,058,000 of FHLB stock. Advances from the FHLB are collateralized by 1-4 unit residential mortgages equal to 150% of total outstanding notes. A summary of FHLB advances as of December 31, 1997, is as follows:
(Amounts In Thousands) Amount Due Weighted Average Rate ---------- --------------------- 1 to 3 months 3,568 5.90% 4 to 6 months 2,269 5.40 7 to 12 months 638 6.20 1 to 5 years 6,260 6.16 ------- ---- $12,735 5.95% ======= ====
Notes Payable to individuals totaled $5,453,000 as of December 31, 1997. The notes bear interest at 6.50%, are unsecured, and are due as follows:
Due in 1998 Due in 1999 Due in 2000 Due in 2001 ----------- ----------- ----------- ----------- Amounts maturing in thousands $1,812 $1,811 $1,074 $756 ------ ------ ------ ----
NOTE 7. INCOME TAXES The provision for income tax expense is made up of the following components:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Current: Federal $2,422 $2,023 $1,308 State 487 418 304 Deferred -- 93 139 ------ ------ ------ $2,909 $2,534 $1,751 ====== ====== ======
F-14 138 The effective income tax rate is different than the statutory federal income tax rate as follows:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Income tax at a statutory rate of 34% $3,262 $2,882 $2,149 Tax exempt interest, net of related disallowed interest expense (641) (659) (668) State income taxes, net of federal benefit 321 276 201 Other (33) 35 69 ------ ------ ------ $2,909 $2,534 $1,751 ====== ====== ======
Deferred income tax liabilities and assets arose from the following temporary differences:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Deferred income tax assets: Allowance for loan losses $1,225 $1,037 $ 941 Deferred compensation 233 264 287 Certain accrued expenses 121 125 109 Other 20 -- -- ------ ------ ------ $1,599 $1,426 $1,337 ------ ------ ------ Deferred income tax liabilities: Debt securities available for sale $ 695 $ 138 $ 166 Property and equipment 272 274 263 Pension plan asset 1,170 1,001 870 Net deferred loan fees 73 55 35 Other -- 93 71 ------ ------ ------ $2,210 $1,561 $1,405 ------ ------ ------ Net deferred income tax liability $ (611) $ (135) $ (68) ====== ====== ======
The net change in the deferred income taxes is reflected in the financial statements as follows:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Statement of income $ -- $ 93 $ 139 Statement of stockholders' equity 557 (26) 1,204 Adjustments due to business combination (81) -- -- ---- ---- ------ $476 $ 67 $1,343 ==== ==== ======
F-15 139 NOTE 8. EMPLOYEE BENEFIT PLANS The Company sponsors a non-contributory defined benefit pension plan for substantially all employees hired prior to March 1, 1995. Pension benefits vest after five years of service and are based on years of service and average final salary. The Company's funding policy is to make contributions based upon an actuarially-determined cost method; however, no contributions to the plan were required for 1997, 1996 and 1995. The following items are the components of the net pension credit:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Service cost-benefits earned during the year $ 90 $ 104 $ 90 Interest cost on projected benefit obligation 172 230 199 Actual return on plan assets (1,693) (1,025) (1,475) Net amortization and deferral 1,003 323 889 ------- ------- ------- Net pension (credit) $ (428) $ (368) $ (297) ======= ======= =======
The funded status of the plan is as follows:
(Amounts In Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Actuarial present value of benefits for service rendered to date: Accumulated benefits based on salaries to date, including vested benefits 1997, $1,693; 1996, $1,691; 1995, $2,082 $(1,721) $(1,727) $(2,122) Effect of projected compensation increases (562) (794) (514) ------- ------- ------- Projected benefit obligation $(2,283) $(2,521) $(2,636) Fair value of plan assets, invested in equities and bonds 8,915 7,423 8,152 ------- ------- ------- Plan assets in excess of projected benefit obligation $ 6,632 $ 4,902 $ 5,516 Unrecognized net asset being recognized over 18.7 years (721) (829) (936) Unrecognized net gain on assets and projected benefit obligation (2,193) (845) (1,720) ------- ------- ------- Prepaid pension cost $ 3,718 $ 3,228 $ 2,860 ======= ======= =======
The discount rate used to determine the actuarial present value of the projected benefit obligation as of December 31, 1997, 1996 and 1995 was 8.25%. The expected long-term rate of return on plan assets as of December 31, 1997, 1996 and 1995, used in determining net pension expense was 7.50%. The assumed rate of increase in future compensation levels was 4.50%. The Company maintains a defined contribution 401(k) plan covering all employees fulfilling minimum age and service requirements. Employee contributions to the plan are optional. Employer contributions are made to the plan equal to 1% of the employee's salary plus a percentage of employee contributions. F-16 140 The expense for this plan was $282,000, $256,000 and $280,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Bank has a salary continuation plan for certain employees which provides for annual payments of various amounts upon the employee's retirement or death. The Bank is providing for these benefits by charges to operating expense during the period the respective employee attains full eligibility. The amount charged to operating expenses during the years ended December 31, 1997, 1996 and 1995 was $57,000, $69,000 and $75,000 respectively. The Bank carries life insurance policies with face amounts totaling $875,000 to fund the salary continuation plan. The cash value of these policies was $485,000 at December 31, 1997. A nonqualified retirement plan provides a portion of the pension plan benefits to the highly compensated employees of the Bank. The pension plan expense associated with the nonqualified plan totaled $76,000, $76,000, and $73,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The Company has a stock option plan for certain officers and directors whereby the Board of Directors authorizes options for shares that may be granted. As of December 31, 1997, 133,450 shares were reserved for future grants. A stock option committee has granted options at prices equal to the fair value of the stock on the dates of the grants. All options are for a term of five years or less and become exercisable in full or in part within one year of the date granted. Grants under this plan are accounted for following Accounting Principles Board (APB) Opinion No. 25 and related Interpretations. No compensation expense has been charged to expense using the intrinsic value based method as prescribed by APB No. 25. Had compensation expense been determined based on the grant date fair values of the awards, as prescribed by SFAS No. 123, reported net income and basic earnings per common share would have been as follows:
Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Pro forma net income (in thousands) $6,645 $5,902 $4,563 Pro forma earnings per share: Basic $ 1.90 $ 1.67 $ 1.27 Diluted $ 1.88 $ 1.66 $ 1.26 ------ ------ ------
The pro forma effects of applying SFAS No. 123 are not indicative of future amounts since, among other reasons, the pro forma requirements of SFAS No. 123 have been applied only to options granted after December 31, 1994. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997, 1996 and 1995, respectively: dividend rate of 2.9% for all three years; price volatility of 7.91% for all years; risk-free interest rates of 6.50%, 5,56% and 6.63% for 1997, 1996 and 1995, respectively; and expected lives of 3.5 years for all years. F-17 141 A summary of the Company's stock option plan is as follows (restated to reflect 50% stock dividend in July 1997):
Weighted Average Shares Exercise Price ------ -------------- Outstanding at January 1, 1995 135,431 $13.86 Granted 34,650 16.31 Exercised (18,131) 11.89 Forfeited (15,000) 15.49 -------- ------ Outstanding at December 31, 1995 136,950 14.56 Granted 22,050 18.51 Exercised (31,800) 11.67 Canceled (11,025) 16.92 -------- ------ Outstanding at December 31, 1996 116,175 5.87 Granted 53,100 21.75 Exercised (25,800) 20.67 Canceled (1,650) 14.34 -------- ------ Outstanding at December 31, 1997 141,825 18.57 ======== ====== 1997 1996 1995 ---- ---- ---- Number of options exercisable, end of year 78,600 91,425 94,500 Weighted-average fair value per option of options granted during the year $ 2.73 $ 2.72 $ 2.75 ------- ------- -------
Other pertinent information related to the options outstanding at December 31, 1997, is as follows:
Number Remaining Number Exercise Price Outstanding Contractual Life Exercisable -------------- ----------- ---------------- ----------- $14.00 2,100 1 Month 2,100 $14.17 13,350 1 Month 13,350 $17.00 25,200 13 Months 24,450 $16.75 9,450 25 Months 9,450 $16.08 17,625 30 Months 16,125 $17.00 10,500 37 Months 10,500 $20.17 10,500 47 Months 2,625 $20.83 11,550 49 Months -- $22.00 17,700 39 Months -- $22.00 22,800 51 Months -- $22.33 1,050 53 Months -- ------- ------ Total 141,825 78,600 ======= ======
F-18 142 NOTE 9. ACQUISITION OF A BUSINESS Effective April 8, 1997, the Company acquired for cash and notes payable all of the outstanding shares of West Branch Bancorp, Inc., which held 100% of the common stock of West Branch State Bank. The total acquisition cost was $7,604,038. The excess of the acquisition cost over fair value of the net assets acquired was $2,405,690 and is being amortized over fifteen years by the straight-line method. The acquisition was accounted for as a purchase and the results of operations since the date of acquisition is included in the Company's statement of income. Unaudited pro forma net income for 1997, 1996, and 1995, as though West Branch Bancorp, Inc. had been acquired as of January 1, 1995 is not significantly different than reported net income of the Company after consideration of goodwill amortization and interest on borrowed funds. NOTE 10. RELATED PARTY TRANSACTIONS Certain directors of the Company and the Bank and companies with which they are affiliated, as well as certain principal officers of the Company and its affiliate Bank, are customers of and have banking transactions with the Bank in the ordinary course of business. In the case of loans and extensions of credit, indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons. The following is an analysis of the changes in the loans to related parties during the years ended December 31, 1997 and 1996.
(Amounts in Thousands) Years Ended December 31, 1997 1996 - ------------------------ ---- ---- Beginning balance $ 776 $ 1,666 Additions 1,515 233 Collections (364) (1,123) ------ ------- Ending balance $1,927 $ 776 ====== =======
NOTE 11. REGULATORY CAPITAL REQUIREMENTS, RESTRICTIONS ON SUBSIDIARY DIVIDENDS, AND CASH RESTRICTIONS The Company and the Bank are required to maintain minimum amounts of capital to total risk-weighted assets, as defined by the banking regulators. A comparison of the Banks' capital as of December 31, 1997, with the minimum regulatory requirements is presented below:
Actual Minimum Regulatory Capital Requirement ------- ------------------ Total risk-based capital 14.42% 8.00% Tier I risk-based capital 13.17% 4.00% Leverage ratio 8.88% 4.00%
F-19 143 At December 31, 1997, the Bank met the capital criteria required by the "well capitalized" definition. The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid to it by its subsidiary Bank. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. To maintain acceptable capital ratios in the subsidiary Bank, certain of its retained earnings is not available for the payment of dividends. To maintain the minimum of total risk-based capital to risk-weighted assets to qualify as "well capitalized," retained earnings which could be available for the payment of dividends to the Company totaled approximately $15,000,000 as of December 31, 1997. The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $859,000 and $888,000 at December 31, 1997 and 1996, respectively. NOTE 12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(Amounts in Thousands, Except Per Share Data) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Cash payments for: Interest paid to depositors, on note payable, on federal funds purchased and securities sold under agreements to repurchase, and other borrowings $18,093 $16,486 $15,541 Income taxes 2,331 1,867 1,474 Noncash transactions: Net unrealized gains (losses) on debt securities 1,494 (73) 3,228 Deferred income taxes on unrealized gains (losses) on debt securities 557 (26) 1,204 Investment securities transferred from held to maturity portfolio to available for sale portfolio, at fair value -- -- 33,616 Acquisition of certain assets and liabilities from West Branch Bancorp, Inc.: Assets acquired: Cash and cash equivalents $ 996 -- -- Federal funds sold 1,700 -- -- Investment securities 14,690 -- -- Loans 21,076 -- -- Goodwill 2,406 -- -- Other assets 892 ------- ------- ------- $41,760 -- -- Liabilities assumed Deposits (32,789) -- -- Notes payable to sellers (5,453) -- -- Federal Home Loan Bank advances (1,000) -- -- Other liabilities (367) -- -- ------- ------- ------- Cash purchase price $ 2,151 -- -- ------- ------- -------
F-20 144 NOTE 13. COMMITMENTS AND CONTINGENCIES Financial Instruments With Off-Balance-Sheet Risk: The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Bank's commitments at December 31, 1997 and 1996, is as follows:
(Amounts in Thousands) December 31, 1997 1996 ------------ ---- ---- Commitments to extend credit $64,805 $49,358 Standby letters of credit 4,265 4,398 ------- ------- $69,070 $53,756 ======= =======
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary. Concentrations of Credit Risk: Substantially all of the Bank's loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Bank's market area. Investments in securities issued by state and political subdivisions involve diverse governmental entities. The concentrations of credit by type of loan are set forth in Note 3. Standby letters of credit were granted primarily to commercial borrowers. A substantial portion of the debtors' ability to honor their loans is dependent upon economic conditions in the Iowa City/Cedar Rapids and surrounding area. Investment securities of Iowa political subdivisions totaled $14,785,000 as of December 31, 1997. No individual municipality exceeded $750,000. F-21 145 Year 2000 Plans: Information technology experts believe that many data processing application systems could fail or improperly perform as a result of erroneous calculations or data integrity problems if they are unable to process date information beyond December 31, 1999; an issue known as Year 2000. The Company is heavily dependent upon computer processing and has addressed this issue through the implementation of a plan which entails identification, review and validation of all critical systems and vendors. The Company anticipates that this process will be essentially completed during 1998, and management anticipates that the associated expenses will not be material to the financial statements of the Company. NOTE 14. PARENT COMPANY ONLY FINANCIAL INFORMATION The following is condensed financial information of First Financial Bancorporation (parent company only):
Balance Sheets (Amounts in Thousands) December 31, 1997 1996 - ------------ ---- ---- Assets Cash $10,742 $ 4,021 Investment in subsidiaries Investment securities available for sale 47,148 47,674 (cost 1997 $4,627; 1996 $789) 5,744 887 Accrued interest receivable 26 18 Other assets 38 -- Income taxes receivable -- 13 ------- ------- $63,698 $52,613 ======= ======= Liabilities and Stockholders' Equity Liabilities: Income taxes payable $ 15 $ -- Other liabilities 233 37 Deferred income taxes 417 -- Notes payable 5,453 -- Stockholders' equity: Capital stock, common 4,361 2,914 Additional paid-in capital 2,284 2,606 Retained earnings 49,766 46,824 Unrealized gain on debt securities, net 1,169 232 ------- ------- $63,698 $52,613 ======= =======
F-22 146
Statements Of Income (Amounts in Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Operating income, dividends received from subsidiary $15,329 $7,433 $2,252 Interest income 91 31 28 Gain on sale of equity securities 332 -- -- Operating expenses 425 116 54 Interest expense on notes payable 260 -- -- ------- ------ ------ Income before income taxes and equity in subsidiary's undistributed income $15,067 $7,348 $2,226 Income taxes (credits) (89) (24) (10) ------- ------ ------ $15,156 $7,372 $2,236 Equity in subsidiary's undistributed income (8,473) (1,456) 2,334 ------- ------ ------ Net Income $ 6,683 $5,916 $4,570 ======= ====== ====== Statements of Cash Flows (Amounts in Thousands) Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Cash flows from operating activities: Net income $ 6,683 $ 5,916 $ 4,570 Noncash items included in net income: Undistributed earnings of subsidiaries 8,473 1,456 (2,334) Changes in account with subsidiaries 28 (13) (1) (Increase) in accrued interest receivable (8) (8) (10) Other (287) (1) 1 ------- ------- ------- Net cash provided by operating activities $14,889 $ 7,350 $ 2,226 ======= ======= ======= Cash flows (used in) investing activities: Acquisition of subsidiary $(2,151) -- -- Available for sale securities - purchases (4,950) $ (388) $ (401) Available for sale securities - sales 1,549 -- -- ------- ------- ------- Net cash (used in) investing activities $(5,552) $ (388) $ (401) ------- ------- ------- Cash flows (used in) financing activities: Stock options exercised $ 342 $ 308 $ 216 Common stock redeemed (675) (1,925) (69) Dividends paid (2,283) (1,946) (1,811) ------- ------- ------- Net cash (used in) financing activities $(2,616) $(3,563) $(1,664) ------- ------- ------- Increase in cash $ 6,721 $ 3,399 $ 161 Cash balance: Beginning 4,021 622 461 ------- ------- ------- Ending $10,742 $ 4,021 $ 622 ======= ======= =======
F-23 147 NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of First Financial's financial instruments are as follows:
As of December 31, 1997 As of December 31, 1996 ------------------------- ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Cash and due from banks $ 21,449 $ 21,449 $ 20,949 $ 20,949 Federal funds sold 27,925 27,925 -- -- Available for sale securities 112,755 112,755 97,802 97,802 Loans: Variable rate 172,351 172,351 149,538 160,452 Fixed rate 191,950 198,123 181,201 170,287 Accrued interest receivable 3,730 3,730 3,179 3,179 Deposits: Non interest-bearing 59,244 59,244 47,603 47,603 Interest bearing: Variable rate 174,814 174,814 172,454 172,454 Fixed rate 224,757 222,728 175,350 178,062 Federal Home Loan Bank advances and notes payable 18,188 18,245 12,355 12,344 Accrued interest payable 2,153 2,153 1,516 1,516 Off-balance-sheet instruments Face Amount Fair Value Face Amount Fair Value ----------- ---------- ----------- ---------- Loan commitments $ 64,805 $ -- $ 49,358 $ -- Letters of credit 4,265 -- 4,398
The Registrant does not meet the requirements of item 302 of Regulation S-K and therefore has not included the supplemental financial information required by that item. F-24 148 FIRST FINANCIAL BANCORPORATION AND SUBSIDIARY UNAUDITED CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS)
March 31, 1998 -------------- ASSETS Cash and due from banks $ 23,575 Investment securities: Available for sale securities (cost $117,077) 119,254 Federal funds sold 39,300 Loans, net of unearned income 357,598 Less: allowance for loan losses (4,499) -------- Net loans 353,099 Bank premises and equipment, net 12,794 Accrued interest receivable 3,732 Intangible assets 2,695 Prepaid pension cost 3,828 Other assets 10,165 -------- $568,442 ======== LIABILITIES Noninterest-bearing deposits $ 60,913 Interest-bearing deposits 419,548 -------- Total deposits 480,461 Securities sold under agreements to repurchase 9,467 Accrued interest payable 2,044 Other Liabilities 2,208 Federal Home advances 9,267 Notes Payable 3,641 Income tax payable 301 Deferred income taxes 786 -------- $508,175 -------- STOCKHOLDERS' EQUITY Capital stock, common, $1.25 par value; authorized 5,000,000 shares; issued 3,553,717 shares $ 4,442 Additional paid-in capital 3,635 Retained earnings 50,825 Accumulated other comprehensive income, unrealized gains on debt securities, net 1,365 -------- $ 60,267 -------- $568,442 ======== See Notes to Financial Statements.
F-25 149 FIRST FINANCIAL BANCORPORATION AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 ---- ---- INTEREST INCOME: Interest and fees on loans $ 7,395 $ 6,738 Interest on investment securities: Taxable 1,126 1,030 Non-taxable 476 383 Interest on federal funds sold 370 212 ------- ------- Total interest income $ 9,367 $ 8,363 ------- ------- INTEREST EXPENSE: Interest on deposits $ 4,573 $ 3,919 Interest on federal funds purchased 118 15 Notes Payable interest expense 58 -- Interest on Federal Home Loan Bank advances 158 188 ------- ------- Total interest expense $ 4,907 $ 4,122 ------- ------- Net interest income $ 4,460 $ 4,241 Provision for loan losses 100 177 ------- ------- Net interest income after provision for loan losses $ 4,360 $ 4,064 ------- ------- NONINTEREST INCOME: Trust fees $ 938 $ 832 Services charges and fees on deposit accounts 511 445 Other service charges, commissions and fees 998 528 Investment gains (losses), net 154 44 ------- ------- $ 2,601 $ 1,849 ------- ------- NONINTEREST EXPENSES: Salaries and employee benefits $ 2,164 $ 1,801 Occupancy, furniture and equipment 723 655 Data processing 394 327 Office supplies and postage 295 254 Other expenses 915 665 ------- ------- $ 4,491 $ 3,702 ------- ------- Income before income taxes $ 2,470 $ 2,211 Federal and state income taxes 736 664 ------- ------- Net income $ 1,734 $ 1,547 ======= ======= Earnings per share: Basic $ .49 $ .44 Diluted $ .49 $ .44 See Notes to Financial Statements.
F-26 150 FIRST FINANCIAL BANCORPORATION AND SUBSIDIARY UNAUDITED STATEMENTS OF CASH FLOW THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (AMOUNTS IN THOUSANDS)
1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,734 $ 1,547 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 296 267 Amortization 80 38 Provision for loan losses 100 177 Amortization of investment security discount 45 35 (Increase) decrease in accrued interest receivable (2) (212) (Increase) in prepaid pension costs (110) (91) Increase in other assets (5,061) 376 Increase (decrease) in accrued interest and other liabilities (518) (84) Change in accrued income taxes 664 492 --------- -------- Net cash provided by operating activities $ (2,772) $ 2,545 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Available for sale securities: Maturities $ 6,068 $ 2,767 Sales 589 -- Purchases (12,888) (7,827) Fed funds sold, net (11,375) (31,500) Net (increase) decrease in loan balances outstanding 6,513 5,574 Purchases of bank premises and equipment (205) (100) --------- -------- Net cash (used in) investing activities $ (11,298) $(31,086) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit balances $ 21,646 $ 23,758 Federal funds purchased and securities sold under agreements to repurchase (561) (2,061) Repayment of other borrowings (1,812) -- Federal Home Loan Bank advances (3,468) 1,583 Dividends paid (675) (514) Stock options exercised 1,066 361 Common stock redeemed -- (158) Common stock purchased -- (144) Net cash provided by financing activities $ 16,196 $ 22,825 --------- -------- Increase in cash and due from banks $ 2,126 $(5,716) CASH AND DUE FROM BANKS Beginning balance 21,449 20,949 --------- -------- Ending balance $ 23,575 $ 15,233 ========= ======== See Notes to Financial Statements.
F-27 151 FIRST FINANCIAL BANCORPORATION NOTE TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) NOTE A -- BASIS OF PRESENTATION The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. F-28 152 ANNEX A ------- [Letterhead of ABN AMRO Incorporated] -----, 1998 Board of Directors First Financial Bancorporation 204 East Washington Street Iowa City, Iowa 52244-1880 Members of the Board: We understand that First Financial Bancorporation ("FIOW"), Mercantile Bancorporation Inc. ("MTL") and Ameribanc, Inc. ("Ameribanc"), a wholly owned subsidiary of MTL, have entered into an Agreement and Plan of Merger dated May 7, 1998 (the "Agreement") pursuant to which FIOW will be merged with and into Ameribanc in a transaction (the "Merger") in which each issued and outstanding share of common stock of FIOW ("FIOW Common Stock"), will be converted into the right to receive 0.88 (the "Exchange Ratio") of a share of common stock of MTL and the associated "Rights" under the "Rights Agreement," as those terms are defined in Section 3.02 of the Agreement (collectively, "MTL Common Stock"). You have asked us whether, in our opinion, the Exchange Ratio to be received by the holders of FIOW Common Stock in the Merger is fair to such shareholders from a financial point of view. In connection with this opinion, we have reviewed the Agreement and certain related documents and held discussions with certain senior officers and directors of FIOW and certain senior officers of MTL concerning the businesses, operations and prospects of FIOW and MTL. We examined certain publicly available business and financial information relating to FIOW and MTL as well as certain financial information and other data for FIOW and certain financial information and other data related to MTL which were provided to or otherwise discussed with us by the respective managements of FIOW and MTL. We reviewed the financial terms of the Merger as set forth in the Agreement in relation to: (i) current and historical market prices and trading volumes of FIOW Common Stock and MTL Common Stock; (ii) the respective companies' financial and other operating data; and (iii) the capitalization and financial condition of FIOW and MTL. We also considered, to the extent publicly available, the financial terms of certain other banking-industry transactions recently effected which we considered relevant in evaluating the Merger and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations we considered relevant in evaluating those of FIOW and MTL. In connection with our engagement, we held discussions with certain third parties to solicit indications of interest in a possible transaction with FIOW. A-1 153 In rendering our opinion, we have assumed and relied upon the accuracy and completeness of the financial and other information reviewed by us and we have not made or obtained or assumed any responsibility for independent verification of such information. In addition, we have not made an independent evaluation or appraisal of the assets and liabilities of FIOW or MTL or any of their respective subsidiaries. With respect to the financial data of FIOW, we have assumed that it has been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of FIOW as to the future financial performance of FIOW. We have assumed that the Merger will be consummated in accordance with the terms of the Agreement including among other things, that the Merger will be accounted for as a pooling of interests under generally accepted accounting principles and as a tax-free reorganization for federal income tax purposes. We are not expressing any opinion as to what the value of MTL Common Stock actually will be when issued to FIOW shareholders pursuant to the Merger or the price at which MTL Common Stock will trade subsequent to the Merger. ABN AMRO Incorporated ("AAI"), as part of its investment banking business, is continually engaged in the valuation of businesses in connection with mergers and acquisitions, as well as initial and secondary offerings of securities and valuations for other purposes. We have acted as financial advisor to the Board of Directors of FIOW in connection with this transaction and will receive a fee for our services, including rendering this opinion, a significant portion of which is contingent upon the consummation of the Merger. In the ordinary course of our business, AAI and its affiliates may actively trade securities of both FIOW and MTL for their own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. It is understood that this letter is for the benefit and use of the Board of Directors of FIOW in its consideration of the Merger and may not be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose without our prior written consent, except that this letter may be used as part of any proxy statement/prospectus relating to the Merger. This letter does not address FIOW's underlying business decision to enter into the Merger or constitute a recommendation to any shareholder as to how such shareholder should vote with respect to the proposed Merger. Finally, our opinion is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to us, as of the date hereof, and we assume no responsibility to update or revise our opinion based upon circumstances or events occurring after the date hereof. Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, the Exchange Ratio is fair from a financial point of view to the shareholders of FIOW. Sincerely, ABN AMRO Incorporated A-2 154 ANNEX B ------- Following is the text of the statutory appraisal right as set forth in Division XIII of the IBCA. DIVISION XIII DISSENTERS' RIGHTS PART A 490.1301 DEFINITIONS FOR DIVISION XIII. In this division: 1. "Beneficial shareholder" means the person who is a beneficial owner of shares held by a nominee as the record shareholder. 2. "Corporation" means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer. 3. "Dissenter" means a shareholder who is entitled to dissent from corporate action under section 490.1302 and who exercises that right when and in the manner required by sections 490.1320 through 490.1328. 4. "Fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. 5. "Interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. 6. "Record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. 7. "Shareholder" means the record shareholder or the beneficial shareholder. 490.1302 SHAREHOLDERS' RIGHT TO DISSENT. 1. A shareholder is entitled to dissent from, and obtain payment of the fair value of the shareholder's shares in the event of, any of the following corporate actions: a. Consummation of a plan of merger to which the corporation is a party if either of the following apply: (1) Shareholder approval is required for the merger by section 490.1103 or the articles of incorporation and the shareholder is entitled to vote on the merger. B-1 155 (2) the corporation is a subsidiary that is merged with its parent under section 490.1104. b. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan. c. Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one year after the date of sale. d. An amendment of the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it does any or all of the following: (1) Alters or abolishes a preferential right of the shares. (2) Creates, alters, or abolishes a right in respect of redemption, including a provision respecting a sinking fund for the redemption or repurchase, of the shares. (3) Alters or abolishes a preemptive right of the holder of the shares to acquire shares or other securities. (4) Excludes or limits the right of the shares to vote on any matter, or to cumulate votes, other than a limitation by dilution through issuance of shares or other securities with similar voting rights. (5) Reduces the number of shares owned by the shareholder to a fraction of a share if the fractional share so created is to be acquired for cash under section 490.604. (6) Extends, for the first time after being governed by this chapter, the period of duration of a corporation organized under chapter 491 or 496A and existing for a period of years on the day preceding the date the corporation is first governed by this chapter. e. Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. 2. A shareholder entitled to dissent and obtain payment for the shareholder's shares under this chapter is not entitled to challenge the corporate action creating the shareholder's entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation. 490.1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. 1. A record shareholder may assert dissenters' rights as to fewer than all the shares registered in that shareholder's name only if the shareholder dissents with respect to all shares beneficially owned by B-2 156 any one person and notifies the corporation in writing of the name and address of each person on whose behalf the shareholder asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which the shareholder dissents and the shareholder's other shares were registered in the names of different shareholders. 2. A beneficial shareholder may assert dissenters' rights as to shares held on the shareholder's behalf only if the shareholder does both of the following: a. Submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights. b. Does so with respect to all shares of which the shareholder is the beneficial shareholder or over which that beneficial shareholder has power to direct the vote. PART B 490.1320 NOTICE OF DISSENTERS' RIGHTS. 1. If proposed corporate action creating dissenters' rights under section 490.1302 is submitted to a vote at a shareholders' meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters' rights under this part and be accompanied by a copy of this part. 2. If corporate action creating dissenters' rights under section 490.1302 is taken without a vote of shareholders, the corporation shall notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in section 490.1322. 490.1321 NOTICE OF INTENT TO DEMAND PAYMENT. 1. If proposed corporate action creating dissenters' rights under section 490.1302 is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights must do all of the following: a. Deliver to the corporation before the vote is taken written notice of the shareholder's intent to demand payment for the shareholder's shares if the proposed action is effectuated. b. Not vote the dissenting shareholder's shares in favor of the proposed action. 2. A shareholder who does not satisfy the requirements of subsection 1 is not entitled to payment for the shareholder's shares under this part. 490.1322 DISSENTERS' NOTICE. 1. If proposed corporate action creating dissenters' rights under section 490.1302 is authorized at a shareholders' meeting, the corporation shall deliver a written dissenters' notice to all shareholders who satisfied the requirements of section 490.1321. B-3 157 2. The dissenters' notice must be sent no later than ten days after the proposed corporate action is authorized at a shareholders' meeting, or, if the corporate action is taken without a vote of the shareholders, no later than ten days after the corporate action is taken, and must do all of the following: a. State where the payment demand must be sent and where and when certificates for certificated shares must be deposited. b. Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received. c. Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not the person acquired beneficial ownership of the shares before that date. d. Set a date by which the corporation must receive the payment demand, which date shall not be fewer than thirty nor more than sixty days after the date the dissenters' notice is delivered. e. Be accompanied by a copy of this division. (Last amended by Ch. 211, L. `91, eff. 7-1-91.) 490.1323 DUTY TO DEMAND PAYMENT. 1. A shareholder sent a dissenter's notice described in section 490.1322 must demand payment, certify whether the shareholder acquired beneficial ownership of the shares before the date required to be set forth in the dissenter's notice pursuant to section 490.1322, subsection 2, paragraph "c," and deposit the shareholder's certificates in accordance with the terms of the notice. 2. The shareholder who demands payment and deposits the shareholder's shares under subsection 1 retains all other rights of a shareholder until these rights are canceled or modified by the taking of the proposed corporate action. 3. A shareholder who does not demand payment or deposit the shareholder's share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for the shareholder's shares under this division. 490.1324 SHARE RESTRICTIONS. 1. The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under section 490.1326. 2. The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are canceled or modified by the taking of the proposed corporate action. B-4 158 490.1325 PAYMENT. 1. Except as provided in section 490.1327, at the time the proposed corporate action is taken, or upon receipt of a payment demand, whichever occurs later, the corporation shall pay each dissenter who complied with section 490.1323 the amount the corporation estimates to be the fair value of the dissenter's shares, plus accrued interest. 2. The payment must be accompanied by all of the following: a. The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year and the latest available interim financial statements, if any. b. A statement of the corporation's estimate of the fair value of the shares. c. An explanation of how the interest was calculated. d. A statement of the dissenter's right to demand payment under section 490.1328. e. A copy of this division. (Last amended by Ch. 211, L. `91, eff. 7-1-91.) 490.1326 FAILURE TO TAKE ACTION. 1. If the corporation does not take the proposed action within one hundred eighty days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. 2. If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must send a new dissenters' notice under section 490.1322 as if the corporate action was taken without a vote of the shareholders and repeat the payment demand procedure. (Last amended by Ch. 171, L. `91, eff. 7-1-91.) 490.1327 AFTER-ACQUIRED SHARES. 1. A corporation may elect to withhold payment required by section 490.1325 from a dissenter unless the dissenter was the beneficial owner of the shares before the date set forth in the dissenters' notice as the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action. 2. To the extent the corporation elects to withhold payment under subsection 1, after taking the proposed corporate action, it shall estimate the fair value of the shares, plus accrued interest, and shall pay this amount to each dissenter who agrees to accept it in full satisfaction of the dissenter's demand. The corporation shall send with its offer a statement of its estimate of the fair value of the shares, an explanation of how the interest was calculated and a statement of the dissenter's right to demand payment under section 490.1328. B-5 159 490.1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER. 1. A dissenter may notify the corporation in writing of the dissenter's own estimate of the fair value of the dissenter's shares and amount of interest due and demand payment of the dissenter's estimate, less any payment under section 490.1325, or reject the corporation's offer under section 490.1327 and demand payment of the fair value of the dissenter's shares and interest due, if any of the following apply: a. The dissenter believes that the amount paid under section 490.1325 or offered under section 490.1327 is less than the fair value of the dissenter's shares or that the interest due is incorrectly calculated. b. The corporation fails to make payment under section 490.1325 within sixty days after the date set for demanding payment. c. The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty days after the date set for demanding payment. 2. A dissenter waives the dissenter's right to demand payment under this section unless the dissenter notifies the corporation of the dissenter's demand in writing under subsection 1 within thirty days after the corporation made or offered payment for the dissenter's shares. PART C 490.1330 COURT ACTION. 1. If a demand for payment under section 490.1328 remains unsettled, the corporation shall commence a proceeding within sixty days after receiving the payment demand and petition the court to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the sixty-day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. 2. The corporation shall commence the proceeding in the district court of the county where a corporation's principal office or, if none in this state, its registered office is located. If the corporation is a foreign corporation without a registered office in this state, it shall commence the proceeding in the county in this state where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. 3. The corporation shall make all dissenters, whether or not residents of this state, whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. 4. The jurisdiction of the court in which the proceeding is commenced under subsection 2 is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order B-6 160 appointing them, or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. 5. Each dissenter made a party to the proceeding is entitled to judgment for either of the following: a. The amount, if any, by which the court finds the fair value of the dissenter's shares, plus interest, exceeds the amount paid by the corporation. b. The fair value, plus accrued interest, of the dissenter's after-acquired shares for which the corporation elected to withhold payment under section 490.1327. 490.1331 COURT COSTS AND COUNSEL FEES. 1. The court in an appraisal proceeding commenced under section 490.1330 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent the court finds the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding payment under section 490.1328. 2. The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable, for either of the following: a. Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of sections 490.1320 through 490.1328. b. Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. 3. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. B-7 161 PROXY FIRST FINANCIAL BANCORPORATION 204 EAST WASHINGTON STREET, P.O. BOX 1880 IOWA CITY, IOWA 52244-1880 For the Special Meeting of Shareholders to be held ------------, 1998 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned shareholder(s) of FIRST FINANCIAL BANCORPORATION ("First Financial"), does hereby nominate, constitute and appoint Margaret N. Keyes and Gerald W. Buxton, Jr. or each of them (with full power to act alone), true and lawful proxies and attorneys-in-fact, with full power of substitution, for the undersigned and in the name, place and stead of the undersigned to vote all of the shares of common stock, $1.25 par value, of First Financial standing in the name of the undersigned on its books at the close of business on ---------, 1998 at the Special Meeting of Shareholders to be held at --------------------------------------------, on -------, - -----------, 1998, at ------ -.m. Central Time, and at any adjournments or postponements thereof, with all the powers the undersigned would possess if personally present, as follows: 1. To consider and vote upon the adoption and approval of the Agreement and Plan of Merger, dated May 7, 1998 (the "Merger Agreement"), pursuant to which First Financial will be merged with and into Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), in a transaction that would result in the business and operations of First Financial being continued through such wholly owned subsidiary, and whereby, upon consummation of the merger, each share of First Financial common stock will be converted into the right to receive 0.88 of a share of MBI common stock, as set forth in detail in the accompanying Proxy Statement/Prospectus. / / FOR / / AGAINST / / ABSTAIN 2. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The undersigned hereby revokes any other proxies to vote at such meeting and hereby ratifies and confirms all that the proxies and attorneys-in-fact, or each of them, appointed hereunder may lawfully do by virtue hereof. Said proxies and attorneys-in-fact, without limiting their general authority, are specifically authorized to vote in accordance with their best judgment with respect to all matters incident to the conduct of the Special Meeting. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL LISTED ABOVE. PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY. RETURN USING THE ENVELOPE PROVIDED FIRST FINANCIAL BANCORPORATION SPECIAL MEETING Check appropriate box Date-------------------- NO. OF SHARES Indicate changes below: Address Change? / / Name Change? / / -------------------------------------------------- -------------------------------------------------- Signature(s) In Box When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If more than one person holds the power to vote the same shares, all must sign. All joint owners must sign. The undersigned hereby acknowledges receipt of the notice of Special Meeting and the Proxy Statement/Prospectus (with all enclosures and attachments), dated --------, 1998, relating to the Special Meeting. 162 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 $45,000,000, 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-1 163 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 II-2 164 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. (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; notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (b) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 165 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant 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 June 26, 1998. MERCANTILE BANCORPORATION INC. By /s/ John Q. Arnold -------------------------------------------------- John Q. Arnold, Vice Chairman and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and as of June 26, 1998.
Signature Title --------- ----- Chairman of the Board, - ----------------------------------- President and Chief Executive Thomas H. Jacobsen Officer Principal Executive Officer /s/ John Q. Arnold Vice Chairman and - ----------------------------------- Chief Financial Officer John Q. Arnold Principal Financial Officer Senior Vice President - Finance - ----------------------------------- and Control Michael T. Normile Principal Accounting Officer Director - ----------------------------------- Richard E. Beumer Director - ----------------------------------- Harry M. Cornell, Jr. Director - ----------------------------------- Dr. Henry Givens, Jr. II-4 166 Signature Title --------- ----- Director - ----------------------------------- William A. Hall Director - ----------------------------------- Frank Lyon, Jr. Director - ----------------------------------- Robert W. Murray Director - ----------------------------------- Harvey Saligman Director - ----------------------------------- Craig D. Schnuck Director - ----------------------------------- Alvin J. Siteman Director - ----------------------------------- Patrick T. Stokes Director - ----------------------------------- John A. Wright By /s/ John Q. Arnold -------------------------------------------------- John Q. Arnold John Q. Arnold, by signing his name hereto, does sign this document on behalf of the persons named above, pursuant to a power of attorney duly executed by such persons and previously filed.
II-5 167 EXHIBIT INDEX
Exhibit Number Description Page - ------ ----------- ---- 2.1 Agreement and Plan of Merger, dated May 7, 1998, by and among MBI, Ameribanc and First Financial. 2.2 Stock Option Agreement, dated May 7, 1998, and entered into by and between MBI and First Financial. 2.3 Form of Voting Agreement, dated May 7, 1998, by and between MBI and certain of the directors of First Financial. 3.1(a) MBI's Restated Articles of Incorporation, as amended and currently in effect, filed as Exhibit 3.1(a) to MBI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, are incorporated herein by reference. 3.1(b) Third Amended and Restated Certificate of Designation, Preferences and rights of Series B Junior Participating Stock of MBI, filed as part of Exhibit 1 to MBI's Registration Statement on Form 8-A dated May 27, 1998, is incorporated herein by reference. 3.2 MBI's by-laws, as amended and currently in effect, filed as Exhibit 3.2 to Amendment No. 2 to MBI's Registration Statement on Form S-4 (No. 333-17757), are incorporated herein by reference. 4.1 Form of Indenture Regarding Subordinated Securities between MBI and The First National Bank of Chicago, Trustee, filed on March 31, 1992 as Exhibit 4.1 to MBI's Current Report on Form 8-K dated September 24, 1992, is incorporated herein by reference. 4.2 Rights Agreement, dated May 20, 1998, between MBI and Mercantile Bank, as Rights Agent (including as exhibits thereto the form of Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock and the form of Right Certificate), filed as Exhibit 1 to MBI's Registration Statement on Form 8-A dated May 27, 1998, is incorporated herein by reference. 4.3 Form of Indenture Regarding Senior Debt Securities, filed as Exhibit 4.1 to MBI's Registration Statement on Form S-3 (No. 333-25775), is incorporated herein by reference. 4.4 Form of Indenture Regarding Subordinated Debt Securities, filed as Exhibit 4.2 to MBI's Registration Statement on Form S-3 (No. 333-25775), is incorporated herein by reference. II-6 168 Exhibit Number Description Page - ------ ----------- ---- 4.5 Indenture, dated February 4, 1997, First Supplemental Indenture, dated February 4, 1997, and Supplemental Indenture of First Supplemental Indenture, dated May 22, 1997, between MBI, as issuer, and The Chase Manhattan Bank, as Indenture Trustee, filed as Exhibits 4.5, 4.6 and 4.12, respectively, to MBI's Registration Statement on Form S-4 (No. 333-25131), are incorporated herein by reference. 5.1 Opinion of Thompson Coburn as to the legality of the securities being registered. 8.1 Opinion of Thompson Coburn regarding certain tax matters in the Merger. 10.1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10-3 to MBI's Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.2 The Mercantile Bancorporation Inc. Amended and Restated Executive Incentive Compensation Plan, filed as Annex H to MBI's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders, is incorporated herein by reference. 10.3 The Mercantile Bancorporation Inc. Employee Stock Purchase Plan, filed as Exhibit 10-7 to MBI's Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.4 The Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-7 to MBI's Annual Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. 10.5 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-6 to MBI's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.6 The Mercantile Bancorporation Inc. Amended and Restated Stock Incentive Plan, filed as Annex G to MBI's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders, is incorporated herein by reference. 10.7 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. 10.8 The Mercantile Bancorporation Inc. Amended and Restated Voluntary Deferred Compensation Plan, filed as Exhibit 10.1 to MBI's Registration Statement on Form S-8 (file no. 333-47713), is incorporated herein by reference. II-7 169 Exhibit Number Description Page - ------ ----------- ---- 10.9 Employment Agreement for Thomas H. Jacobsen, as amended and restated, filed as Exhibit 10-9 to MBI's Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. 10.10 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 Annual Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.11 The Mercantile Bancorporation Inc. Supplemental Retirement Plan, filed as Exhibit 10-12 to MBI's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. 10.12 Mercantile Bancorporation Inc. Voluntary Deferred Compensation Plan for Non-Employee Affiliate Directors and Advisory Directors, filed as Exhibit 10.3 to MBI's Registration Statement on Form S-8 (File No. 333-47713), is incorporated herein by reference. 10.13 Mercantile Bancorporation Inc. Amended and Restated Stock Incentive Plan for Non-Employee Directors, filed as Exhibit 10.2 to MBI's Registration Statement on Form S-8 (File No. 333-47713), is incorporated herein by reference. 10.14 Agreement and Plan of Reorganization, dated October 27, 1996, by and among MBI, Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 2.1 to MBI's Current Report on Form 8-K filed November 6, 1996, is incorporated herein by reference. 10.15 Amendment to Agreement and Plan of Reorganization, dated January 24, 1997, by and among MBI, Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 10-16 to Amendment No. 2 to MBI's Registration Statement on Form S-4 (File No. 333-17757), is incorporated herein by reference. 10.16 Stock Option Agreement, dated October 27, 1996, by and between MBI, as grantee, and Mark Twain Bancshares, Inc., as issuer, filed as Exhibit 2.2 to MBI's Current Report on Form 8-K filed on November 6, 1996, is incorporated herein by reference. 10.17 Agreement and Plan of Reorganization, dated December 22, 1996, by and between MBI and Roosevelt Financial Group, Inc., filed as Exhibit 2.1 to MBI's Current Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference. 10.18 Stock Option Agreement, dated December 22, 1996, by and between MBI, as grantee, and Roosevelt Financial Group, Inc., as issuer, filed as Exhibit 2.1 to MBI's Current Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference. II-8 170 Exhibit Number Description Page - ------ ----------- ---- 10.19 Employment Agreement for Alvin J. Siteman, dated November 18, 1996, filed as Exhibit 10.3 to MBI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by reference. 10.20 Employment Agreement for John P. Dubinsky, dated October 27, 1996, filed as Exhibit 10.4 to MBI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by reference. 10.21 Employment Agreement for Stanley J. Bradshaw, dated December 22, 1996, filed as Exhibit 10 to MBI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference. 10.22 Agreement and Plan of Reorganization, dated January 30, 1998, by and among MBI, Ameribanc, Inc. and Firstbank of Illinois Co., filed as Exhibit 2.1 to MBI's Current Report on Form 8-K filed on February 3, 1998, is incorporated herein by reference. 23.1 Consent of KPMG Peat Marwick LLP with regard to the use of its report on MBI's financial statements. 23.2 Consent of McGladrey & Pullen, LLP with regard to the use of its report on First Financial's financial statements. 23.3 Consent of ABN AMRO Incorporated. 23.4 Consent of Thompson Coburn (included in Exhibit 5.1). 24.1 Power of Attorney. - ------ Previously filed on June 19, 1998.
II-9 EX-23.1 2 CONSENT OF EXPERT 1 Exhibit 23.1 ------------ Independent Auditors' Consent To the Board of Directors and Stockholders of 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 June 26, 1998 EX-23.2 3 CONSENT OF EXPERT 1 Exhibit 23.2 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors First Financial Bancorporation Iowa City, Iowa We hereby consent to the use in this Registration Statement on Form S-4 (No. 333-57345) of our report, dated February 17, 1998, relating to the consolidated financial statements of First Financial Bancorporation and subsidiary. We also consent to the reference to our Firm under the captions "Relationship with Independent Accountants" and "Experts" in the prospectus. /s/ McGladrey & Pullen, LLP Davenport, Iowa June 29, 1998 -----END PRIVACY-ENHANCED MESSAGE-----