-----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, G2extgucc8DvcgneBBn/Mv1Vel5ww50ioS8c4bhQHr9svFV8cmk6EexnX6aHbbl2 GB4e1ZlIaK/HGqo6NeC2SA== 0000950114-96-000105.txt : 19960513 0000950114-96-000105.hdr.sgml : 19960513 ACCESSION NUMBER: 0000950114-96-000105 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960510 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE BANCORPORATION INC CENTRAL INDEX KEY: 0000064907 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 430951744 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03475 FILM NUMBER: 96559732 BUSINESS ADDRESS: STREET 1: P O BOX 524 STREET 2: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 S-4 1 MERCANTILE BANCORPORATION INC. FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ---------------------- MERCANTILE BANCORPORATION INC. (Exact name of registrant as specified in its charter) MISSOURI 6712 43-0951744 (State or other jurisdiction 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) 425-2525 (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) 425-2525 (Name, address, including ZIP code, and telephone number, including area code, of agent for service) ---------------------- Copy to: JOHN Q. ARNOLD ROBERT M. LaROSE, ESQ. HOWARD H. MICK, ESQ. Chief Financial Officer Thompson Coburn Stinson, Mag & Mercantile Bancorporation Inc. One Mercantile Center Fizzell, P.C. P.O. Box 524 St. Louis, Missouri 1201 Walnut Street St. Louis, Missouri 63166-0524 63101-1693 Suite 2800 (314) 425-2525 (314) 552-6000 Kansas City, Missouri 64141 (816) 842-8600 ---------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / ----------------------
CALCULATION OF REGISTRATION FEE ============================================================================================================================ Title of each class of Amount to be Proposed maximum Proposed maximum Amount of securities to be registered registered offering price per unit aggregate offering price registration fee - ---------------------------------------------------------------------------------------------------------------------------- Common Stock, $5.00 par value 325,843 shares N/A $8,021,730.12 $2,766.13 ============================================================================================================================ Includes one attached Preferred Share Purchase Right per share. Estimated solely for purposes of computing the Registration Fee pursuant to the provisions of Rule 457(f)(2), and based upon the $8,021,730.12 aggregate book value of the 22,500 shares of Common Stock, $100.00 par value, of Peoples State Bank issued and outstanding as of April 30, 1996.
------------------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 MERCANTILE BANCORPORATION INC. CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING HEADING OR LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-4 -----------------------------------------------------------
Form S-4 Item Number and Caption Heading or Location in Prospectus - -------------------------------- --------------------------------- A. Information about the Transaction Facing Page; Cross Reference Sheet; Outside 1. Forepart of Registration Front Cover Page of Prospectus Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Available Information; Incorporation of Back Cover Pages of Certain Information by Reference; Table of Prospectus Contents 3. Risk Factors, Ratio of Summary Information; Pro Forma Financial Earnings to Fixed Charges and Information Other Information 4. Terms of the Transaction Summary Information; Incorporation of Certain Information by Reference; Terms of the Proposed Acquisition; Certain Federal Income Tax Consequences of the Acquisition; Information Regarding MBI Common Stock 5. Pro Forma Financial Pro Forma Financial Information Information 6. Material Contacts with Summary Information; Terms of the Proposed the Company Being Acquired Acquisition 7. Additional Information Not Applicable Required for Reoffering by Persons and Parties Deemed to be Underwriters 8. Interests of Named Legal Matters Experts and Counsel 9. Disclosure of Commission Not Applicable Position on Indemnification for Securities Act Liabilities -i- 3 Form S-4 Item Number and Caption Heading or Location in Prospectus - -------------------------------- --------------------------------- B. Information About the Registrant 10. Information with Respect Incorporation of Certain Information by to S-3 Registrants Reference; Summary Information; Information Regarding MBI Common Stock 11. Incorporation of Certain Incorporation of Certain Information by Information by Reference Reference 12. Information with Respect Not Applicable to S-2 or S-3 Registrants 13. Incorporation of Certain Not Applicable Information by Reference 14. Information with Respect Not Applicable to Registrants Other Than S-2 or S-3 Registrants C. Information About the Company Being Acquired 15. Information with Respect Not Applicable to S-3 Companies 16. Information with Respect Not Applicable to S-2 or S-3 Companies 17. Information with Respect Summary Information; Information Regarding to Companies Other Than S-2 Peoples Bankshares and Peoples Bank or S-3 Companies D. Voting and Management Information 18. Information if Proxies, Information Regarding Special Meetings; Consents or Authorizations Incorporation of Certain Information by are to be Solicited Reference; Dissenters' Rights of Stockholders of Peoples Bank; Information Regarding Peoples Bankshares and Peoples Bank 19. Information if Proxies, Not Applicable Consents or Authorizations are not to be Solicited in an Exchange Offer
-ii- 4 [letterhead of Peoples State Bankshares, Inc.] ----------------, 1996 Dear Stockholder: The Board of Directors cordially invites you to attend a Special Meeting of Stockholders of Peoples State Bankshares, Inc. ("Peoples Bankshares") to be held at ---:-0 -.m., Central Time, on ---------, - -----------, 1996, at -----------------------, -------------------------, Topeka, Kansas (the "Special Meeting"). At this important meeting, you will be asked to consider and vote upon the Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as of December 19, 1995, pursuant to which Ameribanc, Inc. ("Ameribanc"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), will acquire all of the outstanding capital stock of Peoples State Bank, a Kansas state-chartered bank ("Peoples Bank"), through the consummation of two concurrent and interdependent transactions: (i) the exchange (the "Exchange") of all of the shares of common stock of Peoples Bank owned beneficially and of record by Peoples Bankshares for shares of MBI common stock, and (ii) the merger (the "Merger") of Mercantile Bank of Shawnee County, a Kansas state-chartered bank in organization and wholly owned subsidiary of Ameribanc, with and into Peoples Bank. I have enclosed the following items relating to the Special Meeting and the proposed transactions: 1. Joint Proxy Statement/Prospectus; 2. Proxy card; and 3. A pre-addressed return envelope to Peoples Bankshares for the proxy card. The Joint Proxy Statement/Prospectus and related proxy materials set forth, or incorporate by reference, financial data and other important information relating to Peoples Bankshares, Peoples Bank, MBI and Ameribanc, and describe the terms and conditions of the proposed Exchange and 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 PEOPLES BANKSHARES CAREFULLY CONSIDERED AND APPROVED THE TERMS OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AS BEING IN THE BEST INTEREST OF PEOPLES BANKSHARES AND ITS STOCKHOLDERS. THE PEOPLES BANKSHARES BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE --- PROPOSAL TO APPROVE THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. APPROVAL OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY IS A CONDITION TO THE CONSUMMATION OF THE EXCHANGE AND 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, sign and date the enclosed proxy card and return it to Peoples Bankshares in the enclosed pre-addressed envelope which requires no postage if mailed within the United States. If you later decide to attend the Special Meeting and vote in person, or if you wish to revoke your proxy for any reason prior to the vote at the Special Meeting, you may do so and your proxy will have no further effect. You may revoke your proxy by delivering to the Secretary of Peoples Bankshares a written 5 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 Joint Proxy Statement/Prospectus, please feel free to contact ------------------ at (913) --------. Sincerely, Ronald D. Lutz President 6 [letterhead of Peoples State Bank] ---------------, 1996 Dear Stockholder: The Board of Directors cordially invites you to attend a Special Meeting of Stockholders of Peoples State Bank ("Peoples Bank") to be held at - --:-0 -.m., Central Time, on -------, ----------, 1996, at - ----------------------, --------------------, Topeka, Kansas (the "Special Meeting"). At this important meeting, you will be asked to consider and vote upon the Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as of December 19, 1995, and the related Plan of Merger dated as of May 2, 1996 (the "Plan of Merger" and, collectively with the Reorganization Agreement, the "Acquisition Agreements"), pursuant to which Ameribanc, Inc. ("Ameribanc"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), will acquire all of the outstanding capital stock of Peoples Bank through the consummation of two concurrent and interdependent transactions: (i) the exchange (the "Exchange") of all of the shares of common stock of Peoples Bank owned beneficially and of record by Peoples State Bankshares, Inc. ("Peoples Bankshares") for shares of MBI common stock, and (ii) the merger (the "Merger") of Mercantile Bank of Shawnee County, a wholly owned subsidiary of Ameribanc in organization, with and into Peoples Bank. I have enclosed the following items relating to the Special Meeting and the proposed transactions: 1. Joint Proxy Statement/Prospectus; 2. Proxy card; and 3. A pre-addressed return envelope to Peoples Bank for the proxy card. The Joint Proxy Statement/Prospectus and related proxy materials set forth, or incorporate by reference, financial data and other important information relating to Peoples Bank, Peoples Bankshares, MBI and Ameribanc, and describe the terms and conditions of the proposed Exchange and 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 PEOPLES BANK CAREFULLY CONSIDERED AND APPROVED THE TERMS OF THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREBY AS BEING IN THE BEST INTEREST OF PEOPLES BANK AND ITS STOCKHOLDERS. THE PEOPLES BANK BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE PROPOSAL TO --- APPROVE THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREBY. APPROVAL OF THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREBY IS A CONDITION TO THE CONSUMMATION OF THE EXCHANGE AND 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, sign and date the enclosed proxy card and return it to Peoples Bank in the enclosed pre-addressed envelope which requires no postage if mailed within the United States. If you later decide to attend the Special Meeting and vote in person, or if you wish to revoke your proxy for any reason prior to the vote at the Special Meeting, you may do so and your proxy will have no further effect. 7 You may revoke your proxy by delivering to the Secretary of Peoples Bank a written notice of revocation or another proxy relating to the same shares bearing a later date than the proxy being revoked or by attending the Special Meeting and voting in person. Attendance at the Special Meeting will not in itself constitute a revocation of an earlier dated proxy. If you need assistance in completing your proxy card or if you have any questions about the Joint Proxy Statement/Prospectus, please feel free to contact ------------------ at (913) --------. Sincerely, Ronald D. Lutz Chairman and Chief Executive Officer 8 PEOPLES STATE BANKSHARES, INC. 1080 S.W. Wanamaker Road, Suite A Topeka, Kansas 66604-3888 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To Be Held -------------, 1996 TO THE STOCKHOLDERS OF PEOPLES STATE BANKSHARES, INC.: Notice is hereby given that a Special Meeting of Stockholders of PEOPLES STATE BANKSHARES, INC., a Kansas corporation ("Peoples Bankshares"), will be held at -----------------, ---------------------, Topeka, Kansas on - ---------, --------------, 1996, at --:-0 -.m., Central Time, for the following purposes: (1) To consider and vote upon the adoption and approval of the Agreement and Plan of Reorganization dated as of December 19, 1995 (the "Reorganization Agreement"), pursuant to which (i) Peoples Bankshares and Ameribanc, Inc. ("Ameribanc"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), will effect an exchange (the "Exchange") of all of the shares of common stock of Peoples State Bank ("Peoples Bank") owned by Peoples Bankshares for shares of MBI common stock, (ii) Mercantile Bank of Shawnee County, a wholly owned subsidiary of Ameribanc in organization, will be merged with and into Peoples Bank (the "Merger"), whereby, (x) upon consummation of the Exchange, each share of Peoples Bank common stock that is beneficially owned by Peoples Bankshares will be transferred to Ameribanc in exchange for 14.4819 shares of MBI common stock and (y) upon consummation of the Merger, each outstanding share of Peoples Bank common stock (other than the shares that have been transferred to Ameribanc pursuant to the Exchange or shares as to which a stockholder has exercised dissenters' rights) will be converted into the right to receive 14.4819 shares of MBI common stock. (2) To consider and vote upon a proposal to permit the Special Meeting to be adjourned or postponed, in the discretion of the proxies, which adjournment or postponement could be used for the purpose, among others, of allowing time for the solicitation of additional votes to approve the Reorganization Agreement. The record date for determining the stockholders entitled to receive notice of, and to vote at, the Special Meeting or any adjournment thereof has been fixed as of the close of business on ------------, 1996. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE 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 JOINT PROXY STATEMENT/PROSPECTUS. BY ORDER OF THE BOARD OF DIRECTORS Joyce M. Lutz Secretary Topeka, Kansas - -----------, 1996 9 PEOPLES STATE BANK 1064 S.W. Wanamaker Road Topeka, Kansas 66604-3888 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To Be Held -------------, 1996 TO THE STOCKHOLDERS OF PEOPLES STATE BANK: Notice is hereby given that a Special Meeting of Stockholders of PEOPLES STATE BANK, a Kansas state-chartered bank ("Peoples Bank"), will be held at ----------------------, -----------------, Topeka, Kansas, on - ---------, -------------, 1996, at --:-0 a.m., Central Time, for the following purposes: (1) To consider and vote upon the adoption and approval of the Agreement and Plan of Reorganization dated as of December 19, 1995 (the "Reorganization Agreement") and the related Plan of Merger dated as of - -------------, 1996 (the "Plan of Merger" and, collectively with the Reorganization Agreement, the "Acquisition Agreements"), pursuant to which (i) Peoples State Bankshares, Inc. ("Peoples Bankshares") and Ameribanc, Inc. ("Ameribanc"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), will effect an exchange (the "Exchange") of all of the shares of Peoples Bank common stock owned by Peoples Bankshares for shares of MBI common stock, (ii) Mercantile Bank of Shawnee County, a wholly owned subsidiary of Ameribanc in organization, will be merged with and into Peoples Bank (the "Merger") whereby, (x) upon consummation of the Exchange, each share of Peoples Bank common stock that is beneficially owned by Peoples Bankshares will be transferred to Ameribanc in exchange for 14.4819 shares of MBI common stock and (y) upon consummation of the Merger, each outstanding share of Peoples Bank common stock (other than the shares that have been transferred to Ameribanc pursuant to the Exchange or shares as to which a stockholder has exercised dissenters' rights) will be converted into the right to receive 14.4819 shares of MBI common stock. (2) To consider and vote upon a proposal to permit the Special Meeting to be adjourned or postponed, in the discretion of the proxies, which adjournment or postponement could be used for the purpose, among others, of allowing time for the solicitation of additional votes to approve the Acquisition Agreements. The record date for determining the stockholders entitled to receive notice of, and to vote at, the Special Meeting or any adjournment thereof has been fixed as of the close of business on ------------, 1996. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE 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 JOINT PROXY STATEMENT/PROSPECTUS. BY ORDER OF THE BOARD OF DIRECTORS Joyce M. Lutz Secretary Topeka, Kansas - -----------, 1996 10 MERCANTILE BANCORPORATION INC. PROSPECTUS ---------- PEOPLES STATE BANKSHARES, INC. PEOPLES STATE BANK JOINT PROXY STATEMENT SPECIAL MEETINGS OF STOCKHOLDERS TO BE HELD ON --------------, 1996 This Prospectus of Mercantile Bancorporation Inc. ("MBI") relates to up to 325,843 shares of common stock, $5.00 par value ("Common Stock"), and attached Preferred Share Purchase Rights (the "Rights"), of MBI (the Common Stock and the Rights are collectively referred to herein as the "MBI Common Stock"), to be issued upon the acquisition by Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of MBI ("Ameribanc"), of all of the outstanding common stock, $100.00 par value ("Peoples Bank Common Stock"), of Peoples State Bank, a Kansas state-chartered bank ("Peoples Bank"). The acquisition will be accomplished through the consummation of two concurrent and interdependent transactions: (i) the exchange (the "Exchange") of all of the shares of Peoples Bank Common Stock owned beneficially and of record by Peoples State Bankshares, Inc., a Kansas corporation ("Peoples Bankshares"), for shares of MBI Common Stock, and (ii) the merger (the "Merger") of Mercantile Bank of Shawnee County, a wholly owned subsidiary of Ameribanc in organization ("MBSC"), with and into Peoples Bank, whereby all of the outstanding shares of Peoples Bank Common Stock (other than shares received by Ameribanc pursuant to the Exchange or shares as to which a stockholder has exercised dissenters' rights) will be converted into the right to receive shares of MBI Common Stock (the "Merger" and the "Exchange" are hereinafter referred to collectively as the "Acquisition"). The Acquisition will be consummated in accordance with the terms and conditions, including regulatory and stockholder approvals, as set forth more fully in the Agreement and Plan of Reorganization (the "Reorganization Agreement"), dated as of December 19, 1995, by and among MBI, Ameribanc, Peoples Bank and Peoples Bankshares, and the related Plan of Merger (the "Plan of Merger" and, together with the Reorganization Agreement, the "Acquisition Agreements") dated as of May 2, 1996 by and between Peoples Bank and MBSC. This Prospectus also serves as the Proxy Statement for each of Peoples Bankshares and Peoples Bank in connection with the Special Meeting of Stockholders of Peoples Bankshares (the "Peoples Bankshares Special Meeting") and the Special Meeting of Stockholders of Peoples Bank (the "Peoples Bank Special Meeting" and, collectively with the Peoples Bankshares Special Meeting, the "Special Meetings"), both of which will be held on ---------------, 1996, at the times and places and for the purposes stated in the Notice of Special Meeting of Stockholders of Peoples Bankshares and Notice of Special Meeting of Stockholders of Peoples Bank accompanying this Joint Proxy Statement/Prospectus. Pursuant to the Acquisition, MBI will issue up to an aggregate of 325,843 shares of MBI Common Stock (the "Acquisition Consideration"). Upon the consummation of the Exchange, Peoples Bankshares will transfer each share of Peoples Bank Common Stock that is beneficially owned by Peoples Bankshares to Ameribanc in exchange for 14.4819 shares of MBI Common Stock. Within six months after the Exchange, Peoples Bankshares shall liquidate and dissolve and effect a liquidating distribution to the holders of the capital stock of Peoples Bankshares of all of the shares of MBI Common Stock then owned beneficially and of record by Peoples Bankshares (the "Liquidation"). Upon consummation of the Merger, the business and operations of Peoples Bank will be continued through Peoples Bank as a wholly owned subsidiary of Ameribanc, and each issued and outstanding share of Peoples Bank Common Stock 11 (other than those shares that have been transferred to Ameribanc pursuant to the Exchange or those shares as to which a stockholder of Peoples Bank has exercised dissenters' rights under Section 17-6712 of the General Corporation Code of Kansas (the "Kansas Corporation Code")) will be converted into the right to receive 14.4819 shares of MBI Common Stock. The fair market value of the MBI Common Stock to be issued as the Acquisition Consideration may fluctuate and at the consummation of the Acquisition may be more or less than the current fair market value of such shares. See "TERMS OF THE PROPOSED ACQUISITION - General Description of the Acquisition." No fractional shares of MBI Common Stock will be issued in the Acquisition, but cash will be paid in lieu of such fractional shares. See "TERMS OF THE PROPOSED ACQUISITION - Fractional Shares." The Acquisition is intended to qualify as a tax-deferred reorganization under the Internal Revenue Code of 1986, as amended (the "Code"), and, accordingly, is intended to achieve certain tax-deferral benefits for federal income tax purposes for Peoples Bankshares and the stockholders of Peoples Bank and Peoples Bankshares with respect to those shares of MBI Common Stock received pursuant to the Acquisition. See "SUMMARY INFORMATION - Federal Income Tax Consequences in General" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION." MBI Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "MTL." On ------------, 1996, the closing sale price for MBI Common Stock as reported on the NYSE Composite Tape was $-----. This Joint Proxy Statement/Prospectus, the Notices of the Special Meetings and the forms of proxy were first mailed to the stockholders of Peoples Bankshares and Peoples Bank on or about ---------------, 1996. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT 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 SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. The date of this Joint Proxy Statement/Prospectus is -------------, 1996. - 2 - 12 AVAILABLE INFORMATION --------------------- MBI is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by MBI with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Suite 1300, Seven World Trade Center, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. MBI Common Stock is listed on the NYSE, and such reports, proxy statements and other information concerning MBI are also available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Joint 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 Joint Proxy Statement/Prospectus omits certain information contained or incorporated by reference in the Registration Statement. Statements contained in this Joint Proxy Statement/Prospectus provide a summary of the contents of certain contracts or other documents referenced herein but are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement. For such further information, reference is made to the Registration Statement. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ------------------------------------------------- THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO MBI, EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN, ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST TO JON W. BILSTROM, GENERAL COUNSEL AND SECRETARY, MERCANTILE BANCORPORATION INC., P.O. BOX 524, ST. LOUIS, MISSOURI 63166-0524, TELEPHONE (314) 425-2525. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ---------------, 1996. 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, 1995. (b) MBI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (c) MBI's Current Reports on Form 8-K dated January 16, 1996 and March 11, 1996. (d) The description of MBI 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 Preferred Share Purchase Rights set forth in Item 1 of MBI's Registration Statement on Form 8-A, dated March 5, 1993, and any amendment or report filed for the purpose of updating such description. - 3 - 13 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 Meetings 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 Joint 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 Joint 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 JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MBI, PEOPLES BANKSHARES OR PEOPLES BANK. THIS JOINT 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 JOINT 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 ITS SUBSIDIARIES, PEOPLES BANKSHARES OR PEOPLES BANK OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE HEREOF. - 4 - 14 TABLE OF CONTENTS
PAGE AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . 3 SUMMARY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Business of MBI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Business of Peoples Bankshares and Peoples Bank . . . . . . . . . . . . . . . . . . 8 The Proposed Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Interests of Certain Persons in the Acquisition . . . . . . . . . . . . . . . . . . 10 Special Meetings of Stockholders of Peoples Bankshares and Peoples Bank . . . . . . 10 Reasons for the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Waiver and Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Federal Income Tax Consequences in General. . . . . . . . . . . . . . . . . . . . . 12 Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Dissenters' Rights of Peoples Bank Stockholders . . . . . . . . . . . . . . . . . . 13 Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Markets and Market Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Comparative Unaudited Per Share Data. . . . . . . . . . . . . . . . . . . . . . . . 15 Summary Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 INFORMATION REGARDING SPECIAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 20 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Date, Time and Place. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Record Date; Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Voting and Revocation of Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . 21 Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 TERMS OF THE PROPOSED ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 General Description of the Acquisition. . . . . . . . . . . . . . . . . . . . . . . 23 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Interests of Certain Persons in the Acquisition . . . . . . . . . . . . . . . . . . 25 Background of and Reasons for the Acquisition; Board Recommendations. . . . . . . . 25 Conditions of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Termination of the Reorganization Agreement . . . . . . . . . . . . . . . . . . . . 30 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Surrender of Peoples Bank Stock Certificates and Receipt of MBI Common Stock. . . . 31 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Certain Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Business Pending the Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . 32 Waiver and Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 - 5 - 15 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION. . . . . . . . . . . . . . . . 36 DISSENTERS' RIGHTS OF STOCKHOLDERS OF PEOPLES BANK. . . . . . . . . . . . . . . . . . . . 38 PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Comparative Unaudited Per Share Data. . . . . . . . . . . . . . . . . . . . . . . . 40 Pro Forma Combined Consolidated Financial Statements (Unaudited). . . . . . . . . . 41 INFORMATION REGARDING PEOPLES BANKSHARES AND PEOPLES BANK . . . . . . . . . . . . . . . . 47 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Management's Discussion and Analysis of Financial Condition and Results of Operations 47 Security Ownership of Certain Beneficial Owners and Management of Peoples Bankshares 65 Security Ownership of Certain Beneficial Owners and Management of Peoples Bank. . . 66 INFORMATION REGARDING MBI COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . 67 Description of MBI Common Stock and Attached Preferred Share Purchase Rights. . . . 67 Restrictions on Resale of MBI Common Stock by Affiliates. . . . . . . . . . . . . . 69 Comparison of the Rights of Shareholders of MBI and the Rights of Stockholders of Peoples Bankshares and Peoples Bank . . . . . . . . . . . . . 69 SUPERVISION AND REGULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Certain Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . . 73 Payment of Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Capital Adequacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 FDIC Insurance Assessments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Proposals to Overhaul the Savings Association Industry. . . . . . . . . . . . . . . 74 Support of Subsidiary Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 FIRREA and FDICIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Depositor Preference Statute. . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 The Interstate Banking and Community Development Legislation. . . . . . . . . . . . 76 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . 76 LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 FINANCIAL STATEMENTS INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 ANNEX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
- 6 - 16 SUMMARY INFORMATION ------------------- THE FOLLOWING IS A SUMMARY OF THE IMPORTANT TERMS OF THE PROPOSED ACQUISITION AND RELATED INFORMATION DISCUSSED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS BUT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION WHICH APPEARS ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, INCLUDING THE ANNEX ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS OF PEOPLES BANKSHARES AND PEOPLES BANK ARE URGED TO READ THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY. ALL MBI PER SHARE DATA REFLECT A THREE-FOR-TWO STOCK SPLIT DISTRIBUTED IN THE FORM OF A DIVIDEND ON APRIL 11, 1994. BUSINESS OF MBI MBI, a Missouri corporation, was organized in 1970 and is a registered bank holding company under the federal Bank Holding Company Act of 1956, as amended (the "BHCA"). MBI is also registered as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended (the "HOLA"). At March 31, 1996, MBI owned, directly or indirectly, all of the capital stock of Mercantile Bank of St. Louis National Association ("Mercantile Bank") and 72 other commercial banks which operate from 411 banking offices and 399 Fingertip Banking automated teller machines, including 40 off-premises machines, located throughout Missouri, Illinois, eastern Kansas, northern Arkansas and Iowa. MBI's services concentrate in four major lines of business -- consumer, corporate, investment banking and trust services. MBI also operates non-banking subsidiaries which provide related financial services, including investment management, brokerage services and asset-based lending. As of March 31, 1996, MBI had 63,124,053 shares of its Common Stock issued and outstanding. As of March 31, 1996, MBI reported, on a consolidated basis, total assets of $17.9 billion, total deposits of $14.0 billion, total loans and leases of $11.8 billion and shareholders' equity of $1.6 billion. On January 2, 1996, MBI completed the acquisitions of (i) Hawkeye Bancorporation ("Hawkeye"), an Iowa corporation and registered bank holding company under the BHCA, located in Des Moines, Iowa, and (ii) First Sterling Bancorp, Inc. ("Sterling"), an Illinois corporation and registered bank holding company under the BHCA, located in Sterling, Illinois. These acquisitions were accounted for under the pooling-of-interest method of accounting. As of January 2, 1996, Hawkeye and Sterling reported total assets of $2.0 billion and $168 million, respectively. On February 9, 1996 and March 7, 1996, respectively, MBI completed the acquisitions of (i) Security Bank of Conway, F.S.B. ("Conway"), a federal stock savings bank located in Conway, Arkansas, and (ii) Metro Savings Bank, F.S.B. ("Metro"), a federal stock savings bank located in Wood River, Illinois. These acquisitions were accounted for under the purchase method of accounting. As of February 9, 1996 and March 7, 1996, Conway and Metro reported total assets of $103 million and $81 million, respectively. On March 19, 1996, MBI entered into an agreement to acquire TODAY'S BANCORP, INC. ("TODAY'S"), located in Freeport, Illinois. TODAY'S, a Delaware corporation and registered bank holding company under the BHCA, operates from twelve locations in northern Illinois. As of March 31, 1996, TODAY'S reported total assets of $510 million, total deposits of $437 million, total loans of $368 million and stockholders' equity of $47 million. The acquisition of TODAY'S will be accounted for under the purchase method of accounting. - 7 - 17 In connection with the acquisition of Hawkeye, MBI restated its consolidated financial statements as of and for the years ended December 31, 1995, 1994 and 1993. MBI filed supplemental financial statements as of and for the years ended December 31, 1995, 1994 and 1993 in a Current Report on Form 8-K, dated March 11, 1996, which has been incorporated by reference into this Joint Proxy Statement/Prospectus. Due to the immateriality of the financial condition and results of operation of Sterling to that of MBI, the supplemental consolidated financial statements of MBI do not reflect the acquisition of Sterling. MBI's principal executive offices are located at One Mercantile Center, St. Louis, Missouri 63101-1693, and its telephone number is (314) 425-2525. BUSINESS OF PEOPLES BANKSHARES AND PEOPLES BANK Peoples Bankshares, a Kansas corporation, commenced operations in 1973 and is a registered bank holding company under the BHCA. Peoples Bankshares currently owns 88.88% of the issued and outstanding shares of the capital stock of Peoples Bank, a Kansas state-chartered bank founded in 1909 which operates from five locations in eastern Kansas. As of March 31, 1996, Peoples Bankshares had 97,455 shares of its common stock, $1.00 par value ("Peoples Bankshares Common Stock"), issued and outstanding and Peoples Bank had 22,500 shares of Peoples Bank Common Stock issued and outstanding. As of March 31, 1996, Peoples Bankshares reported, on a consolidated basis, total assets of $94 million, total deposits of $76 million, net loans of $52 million and stockholders' equity of $8 million, and Peoples Bank reported total assets of $94 million, total deposits of $77 million, net loans of $51 million and stockholders' equity of $8 million. The principal executive offices of Peoples Bankshares are located at 1080 S.W. Wanamaker Road, Suite A, Topeka, Kansas 66604-3888, and the principal executive offices of Peoples Bank are located at 1064 S.W. Wanamaker Road, Topeka, Kansas 66604-3888. THE PROPOSED ACQUISITION Pursuant to the Acquisition Agreements, Ameribanc will acquire all of the outstanding capital stock of Peoples Bank through the consummation of two concurrent and interdependent transactions: (i) the exchange of all of the shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares for shares of MBI Common Stock, and (ii) the merger of MBSC, a wholly owned subsidiary of Ameribanc in organization, with and into Peoples Bank. Upon consummation of the Acquisition, the separate corporate existence of MBSC will terminate, and the business and operations of Peoples Bank will be continued through Peoples Bank as a wholly owned subsidiary of Ameribanc. Following the Closing Date (as hereinafter defined), MBI intends to cause Mercantile Bank of Topeka, a Kansas state-chartered bank and wholly owned subsidiary of Ameribanc, to merge with and into Peoples Bank (the "Topeka Merger"), with the surviving entity to be a Kansas state-chartered bank named "Mercantile Bank of Topeka." Pursuant to the Acquisition, MBI will issue up to an aggregate of 325,843 shares of MBI Common Stock as the Acquisition Consideration. Upon consummation of the Exchange, Peoples Bankshares will be entitled to receive 14.4819 shares of MBI Common Stock for each share of Peoples Bank Common Stock that is beneficially owned by Peoples Bankshares. Pursuant to the Reorganization Agreement, within six months of the Exchange, Peoples Bankshares shall effect the Liquidation and distribute all of the shares of MBI Common Stock then owned beneficially and of record by Peoples Bankshares to the holders of Peoples Bankshares Common Stock. - 8 - 18 Upon consummation of the Merger, each issued and outstanding share of Peoples Bank Common Stock (other than shares transferred to Ameribanc pursuant to the Exchange or shares as to which a stockholder has exercised dissenters' rights under Section 17-6712) will cease to be outstanding and will be converted into the right to receive 14.4819 shares of MBI Common Stock. THE FAIR MARKET VALUE OF THE MBI COMMON STOCK TO BE ISSUED AS THE ACQUISITION CONSIDERATION MAY FLUCTUATE AND AT THE CONSUMMATION OF THE ACQUISITION MAY BE MORE OR LESS THAN THE CURRENT FAIR MARKET VALUE OF SUCH SHARES. The Reorganization Agreement provides that the consummation of the Acquisition is subject to certain terms and conditions, including (i) the approval of the Reorganization Agreement and the transactions contemplated thereby by the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bankshares Common Stock, (ii) the approval of the Acquisition Agreements and the transactions contemplated thereby by the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank Common Stock, (iii) the receipt of certain regulatory approvals and (iv) an opinion of counsel regarding certain federal income tax aspects of the Acquisition. For a discussion of each of the conditions to the Acquisition, see "TERMS OF THE PROPOSED ACQUISITION - Conditions of the Acquisition." The Acquisition will be consummated and become effective on the date and at the time (the "Effective Time") that the authorization of the Kansas State Bank Commissioner (the "Kansas Commissioner") is filed with the Office of the Secretary of State of the State of Kansas. Unless the parties otherwise agree, the date of the closing of the Acquisition (the "Closing Date") shall be on the first business day of the month commencing at least five business days following the last to occur of (i) the receipt of the requisite approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares and of the Acquisition Agreements and the transactions contemplated thereby by the stockholders of Peoples Bank and (ii) the receipt of approval of the Acquisition by each of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Federal Deposit Insurance Corporation (the "FDIC"), the Kansas Commissioner and any other bank regulatory agency that may be necessary or appropriate (the Federal Reserve Board, the FDIC, the Kansas Commissioner and any other bank regulatory agency that may be necessary or appropriate are collectively referred to herein as the "Regulatory Authorities" and individually as a "Regulatory Authority"), and the expiration of all required waiting periods. The Reorganization Agreement may be terminated at any time prior to the Closing Date by mutual consent of the parties thereto or unilaterally by any party thereto upon the occurrence of certain events or if the Acquisition is not consummated by December 31, 1996. See "TERMS OF THE PROPOSED ACQUISITION - Conditions of the Acquisition" and "- Termination of the Agreements." OTHER AGREEMENTS In addition to and contemporaneously with the Reorganization Agreement, MBI executed separate agreements (the "Voting Agreements") with each of Ronald D. Lutz, President of Peoples Bankshares and Chairman and Chief Executive Officer of Peoples Bank, and Joyce M. Lutz, Secretary of both Peoples Bankshares and Peoples Bank, whereby such individuals agreed that they will vote all of the shares of Peoples Bankshares Common Stock that they then owned or subsequently acquire in favor of approval of the Reorganization Agreement and the transactions contemplated thereby at the Peoples Bankshares Special Meeting. On a combined basis, Mr. and Mrs. Lutz control 82.09% of the voting power of the issued and outstanding shares of Peoples Bankshares Common Stock. The vote by Mr. and Mrs. Lutz will be sufficient to assure the stockholder vote required to approve the Reorganization Agreement and the transactions contemplated thereby. In addition, pursuant to the Voting Agreements, until the earliest to occur of the Closing Date, - 9 - 19 the termination of the Reorganization Agreement or the abandonment of the Acquisition, Mr. and Mrs. Lutz further agreed that they each will not transfer such shares or vote any such shares in favor of the approval of any other competing acquisition proposal involving any merger with or sale of substantially all of the assets of Peoples Bankshares to any person other than MBI or its affiliates. Pursuant to the Reorganization Agreement, Peoples Bankshares has agreed that, upon approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares, Peoples Bankshares will vote all of its shares of Peoples Bank Common Stock, which represent 88.88% of the total number of outstanding shares of Peoples Bank Common Stock, in favor of the Acquisition Agreements and the transactions contemplated thereby. The vote by Peoples Bankshares will be sufficient to assure the stockholder vote required to approve the Acquisition Agreements and the transaction contemplated thereby. INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION MBI has entered into an arrangement with Ronald D. Lutz whereby Mr. Lutz shall serve as a member of the Board of Directors of Peoples Bank, which shall be renamed "Mercantile Bank of Topeka" upon consummation of the Topeka Merger, for a period of two years commencing on the Closing Date. During such two-year period, Mr. Lutz shall be entitled to the same directors' fees as are paid to the other members of the Board of Directors of Mercantile Bank of Topeka. SPECIAL MEETINGS OF STOCKHOLDERS OF PEOPLES BANKSHARES AND PEOPLES BANK The Peoples Bankshares Special Meeting will be held on - -----------, --------------, 1996, at ---:-0 -.m. Central Time, at - -------------------------, --------------------, Topeka, Kansas. Approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares requires the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bankshares Common Stock. The Peoples Bank Special Meeting will be held on -----------, - --------------, 1996, at ---:-0 -.m. Central Time, at - -------------------------, --------------------, Topeka, Kansas. Approval of the Acquisition Agreements and the transactions contemplated thereby by the stockholders of Peoples Bank requires the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank Common Stock. Only holders of record of Peoples Bankshares Common Stock and Peoples Bank Common Stock at the close of business on ------------, 1996 (the "Record Date") will be entitled to notice of, and to vote at, the Special Meetings. As of the Record Date, there were 97,455 shares of Peoples Bankshares Common Stock and 22,500 shares of Peoples Bank Common Stock outstanding. As of the Record Date, the directors and executive officers of Peoples Bankshares and their affiliates in the aggregate owned beneficially all of the shares of Peoples Bankshares Common Stock entitled to vote at the Peoples Bankshares Special Meeting. Pursuant to the Voting Agreements, Ronald D. Lutz and Joyce M. Lutz have agreed to vote 80,008 shares, or 82.09% of the outstanding shares of the Peoples Bankshares Common Stock, for the approval of the Reorganization Agreement and the transactions contemplated thereby. The vote by Mr. And Mrs. Lutz will be sufficient to assure the stockholder vote required to approve the Reorganization Agreement and the transactions contemplated thereby. The remaining directors and executive officers of Peoples Bankshares, who own beneficially and of record the remaining 17,447 outstanding shares of Peoples Bankshares Common Stock, have also - 10 - 20 indicated their intention to vote such shares for the approval of the Reorganization Agreement and the transactions contemplated thereby. As of the Record Date, Peoples Bankshares and the directors and executive officers of Peoples Bank and their affiliates owned beneficially an aggregate of 20,282 shares of Peoples Bank Common Stock, or 90.01%, of the shares entitled to vote at the Peoples Bank Special Meeting. Pursuant to the Reorganization Agreement, Peoples Bankshares has agreed to vote the 19,997 shares owned beneficially and of record by it, or 88.88% of the outstanding shares of Peoples Bank Common Stock, for the approval of the Acquisition Agreements and the transactions contemplated thereby. The vote by Peoples Bankshares will be sufficient to assure the stockholder vote required to approve the Acquisition Agreements and the transactions contemplated thereby. The directors and executive officers of Peoples Bank and their affiliates, who own beneficially and of record 285 shares, or 1.27% of the outstanding shares of Peoples Bank Common Stock, have also indicated their intention to vote such shares for the approval of the Acquisition Agreements and the transactions contemplated thereby. THE BOARD OF DIRECTORS OF PEOPLES BANKSHARES CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AS BEING IN THE BEST INTEREST OF PEOPLES BANKSHARES AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD OF DIRECTORS OF PEOPLES BANK CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREBY AS BEING IN THE BEST INTEREST OF PEOPLES BANK AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREBY. REASONS FOR THE ACQUISITION The respective Boards of Directors of Peoples Bankshares and Peoples Bank believe that the Acquisition will result in a combined entity that is (i) committed to serving the banking and other financial needs of Peoples Bank's depositors, employees, customers and communities, (ii) capable of competing more effectively with larger financial institutions that have exerted increased competitive pressure on Peoples Bank and (iii) well capitalized and capable of enjoying significant market penetration throughout the Topeka bank market. In addition, the boards believe that the Acquisition will provide the holders of Peoples Bankshares Common Stock and Peoples Bank Common Stock with an opportunity to receive a premium over the book value of their shares, and will enable such stockholders to participate as MBI shareholders, on a tax deferred basis, in the expanded opportunities for growth and profitability made possible by the Acquisition. See "TERMS OF THE PROPOSED ACQUISITION - Background of and Reasons for the Acquisition; Board Recommendations." The Board of Directors of MBI believes that the Acquisition will enable MBI to (i) take advantage of an opportunity for MBI to increase its presence in eastern Kansas through the acquisition of an established banking organization and (ii) enhance MBI's ability to compete in the increasingly - 11 - 21 competitive banking and financial services industry. See "TERMS OF THE PROPOSED ACQUISITION - Background of and Reasons for the Acquisition; Board Recommendations." FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to Peoples Bankshares or any other stockholders of Peoples Bank in connection with the Acquisition. Peoples Bankshares and each former holder of Peoples Bank Common Stock who otherwise would have been entitled to receive a fraction of a share of MBI Common Stock will receive in lieu thereof cash, without interest, in an amount equal to the holder's fractional share interest in Peoples Bank multiplied by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal, Midwest Edition, on the Closing Date of the Acquisition. Cash received by Peoples Bankshares or the other former stockholders of Peoples Bank in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION." WAIVER AND AMENDMENT Any provision of the Reorganization Agreement, including, without limitation, the conditions to the consummation of the Acquisition and the restrictions described under the caption "TERMS OF THE PROPOSED ACQUISITION - Business Pending the Acquisition," may be (i) waived in writing at any time by the party that is, or whose shareholders or stockholders are, entitled to the benefits thereof or (ii) amended at any time by written agreement of the parties, if such written agreement is approved by or on behalf of the parties' respective Boards of Directors, whether before or after the Special Meetings; provided, however, that after approval at the Special Meetings of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares and the Acquisition Agreements and the transactions contemplated thereby by the stockholders of Peoples Bank, no such modification may (i) alter or change the form of the Acquisition Consideration to be received by Peoples Bankshares or the other stockholders of Peoples Bank, (ii) adversely affect the tax treatment of the stockholders of Peoples Bankshares or Peoples Bank, (iii) alter or change any of the terms of the Reorganization Agreement or the Plan of Merger if such alteration or change would adversely affect the stockholders of Peoples Bank or (iv) impede or delay receipt of any approval from a Regulatory Authority. FEDERAL INCOME TAX CONSEQUENCES IN GENERAL Thompson Coburn, MBI's legal counsel, has delivered its opinion to the effect that, assuming the Acquisition occurs in accordance with the Acquisition Agreements and conditioned on the accuracy of certain representations made by MBI, Peoples Bankshares, Peoples Bank and certain stockholders of Peoples Bankshares or Peoples Bank, the Acquisition will constitute a "reorganization" for federal income tax purposes and that, accordingly, no gain or loss will be recognized by Peoples Bankshares, the stockholders of Peoples Bankshares or the stockholders of Peoples Bank, upon the exchange of shares of Peoples Bank Common Stock or Peoples Bankshares Common Stock solely for shares of MBI Common Stock pursuant to the Exchange, the Liquidation or the Merger, respectively. However, cash received in lieu of fractional shares in the Merger may give rise to taxable income. EACH STOCKHOLDER OF PEOPLES BANKSHARES OR PEOPLES BANK IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE, THE LIQUIDATION OR THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICABILITY OF VARIOUS STATE, LOCAL AND FOREIGN TAX LAWS. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION." - 12 - 22 REGULATORY APPROVALS The Acquisition is subject to the prior approval of each of the Federal Reserve Board, the FDIC and the Kansas Commissioner. MBI will file the required applications for approval with such Regulatory Authorities. In reviewing the Acquisition, the Regulatory Authorities will consider various factors, including possible anticompetitive effects of the Acquisition, and will examine the financial and managerial resources and future prospects of the combined organization. There can be no assurance that the necessary regulatory approvals will be received or as to the timing of such approvals. See "TERMS OF THE PROPOSED ACQUISITION - Certain Regulatory Approvals" and "SUPERVISION AND REGULATION." DISSENTERS' RIGHTS OF PEOPLES BANK STOCKHOLDERS Under Section 9-1724 of the Kansas Banking Code (the "Kansas Banking Code"), which incorporates by reference Section 17-6712 of the Kansas Corporation Code, each holder of shares of Peoples Bank Common Stock may, in lieu of the consideration such stockholder would otherwise receive in the Merger, seek payment of the value of such shares and receive payment of such value in cash upon consummation of the Merger by following certain procedures set forth in Section 17-6712, the text of which is attached hereto as Annex A. ------- Failure to follow such procedures may result in the loss of such dissenters' rights. Any Peoples Bank stockholder who returns a blank executed proxy card will be deemed to have approved the Acquisition Agreements and the transactions contemplated thereby and to have waived any such dissenters' rights. Stockholders of Peoples Bankshares do not have dissenters' rights with respect to the Exchange or the Liquidation. See "DISSENTERS' RIGHTS OF STOCKHOLDERS OF PEOPLES BANK." ACCOUNTING TREATMENT It is intended that the Acquisition will be accounted for under the purchase method of accounting. See "TERMS OF THE PROPOSED ACQUISITION - Accounting Treatment." - 13 - 23 MARKETS AND MARKET PRICES MBI Common Stock is currently traded on the NYSE under the symbol "MTL." The last sale price reported for MBI Common Stock on December 19, 1995, the last trading date preceding the public announcement of the Acquisition, was $44.375. Management of Peoples Bank is not aware of any transactions in Peoples Bank Common Stock during the years ended December 31, 1994 and 1995 or during the current fiscal year. The last sale price for Peoples Bank Common Stock known to management prior to the public announcement of the Acquisition on December 20, 1995 was $270 per share in March 1993. Because of the lack of an established trading market for shares of Peoples Bank Common Stock, this sale price may not reflect the prices that would have been paid in an active market.
MBI PEOPLES BANK ------- ------------ SALES PRICE CASH SALES PRICE CASH ----------- DIVIDEND ----------- DIVIDEND HIGH LOW DECLARED HIGH LOW DECLARED ---- --- -------- ---- --- -------- 1994 - ---- First Quarter. . . . . . . $34.125 $29.875 $.28 $15.56 Second Quarter . . . . . . 38.125 31.125 .28 -- Third Quarter. . . . . . . 39.250 34.875 .28 -- Fourth Quarter . . . . . . 36.875 29.500 .28 -- 1995 - ---- First Quarter. . . . . . . $37.250 $31.250 $.33 $10.00 Second Quarter . . . . . . 44.875 36.000 .33 -- Third Quarter. . . . . . . 47.000 41.625 .33 -- Fourth Quarter . . . . . . 46.500 41.500 .33 -- 1996 - ---- First Quarter. . . . . . . $46.500 $41.500 $.41 $20.00 Second Quarter (through May 9, 1996). . . 44.250 43.750 .41 5.00 - ------------ For a recent sale price of MBI Common Stock, see the cover of this Joint Proxy Statement/Prospectus. No trades known to management of Peoples Bank.
- 14 - 24 COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and Peoples Bank and the corresponding pro forma per share amounts, giving effect to the proposed acquisitions of Peoples Bank and TODAY'S. The data presented is based upon the consolidated financial statements and related notes of MBI and Peoples Bank included in this Joint Proxy Statement/Prospectus or in the documents incorporated herein by reference, TODAY'S consolidated financial statement and related note, 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. Due to the immateriality of the financial condition and results of operations of Sterling, Conway and Metro, individually and in the aggregate, to that of MBI, the table only reflects the acquisitions of Sterling, Conway and Metro from their closing dates forward. The assumptions used in the preparation of this table are set forth in the notes to the pro forma financial information appearing elsewhere in this Joint Proxy Statement/Prospectus. See "PRO FORMA FINANCIAL INFORMATION." This data is not necessarily indicative of the results of the future operations of the combined organization or the actual results that would have occurred if the proposed acquisitions of Peoples Bank and TODAY'S had been consummated prior to the periods indicated.
MBI/ MBI/ PEOPLES BANK/ PEOPLES PEOPLES BANK PEOPLES BANK ALL ENTITIES ALL ENTITIES MBI BANK PRO FORMA PRO FORMA PRO FORMA PRO FORMA REPORTED REPORTED COMBINED EQUIVALENT COMBINED EQUIVALENT -------- -------- ------------ -------------- ------------- -------------- Book Value per Share: March 31, 1996 . . . . . . . . . . . . $ 25.47 $ 360.09 $ 25.36 $ 367.26 $ 25.27 $ 365.96 December 31, 1995. . . . . . . . . . . 26.04 376.09 25.94 375.66 25.83 374.07 Cash Dividends Declared per Share: Three months ended March 31, 1996. . . . $ .41 $ 20.00 $ .41 $ 5.94 $ .41 $ 5.94 Year ended December 31, 1995 . . . . . 1.32 10.00 1.32 19.11 1.32 19.11 Earnings per Share: Three months ended March 31, 1996. . . $ .07 $ 12.27 $ .07 $ 1.01 $ (.05) $ (.72) Year ended December 31, 1995 . . . . . 3.74 51.69 3.75 54.31 3.57 51.70 Market Price per Share: At December 19, 1995 . . . . . . . $ 44.375 N/A -- -- -- -- At May 9, 1996. . . . . . . . . . 44.250 N/A -- -- -- -- - ---------- Includes the effect of pro forma adjustments for Peoples Bank as appropriate. See "PRO FORMA FINANCIAL INFORMATION." Based on the pro forma combined per share amounts multiplied by 14.4819, the exchange ratio applicable to one share of Peoples Bank common stock. Further explanation of the assumptions used in the preparation of these pro forma combined consolidated financial statements is included in the notes to pro forma financial statements. See "PRO FORMA FINANCIAL INFORMATION." Includes the effect of pro forma adjustments for Peoples Bank and TODAY'S, as appropriate. The market value of MBI Common Stock was determined as of the last trading day preceding the public announcement of the proposed Acquisition and as of the latest available date prior to the filing of the Joint Proxy Statement/ Prospectus, based on the last sale price as reported on the NYSE Composite Tape. The market values of Peoples Bank Common Stock as of the dates set forth in the table can not be accurately estimated because the last transaction in Peoples Bank Common Stock known to management of Peoples Bank prior to the public announcement of the proposed Acquisition occurred in March 1993.
- 15 - 25 SUMMARY FINANCIAL DATA The following table sets forth for the periods indicated certain summary historical consolidated financial information for MBI and certain summary historical financial information for Peoples Bankshares and Peoples Bank. The balance sheet data and income statement data included in the summary financial data for the five years ended December 31, 1995 are taken from the audited supplemental consolidated financial statements of MBI as of and for such years, the audited consolidated financial statements of Peoples Bankshares and the audited financial statements of Peoples Bank as of and for the year ended December 31, 1995 and the unaudited consolidated financial statements of Peoples Bankshares and the unaudited financial statements of Peoples Bank as of and for the four years ended December 31, 1994. The balance sheet data and income statement data included in the summary financial data as of and for the three months ended March 31, 1996 and 1995 are taken from the unaudited consolidated financial statements of MBI and Peoples Bankshares and the unaudited financial statements of Peoples Bank as of and for the three months ended March 31, 1996 and 1995. This data includes all adjustments which are, in the opinion of the respective managements of MBI, Peoples Bankshares and Peoples Bank, necessary to present a fair statement of these periods and are of a normal recurring nature (except non-recurring merger expenses for MBI of $40,012,000, or $.63 per share, for the three months ended March 31, 1996). Results for the three months ended March 31, 1996 are not necessarily indicative of results for the entire year. The following information should be read in conjunction with the supplemental consolidated financial statements of MBI, the consolidated financial statements of Peoples Bankshares and the financial statements of Peoples Bank, and the related notes thereto, included herein or in documents incorporated herein by reference, and in conjunction with the unaudited pro forma combined consolidated financial information, including the notes thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "PRO FORMA FINANCIAL INFORMATION." - 16 - 26 MERCANTILE BANCORPORATION INC. SUMMARY FINANCIAL DATA
As of or for the Three Months Ended As of or for the March 31 Year Ended December 31 ------------------ ---------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- PER SHARE DATA Net income. . . . . . . . . . . . $ .07 $ .91 $ 3.74 $ 3.19 $ 2.79 $ 2.40 $ 2.34 Dividends declared. . . . . . . . . . .41 .33 1.32 1.12 .99 .93 .93 Book value at period end. . . . . . . 25.47 23.82 26.04 23.32 21.59 19.44 18.12 Average common shares outstanding (thousands) . . . . . . . . . . . . 63,052 60,774 61,884 59,757 58,751 55,050 47,159 EARNINGS (THOUSANDS) Interest income . . . . . . . . . . . $325,240 $314,196 $1,293,944 $1,118,069 $1,094,611 $1,139,807 $1,156,821 Interest expense. . . . . . . . . . . 155,504 142,283 620,534 450,950 444,573 549,642 668,578 -------- -------- ---------- ---------- ---------- ---------- ---------- Net interest income . . . . . . . . . 169,736 171,913 673,410 667,119 650,038 590,165 488,243 Provision for possible loan losses. . 33,168 13,990 36,530 43,265 64,302 79,551 64,028 Other income. . . . . . . . . . . . . 59,284 62,701 273,653 236,561 245,589 224,456 195,237 Other expense . . . . . . . . . . . . 182,770 135,926 553,748 555,176 570,182 529,645 486,490 Income taxes. . . . . . . . . . . . . 8,517 29,265 124,109 113,165 96,074 69,681 28,418 -------- -------- ---------- ---------- ---------- ---------- ---------- Net income. . . . . . . . . . . . . . $ 4,565 $ 55,433 $ 232,676 $ 192,074 $ 165,069 $ 135,744 $ 104,544 ======== ======== ========== ========== ========== ========== ========== ENDING BALANCE SHEET (MILLIONS) Total assets. . . . . . . . . . . . . $ 17,902 $ 17,097 $ 17,928 $ 16,724 $ 16,293 $ 16,033 $ 14,045 Earning assets. . . . . . . . . . . . 16,483 15,872 16,264 15,427 14,980 14,678 12,854 Investment securities . . . . . . . . 4,321 4,288 4,211 4,280 4,670 4,632 3,412 Loans and leases, net of unearned income. . . . . . . 11,840 11,322 11,731 10,904 9,809 9,570 8,809 Deposits. . . . . . . . . . . . . . . 14,002 13,021 13,714 12,865 13,243 13,260 11,685 Long-term debt. . . . . . . . . . . . 324 323 325 330 316 336 238 Shareholders' equity. . . . . . . . . 1,608 1,456 1,640 1,409 1,295 1,143 939 Reserve for possible loan losses. . . 212 217 202 216 206 199 176 SELECTED RATIOS Return on average assets. . . . . . . .10% 1.30% 1.33% 1.17% 1.03% .89% .78% Return on average equity. . . . . . . 1.09 15.35 15.14 14.06 13.46 12.76 11.81 Net interest rate margin. . . . . . . 4.23 4.48 4.28 4.53 4.52 4.33 4.12 Equity to assets. . . . . . . . . . . 8.98 8.52 9.15 8.42 7.95 7.13 6.68 Reserve for possible loan losses to: Outstanding loans . . . . . . . . . 1.79 1.92 1.72 1.98 2.10 2.08 2.00 Non-performing loans. . . . . . . . 259.41 548.87 245.18 583.17 290.02 154.17 109.79 - ------------------------------ Based on weighted average common shares outstanding.
- 17 - 27 PEOPLES STATE BANKSHARES, INC. SUMMARY FINANCIAL DATA
As of or for the Three Months Ended As of or for the March 31 Year Ended December 31 ------------------ ------------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- -------- ---- ---- ---- PER SHARE DATA Net income (loss) . . . . . . . . . . $ 1.07 $ (.38) $ 7.01 $ 14.77 $ 7.56 $ 7.49 $ 5.42 Dividends declared. . . . . . . . . . -- -- -- -- -- -- -- Book value at period end. . . . . . . 82.08 71.16 82.70 70.70 57.54 49.91 42.58 Average common shares outstanding . . 97,455 97,455 97,455 97,455 97,588 99,847 100,000 EARNINGS (THOUSANDS) Interest income . . . . . . . . . . . $ 1,837 $ 1,568 $ 7,114 $ 6,860 $ 7,450 $ 8,121 $ 9,459 Interest expense. . . . . . . . . . . 919 753 3,512 3,127 3,499 4,316 6,085 -------- -------- -------- -------- -------- -------- -------- Net interest income . . . . . . . . . 918 815 3,602 3,733 3,951 3,805 3,374 Provision for possible loan losses. . -- 15 45 97 144 170 167 Other income. . . . . . . . . . . . . 146 112 581 1,886 708 669 547 Other expense . . . . . . . . . . . . 854 932 2,879 3,086 3,285 3,052 2,864 Minority interest . . . . . . . . . . (31) (24) (129) (106) (109) (114) (93) Income taxes. . . . . . . . . . . . . 75 (7) 447 891 383 390 255 -------- -------- -------- -------- -------- -------- -------- Net Income (loss) . . . . . . . . . . $ 104 $ (37) $ 683 $ 1,439 $ 738 $ 748 $ 542 ======== ======== ======== ======== ======== ======== ======== ENDING BALANCE SHEET (THOUSANDS) Total assets. . . . . . . . . . . . . $ 94,306 $ 84,682 $ 97,860 $ 85,656 $112,875 $109,304 $104,382 Earning assets. . . . . . . . . . . . 88,405 78,228 90,664 78,034 104,942 98,478 94,670 Investment securities . . . . . . . . 36,757 28,550 37,364 29,345 50,158 38,913 45,142 Loans and leases, net . . . . . . . . 51,625 49,556 52,325 47,479 54,774 51,799 49,528 Deposits. . . . . . . . . . . . . . . 76,285 64,520 74,130 64,836 86,435 86,985 89,773 Other borrowings. . . . . . . . . . . 8,661 12,105 14,138 12,448 15,100 11,352 5,287 Long-term debt. . . . . . . . . . . . -- -- -- -- 4,100 4,251 3,216 Stockholders' equity. . . . . . . . . 7,999 6,935 8,060 6,890 5,608 4,955 4,258 Reserve for possible loan losses. . . 712 688 713 673 808 732 621 SELECTED RATIOS Return on average assets. . . . . . . .43% (.17)% .75% 1.43% .67% .71% .51% Return on average equity. . . . . . . 5.21 (2.08) 9.48 23.86 14.48 16.23 13.44 Net interest rate margin. . . . . . . 4.07 4.07 4.29 3.98 3.82 3.90 3.39 Equity to assets. . . . . . . . . . . 8.48 8.19 8.24 8.04 4.97 4.53 4.08 Reserve for possible loan losses to: Outstanding loans . . . . . . . . . 1.38 1.39 1.36 1.42 1.48 1.41 1.25 Non-performing loans. . . . . . . . 501.41 380.11 584.43 384.57 153.61 306.28 453.28 - ----------------- On July 31, 1994, Peoples Bankshares sold its majority-owned subsidiary, Citizens State Bank ("Citizens"), located in Osage City, Kansas. The consolidated financial condition and result of operations of Peoples Bankshares for the period ended July 31, 1994 and preceding periods include Citizens. In 1994, Peoples Bankshares' consolidated results of operations include a gain resulting from the sale of Citizens of $1,241,000 ($734,000 net of tax).
- 18 - 28 PEOPLES STATE BANK SUMMARY FINANCIAL DATA
As of or for the Three Months Ended As of or for the March 31 Year Ended December 31 ------------------ ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- PER SHARE DATA Net income. . . . . . . . . . . . . . $ 12.27 $ 9.47 $ 51.69 $ 35.56 $ 30.62 $ 33.87 $ 26.98 Dividends declared. . . . . . . . . . 20.00 10.00 10.00 15.56 15.56 5.01 -- Book value at period end. . . . . . . 360.09 313.64 376.09 310.04 297.91 280.89 252.04 Average common shares outstanding . . 22,500 22,500 22,500 22,500 22,500 22,500 22,500 EARNINGS (THOUSANDS) Interest income . . . . . . . . . . . $ 1,832 $ 1,557 $ 7,086 $ 5,700 $ 5,411 $ 5,853 $ 6,903 Interest expense. . . . . . . . . . . 923 753 3,517 2,558 2,476 3,017 4,382 ------- ------- ------- ------- ------- ------- ------- Net interest income . . . . . . . . . 909 804 3,569 3,142 2,935 2,836 2,521 Provision for possible loan losses. . -- 15 45 68 120 120 90 Other income. . . . . . . . . . . . . 146 112 581 502 475 465 371 Other expense . . . . . . . . . . . . 633 578 2,314 2,372 2,259 2,047 1,910 Income taxes. . . . . . . . . . . . . 146 110 628 404 342 372 285 ------- ------- ------- ------- ------- ------- ------- Net income. . . . . . . . . . . . . . $ 276 $ 213 $ 1,163 $ 800 $ 689 $ 762 $ 607 ======= ======= ======= ======= ======= ======= ======= ENDING BALANCE SHEET (THOUSANDS) Total assets. . . . . . . . . . . . . $93,985 $84,434 $97,566 $84,582 $81,930 $78,822 $75,185 Earning assets. . . . . . . . . . . . 88,145 78,054 90,439 77,054 76,247 72,344 70,030 Investment securities . . . . . . . . 36,757 28,550 37,364 28,565 34,794 26,493 33,808 Loans and leases, net . . . . . . . . 51,365 49,382 52,100 47,279 41,443 38,085 35,072 Deposits. . . . . . . . . . . . . . . 76,684 64,823 74,369 64,846 61,523 61,710 64,626 Stockholders' equity. . . . . . . . . 8,102 7,057 8,462 6,976 6,703 6,320 5,671 Other borrowings. . . . . . . . . . . 8,661 12,105 14,138 12,448 12,355 9,347 4,287 Reserve for possible loan losses. . . 712 688 713 673 621 518 441 SELECTED RATIOS Return on average assets. . . . . . . 1.16% 1.01% 1.29% .94% .86% 1.01% .78% Return on average equity. . . . . . . 13.41 12.29 15.68 12.02 10.94 12.99 11.47 Net interest rate margin. . . . . . . 4.04 4.06 4.28 3.94 3.90 4.04 3.46 Equity to assets. . . . . . . . . . . 8.62 8.36 8.67 8.25 8.18 8.02 7.54 Reserve for possible loan losses to: Outstanding loans . . . . . . . . . 1.39 1.39 1.37 1.42 1.50 1.36 1.26 Non-performing loans. . . . . . . . 501.41 380.11 584.43 384.57 118.06 216.74 321.90
- 19 - 29 INFORMATION REGARDING SPECIAL MEETINGS -------------------------------------- GENERAL This Joint Proxy Statement/Prospectus is being furnished to holders of Peoples Bankshares Common Stock and Peoples Bank Common Stock in connection with the solicitation of proxies by the respective Boards of Directors of Peoples Bankshares and Peoples Bank for use at the Special Meetings and any adjournments thereof at which the stockholders of Peoples Bankshares and Peoples Bank will consider and vote upon proposals to approve the Reorganization Agreement and the transactions contemplated thereby and the Acquisition Agreements and the transactions contemplated thereby, respectively, and consider and vote upon any other business which may properly be brought before the Special Meetings or any adjournments thereof. Each copy of this Joint Proxy Statement/Prospectus is accompanied by a Notice of Special Meeting of Stockholders of Peoples Bankshares or Notice of Special Meeting of Stockholders of Peoples Bank, as the case may be, a proxy card and related instructions and a self-addressed return envelope to Peoples Bankshares or Peoples Bank for the proxy card. This Joint Proxy Statement/Prospectus is also furnished by MBI to each holder of Peoples Bankshares Common Stock and Peoples Bank Common Stock as a prospectus in connection with the issuance of shares of MBI Common Stock upon the consummation of the Acquisition. This Joint Proxy Statement/Prospectus and the Notices of Special Meetings, proxy card and related materials are being first mailed to stockholders of Peoples Bankshares and Peoples Bank on--------------------------------, 1996. DATE, TIME AND PLACE The Peoples Bankshares Special Meeting will be held at the offices of ------------ at ------------------------------, on ------------, - -----------, 1996, at ------- --.m. Central Time. The Peoples Bank Special Meeting will be held at the offices of ------------------------------- at - ------------------------------, on ------------, -----------, 1996, at - ------- --.m. Central Time. RECORD DATE; VOTE REQUIRED On the Record Date, there were 97,455 shares of Peoples Bankshares Common Stock outstanding and entitled to vote at the Peoples Bankshares Special Meeting. Each such share is entitled to one vote on each matter properly brought before the Peoples Bankshares Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of Peoples Bankshares Common Stock is required to approve the Reorganization Agreement and the transactions contemplated thereby. As of the Record Date, the directors and officers of Peoples Bankshares and their affiliates in the aggregate owned beneficially all of the shares of Peoples Bankshares Common Stock entitled to vote at the Peoples Bankshares Special Meeting. Pursuant to the Voting Agreements, Ronald D. Lutz and Joyce M. Lutz, President and Secretary, respectively, of Peoples Bankshares, have agreed to vote 80,008 shares owned beneficially and of record by them, or 82.09% of the outstanding shares of Peoples Bankshares Common Stock, for approval of the Reorganization Agreement and the transactions contemplated thereby. The vote by Mr. and Mrs. Lutz will be sufficient to assure the stockholder vote required to approve the Reorganization Agreement and the transactions contemplated - 20 - 30 thereby. The remaining directors and executive officers of Peoples Bankshares, who own beneficially and of record the remaining 17,447 outstanding shares of Peoples Bankshares Common Stock, have also indicated their intention to vote such shares for the approval of the Reorganization Agreement and the transactions contemplated thereby. On the Record Date, there were 22,500 shares of Peoples Bank Common Stock outstanding and entitled to vote at the Peoples Bank Special Meeting. Each such share is entitled to one vote on each matter properly brought before the Peoples Bank Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank Common Stock is required to approve the Acquisition Agreements and the transactions contemplated thereby. As of the Record Date, Peoples Bankshares and the directors and officers of Peoples Bank and their affiliates owned beneficially an aggregate of 20,282 shares of Peoples Bank Common Stock, or 90.01% of the outstanding shares of Peoples Bank Common Stock entitled to vote at the Peoples Bank Special Meeting. Pursuant to the Reorganization Agreement, Peoples Bankshares has agreed to vote 19,997 shares owned beneficially and of record by it, or 88.88% of the outstanding shares of Peoples Bank Common Stock, for the approval of the Acquisition Agreements and the transactions contemplated thereby. The vote by Peoples Bankshares will be sufficient to assure the stockholder vote required to approve the Acquisition Agreements and the transactions contemplated thereby. The directors and executive officers of Peoples Bank and their affiliates, who own beneficially and of record 285 shares, or 1.27% of the outstanding shares of Peoples Common Stock, have also indicated their intention to vote such shares for the approval of the Acquisition Agreements and the transactions contemplated thereby. VOTING AND REVOCATION OF PROXIES Shares of Peoples Bankshares Common Stock or Peoples Bank Common Stock which are represented by a properly executed proxy received prior to the vote at the Peoples Bankshares or Peoples Bank 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 PEOPLES BANKSHARES OR PEOPLES BANK STOCKHOLDER RETURNING A BLANK EXECUTED PROXY CARD WILL BE DEEMED TO HAVE APPROVED THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED THEREBY, AS THE CASE MAY BE. Failure to return a properly executed proxy card or to vote in person at the Peoples Bankshares or Peoples Bank Special Meeting will have the practical effect of a vote against the Reorganization Agreement and the transactions contemplated thereby or the Acquisition Agreements and the transactions contemplated thereby, as the case may be. Shares subject to abstentions will be treated as shares that are present at the Special Meetings for purposes of determining the presence of a quorum and as voted for the purposes of determining the base number of shares voting on the proposal. Shares subject to abstentions will, therefore, have the effect of a vote against the approval of the Reorganization Agreement and the transactions contemplated thereby or the Acquisition Agreements and the transactions contemplated thereby, as the case may be. If a broker or other nominee holder indicates on the proxy card that it does not have discretionary authority to vote the shares it holds of record on the proposal, those shares will not be treated as shares that are present at the Special Meetings for purposes of determining the presence of a quorum and will not be considered as voted for purposes of determining the approval of stockholders on the proposal. - 21 - 31 Any stockholder of Peoples Bankshares or Peoples Bank giving a proxy may revoke it at any time prior to the vote at the Peoples Bankshares or Peoples Bank Special Meeting. Stockholders of Peoples Bankshares or Peoples Bank wishing to revoke a proxy prior to the vote may do so by delivering to the Secretary of Peoples Bankshares at 1080 S.W. Wanamaker Road, Topeka, Kansas 66604-3888, or the Secretary of Peoples Bank at 1064 S.W. Wanamaker Road, Topeka, Kansas 66604-3888, as the case may be, 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 Peoples Bankshares or Peoples Bank Special Meeting and voting such shares in person. Attendance at the Special Meetings will not in itself constitute the revocation of a proxy. The respective Boards of Directors of Peoples Bankshares and Peoples Bank are not currently aware of any business to be brought before the Special Meetings other than that described herein. If, however, any other matters are properly brought before such Special Meetings, or any adjournments thereof, the persons appointed as proxies will have authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment as to the best interest of Peoples Bankshares or Peoples Bank. SOLICITATION OF PROXIES Each of Peoples Bankshares and Peoples Bank 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 Joint Proxy Statement/Prospectus. Proxies will initially be solicited by mail, but directors, officers and selected other employees of Peoples Bankshares and Peoples Bank may also solicit proxies in person or by telephone. Directors, executive officers and any other employees of Peoples Bankshares or Peoples Bank who solicit proxies will not be specially compensated for their 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 PEOPLES BANKSHARES COMMON STOCK OR PEOPLES BANK COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE APPROPRIATE ACCOMPANYING PROXY CARD(S) AND RETURN SUCH PROXY CARD(S) PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. - 22 - 32 TERMS OF THE PROPOSED ACQUISITION --------------------------------- THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS AND CONDITIONS OF THE ACQUISITION AGREEMENTS, WHICH DOCUMENTS ARE INCORPORATED BY REFERENCE HEREIN. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF THE ACQUISITION AGREEMENTS. MBI, UPON WRITTEN REQUEST, WILL FURNISH A COPY OF THE ACQUISITION AGREEMENTS, WITHOUT CHARGE, TO ANY PERSON WHO RECEIVES A COPY OF THIS JOINT 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) 425-2525. GENERAL DESCRIPTION OF THE ACQUISITION Pursuant to the Acquisition Agreements, Ameribanc will acquire all of the outstanding capital stock of Peoples Bank through the consummation of two concurrent and interdependent transactions: (i) the Exchange of all of the shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares for shares of MBI Common Stock, and (ii) the Merger of MBSC with and into Peoples Bank. Upon consummation of the Exchange and the Merger, the separate corporate existence of MBSC will terminate, and the business and operations of Peoples Bank will be continued through Peoples Bank as a wholly owned subsidiary of Ameribanc. Following the Closing Date, MBI intends to cause Mercantile Bank of Topeka, a Kansas state-chartered bank and wholly owned subsidiary of Ameribanc, to merge with and into Peoples Bank, with the surviving entity being a Kansas state-chartered bank named "Mercantile Bank of Topeka." Pursuant to the Acquisition, MBI will issue up to an aggregate of 325,843 shares of MBI Common Stock as Acquisition Consideration. Upon consummation of the Exchange, Peoples Bankshares will be entitled to receive 14.4819 shares of MBI Common Stock for each share of Peoples Bank Common Stock that is beneficially owned by Peoples Bankshares. Pursuant to the Reorganization Agreement, within six months after the Exchange, Peoples Bankshares shall effect the Liquidation. Upon consummation of the Merger, each issued and outstanding share of Peoples Bank Common Stock (other than shares that have been transferred to Ameribanc or shares as to which stockholder of Peoples Bank has exercised dissenters' rights under Section 17-6712) shall cease to be outstanding and will be converted into the right to receive 14.4819 shares of MBI Common Stock. The amount and nature of the Acquisition Consideration was established through arm's-length negotiations between MBI, Ameribanc, Peoples Bankshares and Peoples Bank, and reflects the balancing of a number of countervailing factors. The total amount of the Acquisition Consideration reflects a price all parties concluded was appropriate. The fair market value of MBI Common Stock to be issued as the Acquisition Consideration may fluctuate and at the consummation of the Acquisition may be more or less than the current fair market value of such shares. See "- Background of and Reasons for the Acquisition; Board Recommendations." The fact that the Acquisition Consideration is payable in shares of MBI Common Stock reflects the desire to have the favorable tax attributes of a "reorganization" for federal income tax purposes (see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION"), and the potential for appreciation in the value of the MBI Common Stock. 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 - 23 - 33 PEOPLES BANKSHARES OR PEOPLES BANK STOCKHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI COMMON STOCK RECEIVED BY A PEOPLES BANKSHARES OR PEOPLES BANK STOCKHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK DUE TO NUMEROUS MARKET FACTORS. At the closing of the Acquisition, Peoples Bankshares shall deliver to MBI certificates evidencing all shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares on the Closing Date in exchange for the number of shares of MBI Common Stock to which Peoples Bankshares is entitled. Following the Closing Date, the stockholders of Peoples Bank (other than Peoples Bankshares) will be required to submit to KeyCorp Shareholder Services, Inc., which has been appointed as Exchange Agent in the Acquisition (the "Exchange Agent"), a properly executed letter of transmittal and to surrender to the Exchange Agent the stock certificate(s) formerly representing the shares of Peoples Bank Common Stock prior to the issuance by the Exchange Agent of the stock certificate evidencing the shares of MBI Common Stock to which each such stockholder is entitled. No dividends or other distributions will be paid to any such Peoples Bank stockholder with respect to shares of MBI Common Stock until such stockholder's letter of transmittal and stock certificates formerly representing Peoples Bank Common Stock, or documentation acceptable to the Exchange Agent in lieu of lost or destroyed certificates, is delivered to the Exchange Agent. See "TERMS OF THE PROPOSED ACQUISITION - Surrender of Peoples Bank Stock Certificates and Receipt of MBI Common Stock." No fractional shares of MBI Common Stock will be issued pursuant to the Acquisition, but cash will be paid in lieu of such fractional shares, such cash being calculated by multiplying each such holder's fractional share interest by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal, Midwest Edition, on the Closing Date of the Acquisition. See "TERMS OF THE PROPOSED ACQUISITION - Fractional Shares." The shares of MBI Common Stock to be issued pursuant to the Acquisition will be freely transferable except by certain stockholders of Peoples Bankshares or Peoples Bank who are deemed to be "affiliates" of Peoples Bankshares or Peoples Bank, as the case may be. 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 COMMON STOCK - Restrictions on Resale of MBI Common Stock by Affiliates." OTHER AGREEMENTS In addition to and contemporaneously with the Acquisition Agreements, MBI executed separate Voting Agreements with each of Ronald D. Lutz, President of Peoples Bankshares and Chairman and Chief Executive Officer of Peoples Bank, and Joyce M. Lutz, Secretary of both Peoples Bankshares and Peoples Bank. Pursuant to the Voting Agreements, each of Mr. and Mrs. Lutz agreed that he or she will vote all of the shares of Peoples Bankshares Common Stock that he or she then owned or subsequently acquires in favor of the approval of the Reorganization Agreement and the transactions contemplated thereby at the Peoples Bankshares Special Meeting. On a combined basis, Mr. and Mrs. Lutz control 82.09% of the voting power of the issued and outstanding shares of Peoples Bankshares Common Stock. The vote by Mr. and Ms. Lutz will be sufficient to assure the stockholder vote required to approve the Reorganization Agreement and the transactions contemplated thereby. In addition, until the earliest to occur of the Closing Date, the termination of the Reorganization Agreement or the abandonment of the Acquisition, each of Mr. and Mrs. Lutz further agreed that he or she will not transfer any such shares or vote any such - 24 - 34 shares in favor of the approval of any other competing acquisition proposal involving any merger with or sale of substantially all of the assets of Peoples Bankshares to any person other than MBI or its affiliates. Pursuant to the Reorganization Agreement, Peoples Bankshares has agreed that, upon approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares, Peoples Bankshares will vote all of its shares of Peoples Bank Common Stock, which represent 88.88% of the total number of outstanding shares of Peoples Bank Common Stock, in favor of the Acquisition Agreements and the transactions contemplated thereby. The vote by Peoples Bankshares will be sufficient to assure the stockholder vote required to approve the Acquisition Agreements and the transactions contemplated thereby. INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION MBI has entered into an arrangement with Ronald D. Lutz whereby Mr. Lutz shall serve as a member of the Board of Directors of Peoples Bank, which shall be named "Mercantile Bank of Topeka" upon consummation of the Topeka Merger, for a period of two years, commencing on the Closing Date. During such two-year period, Mr. Lutz shall be entitled to the same directors' fee as are paid to the other members of the Board of Directors of Peoples Bank or Mercantile Bank of Topeka, as the case may be. Mr. Lutz's arrangement with MBI will replace Mr. Lutz's other employment agreements with Peoples Bankshares and Peoples Bank. BACKGROUND OF AND REASONS FOR THE ACQUISITION; BOARD RECOMMENDATIONS BACKGROUND. Throughout its history, Peoples Bank has been an independent bank with its headquarters located outside the downtown Topeka area in the western part of Topeka and branches located throughout Shawnee County, Kansas. Peoples Bank has been a subsidiary of Peoples Bankshares since 1973. Prior to 1994, Peoples Bankshares also owned and controlled Citizens State Bank ("Citizens"), located in Osage City, Kansas. In 1994, Peoples Bankshares determined that, in view of the changing banking environment, emphasis should be given to expansion of Peoples Bank in the Topeka market and, as a result, Citizens was sold. The Board of Peoples Bankshares was not necessarily committed to affiliating with a larger institution, but felt that Peoples Bank could continue to be a viable competitor as an independent institution. Beginning in 1993, a number of contacts were initiated by other banking organizations to determine whether Peoples Bank might be interested in a potential combination. Two such contacts were from other community banking organizations which were interested in acquiring Peoples Bank. Peoples Bankshares, however, was only interested in either acquiring smaller institutions in Topeka or being acquired by a large organization in a tax-deferred exchange for a marketable stock which the stockholders of Peoples Bankshares (all of whom are on the Board of Directors of Peoples Bankshares) would be interested in holding for the long term. In 1993, a large holding company initiated merger negotiations with Peoples Bankshares, but it was only interested in proceeding with a merger if it could acquire an additional bank in Topeka. When the efforts to acquire the other institution were unsuccessful, negotiations were terminated. In 1995, Peoples Bankshares made an attempt to acquire a small Topeka bank which it - 25 - 35 planned to combine with Peoples Bank. After several meetings with the proposed seller, negotiations were terminated. The Board believed there were only about two other organizations, including MBI, which might be interested in acquiring Peoples Bank and which met the Board's criteria for a combination. Although Peoples Bankshares did not engage a financial advisor to assist it in considering options for expansion, the management and Board of Directors of Peoples Bankshares took active measures to keep themselves informed concerning trends in the banking industry and prices being paid for community banks. For several years, Peoples Bankshares has been a member of the Sheshunoff High Performance Affiliation Group ("Sheshunoff"), which provides materials, including pricing information, and sponsors seminars regarding bank mergers and acquisitions. In late 1994, Peoples Bankshares obtained an appraisal of its controlling interest in Peoples Bank by the Sheshunoff organization, which is nationally recognized as an expert in bank valuations. Those actions were designed to keep the Board and management informed of developments in the industry and equip them to respond to any proposals which they might receive. MBI approached Ronald D. Lutz, the Chairman of the Board of Directors of both Peoples Bankshares and Peoples Bank, in July of 1995, indicated an interest in acquiring Peoples Bank and requested information which would enable MBI to make an acquisition proposal. An additional request for information was made in September and negotiations commenced in earnest in November 1995. During the course of negotiations, the Board consulted with GRA, Thompson, White & Co., P.C., which, in addition to accounting services, provides merger and acquisition advice to community banks, and obtained from Sheshunoff updated information with respect to prices paid in comparable transactions. The Board also engaged the law firm of Stinson, Mag & Fizzell, P.C., which is experienced in representing financial institutions in mergers and acquisitions, to assist in negotiating the Reorganization Agreement. MBI conducted due diligence on the premises of Peoples Bank in early December 1995. The terms of the Acquisition were unanimously approved by the Boards of Directors of Peoples Bank and Peoples Bankshares and the Reorganization Agreement was executed on December 19, 1995. PEOPLES BANKSHARES' AND PEOPLES BANK'S REASONS AND BOARD RECOMMENDATIONS. The recommendations of the respective Boards of Directors of each of Peoples Bankshares and Peoples Bank are based upon a number of factors, including the terms of the Acquisition Agreements, the substantial benefits expected to result from the combination of Peoples Bank and MBI, information concerning the financial condition, results of operations and prospects of MBI and Peoples Bank, on both a stand-alone and a combined basis, the market price of MBI Common Stock and the value which Peoples Bankshares, as the principal stockholder of Peoples Bank, believed should be realized in a sale transaction. The Acquisition Consideration was determined pursuant to arms-length negotiations between MBI, Ameribanc, Peoples Bankshares and Peoples Bank. In arriving at the Acquisition Consideration, Peoples Bank and Peoples Bankshares considered a recent appraisal of Peoples Bank and information provided by a bank consulting firm public information regarding prices paid for comparable banks in similar transactions, but did not engage an outside firm for advice on the fairness of the Acquisition Consideration. See "SUMMARY INFORMATION - Markets and Market Prices." - 26 - 36 The Boards of Directors of both Peoples Bank and Peoples Bankshares were influenced by the fact that the Acquisition Consideration significantly exceeded the recent appraised value of Peoples Bank and was favorable in relation to prices paid for comparable banks in recent transactions. The Boards did not seek competing offers because they felt that the Acquisition Consideration was favorable to the stockholders of the Peoples Bank and Peoples Bankshares and that, based on their knowledge of the market and previous negotiations with one potential acquiror, and the organizations which might be interested in entering, or expanding their presence in, the Topeka market, there was no other such organization which met the Boards' criteria for a merger partner. Although the financial aspects of the MBI proposal were considered paramount, the Board of Peoples Bankshares considered MBI to be the most appropriate merger partner from the standpoint of the strategic objectives of Peoples Bank. Central to the decision was the fact that MBI's subsidiary, Mercantile Bank of Topeka, is headquartered in downtown Topeka, where Peoples Bank is not located, and also has branches in other areas where Peoples Bank is not represented. In addition, the Board believed that MBI and Peoples Bank share similar philosophies with respect to lending and bank operations and that these factors will help assure that the combination will be beneficial to the employees and customers of Peoples Bank and to the greater Topeka community at large. The respective Boards of Directors of each of Peoples Bankshares and Peoples Bank believe that the Acquisition will provide the holders of Peoples Bank Common Stock with the opportunity to receive a substantial premium over the estimated market value of Peoples Bank Common Stock and will enable them to participate as MBI shareholders, on a tax-deferred basis, in the expanded opportunities for growth and profitability made possible by the Acquisition. The respective Boards of Directors of each of Peoples Bankshares and Peoples Bank also believe that the Acquisition and the anticipated merger of Peoples Bank with Mercantile Bank of Topeka will result in a combined entity that is (i) committed to serving the banking and other financial needs of Peoples Bank's depositors, employees, customers and communities, (ii) capable of competing more effectively with larger financial institutions that have exerted increasing competitive pressure on Peoples Bank, (iii) well-capitalized and (iv) capable of enjoying significant market penetration in Topeka and the northeast Kansas banking market. THE BOARD OF DIRECTORS OF EACH OF PEOPLES BANKSHARES AND PEOPLES BANK BELIEVES THAT THE ACQUISITION IS IN THE BEST INTEREST OF PEOPLES BANKSHARES AND PEOPLES BANK, RESPECTIVELY, AND THEIR RESPECTIVE STOCKHOLDERS. THE BOARD OF DIRECTORS OF PEOPLES BANKSHARES UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF PEOPLES BANKSHARES VOTE FOR THE PROPOSAL TO APPROVE THE REORGANIZATION --- AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD OF DIRECTORS OF PEOPLES BANK UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF PEOPLES BANK VOTE FOR THE PROPOSAL TO APPROVE THE ACQUISITION AGREEMENTS AND THE TRANSACTIONS - --- CONTEMPLATED THEREBY. 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 Peoples Bankshares and Peoples Bank and the projected synergies which are anticipated to result from the Acquisition. The Executive Committee concluded that the Acquisition presents an unique opportunity for MBI to increase its presence in the regional banking market in eastern Kansas through the addition of an established banking organization. MBI believes that the most effective and least costly - 27 - 37 means to achieve this presence is the acquisition of a banking organization with significant operations in the targeted area. MBI's decision to pursue discussions with Peoples Bankshares and Peoples Bank was primarily a result of MBI's assessment of the value of Peoples Bank's banking franchise, its substantial asset base within eastern Kansas and the compatibility of the businesses of the two banking organizations. CONDITIONS OF THE ACQUISITION The respective obligations of MBI, Ameribanc, Peoples Bankshares and Peoples Bank to effect the Acquisition are subject to the satisfaction of certain mutual conditions, including the following: (1) The Reorganization Agreement and the transactions contemplated thereby shall be approved by the holders of a majority of the outstanding shares of Peoples Bankshares Common Stock at the Peoples Bankshares Special Meeting. (2) The Acquisition Agreements and the transactions contemplated thereby shall be approved by the holders of a majority of the outstanding shares of Peoples Bank Common Stock at the Peoples Bank Special Meeting. (3) The Acquisition Agreements and the transactions contemplated thereby shall have been approved by the Federal Reserve Board, the FDIC, the Kansas Commissioner and any other federal and/or state regulatory agency whose approval is required for the consummation of the transactions contemplated thereby. (4) The Registration Statement of which this Joint Proxy Statement/Prospectus is a part and which registers the shares of MBI Common Stock to be issued in the Acquisition shall have been declared effective and not be subject to a stop order or any threatened stop order. (5) None of MBI, Ameribanc, Peoples Bankshares, Peoples Bank or MBSC shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the he Acquisition. (6) MBI, Ameribanc and Peoples Bankshares shall have taken all actions as are necessary to effect the Exchange simultaneously with the Merger. (7) Each of MBI, Peoples Bankshares and Peoples Bank shall have received from Thompson Coburn, counsel for MBI, an opinion to the effect that the Acquisition will constitute a reorganization within the meaning of Section 368 of the Code and that no gain or loss will be recognized by the stockholders of Peoples Bankshares or Peoples Bank to the extent that they receive MBI Common Stock in exchange for shares of Peoples Bankshares Common Stock or Peoples Bank Common Stock, respectively. The respective obligations of MBI and Ameribanc to effect the Acquisition are subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of Peoples Bankshares and Peoples Bank made in the Reorganization Agreement shall be true and correct in all material - 28 - 38 respects, except such as are not of a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of Peoples Bank, as of December 19, 1995 and as of the Closing Date (as though made on and as of the Closing Date) except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the condition of Peoples Bank and (iii) for the effect of the transactions contemplated by the Reorganization Agreement, and all obligations required to be performed by Peoples Bankshares and Peoples Bank under the Reorganization Agreement prior to the Closing Date shall have been performed in all material respects, and MBI shall have received an officers' certificate from each of Peoples Bankshares and Peoples Bank to that effect. (2) Peoples Bankshares and Peoples Bank shall have obtained any and all material consents or waivers from other parties to loan agreements, leases or other contracts material to Peoples Bank's business and any and all material permits, authorizations, consents, waivers or approvals required for the lawful consummation of the Acquisition. (3) Since December 19, 1995, there shall have been no material adverse change in the business, financial condition, results of operations or prospects of Peoples Bank. (4) Stinson, Mag & Fizzell, P.C., counsel to Peoples Bankshares and Peoples Bank, shall have delivered to MBI an opinion regarding certain legal matters. (5) Peoples Bankshares shall have delivered to the Exchange Agent the certificates evidencing shares of Peoples Bank Common Stock owned beneficially or of record by Peoples Bankshares, and such other documentation as shall be reasonably required by MBI or the Exchange Agent to effect the Exchange. The respective obligations of Peoples Bankshares and Peoples Bank to effect the Acquisition are 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 Reorganization Agreement shall be true and correct in all material respects, except such as are not of a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of MBI and its subsidiaries taken as a whole, as of December 19, 1995 and as of the Closing Date (as though made on and as of the Closing Date) except (i) to the extent such representations and warranties are by their express provisions made as of a specified date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the condition of MBI and its subsidiaries taken as a whole, and (iii) for the effect of the transactions contemplated by the Reorganization Agreement and all obligations required to be performed by MBI and Ameribanc under the Reorganization Agreement prior to the Effective Time shall have been performed in all - 29 - 39 material respects, and Peoples Bankshares and Peoples Bank shall have received an officers' certificate from MBI and Ameribanc 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 Acquisition. (3) Since the date of the Reorganization Agreement, there shall have been no material adverse change in the business, financial condition, results of operations or prospects of MBI and its subsidiaries taken as a whole. (4) Thompson Coburn, counsel to MBI and Ameribanc, shall have delivered to Peoples Bankshares and Peoples Bank an opinion regarding certain legal matters. TERMINATION OF THE REORGANIZATION AGREEMENT The Reorganization Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the stockholders of Peoples Bankshares and Peoples Bank, by mutual consent of the Executive Committee of the Board of Directors of MBI and the Boards of Directors of Ameribanc, Peoples Bankshares and Peoples Bank, or unilaterally by the Executive Committee of the Board of Directors of MBI or the Boards of Directors of Ameribanc, Peoples Bankshares or Peoples Bank: (i) at any time after December 31, 1996 if the Acquisition has not been consummated by such date or (ii) if the Federal Reserve Board, the FDIC, the Kansas Commissioner or any other Regulatory Authority has denied approval of the Acquisition. The Reorganization Agreement may also be terminated by the Executive Committee of the Board of Directors of MBI or the Board of Directors of Ameribanc, on the one hand, or the Board of Directors of Peoples Bankshares and the Board of Directors of Peoples Bank, on the other, in the event of a breach of the Reorganization Agreement by the other party, which breach is of such a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of the breaching party taken as a whole, and is not cured or waived within forty-five days following written notice of such breach given to the party committing such breach by the other party. INDEMNIFICATION MBI and Ameribanc, on the one hand, and Peoples Bankshares and Peoples Bank, on the other, have agreed to indemnify each other against any claims or liabilities to which either such party may become subject under federal or state securities laws or regulations, to the extent that such claim or liability arises out of information furnished to the party subject to such liability by the other party or an omission by such other party to state a necessary or material fact in the Registration Statement of which this Joint Proxy Statement/Prospectus is a part. - 30 - 40 CLOSING DATE The Acquisition will be consummated and become effective on the Closing Date at the time that the authorization of the Kansas Commissioner is filed with the Office of the Secretary of State of the State of Kansas. Pursuant to the Reorganization Agreement, unless the parties otherwise agree, the Closing Date shall be the first business day of the month commencing at least five business days following the last to occur of: (i) the receipt of the requisite approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares and the Acquisition Agreements and the transactions contemplated thereby by the stockholders of Peoples Bank; or (ii) the approval of the Acquisition by the Regulatory Authorities and the expiration of any required waiting period. SURRENDER OF PEOPLES BANK STOCK CERTIFICATES AND RECEIPT OF MBI COMMON STOCK Except for the shares of Peoples Bank Common Stock subject to the exercise of dissenters' rights, at the Effective Time of the Acquisition, each outstanding share of Peoples Bank Common Stock will be converted into the right to receive 14.4819 shares of MBI Common Stock. See "TERMS OF THE PROPOSED ACQUISITION - General Description of the Acquisition." At the closing of the Acquisition, Peoples Bankshares will deliver to the Exchange Agent the stock certificates representing the shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares on the Closing Date and any other documentation reasonably required to effect the Exchange. Upon such delivery, Peoples Bankshares will be entitled to receive a stock certificate evidencing the shares of MBI Common Stock to which Peoples Bankshares is entitled. As soon as practicable following the Effective Time of the Acquisition, the Exchange Agent will mail to each former Peoples Bank stockholder of record as of the Closing Date (other than Peoples Bankshares) a notification of the consummation of the Acquisition, a letter of transmittal and instructions as to the procedure for the surrender of stock certificates evidencing Peoples Bank Common Stock and the receipt of stock certificates evidencing the shares of MBI Common Stock to which each former Peoples Bank stockholder is entitled. It will be the responsibility of such former Peoples Bank stockholders to submit the certificates evidencing such shares of Peoples Bank Common Stock to the Exchange Agent. No dividends or other distributions will be paid to a former Peoples Bank stockholder with respect to shares of MBI Common Stock until the stockholder delivers to the Exchange Agent a properly completed letter of transmittal and all stock certificates formerly representing shares of Peoples Bank Common Stock, or documentation acceptable to the Exchange Agent in lieu of a lost or destroyed certificate. The Exchange Agent may also require the stockholder of a lost or destroyed certificate to post an insurance bond acceptable to the Exchange Agent. All dividends or other distributions on MBI Common Stock declared between the Closing Date of the Acquisition and the date of the surrender of a Peoples Bank stock certificate will be held for the benefit of the former Peoples Bank stockholders and will be paid to each such stockholder, without interest thereon, upon the surrender of such stock certificate or documentation and/or insurance bond in lieu thereof. FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to Peoples Bankshares or the other former stockholders of Peoples Bank in connection with the Acquisition. Each former holder of Peoples Bank Common Stock who otherwise would have been entitled to receive a fraction of a share of - 31 - 41 MBI Common Stock shall receive in lieu thereof cash, without interest, in an amount equal to the holder's fractional share interest multiplied by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date. Cash received by Peoples Bank stockholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION." CERTAIN REGULATORY APPROVALS In addition to the approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares and the Acquisition Agreements and the transactions contemplated thereby by the stockholders of Peoples Bank, the obligations of the parties to effect the Acquisition are subject to prior approval of the Federal Reserve Board, the FDIC and the Kansas Commissioner. Applications for approval will be filed with such Regulatory Authorities. In reviewing the applications, the Regulatory Authorities will consider, among other things, whether the effect of the Acquisition would be to substantially lessen competition in the relevant market. In addition, the Regulatory Authorities will consider whether the combined organization meets the requirements of the Community Reinvestment Act of 1977, as amended, by assessing the involved entities' respective records of meeting the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions. In their review, the Regulatory Authorities will also examine the financial and managerial resources and future prospects of the combined organization and analyze the capital structure and soundness of the resulting entity. The Regulatory Authorities have the authority to deny the applications if they conclude that the combined organization would have inadequate capital. MBI, Ameribanc, Peoples Bankshares and Peoples Bank are not aware of any governmental approvals or actions that may be required for the consummation of the Acquisition 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 necessary approvals or actions will be timely received or taken, that no action will be brought challenging a necessary 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 Acquisition. See "SUPERVISION AND REGULATION." BUSINESS PENDING THE ACQUISITION The Reorganization Agreement provides that, during the period from December 19, 1995 to the Effective Time, Peoples Bankshares and Peoples Bank will conduct their respective businesses according to the ordinary and usual course consistent with past and current practices and use their best efforts to maintain and preserve their respective business organizations, employees and advantageous business relationships and to retain the services of their officers and key employees. Furthermore, from December 19, 1995 to the Closing Date, Peoples Bankshares and Peoples Bank will not, 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 their capital stock, except that (i) Peoples Bank may declare and - 32 - 42 pay a cash dividend of not more than $20.00 per share on the Peoples Bank Common Stock in January of 1996 for the year ended December 31, 1995, and (ii) Peoples Bank may declare and pay dividends of not more than $5.00 per share for each of the first and second quarter of 1996; provided, however, that Peoples Bank will coordinate the record and payment dates of each such quarterly dividend such that the record and payment dates for a given quarterly dividend are the same as MBI's record and payment dates for its regular quarterly dividend for that quarter; and provided further that if the Effective Time has not occurred on or before September 10, 1996, Peoples Bank may declare and pay a dividend for each quarter ending thereafter in which the MBI Board of Directors shall declare a dividend on shares of MBI Common Stock that in the aggregate is not in excess of the greater of (A) the aggregate quarterly dividend that would have been paid by MBI on the Acquisition Consideration if the Acquisition had been consummated on September 10, 1996 and (B) $112,500; provided further, however, that Peoples Bank may not declare or pay a dividend for any quarter in which Peoples Bank's stockholders will be entitled to receive a regular quarterly dividend on the shares of MBI Common Stock to be issued in the Acquisition; (2) enter into or amend any employment, severance or similar agreement or arrangement with any director or officer or employee, materially modify any of their employee plans, grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except (i) normal individual increases in compensation to employees consistent with past practice, (ii) as required by law or contract and (iii) increases of which Peoples Bank and Peoples Bankshares notify 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, announce an intention to authorize, so recommend or propose, or enter into an agreement in principle with respect to, any merger, consolidation or business combination (other than the Acquisition and the Topeka 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 their articles of incorporation, charter documents or By-Laws; (5) issue, sell, grant, confer or award any of their equity securities, effect any stock split or adjust, combine, reclassify or otherwise change their capitalization as it existed on December 19, 1995; (6) purchase, redeem, retire, repurchase or exchange, or otherwise acquire or dispose of, directly or indirectly, any of their shares of capital stock or other equity securities, whether pursuant to the terms of such securities or otherwise; (7) (i) without first consulting with MBI, enter into, renew or increase any loan or credit commitment (including stand-by letters of credit) to, or invest or agree to invest in any person or entity or modify any of the material provisions or renew or - 33 - 43 otherwise extend the maturity date of any existing loan or credit commitment (collectively, "Lend to") in an amount in excess of $250,000 or in any amount which, when aggregated with any and all loans or credit commitments of Peoples Bank to such person or entity, would be in excess of $250,000, provided that no such consultation is required in respect of single-family residential loans or credits that (A) remain in Peoples Bank's loan portfolio, (B) do not exceed $125,000 and (C) are salable in recognized secondary markets pursuant to Peoples Bank's lending policies as in effect on December 19, 1995, (ii) without first obtaining the written consent of MBI, Lend to any person or entity, in an amount in excess of $400,000 or in any amount which, when aggregated with any and all loans or credit commitments of Peoples Bank to such person or entity would be in excess of $400,000, (iii) Lend to any person other than in accordance with Peoples Bank's lending policies as in effect on December 19, 1995, provided that in the case of clauses (i) and (ii), Peoples Bank may make any such loan in the event (A) Peoples Bank delivers to MBI or its designated representative a notice of its intention to make such loan and such information as MBI or its designated representative reasonably requires in respect thereof and (B) MBI or its designated representative do not reasonably object to such loan by giving written or facsimile notice of such objection within two business days following the delivery to MBI or its designated representative of the notice of intention and information as aforesaid, or (iv) Lend to any person or entity any of the loans or other extensions of credit to which or investments in which are on a "watch list" or similar or internal report of Peoples Bank (except those denoted "pass" thereon), in an amount in excess of $25,000; provided, however, that Peoples Bank may honor any contractual obligation in existence on December 19, 1995 or, with respect to loans described in clause (i) above, may make such loans after consulting with MBI. Notwithstanding clauses (i) and (ii), however, Peoples Bankshares and Peoples Bank are authorized, without first consulting with or obtaining the written consent of MBI or Ameribanc, 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 may not be in excess of the lesser of five percent (5%) of such Pre-Existing Facilities or $25,000; (8) directly or indirectly (including through their officers, directors, employees or other representatives) (i) initiate, solicit or encourage any discussions, inquiries or proposals with any third party (other than the MBI, Ameribanc or the affiliates thereof) relating to the disposition of any significant portion of the business or assets of Peoples Bankshares or Peoples Bank, the acquisition of the capital stock or other equity securities of Peoples Bankshares or Peoples Bank, the merger of Peoples Bankshares or Peoples Bank with any person (other than MBI, Ameribanc or the affiliates thereof) or any similar transaction, or (ii) provide any such person with information or assistance or negotiate with any such person with respect to such a transaction, and Peoples Bankshares and Peoples Bank will promptly notify MBI orally of all the relevant details relating to all inquiries, indications of interest and proposals which they receive with respect to any such transaction; (9) take any action that would (i) materially impede or delay the consummation of the transactions contemplated by the Acquisition Agreements, or the ability of MBI, Ameribanc, Peoples Bankshares or Peoples Bank to obtain any approval - 34 - 44 of any Regulatory Authority required for the transactions contemplated by the Acquisition Agreements or perform their covenants and agreements under the Acquisition Agreements or (ii) prevent or impede the Acquisition from qualifying as a reorganization within the meaning of Section 368 of the Code; (10) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity; (11) in the case of Peoples Bank, 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 of greater than $500,000 for U.S. Treasury Securities and Federal Agency securities and $100,000 for all other investment instruments, provided that the prior written consent of MBI and Ameribanc is not unreasonably withheld; (12) agree in writing or otherwise take any of the foregoing actions or engage in any activity, enter into any transaction or intentionally take or omit to take any other act which would make any of the representations and warranties in Article II of the Reorganization Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other act; or (13) enter into or increase any loan or credit commitment (including standby letters of credit) to any executive officer or director of Peoples Bankshares or Peoples Bank, any stockholder of Peoples Bankshares or Peoples Bank, or any entity controlled, directly or indirectly, by any of the foregoing or engage in any transaction with any of the foregoing which is of the type or nature sought to be regulated in 12 U.S.C. Sec. 371c and 12 U.S.C. Sec. 371c-1, without first obtaining the prior written consent of MBI, which consent may not be unreasonably withheld. From December 19, 1995 to the Closing Date, MBI and Ameribanc will not, without the prior consent of Peoples Bankshares and Peoples Bank, agree in writing or otherwise engage in any activity, enter into any transaction or take or omit to take any other action which would make any of the representations and warranties in Article III of the Reorganization Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other action. WAIVER AND AMENDMENT Any provision of the Reorganization Agreement, including, without limitation, the conditions to the consummation of the Acquisition and the restrictions described under the caption "TERMS OF THE PROPOSED ACQUISITION - Business Pending the Acquisition," may be (i) waived in writing at any time by the party that is, or whose shareholders or stockholders, as the case may be, are entitled to the benefits thereof or (ii) amended at any time by written agreement of the parties to the Reorganization Agreement, if such agreement is approved by or on behalf of their respective Boards of - 35 - 45 Directors, whether before or after the Special Meetings; provided, however, that after approval of the Reorganization Agreement and the transactions contemplated thereby by the stockholders of Peoples Bankshares and the Acquisition Agreements and the transactions contemplated thereby by the stockholders of Peoples Bank at the Special Meetings, no such modification may: (A) alter the amount or change the form of Acquisition Consideration to be received by Peoples Bankshares and the other stockholders of Peoples Bank in the Acquisition; (B) adversely affect the tax treatment of the stockholders of Peoples Bankshares or Peoples Bank; (C) alter or change any of the terms of the Reorganization Agreement if such alteration or change would adversely affect the stockholders of Peoples Bank; or (D) impede or delay the receipt of any approval from a Regulatory Authority or the consummation of the Acquisition. ACCOUNTING TREATMENT The Acquisition will be accounted for under the purchase method of accounting. Accordingly, data regarding the financial condition and results of operations of Peoples Bank will be included in MBI's consolidated financial statements on and after the Closing Date. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION ---------------------------------------------------------- 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 Exchange, the Merger and the Liquidation to certain stockholders of Peoples Bankshares and to certain stockholders of Peoples Bank and does not purport to be a complete analysis or listing of all potential tax considerations or consequences relevant to a decision whether to vote for the approval of the Reorganization Agreement, the Acquisition Agreements and the transactions contemplated by each. The discussion does not address all aspects of federal income taxation that may be applicable to stockholders of Peoples Bankshares or Peoples Bank in light of their status or personal investment circumstances, nor does it address the federal income tax consequences that are applicable to any stockholder 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 stock pursuant to the exercise of employee stock options or otherwise as compensation, persons who hold their stock as part of a "straddle," "hedge" or "conversion transaction," and persons who acquired their stock after December 19, 1995. 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 STOCKHOLDER OF PEOPLES BANKSHARES OR PEOPLES BANK IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE, THE MERGER AND THE LIQUIDATION TO SUCH STOCKHOLDER. The discussion assumes that shares of Peoples Bankshares Common Stock and shares of Peoples Bank Common Stock are held as capital assets (within the meaning of Section 1221 of the Code) at the Effective Time. Peoples Bankshares and Peoples Bank have each received an opinion from Counsel to the effect that, assuming the Exchange and the Merger occur in accordance with the Acquisition Agreements, each of the Exchange and the Merger will constitute a "reorganization" for federal income tax purposes under Section 368(a)(1) with the following federal income tax consequences: 1. No gain or loss will be recognized by Peoples Bankshares on its transfer of Peoples Bank Common Stock solely in exchange for MBI Common Stock in the Exchange. - 36 - 46 2. No gain or loss will be recognized by Peoples Bankshares on its distribution of MBI Common Stock to its stockholders in the Liquidation. 3. Each stockholder of Peoples Bankshares who exchanges, in the Liquidation, his, her or its shares of Peoples Bankshares Common Stock solely for shares of MBI Common Stock: a) will recognize no gain or loss; b) will have an aggregate adjusted basis for the shares of MBI Common Stock received equal to the aggregate basis of the shares of Peoples Bankshares Common Stock surrendered; and c) will have a holding period for the share of MBI Common Stock received which includes the period during which the shares of Peoples Bankshares Common Stock surrendered were held. 4. Each stockholder of Peoples Bank who exchanges in the Merger his, her or its shares of Peoples Bank Common Stock solely for shares of MBI Common Stock: a) will recognize no gain or loss, except with regard to cash received in lieu of a fractional share, as discussed; b) will have an aggregate adjusted basis for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 5, below) equal to the aggregate basis of the shares of Peoples Bank Common Stock surrendered; and c) will have a holding period for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 5, below) which includes the period during which the shares of Peoples Bank Common Stock surrendered were held. 5. Each stockholder of Peoples Bank who receives cash in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received and then redeemed by MBI. The receipt of such cash will cause the recipient to recognize capital gain or loss, equal to the difference between the amount of cash received and the portion of such holder's adjusted tax basis in the shares of MBI Common Stock allocable to the fractional share interest. Counsel's opinion is subject to the conditions and assumptions stated therein and relies upon representations made by MBI, Peoples Bankshares, Peoples Bank, and certain stockholders of Peoples Bankshares or Peoples Bank. If any of these representations or assumptions is inaccurate, the federal income tax consequences of the Acquisition or Liquidation could differ from those described herein. Counsel's opinion is also based upon the Code, regulations proposed or promulgated thereunder, and administrative interpretations and judicial precedents relating thereto, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences discussed herein. Copies of the opinion are available without charge upon written request to MBI. - 37 - 47 Consummation of the Acquisition is subject to the condition that Counsel's opinion shall have been received (and not withdrawn) before the Effective Time. 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 the opinion and, if the matter were litigated, a court may reach a decision contrary to the opinion. Neither MBI, Peoples Bankshares nor Peoples Bank has requested an advance ruling as to the federal income tax consequences of the Exchange, the Merger or the Liquidation, 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 EXCHANGE, THE MERGER AND THE LIQUIDATION TO CERTAIN STOCKHOLDERS AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH STOCKHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EACH STOCKHOLDER OF PEOPLES BANKSHARES OR PEOPLES BANK. ACCORDINGLY, EACH SUCH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE, THE MERGER, AND THE LIQUIDATION, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS. DISSENTERS' RIGHTS OF STOCKHOLDERS OF PEOPLES BANK -------------------------------------------------- Under Section 9-1724 of the Kansas Banking Code, which incorporates by reference Section 17-6712 of the Kansas Corporation Code, each stockholder of Peoples Bank has the right to dissent from the Merger with respect to some or all of his or her shares of Peoples Bank Common Stock and to receive the fair value of such shares in cash by following the procedures set forth under Section 17-6712, attached hereto as Annex A and ------- the material provisions of which are summarized below. Stockholders of Peoples Bankshares do not have dissenters' rights in connection with the Exchange. Under Section 17-6712, a stockholder of Peoples Bank who (i) files with Peoples Bank prior to the vote on the Merger a written objection to the Merger, (ii) is not entitled to vote or does not vote in favor of the approval of the Merger and (iii) within twenty days of receiving notice of the Merger from Peoples Bank, delivers to Peoples Bank a written demand for payment of the value of his or her shares, shall be entitled to receive from Peoples Bank, within thirty days following the expiration of the twenty-day period for a written demand, the value of his or her shares on the Closing Date, exclusive of any value derived from the consummation of the Merger. A VOTE AGAINST THE MERGER WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN OBJECTION FOR PURPOSES OF ASSERTING APPRAISAL RIGHTS. If, within thirty days following the expiration of the twenty-day period for a written demand, Peoples Bank and any such dissenting stockholder do not agree on the value of his or her shares, the dissenting stockholder may, within four months after the expiration of such thirty-day period for agreement, file a complaint in the District Court of Kansas asking for a finding and determination of the value of such shares. Such dissenting stockholder shall be entitled to judgment for the amount of the fair value as determined by a court-appointed appraiser with interest thereon to the date of such judgment. Any stockholder who demands payment of stock pursuant to Section 17-6712 will not thereafter be - 38 - 48 entitled to vote for any purpose and will not be entitled to dividends or other distributions following the Closing Date, unless the appraisal proceedings are dismissed or such stockholder delivers to the corporation a written withdrawal of objection and acceptance of the Merger. THE PRECEDING DISCUSSION IS A FAIR SUMMARY OF THE PROVISIONS REGARDING DISSENTERS' RIGHTS UNDER THE KANSAS CORPORATION CODE AND IS QUALIFIED IN ITS ENTIRETY BY THE TEXT OF SECTION 17-6712 OF THE KANSAS CORPORATION CODE, WHICH IS ATTACHED HERETO AS ANNEX A. PEOPLES BANK STOCKHOLDERS WHO ARE ------- INTERESTED IN PERFECTING THEIR DISSENTERS' RIGHTS PURSUANT TO SECTION 17-6712 IN CONNECTION WITH THE MERGER MAY WISH TO CONSULT WITH THEIR COUNSEL FOR ADVICE AS TO THE PROCEDURES REQUIRED TO BE FOLLOWED. - 39 - 49 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 Peoples Bank and the corresponding pro forma per share amounts, giving effect to the proposed acquisitions of Peoples Bank and TODAY'S. The data presented is based upon the consolidated financial statements and related notes of MBI and Peoples Bank included in this Joint Proxy Statement/Prospectus or in the documents incorporated herein by reference, TODAY'S consolidated financial statements and related notes 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. Due to the immateriality of the financial condition and results of operations of Sterling, Conway and Metro, individually and in the aggregate, to that of MBI, the table only reflects the acquisitions of Sterling, Metro and Conway from their closing dates forward. The assumptions used in the preparation of this table are set forth in the notes to the pro forma financial information appearing elsewhere in this Joint Proxy Statement/Prospectus.
MBI/ MBI/ PEOPLES BANK/ PEOPLES PEOPLES BANK PEOPLES BANK ALL ENTITIES ALL ENTITIES MBI BANK PRO FORMA PRO FORMA PRO FORMA PRO FORMA REPORTED REPORTED COMBINED EQUIVALENT COMBINED EQUIVALENT -------- -------- ------------- --------------- ------------- --------------- Book Value per Share: March 31, 1996 . . . . . . . . . . . $25.47 $360.09 $25.36 $367.26 $25.27 $365.96 December 31, 1995. . . . . . . . . . 26.04 376.09 25.94 375.66 25.83 374.07 Cash Dividends Declared per Share: Three months ended March 31, 1996. . $ .41 $ 20.00 $ .41 $ 5.94 $ .41 $ 5.94 Year ended December 31, 1995 . . . . 1.32 10.00 1.32 19.11 1.32 19.11 Earnings per Share: Three months ended March 31, 1996. . $ .07 $ 12.27 $ .07 $ 1.01 $ (.05) $ (.72) Year ended December 31, 1995 . . . . 3.74 51.69 3.75 54.31 3.57 51.70 Market Price per Share: At December 19, 1995 . . . . . . $44.375 N/A -- -- -- -- At May 9, 1996 . . . . . . . . . 44.250 N/A -- -- -- -- - -------------------- Includes the effect of pro forma adjustments for Peoples Bank as appropriate. Based on the pro forma combined per share amounts multiplied by 14.4819, the per share exchange ratio applicable to one share of Peoples Bank Common Stock. Further explanation of the assumptions used in the preparation of this pro forma combined consolidated financial statements is included in the notes to pro forma financial statements. Includes the effect of pro forma adjustments for Peoples Bank and TODAY'S, as appropriate. The market value of MBI Common Stock was determined as of the last trading day preceding the public announcement of the proposed Acquisition and as of the latest available date prior to the filing of the Joint Proxy Statement/Prospectus, based on the last sale price as reported on the NYSE Composite Tape. The market values of Peoples Bank Common Stock as of the dates set forth in the table can not be accurately estimated because the last transaction in Peoples Bank Common Stock known to management of Peoples Bank occurred in March 1993.
- 40 - 50 PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma combined consolidated balance sheet gives effect to the proposed acquisitions of Peoples Bank and TODAY'S as if each of the acquisitions had been consummated on March 31, 1996. The following unaudited pro forma combined consolidated income statements for the three months ended March 31, 1996 and for the year ended December 31, 1995 set forth the results of operations of MBI combined with the results of operations of Peoples Bank and TODAY'S as if the acquisitions of Peoples Bank and TODAY'S had occurred as of the first day of the period presented. 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, Peoples Bank and TODAY'S. The historical interim financial information for the three months ended March 31, 1996, used as a basis for the pro forma combined consolidated financial statements, include all necessary adjustments which, in management's opinion, are necessary to present the data fairly. These pro forma combined consolidated financial statements may not be indicative of the results of operations that actually would have occurred if the proposed acquisitions had been consummated on the dates assumed above or of the results of operations that may be achieved in the future. Due to the immateriality of the financial condition and results of operation of Sterling, Conway and Metro, individually and in the aggregate, to that of MBI, the unaudited pro forma combined consolidated financial statements only reflect the acquisitions of Sterling, Metro and Conway from their closing dates forward. - 41 - 51 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (THOUSANDS) (UNAUDITED)
MBI/Peoples Bank All Entities Pro Forma Pro Forma Peoples Peoples Bank Combined TODAY'S Combined MBI Bank Adjustments Consolidated TODAY'S Adjustments Consolidated ------------ ------- --------------- ------------ ------- --------------- ------------ ASSETS Cash and due from banks. . . . . . $ 888,924 $ 2,612 $ (14,670) $ 876,866 $ 15,770 $(52,965) $ 805,386 (34,285) Due from banks-interest bearing. . 77,206 23 77,229 77,229 Federal funds sold and repurchase agreements. . . . . . . . . . . . 245,037 -- 245,037 -- 245,037 Investments in debt and equity securities. . . . . . . . . . . . -- Trading. . . . . . . . . . . . 13,245 -- 13,245 -- 13,245 Available-for-sale . . . . . . 4,307,504 36,757 4,344,261 74,119 4,418,380 Held-to-maturity . . . . . . . -- -- -- 30,780 30,780 ----------- ------- --------- ----------- -------- -------- ----------- Total. . . . . . . . . . . 4,320,749 36,757 -- 4,357,506 104,899 -- 4,462,405 Loans and leases . . . . . . . . . 11,840,242 52,077 11,892,319 368,053 12,260,372 Reserve for possible loan losses . (211,608) (712) (212,320) (3,312) (215,632) ----------- ------- --------- ----------- -------- -------- ----------- Net Loans and Leases . . . . . 11,628,634 51,365 -- 11,679,999 364,741 -- 12,044,740 Other assets . . . . . . . . . . . 741,776 3,228 8,102 751,004 24,259 47,149 815,963 (8,102) (47,149) 6,000 40,700 Total Assets . . . . . . . . . . $17,902,326 $93,985 $ (8,670) $17,987,641 $509,669 $(46,550) $18,450,760 =========== ======= ========= =========== ======== ======== =========== See notes to pro forma combined consolidated financial statements.
- 42 - 52 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (THOUSANDS) (UNAUDITED)
MBI/Peoples Bank All Entities Pro Forma Pro Forma Peoples Peoples Bank Combined TODAY'S Combined MBI Bank Adjustments Consolidated TODAY'S Adjustments Consolidated ------------ ------- --------------- ------------ ------- --------------- ------------ LIABILITIES Deposits Non-interest bearing . . . . . . $ 2,040,285 $ 8,972 $ $ 2,049,257 $ 43,020 $ $ 2,092,277 Interest bearing . . . . . . . . 11,801,245 67,712 11,868,957 394,077 12,263,034 Foreign. . . . . . . . . . . . . 160,478 -- 160,478 -- 160,478 ----------- ------- --------- ----------- -------- -------- ----------- Total Deposits . . . . . . . . 14,002,008 76,684 -- 14,078,692 437,097 -- 14,515,789 Federal funds purchased and repurchase agreements . . 1,220,321 8,261 1,228,582 8,539 1,237,121 Other borrowings . . . . . . . 220,891 400 221,291 12,497 233,788 Other liabilities. . . . . . . 851,219 538 851,757 4,387 856,144 ----------- ------- --------- ----------- -------- -------- ----------- Total Liabilities . . . . . . . 16,294,439 85,883 -- 16,380,322 462,520 -- 16,842,842 SHAREHOLDERS' EQUITY Common stock . . . . . . . . . 316,058 2,250 1,630 317,688 13,714 5,885 323,573 (2,250) (13,714) Capital surplus. . . . . . . . 234,689 2,250 12,472 247,161 6,447 47,679 294,840 (2,250) (6,447) Retained earnings. . . . . . . 1,060,542 3,602 (3,602) 1,060,542 26,988 (26,988) 1,060,542 Treasury stock . . . . . . . . (3,402) -- (14,670) (18,072) -- (52,965) (71,037) ----------- ------- --------- ----------- -------- -------- ----------- Total Shareholders' Equity . . 1,607,887 8,102 (8,670) 1,607,319 47,149 (46,550) 1,607,918 ----------- ------- --------- ----------- -------- -------- ----------- Total Liabilities and Shareholders' Equity. . . . . $17,902,326 $93,985 $ (8,670) $17,987,641 $509,669 $(46,550) $18,450,760 =========== ======= ========= =========== ======== ======== =========== See notes to pro forma combined consolidated financial statements.
- 43 - 53 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1996 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/Peoples Bank All Entities Pro Forma Pro Forma Peoples Peoples Bank Combined TODAY'S Combined MBI Bank Adjustments Consolidated TODAY'S Adjustments Consolidated ------------ ------- --------------- ------------ ------- --------------- ------------ Interest Income. . . . . . . . . . . $ 325,240 $1,832 (183) $ 326,889 $9,755 $ (1,091) $ 335,553 Interest Expense . . . . . . . . . . 155,504 923 156,427 4,955 161,382 ----------- ------ -------- ----------- ------ --------- ----------- Net Interest Income. . . . . . . . 169,736 909 (183) 170,462 4,800 (1,091) 174,171 Provision for Possible Loan Losses . 33,168 -- 33,168 280 33,448 ----------- ------ -------- ----------- ------ --------- ----------- Net Interest Income after Provision for Possible Loan Losses . . . . 136,568 909 (183) 137,294 4,520 (1,091) 140,723 Other Income Trust. . . . . . . . . . . . . . . 19,354 -- 19,354 476 19,830 Service charges. . . . . . . . . . 19,272 106 19,378 420 19,798 Credit card fees . . . . . . . . . 1,449 -- 1,449 -- 1,449 Securities gains (losses). . . . . (2,956) -- (2,956) 7 (2,949) Other. . . . . . . . . . . . . . . 22,165 40 22,205 305 22,510 ----------- ------ -------- ----------- ------ --------- ----------- Total Other Income . . . . . . . 59,284 146 -- 59,430 1,208 -- 60,638 Other Expense Salaries and employee benefits . . 79,256 293 79,549 1,885 81,434 Net occupancy and equipment. . . . 21,316 128 21,444 1,017 22,461 Other. . . . . . . . . . . . . . . 82,198 212 100 82,510 899 10,680 94,089 ----------- ------ -------- ----------- ------ --------- ----------- Total Other Expense. . . . . . . 182,770 633 100 183,503 3,801 10,680 197,984 ----------- ------ -------- ----------- ------ --------- ----------- Income Before Income Taxes . . . 13,082 422 (283) 13,221 1,927 (11,771) 3,377 Income Taxes . . . . . . . . . . . . 8,517 146 (66) 8,597 674 (2,607) 6,664 ----------- ------ -------- ----------- ------ --------- ----------- Net Income . . . . . . . . . . . $ 4,565 $ 276 $ (217) $ 4,624 $1,253 $ (9,164) $ (3,287) =========== ====== ======== =========== ====== ========= =========== Per Share Data Average Common Shares Outstanding. 63,052,401 63,052,401 63,052,401 Net Income . . . . . . . . . . . . $ 0.07 $ 0.07 $ (.05) See notes to pro forma combined consolidated financial statements.
- 44 - 54 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI/Peoples Bank All Entities Pro Forma Pro Forma Peoples Peoples Bank Combined TODAY'S Combined MBI Bank Adjustments Consolidated TODAY'S Adjustments Consolidated ------------ ------- --------------- ------------ ------- --------------- ------------ Interest Income. . . . . . . . . . . $ 1,293,944 $7,086 (734) $ 1,300,296 $39,180 $ (4,362) $ 1,335,114 Interest Expense . . . . . . . . . . 620,534 3,517 624,051 19,775 643,826 ----------- ------ -------- ----------- ------- --------- ----------- Net Interest Income. . . . . . . . 673,410 3,569 (734) 676,245 19,405 (4,362) 691,288 Provision for Possible Loan Losses . 36,530 45 36,575 960 37,535 ----------- ------ -------- ----------- ------- --------- ----------- Net Interest Income after Provision for Possible Loan Losses . . . . 636,880 3,524 (734) 639,670 18,445 (4,362) 653,753 Other Income Trust. . . . . . . . . . . . . . . 70,751 -- 70,751 1,624 72,375 Service charges. . . . . . . . . . 75,408 452 75,860 1,655 77,515 Credit card fees . . . . . . . . . 19,690 -- 19,690 -- 19,690 Securities gains (losses). . . . . 4,042 (14) 4,028 62 4,090 Other. . . . . . . . . . . . . . . 103,762 143 103,905 1,640 105,545 ----------- ------ -------- ----------- ------- --------- ----------- Total Other Income . . . . . . . 273,653 581 274,234 4,981 279,215 Other Expense Salaries and employee benefits . . 298,625 1,148 299,773 7,318 307,091 Net occupancy and equipment. . . . 82,674 576 83,250 3,863 87,113 Other. . . . . . . . . . . . . . . 172,449 590 400 173,439 4,779 12,710 190,928 ----------- ------ -------- ----------- ------- --------- ----------- Total Other Expense. . . . . . . 553,748 2,314 400 556,462 15,960 12,710 585,132 ----------- ------ -------- ----------- ------- --------- ----------- Income Before Income Taxes . . . 356,785 1,791 (1,134) 357,442 7,466 (17,072) 347,836 Income Taxes . . . . . . . . . . . . 124,109 628 (264) 124,473 2,587 (1,430) 125,630 ----------- ------ -------- ----------- ------- --------- ----------- Net Income . . . . . . . . . . . $ 232,676 $1,163 $ (870) $ 232,969 $ 4,879 $ (15,642) $ 222,206 =========== ====== ======== =========== ======= ========= =========== Per Share Data Average Common Shares Outstanding. 61,883,723 61,883,723 61,883,723 Net Income . . . . . . . . . . . . $ 3.74 $ 3.75 $ 3.57 See notes to pro forma combined consolidated financial statements.
- 45 - 55 MERCANTILE BANCORPORATION INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS [FN] Represents MBI restated historical consolidated financial statements reflecting the acquisition of Hawkeye effective January 2, 1996. Such acquisition was accounted for as a pooling-of-interests. The acquisition of Sterling was also accounted for as a pooling-of-interests; however, due to immateriality of the financial condition and results of operations of Sterling to that of MBI, MBI did not restate its historical financial statements to reflect the acquisition of Sterling. Sterling, along with Conway and Metro, are included in these pro forma financial statements only from their acquisition dates forward. The full year impact of these acquisitions are immaterial to the pro forma combined financial statements. The acquisitions of each of Peoples Bank and TODAY'S will be accounted for as a purchase transaction. Purchase price adjustments offset each other or are immaterial. Included herein are the amortization of goodwill over a 15-year period (see footnote below) and the lost interest income on the cash consideration (TODAY'S) and stock buybacks. Also included for TODAY'S is $10,000,000 that MBI expects to record upon closing to conform TODAY'S accounting and credit policies to those of MBI. Goodwill is considered non-deductible and a lower tax rate is used on the conforming charges since some portion of those will be non-deductible. The balance sheet impacts of goodwill amortization, lost interest income and the conforming charges are ignored due to immateriality. In connection with the proposed acquisitions, MBI may repurchase up to 1,503,000 shares of MBI Common Stock in the open market. Assumed price is $45.00 per share. Purchase entry of Peoples Bank with assumed consideration of $14,466,000, consisting of 326,000 shares at $44.375 per share, the closing price for MBI Common Stock on December 19, 1995 (the date of the execution of the Reorganization Agreement). Elimination of MBI's investment in Peoples Bank. Purchase entry of TODAY'S with assumed consideration consisting of 1,177,000 shares at $45.50 per share, plus $34,285,000 in cash. The closing price for MBI Common Stock on March 20, 1996 (the date of the execution of the definitive merger agreement between MBI and TODAY'S) was $45.50. Elimination of MBI's investment in TODAY'S. The pro forma excess of cost over fair value of net assets acquired was $6,000,000 and $40,700,000 as of December 31, 1995 for People's and TODAY'S, respectively. - 46 - 56 INFORMATION REGARDING PEOPLES BANKSHARES AND PEOPLES BANK --------------------------------------------------------- BUSINESS GENERAL. Peoples Bankshares was organized in October 1973 and is a one-bank holding company registered with the Federal Reserve Board under the BHCA. Peoples Bankshares currently owns 88.88% of the issued and outstanding shares of capital stock of Peoples Bank, a Kansas state-chartered bank founded in 1909 which operates from five locations in eastern Kansas. As of March 31, 1996, on a consolidated basis, Peoples Bankshares had assets of $94 million, deposits of $76 million, net loans of $52 million and stockholders' equity of $8 million. Peoples Bank is a full-service community bank that provides a full complement of banking services to its customers, who are primarily individuals and small businesses in Shawnee County, Kansas. Peoples Bank accepts demand, savings and time deposits, makes commercial, agricultural, consumer and real estate loans and provides other customary commercial banking services. COMPETITION. The activities in which Peoples Bank engages are highly competitive and the communities in which it provides services are also served by other banks. Competition among these financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges, the convenience of banking facilities and the quality of services rendered. Peoples Bank believes that it has successfully competed in its marketplace by providing superior service to its customers. Additional competition for depositors' funds may come from a variety of sources, including United States government securities, private issues of debt obligations, mutual funds and suppliers of other investment alternatives. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is an analysis of the consolidated financial condition and the consolidated results of operations of Peoples Bankshares and Peoples Bank as of and for the three months ended March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993. The analysis should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and financial data presented elsewhere in this Joint Proxy Statement/Prospectus. Peoples Bankshares' principal asset is its subsidiary, Peoples Bank. Peoples Bankshares also owned Citizens State Bank, located in Osage City, Kansas, until July 31, 1994. The analysis of the consolidated financial condition of Peoples Bankshares for purposes of comparison between years includes its investment in Citizens as if it were an unconsolidated subsidiary. Accordingly, the average investment in Citizens is included in Other Assets in the average balance sheets as of December 31, 1994 and 1993. On July 31, 1994, Citizens had total assets of $31,263,000 and total stockholders' equity of $2,977,000. On that date, Peoples Bankshares, sold its 91.6% interest in Citizens, resulting in a gain of $1,241,000. For purposes of this analysis, net income of Peoples Bankshares includes its equity in the earnings of Citizens in 1994 and 1993 of $183,000 and $347,000, respectively, as well as its gain on the sale of Citizens in 1994 ($734,000 net of tax). Accordingly, the ratios of return on average equity, return on average assets and average equity to average assets of Peoples Bankshares include its average investment in Citizens and the additional equity and earnings resulting from that investment in 1994 and 1993. - 47 - 57 Except as discussed above, the following financial schedules and related narrative do not address the financial condition and the results of operations of Citizens, but focus on the changes in financial condition and results of operations of Peoples Bank. March 31, 1996 and 1995 RESULTS OF OPERATIONS NET INCOME. Net income for the three months ended March 31, 1996 was $104,000, or $1.07 per share, compared to a loss of $37,000, or $.38 per share, for the three months ended March 31, 1995. The increase in net income was primarily a result of increased net interest income of $103,000, increased noninterest income of $34,000 and decreased noninterest expense of $78,000, which was somewhat offset by an $82,000 increase in income tax expense. NET INTEREST INCOME. Net interest income increased $103,000, or 12.6%, from $815,000 for the three-month period ended March 31, 1995 to $918,000 for the same period in 1996. Interest income increased $269,000 and interest expense increased $166,000 for the three months ended March 31, 1995. The increase in interest income was primarily attributable to an increase in average deposits (offset somewhat by reduced other borrowings). An overall rise in the level of interest rates in the economy also contributed to the increased net interest income. PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the three months ended March 31, 1996, compared to $15,000 for the three months ended March 31, 1995. The provision for loan losses is established based upon management's estimate of the allowance for loan losses required to absorb losses inherent in existing loans and commitments to extend credit. NONINTEREST INCOME. For the three months ended March 31, 1996, deposit service charge income remained stable and other noninterest income increased $18,000, as compared to the three months ended March 31, 1995. This increase included a $20,000 gain resulting from the sale of loans in the secondary market during 1996. There were no gains or losses on sales of investment securities for the three months ended March 31, 1996, compared to losses of $14,000 on sales of investment securities during the three months ended March 31, 1995. OTHER EXPENSES. Compensation and benefits decreased $124,000, or 20.1%, during the three months ended March 31, 1996, as compared to the same period in 1995. This decrease was primarily due to the higher than normal bonuses paid to Peoples Bankshares employees during the three months ended March 31, 1995. Occupancy expense decreased $10,000, or 8.4%, during the three months ended March 31, 1996, as compared to March 31, 1995. The decrease was primarily due to a decrease in depreciation expense of $6,000. Other operating expenses increased $56,000 or 28.6%. Issues related to the pending sale of Peoples Bank led to increased legal, accounting and other expenses of $60,000 during the first quarter of 1996. Also, expenses related to converting the data processing system and purchasing supplies to allow Peoples Bank to provide a check imaging system totaled approximately $32,000. The FDIC insurance assessment, which has been reduced since the Bank Insurance Fund became fully funded, decreased $35,000, which partially offset the specific increases noted. INCOME TAXES. Income tax expense increased $82,000 for the three months ended March 31, 1996 compared to 1995 due to the increased taxable income of $230,000. - 48 - 58 December 31, 1995, 1994 and 1993 RESULTS OF OPERATIONS NET INCOME. Net income of Peoples Bankshares for 1995 was $683,000, or $7.01 per share, compared to $1,439,000, or $14.77 per share, in 1994 and $738,000, or $7.56 per share, in 1993. Net income of Peoples Bankshares' includes its equity in the earnings of Citizens in 1994 and 1993 of $183,000 and $347,000, respectively, as well as its gain on the sale of Citizens of $734,000, net of tax, in 1994. Net income of Peoples Bank for 1995 was $1,163,000, or $51.69 per share, compared to $800,000, or $35.56 per share, in 1994 and $689,000, or $30.62 per share, in 1993. Net income increased $363,000 from 1994 to 1995. The increase in net income from 1993 to 1994 was $111,000. The primary sources of these increases were the asset growth and increased interest rate spread. The following are analyses and comments regarding net interest income, noninterest income and expense and income taxes for the years ended December 31, 1995, 1994 and 1993. These comparisons provide additional details of the increases in net income and include a discussion of the changes between these periods. As noted above, the following financial schedules and related narrative do not address the financial condition and results of operations of Citizens, which was sold on July 31, 1994. NET INTEREST INCOME. The following schedule provides a summary concerning net interest income, average balances and the related interest rates/yields for the past three years. Impaired/nonaccrual loans are included in the interest-earning assets and interest income on such loans is recorded when received. Interest income on loans includes loan fees of $244,000, $266,000 and $243,000 in 1995, 1994 and 1993, respectively. Interest-earning assets includes tax exempt investments and the related income is presented on a tax-equivalent basis assuming a tax rate of 34%. The amount of the tax-equivalent adjustment was $84,000, $93,000 and $96,000 for the years ended December 31, 1995, 1994 and 1993, respectively. - 49 - 59
YEAR ENDED DECEMBER 31 --------------------------------------------------------------------------------------------- 1995 1994 ---------------------------------------------- --------------------------------------------- PERCENT OF INTEREST AVERAGE PERCENT OF INTEREST AVERAGE AVERAGE TOTAL INCOME/ YIELD/ AVERAGE TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE BALANCE ASSETS EXPENSE RATE -------- ---------- -------- ------- ------- ---------- -------- ------- (dollars in thousands) Interest-earning assets: Loans. . . . . . . . . . . . . $ 51,804 56.96% $ 5,025 9.70% $ 47,241 54.21% $ 4,147 8.78% Taxable securities . . . . . . 29,578 32.53 1,868 6.32 28,900 33.16 1,352 4.68 Nontaxable securities. . . . . 2,824 3.11 247 8.75 3,228 3.70 273 8.46 Restricted equity securities . 518 .57 31 5.98 404 .46 23 5.69 Interest-bearing deposits with other banks. . . . . . 26 .03 2 7.69 14 .02 -- -- Federal funds sold . . . . . . 424 .47 25 5.90 402 .46 15 3.73 -------- ------ ------- ----- -------- ------ ------- ----- Total interest-earning assets 85,174 93.67 7,198 8.45 80,189 92.01 5,810 7.25 Noninterest-bearing assets: Cash and due from banks. . . . 2,807 3.09 2,672 3.07 Premises and equipment . . . . 2,037 2.24 2,054 2.36 Accrued interest receivable. . 1,002 1.10 830 .95 Deferred tax asset . . . . . . 157 .17 215 .25 Other assets . . . . . . . . . 87 .10 1,396 1.59 Intangibles. . . . . . . . . . 364 .40 445 .51 Allowance for loan losses. . . (699) (.77) (649) (.74) -------- ------ -------- ------ Total assets . . . . . . . . $ 90,929 100.00% $ 87,152 100.00% ======== ====== ======== ====== Interest-bearing liabilities: NOW accounts . . . . . . . . . $ 7,214 7.93% $ 146 2.02% $ 7,140 8.19% $ 144 2.02% Savings accounts . . . . . . . 5,399 5.94 126 2.33 5,555 6.37 125 2.25 Money market accounts. . . . . 7,841 8.62 254 3.24 8,520 9.78 225 2.64 Time deposits and individual retirement accounts . . . . 39,353 43.28 2,254 5.73 33,563 38.51 1,421 4.23 Short-term borrowings. . . . . 13,241 14.56 732 5.53 14,580 16.73 613 4.20 FHLB long-term debt. . . . . . -- -- -- -- 417 .48 30 7.19 Notes payable. . . . . . . . . -- -- -- -- 1,550 1.78 108 6.97 -------- ------ ------- ----- -------- ------ ------- ----- Total interest-bearing liabilities . . . . . . . . 73,048 80.33 3,512 4.81 71,325 81.84 2,666 3.74 Noninterest-bearing liabilities: Demand deposits. . . . . . . . 9,113 10.02 8,469 9.72 Accrued interest payable . . . 344 .38 326 .37 Accrued income tax payable . . 322 .36 210 .24 Other liabilities. . . . . . . 69 .08 49 .06 -------- ------ -------- ------ Total liabilities. . . . . . 82,896 91.17 80,379 92.23 Minority interest. . . . . . . . 829 .91 743 .85 Stockholders' equity . . . . . . 7,204 7.92 6,030 6.92 -------- ------ -------- ------ Total liabilities and stockholders' equity. . . . $ 90,929 100.00% $ 87,152 100.00% ======== ====== ======== ====== Net interest income. . . . . . . $ 3,686 $ 3,144 ======= ======= Interest rate spread . . . . . . 3.64% 3.51% ==== ==== Net interest margin. . . . . . . 4.33% 3.92% ==== ==== YEAR ENDED DECEMBER 31 ---------------------------------------------- 1993 ---------------------------------------------- PERCENT OF INTEREST AVERAGE AVERAGE TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE -------- ---------- -------- ------- (dollars in thousands) Interest-earning assets: Loans $ 40,705 48.97% $ 3,601 8.85% Taxable securities 29,472 35.45 1,561 5.30 Nontaxable securities 3,451 4.15 283 8.20 Restricted equity securities 253 .30 18 7.11 Interest-bearing deposits with other banks 9 .01 -- -- Federal funds sold 1,271 1.53 44 3.46 -------- ------ ------- ----- Total interest-earning assets 75,161 90.41 5,507 7.33 Noninterest-bearing assets: Cash and due from banks 2,660 3.20 Premises and equipment 1,456 1.75 Accrued interest receivable 883 1.06 Deferred tax asset 113 .14 Other assets 2,873 3.46 Intangibles 577 .69 Allowance for loan losses (588) (.71) -------- ------ Total assets $ 83,135 100.00% ======== ====== Interest-bearing liabilities: NOW accounts $ 5,998 7.21% $ 140 2.33% Savings accounts 4,830 5.81 132 2.73 Money market accounts 8,427 10.14 239 2.84 Time deposits and individual retirement accounts 34,432 41.42 1,491 4.33 Short-term borrowings 12,131 14.59 400 3.30 FHLB long-term debt 1,000 1.20 74 7.40 Notes payable 3,176 3.82 185 5.82 -------- ------ ------- ----- Total interest-bearing liabilities 69,994 84.19 2,661 3.80 Noninterest-bearing liabilities: Demand deposits 6,560 7.89 Accrued interest payable 422 .51 Accrued income tax payable 93 .11 Other liabilities 268 .32 -------- ------ Total liabilities 77,337 93.02 Minority interest 703 .85 Stockholders' equity 5,095 6.13 -------- ------ Total liabilities and stockholders' equity $ 83,135 100.00% ======== ====== Net interest income $ 2,846 ======= Interest rate spread 3.53% ==== Net interest margin 3.79% ====
- 50 - 60 In summary, the above tables indicate the following trends:
DECEMBER 31 ------------------------------ 1995 1994 1993 ------- ------- ------- (dollars in thousands) Average earning assets. . . . . . . . . . . . . $85,174 $80,189 $75,161 Increase from prior year . . . . . . . . . 4,985 5,028 Average interest-bearing liabilities. . . . . . 73,048 71,325 69,994 Increase from prior year . . . . . . . . . 1,723 1,331 Fully taxable equivalent net interest income. . 3,686 3,144 2,846 Increase from prior year . . . . . . . . . 542 298 Net interest margin (net interest income divided by average earning assets) . . . . 4.33% 3.92% 3.79%
The increases in average earning assets and interest-bearing liabilities were mainly a result of normal growth and an improving economy. The improvement in net interest margin illustrates the benefits of a rising interest rate environment nationally and in Peoples Bankshares' primary market. Peoples Bankshares' loan and investment portfolio are fairly short-term which allows them to benefit quickly when interest rates are rising. Net interest income is affected by the volume and rate of both interest-earning assets and interest-bearing liabilities. The following table depicts the dollar effect and rate changes for the different categories of interest-earning assets and interest-bearing liabilities and the resultant change in interest income and interest expense. Nonperforming loans are included with loans in the table.
1995 COMPARED TO 1994 COMPARED TO 1994 INCREASE 1993 INCREASE (DECREASE) DUE TO (DECREASE) DUE TO ------------------------------- ------------------------------- VOLUME RATE COMBINED VOLUME RATE COMBINED ------ -------- -------- ------ -------- -------- (in thousands) Interest earned on: Loans . . . . . . . . . . . . . . . . $ 401 $ 477 $ 878 $ 578 $ (32) $ 546 Taxable securities. . . . . . . . . . 32 484 516 (30) (179) (209) Nontaxable securities . . . . . . . . (34) 8 (26) (18) 8 (10) Restricted equity securities. . . . . 6 2 8 11 (6) 5 Interest-bearing deposits with other banks. . . . . . . . . . 1 1 2 -- -- -- Federal funds sold. . . . . . . . . . 1 9 10 (30) 1 (29) ----- ----- ------ ----- ----- ----- Total interest earning assets. . . . . 407 981 1,388 511 (208) 303 ----- ----- ------ ----- ----- ----- Interest paid on: NOW accounts. . . . . . . . . . . . . 1 1 2 27 (23) 4 Savings accounts. . . . . . . . . . . (4) 5 1 20 (27) (7) Money market deposits . . . . . . . . (18) 47 29 3 (17) (14) Time deposits and individual retirement accounts . . . . . . . . 245 588 833 (38) (32) (70) Short-term borrowings . . . . . . . . (56) 175 119 81 132 213 FHLB long-term debt . . . . . . . . . (30) -- (30) (43) (1) (44) Notes payable . . . . . . . . . . . . (108) -- (108) (95) 18 (77) ----- ----- ------ ----- ----- ----- Total interest-bearing liabilities . . 30 816 846 (45) 50 5 ----- ----- ------ ----- ----- ----- Net interest income. . . . . . . $ 377 $ 165 $ 542 $ 556 $(258) $ 298 ===== ===== ====== ===== ===== ===== - --------------- Changes in interest income and interest expense due to both rate and volume are included in rate variances.
- 51 - 61 During 1995, average interest-earning assets increased $4,985,000. This increase in volume accounted for increased interest income of $407,000. Of this total, $401,000 can be attributed to increased loan volume of $4,563,000. Taxable securities increased $678,000, while nontaxable securities decreased $404,000. Restricted equity securities increased by $114,000, and the combined Federal funds sold and interest-bearing deposits in other banks increased by $34,000. These increases in the volume of average assets were largely due to Peoples Bankshares' effort to expand its construction real estate loan portfolio causing interest income to increase by $407,000, while changes in interest rates on the average volume of interest-earning assets increased interest income $981,000. The increase in interest income associated with higher interest rates reflects the general increase in the level of rates during 1995. The combined effect of the volume and rate changes associated with interest-earning assets increased interest income $1,388,000. Average interest-bearing liabilities increased $1,723,000 during 1995. Average deposits increased $5,029,000 as a result of Peoples Bankshares' effort to increase its deposit base by offering higher interest rates on certificates of deposits and demand deposits with no service charges. Because of the increase in deposits, Peoples Bankshares had less need for borrowings to fund asset growth. Therefore, short-term borrowings, FHLB long-term debt and notes payable combined decreased by $3,306,000. The changes in the volume of deposits led to a $224,000 overall net increase in interest expense while the decrease in borrowings resulted in a decreased interest expense of $194,000. The rising interest rate environment caused an increase in interest expense of $816,000, creating an overall increase in interest expense of $846,000 in 1995 as compared to 1994. The combined or net effect of changes in rate and volume on interest-earning assets and interest-bearing liabilities in 1995 resulted in increased net interest income of $542,000. During 1994, average interest-earning assets increased $5,028,000 and average interest-bearing liabilities increased $1,331,000, resulting in a net increase of $298,000 in net interest income. The most significant change in average assets was an increase in loans of $6,536,000, which was somewhat offset by a decrease in combined federal funds sold and interest-bearing deposits with other banks of $864,000 and a decrease in taxable and nontaxable securities of $795,000. These changes in the mix of average assets and the overall increase in balances resulted in $511,000 in additional interest income; however, reduced yields in all categories, as experienced in the industry, decreased interest income $208,000 for a net overall increase of $303,000. Average interest-bearing deposits increased $1,091,000, while overall borrowings increased $240,000. Because interest rates on deposits were very low, customers tended not to invest in long-term instruments. Therefore, deposits generally moved from longer term time deposits to shorter term, less expensive, demand accounts. In total, volume changes in average interest-bearing liabilities caused a net decrease in expense of $45,000. Increasing rates on Peoples Bankshares' short-term borrowings and notes payable more than offset the effect of declining rates on deposits, resulting in an increase in interest expense of $50,000 due to rate changes. Overall, interest expense increased by $5,000 during 1994. The major influence on the net interest margin or net interest income was the growth in earning assets during both 1995 and 1994 and the increasing interest rate environment experienced in 1995. The increase in interest income of $1,388,000, or 24%, in 1995 was primarily due to the increased yields on loan and investment portfolios. Interest expense increased as interest rates increased on deposits and borrowings used to fund the asset growth. The increase in interest income of $303,000, or 6%, in 1994 was primarily due to growth in the loan portfolio. Overall, interest expense remained relatively stable during 1994. - 52 - 62 PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES. The provision for loan losses results in an allowance against which loan losses are charged as those losses become evident. Management evaluates the appropriate level of the allowance for loan losses on a quarterly basis. The analyses take into consideration the results of an internal analysis, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. A specific portion of the allowance is allocated to those loans which appear to represent a higher than normal exposure to risk. In addition, estimates are made for potential losses on loans not specifically reviewed, based on historical loan loss experience and other factors and trends. Provisions for loan losses of $45,000, $68,000 and $120,000 were recorded by Peoples Bank in 1995, 1994 and 1993, respectively, based on management's evaluation. Factors that influenced management's determination that a provision for loan losses was appropriate included (i) an evaluation of each nonperforming, classified and potential problem loan to ascertain an estimate of loss exposure based upon circumstances then known to management, (ii) current economic conditions and outlook and (iii) an overall review of the loan portfolio in light of past loan loss experience. Net charge-offs (loan losses charged against the allowance for loan losses less recoveries of prior charge-offs) for 1995, 1994 and 1993 were $5,000, $16,000 and $17,000, respectively. NONINTEREST INCOME. A significant portion of a banking institution's earnings are typically generated through noninterest income from fees and service charges. The following tables outline the components of this income source for the years ended December 31, 1995, 1994 and 1993:
YEAR ENDED CHANGE CHANGE DECEMBER 31 1995/1994 1994/1993 ---------------------------- ------------------ ----------------- 1995 1994 1993 AMOUNT PERCENT AMOUNT PERCENT ---- ---- ---- ------ ------- ------ ------- (dollars in thousands) Service charges. . . . . $452 $432 $393 $20 4.63% $39 9.92% Other operating income. . . . . . . 143 120 149 23 19.17 (29) (19.46) ---- ---- ---- --- ------ ---- ------- Subtotal. . . . . . . 595 552 542 43 7.79 10 1.85 Securities gains (losses). . . . . . (14) (8) 5 (6) (75.00) (13) (260.00) ---- --- -- --- --- Total noninterest income. . . . . . . $581 $544 $547 $37 6.80% $(3) (5.48)% ---- ---- ---- --- ------ --- -------
As noted above, noninterest income increased each year due to increased service charges. The growth in service charges was due to the growth in deposit accounts, which provided a majority of this income. The growth in other operating income was primarily due to increased gains on the sale of mortgage loans in the secondary market in 1995. - 53 - 63 OTHER EXPENSES. The following tables outline the components of expenses for the years ended December 31, 1995, 1994 and 1994:
YEAR ENDED CHANGE CHANGE DECEMBER 31 1995/1994 1994/1993 ------------------------------ ------------------- -------------------- 1995 1994 1993 AMOUNT PERCENT AMOUNT PERCENT ---- ---- ---- ------ ------- ------ ------- (dollars in thousands) Compensation and employee benefits . . . . . . $1,626 $1,374 $1,279 $252 18.34% $ 95 7.43% Occupancy expense. . . . . . . . . . . . . . . 494 406 399 88 21.67 7 1.75 FDIC assessment. . . . . . . . . . . . . . . . 75 137 137 (62) (45.26) -- -- Other expenses . . . . . . . . . . . . . . . . 684 691 665 (7) (1.01) 26 3.91 ------ ------ ------ ---- ------ ------- ---- Total noninterest expense $2,879 $2,608 $2,480 $271 10.39% $ 128 5.16% ====== ====== ====== ==== ====== ======= ====
Noninterest expense increased in 1995 due largely to an increase in compensation expense. The increase in compensation expense during 1995 was due to an increase in bonuses for Peoples Bankshares' employees of $205,000 from 1994 to 1995 and due to normal salary and benefits increases. The increase from 1993 to 1994 was primarily due to the opening of an additional branch location in Topeka in the fall of 1993. Occupancy expense remained flat from 1993 to 1994 and increased by $88,000 in 1995. Peoples Bank had accrued additional real estate taxes in years prior to 1994 for the potential payment of real estate taxes on a problem loan because Peoples Bank considered it possible that it would be required to initiate foreclosure proceedings and pay the tax liability. In 1994, the financial condition of the borrower improved and the Bank was able to reverse the accrued real estate taxes resulting in real estate tax expense of $(15,000) for 1994 as compared to an expense of $54,000 for 1995, a net change of $69,000. Without the reversal of the accrued real estate taxes on the problem loan, real estate taxes would have been $52,000 in 1994 and $39,000 in 1993. Real estate taxes increased in 1994 due to the addition of a branch bank. The decrease in the FDIC assessment from 1994 to 1995 relates to the reduction in assessment rates as determined by the FDIC once the Bank Insurance Fund became fully funded in 1995. INCOME TAXES. Peoples Bankshares files a consolidated federal income tax return with Peoples Bank. Peoples Bank makes federal income tax payments to Peoples Bankshares based on the taxable income of Peoples Bank on a stand-alone basis. Deferred income taxes are provided on certain transactions which are reported for financial reporting purposes in different periods than for income tax purposes. - 54 - 64 A reconciliation of expected income tax expense, computed by applying the effective federal statutory rate of 34% to income before the provision for income taxes, follows:
DECEMBER 31 ------------------------------ 1995 1994 1993 ------ ------ ------ (dollars in thousands) Federal income taxes at statutory rate. . . . $428 $312 $237 Less effect of tax exempt income. . . . . . . (53) (59) (61) State taxes, net of Federal income tax benefit . . . . . . . . . . . . . . . . 71 51 43 Other, net. . . . . . . . . . . . . . . . . . 1 4 10 ---- ---- ---- Total provision for income taxes. . . . . . $447 $308 $229 ==== ==== ====
Peoples Bankshares adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, during 1993. The effect of such adoption was not material to the consolidated financial condition or consolidated results of operations. INVESTMENTS. Peoples Bankshares' holdings of short-term investments and scheduled maturities of investment securities serve as a source of liquidity to meet depositor and borrower fund requirements, in addition to constituting a significant element of total interest income. Federal funds sold had outstanding balances of $900,000 and $1,200,000 at December 31, 1995 and 1994, respectively. Investment securities at December 31, 1995 of $37,364,000 increased $8,019,000 as compared to investment securities at December 31, 1994 of $29,345,000. This increase in the balance of investment securities was due primarily to the growth in total assets experienced by Peoples Bank, which was invested principally in mortgage-backed securities. Management invested excess funds primarily in collateral mortgage obligations because they provided a short duration (less than three years) with a slightly higher yield than was available in U.S. Treasuries or agencies. - 55 - 65 SECURITIES PORTFOLIO. The following table presents the composition of investments at the dates indicated:
DECEMBER 31 ------------------------------------------------------------------------ 1995 1994 1993 ----------------------- ---------------------- ----------------------- PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL AMOUNT SECURITIES AMOUNT SECURITIES AMOUNT SECURITIES -------- ---------- -------- ---------- -------- ---------- (dollars in thousands) Held-to-Maturity: U.S. Treasuries and agencies . . . . . . . . $ -- --% $ 8,698 29.65% $ 6,105 17.55% Obligations of states and political subdivisions. . . . . . . . . . -- -- 2,865 9.76 3,575 10.27 Mortgage-backed securities . . . . . . . . . -- -- 5,362 18.27 7,266 20.88 ------- ------ ------- ------ ------- ------ Total investments held-to-maturity . . . . . -- -- 16,925 57.68 16,946 48.70 ------- ------ ------- ------ ------- ------ Available-for-sale: U.S. Treasuries and agencies . . . . . . . . 22,294 59.67 11,783 40.15 15,083 43.35 Obligations of states and political subdivisions. . . . . . . . . . . . . . . 3,321 8.89 -- -- -- -- Mortgage-backed securities . . . . . . . . . 11,222 30.03 118 .40 2,512 7.22 Restricted equity securities . . . . . . . . 527 1.41 519 1.77 253 .73 ------- ------ ------- ------ ------- ------ Total investments available for sale . . . . 37,364 100.00 12,420 42.32 17,848 51.30 ------- ------ ------- ------ ------- ------ Total investments. . . . . . . . . . . . . . $37,364 100.00% $29,345 100.00% $34,794 100.00% ======= ====== ======= ====== ======= ======
The fair market value of total investment securities was $37,364,000, $29,248,000 and $35,223,000 at December 31, 1995, 1994 and 1993, respectively. On December 31, 1993, Peoples Bankshares adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). Restricted equity securities are not included in the SFAS 115 classifications due to the lack of a published market value and certain restrictions that limit their marketability. Such securities are included in the securities totals at cost and labeled as "All other equity securities" for reporting on the Call Report beginning in December 31, 1993. As of December 31, 1995, there were no investment securities of any issuer, other than securities of the U.S. Government and U.S. Government Agencies and corporations, which exceeded 10% of stockholders' equity. - 56 - 66 INVESTMENT SECURITIES-MATURITIES AND YIELDS. The following table shows the components and yields for the various forms of debt securities as of December 31, 1995:
WITHIN OVER 1-5 OVER 5-10 OVER 10 ONE YEAR YEARS YEARS YEARS ------------------- ------------------- ------------------ --------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- (dollars in thousands) U.S. Treasuries and agencies . . . . . . $6,065 6.53% $16,229 6.13% $ -- --% $ -- --% Obligations of states and other political subdivisions. . . . . . 325 8.30 2,303 8.59 693 9.48 -- -- Mortgage-backed securities . . . . . -- -- 3,772 6.26 303 9.07 7,147 6.53 ------ ---- ------- ---- ---- ---- ------ ---- $6,390 6.62% $22,304 6.41% $996 9.36% $7,147 6.53% ====== ==== ======== ==== ==== ==== ====== ==== - ---------------------- Yield presented on a tax-equivalent basis assuming a tax rate of 34%. Expected maturities will differ from contractual maturities due to normal amortization and because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The table above does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
Restricted equity securities of $527,000 held at December 31, 1995 are not included in this table as an equity security has no stated maturity. LOANS. The loan portfolio constitutes the major earning asset of most bank holding companies and typically offers the best alternative for obtaining the maximum interest spread above the cost of funds. The overall economic strength of any bank holding company generally parallels the quality and yield of its loan portfolio. Peoples Bankshares' total loans outstanding on the dates indicated are presented in the following table:
DECEMBER 31 ------------------------------------------------------------------- 1995 1994 1993 ------------------- ------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT (dollars in thousands) Agricultural . . . . . . . . . . . . . . . . $ 6,052 11.41% $ 6,184 12.84% $ 6,130 14.57% Commercial and industrial. . . . . . . . . . . . . . 11,937 22.51 9,870 20.50 10,288 24.46 Real estate Construction. . . . . . . . . . . . . . . 5,906 11.14 4,111 8.54 2,836 6.74 Agricultural. . . . . . . . . . . . . . . 1,970 3.71 2,365 4.91 2,110 5.02 Commercial. . . . . . . . . . . . . . . . 5,745 10.83 5,419 11.25 4,682 11.13 Residential . . . . . . . . . . . . . . . 15,497 29.22 14,973 31.10 11,223 26.68 Consumer . . . . . . . . . . . . . . . . . . 5,356 10.10 4,587 9.53 4,023 9.56 Other. . . . . . . . . . . . . . . . . . . . 575 1.08 643 1.33 772 1.84 ------- ------ ------- ------ ------- ------ $53,038 100.00% $48,152 100.00% $42,064 100.00% ======= ====== ======= ====== ======= ======
The loan portfolio experienced an increase of $4,886,000, or 10.1%, from December 31, 1994 to December 31, 1995, primarily in real estate and commercial loans. An increase of $6,088,000, or 14.5%, from 1993 to 1994 was experienced primarily in real estate loans, due to a strong local real estate sector. A portion of the increase in real estate loans was due to the opening of an additional Peoples Bank branch location in North Topeka in the fall of 1993. This branch positioned Peoples Bank closer to the areas in Topeka with the largest growth of new real estate activity. To take advantage of this opportunity, Peoples Bankshares concentrated on increasing its construction real estate portfolio during 1994. - 57 - 67 MATURITY CLASSES. The following tables set forth the maturity composition and interest sensitivity of total loans at December 31, 1995:
AGRICULTURAL, COMMERCIAL REAL REAL AND ESTATE ESTATE INDUSTRIAL CONSTRUCTION OTHER CONSUMER OTHER TOTAL ------------- ------------ ------ -------- ----- ----- (in thousands) In one year or less. . . . . . . . . . . . . $10,107 $5,827 $ 3,661 $ 550 $316 $20,461 After one through five years. . . . . . . . . . . . . . . . 5,105 79 4,994 4,243 52 14,473 After five years . . . . . . . . . . . . . . 2,777 -- 14,557 563 207 18,104 ------- ------ ------- ------ ---- ------- $17,989 $5,906 $23,212 $5,356 $575 $53,038 ======= ====== ======= ====== ==== =======
INTEREST SENSITIVITY FIXED RATE VARIABLE RATE ---------- ------------- (in thousands) In one year or less. . . . . . . . . . $12,350 $ 8,111 After one through five years . . . . . 9,119 5,354 After five years . . . . . . . . . . . 7,112 10,992 ------- ------- Total Loans $28,581 $24,457 ======= ======= - ------------------- Certain variable rate loans have reached a floor or ceiling interest rate level and can no longer adjust. These loans are treated as fixed rate loans as required by the Consolidated Reports of Condition and Income.
NONPERFORMING ASSETS. Nonperforming assets are defined as impaired loans, nonaccrual loans, loans delinquent ninety or more days, restructured loans and foreclosed assets. Such assets do not necessarily represent future losses to Peoples Bankshares since underlying collateral can be sold and the financial condition of the borrowers may improve. The following table sets forth the detail of nonperforming assets. Peoples Bankshares had no restructured loans at the following dates.
DECEMBER 31 ------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Impaired loans . . . . . . . . . . . . . $118 $ -- $ -- Nonaccrual loans . . . . . . . . . . . . -- 169 222 Loans past due 90 days or more . . . . . 4 6 21 ---- ---- ---- Total nonperforming loans. . . . . . $122 $175 $243 Foreclosed property. . . . . . . . . . . -- -- 38 ---- ---- ---- Total nonperforming assets . . . . . $122 $175 $281 ==== ==== ====
Effective January 1, 1995, Peoples Bankshares implemented Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"), and Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures ("SFAS 118"), which amends SFAS 114. SFAS 114 (as amended) defines the recognition criteria for loan impairment and the measurement methods for certain impaired loans and loans for which terms have been modified in troubled-debt restructurings (restructured loans). Specifically, a loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due - both principal and interest - according to - 58 - 68 the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are required to be discounted at the loan's effective interest rate. Alternatively, impairment can be measured by reference to an observable market price, if one exists, or to the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, SFAS 114 requires a creditor to measure impairment based on the fair value of the collateral when the creditor determines foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. Peoples Bankshares has elected to continue to use its existing nonaccrual methods for recognizing interest on impaired loans. Peoples Bankshares continues to apply all payments received on impaired loans to the outstanding balance of the loan until such a time as the loan balance is reduced to zero, after which time payments are applied to interest income until such time as the foregone interest is recovered, or until such time as an improvement in the condition of the loan has occurred which would warrant the resumption of interest accruals. Peoples Bankshares' policy is to discontinue accruing interest on loans when principal or interest is due and remains unpaid for ninety days or more, unless the loan is well secured and in the process of collection. Peoples Bankshares would have recorded additional interest income of approximately $11,000, $13,000 and $14,000 for 1995, 1994 and 1993, respectively, if contractual interest on these loans had been recognized. No interest was actually collected in 1995, 1994 or 1993. At December 31, 1995, 1994 and 1993, there were no significant commitments to lend additional funds to borrowers whose loans were considered nonperforming. The loan portfolio does not include any loans to foreign countries or highly leveraged transaction loans. Approximately 40% of the loans at Peoples Bankshares on December 31, 1995 were residential real estate loans. Commercial loans to individuals and businesses in the local lending area represented 33% of the loans. The remaining 27% consisted largely of agricultural and consumer lending. Peoples Bankshares has adopted policies that require security for loans, including liens on residential mortgage loans and certain of the other loans secured by real estate. In addition, policies and procedures are in place to assess the creditworthiness of borrowers for all loans and commitments. Borrowers' abilities to honor their loan contracts can be largely dependent upon weather conditions and economic conditions within their market areas and on a national level. Management attributes the lack of significant nonperforming assets to a relatively stable economy in its primary market, strong efforts in the credit review of potential borrowers and close monitoring of potential problem loans. - 59 - 69 The following table sets forth the activity for loan losses and selected financial ratios for the dates indicated:
December 31 ----------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Balance at beginning of period . . . . . . . . $673 $621 $518 ---- ---- ---- Loans charged off: Agricultural. . . . . . . . . . . . . . . . -- -- -- Commercial and industrial . . . . . . . . . -- -- 4 Residential real estate-mortgage. . . . . . 5 12 6 Consumer. . . . . . . . . . . . . . . . . . 3 4 9 ---- ---- ---- Total charge-offs. . . . . . . . . . . . . . . 8 16 19 ---- ---- ---- Recoveries: Agricultural. . . . . . . . . . . . . . . . -- -- -- Commercial and industrial . . . . . . . . . -- -- -- Residential real estate-mortgage. . . . . . 3 -- -- Consumer. . . . . . . . . . . . . . . . . . -- -- 2 ---- ---- ---- Total recoveries . . . . . . . . . . . . . . . 3 -- 2 ---- ---- ---- Net loans recovered (charged off). . . . . . (5) (16) (17) Provision for loan losses. . . . . . . . . . . 45 68 120 ---- ---- ---- Balance at end of period . . . . . . . . . . . $713 $673 $621 ==== ==== ==== Net loan charge-offs to average loans . . . . . . . . . . . . . . .01% .03% .04% Allowance to total loans . . . . . . . . . . . 1.34 1.40 1.48 Allowance to nonperforming loans . . . . . . . 584 385 256
The allowance for loan losses is not allocated to specific categories of loans. However, based on Peoples Bankshares' review of remaining collateral and/or financial condition of identified loans with characteristically more than a normal degree of risk, historical loan loss percentages, and economic conditions, management believes the allowance for loan losses at December 31, 1995 is adequate to cover losses inherent in the portfolio. DEPOSITS. The deposit base provides the major funding source for interest-earning assets of most bank holding companies. Peoples Bankshares' deposits have increased steadily during the period from December 31, 1993 to December 31, 1995. Generally, demand, savings and certificates of deposit less than $100,000 are recognized as the core base of deposits, while certificates of deposit of $100,000 or more and public funds are more interest rate sensitive and, thus, are not considered part of the core deposit base. Because of these factors, management views the growth in deposits other than certificates of deposit of $100,000 or more as more stable growth. - 60 - 70 The following table indicates the mix and average levels of deposits and the average interest rates for each category of deposits for the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993:
MARCH 31 DECEMBER 31 ------------------ ----------------------------------------------------------------- 1996 1995 1994 1993 ------------------ ------------------ ----------------- ------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE ------- ------- ------- ------- ------- ------- ------- ------- (dollars in thousands) Demand and other noninterest bearing. . . . . . . . . $ 9,027 n/a% $ 9,113 n/a% $ 8,469 n/a% $ 6,560 n/a% NOW accounts . . . . . . . . . . . . . 7,919 2.02 7,214 2.02 7,140 2.02 5,998 2.33 Savings accounts . . . . . . . . . . . 5,259 2.28 5,399 2.33 5,555 2.25 4,830 2.73 Money market deposit accounts. . . . . 11,376 3.73 7,841 3.24 8,520 2.64 8,427 2.84 Certificates of deposit including individual retirement accounts . . . 42,388 5.84 39,353 5.73 33,563 4.23 34,432 4.33 ------- ---- ------- ---- ------- ---- ------- ---- Total deposits. . . . . . . . . . . $75,969 4.19% $68,920 4.03% $63,247 3.03% $60,247 3.32% ======= ==== ======= ==== ======= ==== ======= ====
AMOUNT AND MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE. The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 1995:
DECEMBER 31 PERCENT OF 1995 TOTAL ---------- ---------- (dollars in thousands) Three months or less. . . . . . . . . . . $ 305 7.43% Over three through six months . . . . . . 912 22.21 Over six through twelve months. . . . . . 2,251 54.82 Over twelve months. . . . . . . . . . . . 638 15.54 ------ ------ Total . . . . . . . . . . . . . . . . $4,106 100.00% ====== ======
SHORT-TERM BORROWINGS. Amounts and interest rates related to short-term borrowings at the dates indicated were as follows:
MARCH 31 DECEMBER 31 -------- ------------------------------------------- 1996 1995 1994 1993 ---- ---- ---- ---- (dollars in thousands) Federal funds purchased and securities sold under agreements to repurchase: Outstanding balance at period-end . . . . . . . $ 8,261 $10,188 $10,448 $12,355 Average interest rate at period-end . . . . . . 5.01% 4.84% 5.52% 3.11% Average outstanding during the period . . . . . $ 9,889 $12,002 $13,459 $12,131 Year-to-date average interest rate. . . . . . . 4.81% 5.46% 4.09% 3.30% Highest outstanding balance at any month-end. . $13,066 $14,343 $16,294 $19,128 Federal Home Loan Bank advances: Outstanding balance at period-end . . . . . . . $ 400 $ 3,950 $ 2,000 $ -- Average interest rate at period-end . . . . . . 5.90% 6.15% 6.65% --% Average outstanding during the period . . . . . $ 345 $ 1,239 $ 1,121 $ -- Year-to-date average interest rate. . . . . . . 5.82% 6.21% 5.53% --% Highest outstanding balance at any month-end. . $ 400 $ 3,950 $ 3,150 $ --
- 61 - 71 RETURN ON EQUITY AND ASSETS. The following tables compare net income as a percent of average assets and average equity for the dates indicated:
RETURN ON AVERAGE ASSETS RETURN ON AVERAGE EQUITY ------------------------------------------ ------------------------------------------- MARCH 31 DECEMBER 31 MARCH 31 DECEMBER 31 -------- ---------------------------- -------- ----------------------------- 1996 1995 1994 1993 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- Net income . . . . . . . . . .43% .75% 1.43% .67% 5.21% 9.48% 23.86% 14.48%
As discussed previously, these ratios include the financial condition and results of operations of Peoples Bankshares investment in Citizens for 1994 and 1993. During the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, no dividends were declared by Peoples Bankshares. LIQUIDITY AND INTEREST RATE SENSITIVITY. Liquidity is the measure of Peoples Bankshares' ability to meet its customers' present and future deposit withdrawals or increased loan demand without unduly penalizing earnings. Interest rate sensitivity involves the relationship between rate sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on Peoples Bankshares' net interest income. Peoples Bankshares manages both liquidity and interest sensitivity through a GAP analysis report prepared monthly. Liquidity is provided for Peoples Bankshares by projecting credit demand and other financial needs and then maintaining sufficient cash and assets readily convertible into cash to meet these projected requirements. Peoples Bankshares provided for its liquidity needs through core deposits, maturing loans and scheduled maturities of investments in securities, and by maintaining adequate balances in Federal funds sold. Other sources of liquidity include federal funds purchased and other short-term borrowings. At December 31, 1995, cash and cash equivalents amounted to $3,710,000, or 3.79%, of total assets. This is a decrease of $271,000 from December 31, 1994, when cash and cash equivalents totaled $3,981,000, or 4.65%, of total assets. This level of cash and cash equivalents is considered to be adequate in view of projected liquidity needs. Peoples Bankshares' liquidity is generally provided by dividends received from Peoples Bank. These funds are available for the overhead expenses and the payment of dividends to stockholders. Dividends paid by Peoples Bank during 1995, 1994 and 1993 were $225,000, $350,000 and $350,000, of which 88.88% was received by Peoples Bankshares. Interest rate-sensitive assets and liabilities are those with yields or rates subject to change within a future time period due to maturity or changes in market rates. An ongoing objective of Peoples Bankshares' asset/liability management program is to match rate-adjustable assets and liabilities at similar maturity horizons, so that changes in interest rates will not result in wide fluctuations in net interest income. The rate sensitivity position is managed by matching funds acquired having a specific maturity with loans, securities or other liquid assets with similar maturities. At December 31, 1995, $32,303,000, or 60.9%, of the loan portfolio matured or repriced in one year or less. In addition, investment securities maturing or repricing in one year or less of $13,806,000, Federal funds sold of $900,000 and interest-bearing deposits of $75,000 bring total rate-sensitive assets maturing or repricing within one year to $47,084,000, or 51.9%, of total - 62 - 72 interest-earning assets. Rate sensitive liabilities consist of interest- bearing demand deposits, savings deposits, and time deposits maturing or repricing within one year of $56,135,000 and short-term borrowings of $14,138,000, bringing total rate-sensitive liabilities maturing or repricing within one year to $70,273,000, or 89.5%, of interest-bearing liabilities. This represented a position which management believed appropriate, given the decreasing interest rate environment expected at December 31, 1995. CAPITAL. The strength of its capital position determines the ability of a financial institution to take advantage of growth opportunities and handle unforeseen financial difficulties. Peoples Bankshares' stockholders' equity at December 31, 1995 was $8,060,000, an increase of $1,170,000, or 17%, from the December 31, 1994 total of $6,890,000. Stockholders' equity includes Peoples Bankshares' equity in Peoples Bank's unrealized gain (loss) on investment securities available for sale of $369,000 and $(118,000) at December 31, 1995 and 1994, respectively. The average equity to average assets ratios for the years ended December 31, 1995, 1994 and 1993, respectively, were 7.92%, 6.92% and 6.13%. As discussed previously, this ratio includes the financial condition of Peoples Bankshares' investment in Citizens for 1994 and 1993. At March 31, 1996, stockholders' equity was $7,999,000, which includes Peoples Bankshares' equity in Peoples Bank's unrealized gain on investment securities available-for-sale of $204,000. The average equity to average assets ratio at March 31, 1996 was 8.35%. Peoples Bankshares is subject to the issuance of capital adequacy guidelines by its regulators, all of which have issued similar guidelines for the measurement of capital adequacy. One measure is the leverage capital ratio, which equals the ratio of ending total capital less intangible assets to average total assets on a quarterly basis from the latest Consolidated Reports of Income and Condition ("Call Report") less intangible assets. The guidelines also include a definition of capital and provide a framework for calculating risk-weighted assets by assigning assets and off-balance-sheet instruments to broad risk categories. The risk-based capital standards establish a minimum ratio of total capital to risk-weighted assets with a minimum of 4% when using Tier 1 capital and a minimum of 8% when including total capital. Tier 1 capital is the sum of the core capital elements (common stockholders' equity less intangible assets and excluding any unrealized gains or losses on available-for-sale securities). Total capital includes the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets. - 63 - 73 As the following table indicates, Peoples Bankshares exceeded the minimum risk-based and leverage ratios at the date indicated:
DECEMBER 31 MINIMUM 1995 LEVELS ----------- ------- (dollars in thousands) Capital Components: Tier 1 capital . . . . . . . . . $ 7,367 n/a Total capital. . . . . . . . . . 8,068 n/a Assets: Risk-weighted assets and off-balance-sheet instruments. $56,073 n/a Capital ratios Leverage . . . . . . . . . . . . 7.65% 3.00% Tier 1 risk-based capital. . . . 13.14 4.00 Total risk-based capital . . . . 14.39 8.00
- 64 - 74 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PEOPLES BANKSHARES The following table sets forth as of the Record Date the number of shares of Peoples Bankshares Common Stock beneficially owned and the percentage of ownership of outstanding shares of Peoples Bankshares Common Stock by (a) each director of Peoples Bankshares, (b) each person who is known by Peoples Bankshares to own beneficially 5% or more of such stock and (c) all directors and executive officers of Peoples Bankshares as a group:
SHARES BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER ADDRESS OWNED CLASS - ------------------------ ------- ------------ ---------- Ronald D. Lutz . . . . . . . . . 1935 S.W. Indian Woods Lane Topeka, Kansas 66611 40,004 41% Joyce M. Lutz. . . . . . . . . . 1935 S.W. Indian Woods Lane Topeka, Kansas 66611 40,004 41 Michael W. Lutz. . . . . . . . . 6142 S.W. 38th Terrace Topeka, Kansas 66610 6,952 7 Craig E. Lutz. . . . . . . . . . 3835 S.W. Stonybrook Drive Topeka, Kansas 66610 5,020 5 Laurie L. Carney . . . . . . . . 2415 N. Vinegate Court Wichita, Kansas 67226 5,475 6 Directors and Executive Officers 97,455 100 as a Group (five persons) - ------------------------------ Five thousand (5,000) of these shares are held by Bank IV Kansas, N.A., Trustee, 534 Kansas Avenue, P.O. Box 88, Topeka, Kansas 66601, pursuant to the Ronald D. and Joyce M. Lutz Irrevocable Trust for the Benefit of the Lutz Children ("the Trust"). The terms of the Trust provide that Michael W. Lutz holds sole voting power for the shares so held. Five thousand (5,000) of these shares are held by Bank IV Kansas, N.A., Trustee, 534 Kansas Avenue, P.O. Box 88, Topeka, Kansas 66601, pursuant to the Ronald D. and Joyce M. Lutz Irrevocable Trust for the Benefit of the Lutz Children ("the Trust"). The terms of the Trust provide that Craig E. Lutz holds sole voting power for the shares so held. Five thousand (5,000) of these shares are held by Bank IV Kansas, N.A., Trustee, 534 Kansas Avenue, P.O. Box 88, Topeka, Kansas 66601, pursuant to the Ronald D. and Joyce M. Lutz Irrevocable Trust for the Benefit of the Lutz Children ("the Trust"). The terms of the Trust provide that Laurie L. Carney holds sole voting power for the shares so held.
For purposes of the above table, a person is deemed to be a beneficial owner of shares of Peoples Bankshares Common Stock if the person has or shares the power to vote or to dispose of such shares. Unless otherwise indicated in the footnotes, each person has sole voting and investment power with respect to shares shown in the table as beneficially owned by such person and disclaims beneficial ownership in shares described in the footnotes as being "held by" other persons. - 65 - 75 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PEOPLES BANK The following table sets forth as of the Record Date the number of shares of Peoples Bank Common Stock beneficially owned and the percentage of ownership of outstanding shares of Peoples Bank Common Stock by (a) each director of Peoples Bank, (b) each person who is known by Peoples Bank to own beneficially 5% or more of such stock and (c) all directors and executive officers of Peoples Bank as a group:
SHARES BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER ADDRESS OWNED CLASS - ------------------------ ------- ------------ ---------- Peoples State Bankshares, Inc. . 1080 S.W. Wanamaker Topeka, Kansas 66604 19,997 89% Dennis Hatfield. . . . . . . . . P.O. Box 434 Rossville, Kansas 66533 100 James F. Stallbaumer . . . . . . P.O. Box 446 Rossville, Kansas 66533 100 Wilbur E. Levering . . . . . . . 2018 S.W. Urish Road Topeka, Kansas 66615 75 Richard K. Fieger. . . . . . . . 7922 S.W. Huntoon Topeka, Kansas 66615 5 Ronald J. Francis. . . . . . . . 38 Peppertree Lane Topeka, Kansas 66611 5 Ronald D. Lutz . . . . . . . . . 1935 S.W. Indian Woods Lane Topeka, Kansas 66611 -- -- Joyce M. Lutz. . . . . . . . . . 1935 S.W. Indian Woods Lane Topeka, Kansas 66611 -- -- Michael W. Lutz. . . . . . . . . 6142 S.W. 38th Terrace Topeka, Kansas 66610 -- -- Craig E. Lutz. . . . . . . . . . 3835 S.W. Stonybrook Drive Topeka, Kansas 66610 -- -- Directors and Executive Officers as a Group (nine persons) 285 1 - ------------------------------------ Less than 1 percent.
For purposes of the above table, a person is deemed to be a beneficial owner of shares of Peoples Bank Common Stock if the person has or shares the power to vote or to dispose of such shares. Unless otherwise indicated in the footnotes, each person has sole voting and investment power with respect to shares shown in the table as beneficially owned by such person and disclaims beneficial ownership in shares described in the footnotes as being "held by" other persons. - 66 - 76 INFORMATION REGARDING MBI COMMON STOCK -------------------------------------- DESCRIPTION OF MBI COMMON STOCK AND ATTACHED PREFERRED SHARE PURCHASE RIGHTS GENERAL. MBI has authorized 5,000,000 shares of MBI Preferred Stock, no par value, and 100,000,000 shares of MBI Common Stock, $5.00 par value. At March 31, 1996, MBI had no shares of MBI Preferred Stock issued and outstanding and 63,124,053 shares of MBI Common Stock outstanding. Under Missouri law, MBI's Board of Directors may generally approve the issuance of authorized shares of Preferred Stock and Common Stock without shareholder approval. MBI's Board of Directors is also authorized to fix the number of shares and determine the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any series of MBI Preferred Stock. Except for the designation and reservation of Series A Junior Preferred Stock pursuant to MBI's Preferred Share Purchase Rights Plan described below, MBI's Board of Directors has not acted to designate or issue any shares of MBI Preferred Stock. The existence of a substantial number of unissued and unreserved shares of MBI Common Stock and undesignated shares of MBI Preferred Stock may enable the Board of Directors to issue shares to such persons and in such manner as may be deemed to have an anti-takeover effect. The following summary of the terms of MBI's capital stock does not purport to be complete and is qualified in its entirety by reference to the applicable provisions of MBI's Restated Articles of Incorporation and By-Laws and Missouri law. DIVIDENDS. The holders of MBI Common Stock are entitled to share ratably in dividends when, as and if declared by the Board of Directors from funds legally available therefor, after full cumulative dividends have been paid or declared, and funds sufficient for the payment thereof set apart, on all series of MBI Preferred Stock ranking superior as to dividends to MBI Common Stock. The Board of Directors of MBI intends to maintain its present policy of paying quarterly cash dividends on MBI Common Stock, when justified by the financial condition of MBI and its subsidiaries. The declaration and amount of future dividends will depend on circumstances existing at the time, including MBI's earnings, financial condition and capital requirements as well as regulatory limitations, note and indenture provisions and such other factors as the Board of Directors may deem relevant. The payment of dividends to MBI by subsidiary banks is subject to extensive regulation by various state and federal regulatory agencies. See "SUPERVISION AND REGULATION." VOTING RIGHTS. Each holder of MBI Common Stock has one vote for each share held on matters presented for consideration by the shareholders, except that, in the election of directors, each shareholder has cumulative voting rights which entitle such shareholder to the number of votes which equals the number of shares held by the shareholder multiplied by the number of directors to be elected. All such votes may be cast for one candidate for election as a director or may be distributed among two or more candidates. PREEMPTIVE RIGHTS. The holders of MBI Common Stock have no preemptive right to acquire any additional unissued shares or treasury shares of MBI. 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 - 67 - 77 liabilities (or after adequate provision is made therefor) and after preferences on any outstanding MBI Preferred Stock. ASSESSMENT AND REDEMPTION. Shares of MBI Common Stock are and will be, when issued, fully paid and nonassessable. Such shares do not have any redemption provisions. PREFERRED SHARE PURCHASE RIGHTS PLAN. One preferred share purchase right (a "Right") is attached to each share of MBI Common Stock. The Rights trade automatically with shares of MBI Common Stock, and become exercisable and will trade separately from the MBI Common Stock on the tenth day after public announcement that a person or group has acquired, or has the right to acquire, beneficial ownership of 20% or more of the outstanding shares of MBI Common Stock, or upon commencement or announcement of intent to make a tender offer for 20% or more of the outstanding shares of MBI Common Stock, in either case without prior written consent of the Board. When exercisable, each Right will entitle the holder to buy 1/100 of a share of MBI Series A Junior Participating Preferred Stock at an exercise price of $100.00 per Right. In the event a person or group acquires beneficial ownership of 20% or more of MBI Common Stock, holders of Rights (other than the acquiring person or group) may purchase MBI Common Stock having a market value of twice the then current exercise price of each Right. If MBI is acquired by any person or group after the Rights become exercisable, each Right will entitle its holder to purchase stock of the acquiring company having a market value of twice the current exercise price of each Right. The Rights are designed to protect the interests of MBI and its shareholders against coercive takeover tactics. The purpose of the Rights is to encourage potential acquirors to negotiate with MBI's Board of Directors prior to attempting a takeover and to give the Board leverage in negotiating on behalf of all shareholders the terms of any proposed takeover. The Rights may deter certain takeover proposals. The Rights, which can be redeemed by MBI's Board of Directors in certain circumstances, expire by their terms on June 3, 1998. CLASSIFICATION OF BOARD OF DIRECTORS. The Board of Directors of MBI is divided into three classes, and the directors are elected by classes to three-year terms, so that one of the three classes of the directors of MBI will be elected at each annual meeting of the shareholders. While this provision promotes stability and continuity of the Board of Directors, classification of the Board of Directors may also have the effect of decreasing the number of directors that could otherwise be elected at each annual meeting of shareholders by a person who obtains a controlling interest in the MBI Common Stock and thereby could impede a change in control of MBI. Because fewer directors will be elected at each annual meeting, such classification also will reduce the effectiveness of cumulative voting as a means of establishing or increasing minority representation on the Board of Directors. OTHER MATTERS. MBI's Restated Articles of Incorporation and By-Laws also contain provisions which: (i) require the affirmative vote of holders of at least 75% of the voting power of all of the shares of outstanding capital stock of MBI entitled to vote in the election of directors to remove a director or directors without cause; (ii) require the affirmative vote of the holders of at least 75% of the voting power of all shares of the outstanding capital stock of MBI to approve certain "business combinations" with "interested parties" unless at least two-thirds of the Board of Directors first approves such business combinations; and (iii) require an affirmative vote of at least 75% of the voting power of all shares of the outstanding capital stock of MBI for the amendment, alteration, change or repeal of any of the above provisions unless at least two-thirds of the Board of Directors first approves such an amendment, alteration, change or repeal. Such provisions may be deemed to have an anti-takeover effect. - 68 - 78 RESTRICTIONS ON RESALE OF MBI COMMON STOCK BY AFFILIATES Under Rule 145 of the Securities Act of 1933 (the "Securities Act"), certain persons who receive MBI Common Stock pursuant to the Acquisition and who are deemed to be "affiliates" of Peoples Bankshares or Peoples Bank will be limited in their right to resell the stock so received. The term "affiliate" is defined to include any person who, directly or indirectly, controls, or is controlled by, or is under common control with Peoples Bankshares or Peoples Bank at the time the Acquisition is submitted to a vote of the stockholders of Peoples Bankshares or Peoples Bank. Each affiliate of Peoples Bankshares or Peoples Bank (generally any director or executive officer or a stockholder of Peoples Bankshares or Peoples Bank who beneficially owns a substantial number of outstanding shares of Peoples Bankshares or Peoples Bank Common Stock) who desires to resell the MBI Common Stock received in the Acquisition 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 Acquisition pursuant to certain of the requirements of Rule 144 under the Securities Act if such stock is sold within the first two years after the receipt thereof. After two years if such person is not an affiliate of MBI and if MBI is current with respect to its required public filings, a former affiliate of Peoples Bankshares or Peoples Bank may freely resell the stock received in the Acquisition without limitation. After three years from the issuance of the stock, if such person is not an affiliate of MBI at the time of sale and for at least three months prior to such sale, such person may freely resell such stock, without limitation, regardless of the status of MBI's required public filings. The shares of MBI Common Stock to be received by affiliates of Peoples Bankshares or Peoples Bank in the Acquisition will be legended as to the restrictions imposed upon resale of such stock. COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF MBI AND THE RIGHTS OF STOCKHOLDERS OF PEOPLES BANKSHARES AND PEOPLES BANK MBI is incorporated under the laws of the State of Missouri. Peoples Bankshares and Peoples Bank are incorporated and chartered, respectively, under the laws of the State of Kansas. The rights of the shareholders of MBI are governed by its Restated Articles of Incorporation and By-Laws and The General and Business Corporation Law of Missouri (the "Missouri Act"). The rights of the stockholders of Peoples Bankshares are governed by its Articles of Incorporation, its By-Laws and the Kansas Corporation Code. The rights of the stockholders of Peoples Bank are governed by its Restated Articles of Incorporation, its By-Laws and the Kansas Banking Code. The rights of Peoples Bank and Peoples Bankshares stockholders who receive shares of MBI Common Stock in the Acquisition will thereafter be governed by MBI's Restated Articles of Incorporation and By-Laws and by the Missouri Act. The material rights of the MBI shareholders, and, where applicable, the differences between the rights of MBI shareholders and the rights of Peoples Bankshares or Peoples Bank stockholders, are summarized below. PREFERRED SHARE PURCHASE RIGHTS PLAN. As described above under "- Preferred Share Purchase Rights Plan," MBI Common Stock has attached Rights, which may deter certain takeover proposals. Neither Peoples Bankshares nor Peoples Bank has a rights plan. SUPERMAJORITY PROVISIONS. MBI's Restated Articles of Incorporation and By-Laws contain provisions requiring a supermajority vote of the shareholders of MBI to approve certain proposals. Under both MBI's Restated Articles and By-Laws, removal by the shareholders of the entire Board of Directors or any individual director from office without cause requires the affirmative vote of not less than 75% of the total votes entitled to be voted at a meeting of shareholders called for the election of directors. - 69 - 79 Amendment by the shareholders of MBI's Restated Articles or By-Laws relating to (i) the number or qualification of directors; (ii) the classification of the Board of Directors; (iii) the filling of vacancies on the Board of Directors; or (iv) the removal of directors, requires the affirmative vote of not less than 75% of the total votes of MBI's then outstanding shares of capital stock entitled to vote, voting together as a single class, unless such amendment has previously been expressly approved by at least two-thirds of the Board of Directors. The Restated Articles of MBI additionally provide that, in addition to any shareholder vote required under the Missouri Act, the affirmative vote of the holders of not less than 75% of the total votes to which all of the then outstanding shares of capital stock of MBI are entitled, voting together as a single class (the "Voting Stock"), shall be required for the approval of any Business Combination. A "Business Combination" is defined generally to include sales, exchanges, leases, transfers or other dispositions of assets, mergers or consolidations, issuances of securities, liquidations or dissolutions of MBI, reclassifications of securities or recapitalizations of MBI, involving MBI on the one hand, and an Interested Shareholder or an affiliate of an Interested Shareholder on the other hand. An "Interested Shareholder" is defined generally to include any person, firm, corporation or other entity which is the beneficial owner of 5% or more of the voting power of the outstanding Voting Stock. If, however, at least two-thirds of the Board of Directors of MBI approve the Business Combination, such Business Combination shall require only the vote of shareholders as provided by Missouri law or otherwise. The amendment of the provisions of MBI's Restated Articles relating to the approval of Business Combinations requires the affirmative vote of the holders of at least 75% of the Voting Stock unless such amendment has previously been approved by at least two-thirds of the Board of Directors. To the extent that a potential acquiror's strategy depends on the passage of proposals which require a supermajority vote of MBI's shareholders, such provisions requiring a supermajority vote may have the effect of discouraging takeover attempts that do not have Board approval by making passage of such proposals more difficult Under Peoples Bankshares' Articles of Incorporation, a supermajority vote is required to approve any settlement between Peoples Bankshares and its stockholders in the event of receivership or dissolution. A supermajority vote of Peoples Bankshares' stockholders is not required as to any other item. Neither Peoples Bank's Restated Articles nor its By-Laws require a supermajority vote as to any item. VOTING FOR DIRECTORS. MBI's By-Laws provide for cumulative voting in the election of directors. Cumulative voting entitles each shareholder to cast an aggregate number of votes equal to the number of voting shares held, multiplied by the number of directors to be elected. Each shareholder may cast all such votes for one nominee or distribute them among two or more nominees, thus permitting holders of less than a majority of the outstanding shares of voting stock to achieve board representation. Both Peoples Bankshares' and Peoples Bank's By-Laws also provide for cumulative voting. CLASSIFIED BOARD. As described under "- Classification of Board of Directors," the Board of Directors of MBI is divided into three classes of directors, with each class being elected to a staggered three-year term. By reducing the number of directors to be elected in any given year, the existence of a classified Board diminishes the benefits of the cumulative voting rights to minority shareholders. Neither Peoples Bankshares Articles of Incorporation or By-Laws nor Peoples Bank's Restated Articles of Incorporation or By-Laws provide for classified Boards of Directors. ANTI-TAKEOVER STATUTES. The Missouri Act contains certain provisions applicable to Missouri corporations such as MBI which may be deemed to have an anti-takeover effect. Such provisions include Missouri's business combination statute and the control share acquisition statute. The Missouri business combination statute protects domestic corporations after hostile takeovers by prohibiting certain transactions once an acquiror has gained control. The statute restricts - 70 - 80 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" is approved by the Board of Directors of the corporation. Business Combinations may occur during such five-year period if: (i) prior to the stock acquisition by the Interested Shareholder, the Board of Directors approves the transaction in which the Interested Shareholder became an Interested Shareholder or approves the Business Combination in question; (ii) the holders of a majority of the outstanding voting stock, other than stock owned by the Interested Shareholder, approve the Business Combination; or (iii) the Business Combination satisfies certain detailed fairness and procedural requirements. The Missouri Act exempts from its provisions: (i) corporations not having a class of voting stock registered under Section 12 of the Exchange Act; (ii) corporations which adopt provisions in their articles of incorporation or bylaws expressly electing not to be covered by the statute; and (iii) certain circumstances in which a shareholder inadvertently becomes an Interested Shareholder. Neither MBI's Restated Articles of Incorporation and By-Laws nor Security Bank's Articles of Incorporation and By-Laws "opt out" of the Missouri business combination statute. The Missouri Act also contains a "Control Share Acquisition Statute" which restricts the voting power of any "Acquiring Person" who acquires "Control Shares," shares which have the voting power to exercise or direct the exercise of: (i) one-fifth to one-third (ii) one-third to a majority or (iii) a majority of the outstanding stock of the corporation, when added to all shares of the same corporation owned or controlled by the same person. In order to acquire the same voting rights as were accorded the Control Shares prior to the Control Share Acquisition, an Acquiring Person must comply with certain disclosure requirements and obtain the approval of both: (i) a majority of the outstanding voting shares and (ii) a majority of the outstanding voting shares excluding Interested Shares. Interested Shares are defined as shares owned by either the Acquiring Person or directors who are also employees of the corporation or officers of the corporation. Shareholders are given dissenters' rights with respect to any vote on a Control Share Acquisition 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 of shares by the corporation, mergers involving the corporation which satisfy the other requirements of the Missouri Act, transactions with a person who owned a majority of the voting power of the corporation within the prior year, or purchases from a person who has previously satisfied the provisions of the Control Share Acquisition Statute, so long as the transaction does not result in the purchasing party having voting power after the purchase in a percentage range (such ranges are as set forth in the immediately preceding paragraph) beyond the range for which the selling party previously satisfied the provisions of the statute. Additionally, a corporation may exempt itself from application of the statute by inserting a provision in its articles of incorporation or bylaws expressly electing not to be covered by the statute. MBI's Restated Articles of Incorporation and By-Laws do not "opt out" of the Control Share Acquisition Statute. Neither the Kansas Corporation Code nor the Kansas Banking Code contain similar anti-takeover statutes. - 71 - 81 DISSENTERS' RIGHTS. Under Section 351.455 of the Missouri Act, a shareholder of any corporation which is a party to a merger or consolidation, or which sells all or substantially all of its assets, has the right to dissent from such corporate action and to demand payment of the value of such shares. Under Section 17-6712 of the Kansas Corporation Code, stockholders of Peoples Bank are entitled to dissenters' rights upon the consolidation or merger of Peoples Bank which are similar but not identical to those under the Missouri Act. Specifically, under Section 17-6712, a corporation must send notice of a consummation of merger or consolidation within ten days of the consummation to all dissenters who have timely filed a written objection. In addition, several of the time periods during which dissenters must act to preserve their rights under Section 17-6712 are more lengthy than under the Missouri Act. The Kansas Corporation Code does not provide dissenters' rights to a stockholder of a corporation that sells all or substantially all of its assets. Therefore, the stockholders of Peoples Bankshares are not entitled to dissenters' rights in the Exchange. SHAREHOLDERS' RIGHT TO INSPECT. Under Section 351.215 of the Missouri Act, any MBI shareholder may inspect the corporation's books and records for any reasonable and proper purpose. Such inspection may be made at all proper times, subject to regulations as may be prescribed by the By-laws of MBI. Under Section 9-805 of the Kansas Banking Code, any Peoples Bank stockholder may inspect the books and records of Peoples Bank during the business hours of Peoples Bank. Under Section 17-6510 of the Kansas Corporation Code, any Peoples Bankshares stockholder, in person or by attorney or other agent if accompanied by a power of attorney or similar authorization, upon written demand under oath stating the purpose thereof, may inspect for any proper purpose Peoples Bankshares' books and records and make copies or extracts therefrom during the usual hours of business. 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 twelve nor more than twenty-four 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 twelve members. The supermajority vote required for the amendment of MBI's By-Laws regarding a change in the number of directors may have the effect of making it more difficult to force an immediate change in the composition of a majority of the Board of Directors and may be deemed to have an anti-takeover effect. Peoples Bankshares' Articles of Incorporation provide that the number of directors on the Board of Directors shall be not less than one nor more than eight. Currently, Peoples Bankshares has five directors. Peoples Bank's By-Laws provide that the number of directors on the Board of Directors shall be determined by the stockholders at each annual meeting of Peoples Bank, but shall not be fewer than five nor more than twenty-five. Currently, Peoples Bank has nine directors. SUPERVISION AND REGULATION -------------------------- GENERAL As a bank holding company, MBI is subject to regulation under the BHCA and its examination and reporting requirements. Under the BHCA, a bank holding company may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank or savings and loan association, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. - 72 - 82 As a savings and loan holding company, MBI is also subject to regulatory oversight by the Office of Thrift Supervision (the "OTS"). As such, MBI is required to register and file reports with the OTS and is subject to regulation by the OTS. In addition, the OTS has enforcement authority over MBI which permits the OTS to restrict or prohibit activities that are determined to be a serious risk to its subsidiary savings association. MBI and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of MBI's subsidiaries, and therefore the earnings of MBI, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board, the OTS, the FDIC, the Office of the Comptroller of the Currency (the "Comptroller") and 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 any one of the holding company or such nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to the holding company and all such nonbank subsidiaries in the aggregate, to 20% of such capital stock and surplus. PAYMENT OF DIVIDENDS MBI is a legal entity separate and distinct from its wholly owned 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 the affiliate financial institutions can pay to MBI without regulatory approval. The approval of the appropriate federal or state bank regulatory agencies is required for any dividend if the total of all dividends declared by the bank in any calendar year would exceed the total of the institutions 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 may also 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 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, financial institutions and financial institution holding companies are required to maintain capital to support off-balance sheet activities such as loan commitments. - 73 - 83 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." The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), adopted in August 1989 to provide for the resolution of insolvent savings associations, required the FDIC to establish separate deposit insurance funds -- the Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for savings associations. FIRREA also required the FDIC to set deposit insurance assessments at such levels as would cause BIF and SAIF to reach their "designated reserve ratios" of 1.25 percent of the deposits insured by them within a reasonable period of time. Due to low costs of resolving bank insolvencies in the last few years, BIF reached its designated reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC eliminated deposit insurance assessments (except for the minimum $2,000 payment required by law) for banks that are well capitalized and well managed and reduced the deposit insurance assessments for all other banks. The balance in SAIF is not expected to reach the designated reserve ratio until about the year 2002, as FIRREA provides that a significant portion of the costs of resolving past insolvencies of savings associations must be paid from this source. Currently, SAIF-member institutions pay deposit insurance premiums based on a schedule of from $.23 to $.31 per $100.00 of deposits. Accordingly, it is likely that the SAIF rates will be substantially higher than the BIF rates in the future. MBI, which has acquired substantial amounts of SAIF-insured deposits during the years from 1989 to the present, is required to pay SAIF deposit insurance premiums on these SAIF-insured deposits. Bills have recently been proposed by the U. S. Congress to recapitalize the SAIF through a one-time special assessment of approximately 85 basis points on the amount of deposits held by the institution. If such special assessment occurs, it is expected that the deposit premiums paid by SAIF-member institutions would be reduced to approximately $.04 for every $100.00 of deposits and would have the effect of immediately reducing the capital of SAIF-member institutions by the amount of the fee. MBI cannot predict whether the special assessment proposal will be enacted, or, if enacted, the amount of any one-time fee, or whether ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums. If the one-time assessment is not enacted, it is presently expected that the SAIF deposit premiums will continue at their present rate. PROPOSALS TO OVERHAUL THE SAVINGS ASSOCIATION INDUSTRY Proposals recently have been introduced in the U.S. Congress that, if adopted, would overhaul the savings association industry. The most significant of these proposals would recapitalize the SAIF through a one-time special assessment (see "- FDIC Insurance Assessments"), spread the Financing Corp., or FICO, Bond obligation across the BIF and SAIF, merge the Comptroller and the OTS, abolish the federal savings association charter, require federal thrifts to convert to commercial banks and merge the SAIF and the BIF. MBI cannot predict whether these or any other legislative proposals will be enacted, or, if enacted, the final form of the law. - 74 - 84 SUPPORT OF SUBSIDIARY BANKS Under Federal Reserve Board policy, MBI is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each of the subsidiaries in circumstances where it might not choose to do so absent such a policy. This support may be required at times when MBI may not find itself able to provide it. In addition, any capital loans by MBI to any of its subsidiaries would also be subordinate in right of payment to deposits and certain other indebtedness of such subsidiary. Consistent with this policy regarding bank holding companies serving as a source of financial strength for their subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the bank holding company's capital needs, asset quality and overall financial condition. FIRREA AND FDICIA FIRREA contains a cross-guarantee provision which could result in insured depository institutions owned by MBI being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by MBI. Under FIRREA, failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") made extensive changes to the federal banking laws. FDICIA instituted certain changes to the supervisory process, including provisions that mandate certain regulatory agency actions against undercapitalized institutions within specified time limits. FDICIA contains various other provisions that may affect the operations of banks and savings institutions. The prompt corrective action provision of FDICIA requires the federal banking regulators to assign each insured institution to one of five capital categories ("well capitalized," "adequately capitalized" or one of three "undercapitalized" categories) and to take progressively more restrictive actions based on the capital categorization, as specified below. Under FDICIA, capital requirements would include a leverage limit, a risk-based capital requirement and any other measure of capital deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any relevant capital measure. The FDIC and the Federal Reserve Board adopted capital-related regulations under FDICIA. Under those regulations, a bank will be well capitalized if it: (i) had a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier 1 capital to adjusted total assets of 5% or greater; and (iv) was not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An association will be adequately capitalized if it was not "well capitalized" and: (i) had a risk-based capital ratio of 8% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted assets of 4% or greater; and (iii) had a ratio of Tier 1 capital to adjusted total assets of 4% or greater (except that certain associations rated "Composite 1" under the federal banking agencies' CAMEL rating - 75 - 85 system may be adequately capitalized if their ratios of core capital to adjusted total assets were 3% or greater). FDICIA also makes extensive changes in existing rules regarding audits, examinations and accounting. It generally requires annual on-site, full scope examinations by each bank's primary federal regulator. It also imposes new responsibilities on management, the independent audit committee and outside accountants to develop or approve reports regarding the effectiveness of internal controls, legal compliance and off-balance sheet liabilities and assets. DEPOSITOR PREFERENCE STATUTE Legislation enacted in August 1993 provides a preference for deposits and certain claims for administrative expenses and employee compensation against an insured depository institution, in the liquidation or other resolution of such an institution by any receiver. Such obligations would be afforded priority over other general unsecured claims against such an institution, including federal funds and letters of credit, as well as any obligation to shareholders of such an institution in their capacity as such. THE INTERSTATE BANKING AND COMMUNITY DEVELOPMENT LEGISLATION In September 1994, legislation was enacted that is expected to have a significant effect in restructuring the banking industry in the United States. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") facilitates the interstate expansion and consolidation of banking organizations by permitting (i) bank holding companies that are adequately capitalized and managed, one year after enactment of the legislation, to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or to "opt out" of this authority before that date, (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) foreign banks to establish, with approval of the regulators in the United States, branches outside their home states to the same extent that national or state banks located in the home state would be authorized to do so, and (v) banks to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state. One effect of Riegle-Neal will be to permit MBI to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Missouri. Overall, Riegle-Neal is likely to have the effects of increasing competition and promoting geographic diversification in the banking industry. RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS ----------------------------------------- KPMG Peat Marwick LLP served as MBI's independent accountants for the year ended December 31, 1995 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements, review and consultation regarding filings with the Securities and Exchange Commission and other regulatory authorities and consultation on financial accounting and reporting matters. GRA, Thompson, White & Co., P.C. served as Peoples Bankshares' and Peoples Bank's independent accountants for the year ended December 31, 1995 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated - 76 - 86 financial statements, review and consultation regarding filings with regulatory authorities and consultation on financial accounting and reporting matters. LEGAL MATTERS ------------- Certain legal matters will be passed upon for MBI by Thompson Coburn, St. Louis, Missouri and for Peoples Bankshares and Peoples Bank by Stinson, Mag & Fizzell, P.C., Kansas City, Missouri. EXPERTS ------- The consolidated financial statements of MBI as of December 31, 1995, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1995, incorporated by reference in MBI's Annual Report on Form 10-K, and the supplemental consolidated financial statements of MBI as of December 31, 1995, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1995, contained in MBI's Current Report on Form 8-K dated March 11, 1996, have been incorporated by reference herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, which reports are also incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Peoples Bankshares and the financial statements of Peoples Bank as of and for the year ended December 31, 1995 included herein have been audited by GRA, Thompson, White, & Co., P.C., independent certified public accountants, as indicated in their report with respect thereto and are included herein in reliance and upon the authority of said firm as experts in accounting and auditing. OTHER MATTERS ------------- The Boards of Directors of Peoples Bankshares and Peoples Bank, at the date hereof, are not aware of any business to be presented at the Special Meetings other than that referred to in the notices of the Special Meetings and discussed herein. If any other matter should properly come before either 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 Peoples Bankshares or Peoples Bank. SHAREHOLDER PROPOSALS --------------------- If the Acquisition is approved, the other conditions to the Acquisition are satisfied and the Acquisition is consummated, Peoples Bankshares and the other stockholders of Peoples Bank will become shareholders of MBI at the Effective Time. Shareholders of MBI may submit to MBI proposals for formal consideration at the 1997 Annual Meeting of Shareholders of MBI and inclusion in MBI's proxy statement for such meeting. All such proposals must be received in writing by Jon W. Bilstrom, General Counsel and Secretary, at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by November 22, 1996. - 77 - 87 FINANCIAL STATEMENTS INDEX ----- Page ---- PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------- INDEPENDENT AUDITORS' REPORT F-1 CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND DECEMBER 31, 1994 (UNAUDITED) F-2 CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 AND 1993 (UNAUDITED) F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 AND 1993 (UNAUDITED) F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 AND 1993 (UNAUDITED) F-5 to F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-20 CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1995 F-21 CONSOLIDATING STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 F-22 PEOPLES STATE BANK FINANCIAL STATEMENTS - --------------------------------------- INDEPENDENT AUDITORS' REPORT F-23 BALANCE SHEETS AS OF MARCH 31, 1996 (UNAUDITED), DECEMBER 31, 1995 AND DECEMBER 31, 1994 (UNAUDITED) F-24 - 78 - 88 STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 AND 1993 (UNAUDITED) F-25 STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 AND 1993 (UNAUDITED) F-26 STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 AND 1993 (UNAUDITED) F-27 to F-28 NOTES TO FINANCIAL STATEMENTS F-29 to F-41 - 79 - 89 [Letterhead of GRA, Thompson, White & Co., P.C.] INDEPENDENT AUDITORS' REPORT The Board of Directors Peoples State Bankshares, Inc. Topeka, Kansas We have audited the accompanying consolidated balance sheet of Peoples State Bankshares, Inc. and subsidiary as of December 31, 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples State Bankshares, Inc. and subsidiary as of December 31, 1995 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information included in Schedules 1 and 2 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual entities. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly presented in all material respects in relation to the consolidated financial statements taken as a whole. /s/ GRA, Thompson, White & Co., P.C. Merriam, Kansas March 27, 1996 F-1 90 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, ------------- ---------------------------- 1996 1995 1994 ------------- ------------- ------------- ( unaudited ) ( unaudited ) Assets (In thousands) Cash and due from banks. . . . . . . . . . . . . . . $ 2,612 $ 3,710 $ 3,981 Interest bearing deposits. . . . . . . . . . . . . . 23 75 10 Federal funds sold . . . . . . . . . . . . . . . . . - 900 1,200 Available-for-sale securities. . . . . . . . . . . . 36,222 36,837 11,901 Held-to-maturity securities. . . . . . . . . . . . . - - 16,925 Restricted equity securities . . . . . . . . . . . . 535 527 519 Loans receivable, net. . . . . . . . . . . . . . . . 51,625 52,325 47,479 Premises and equipment . . . . . . . . . . . . . . . 1,938 1,970 2,081 Accrued interest receivable. . . . . . . . . . . . . 995 1,132 864 Core deposit intangible. . . . . . . . . . . . . . . 304 324 405 Deferred tax asset . . . . . . . . . . . . . . . . . - - 246 Other assets . . . . . . . . . . . . . . . . . . . . 52 60 45 ------------- ------------ ------------- $ 94,306 $ 97,860 $ 85,656 ============= ============ ============= Liabilities and Stockholders' Equity Liabilities Deposits . . . . . . . . . . . . . . . . . . . . . $ 76,285 $ 74,130 $ 64,836 Other borrowings . . . . . . . . . . . . . . . . . 8,661 14,138 12,448 Accrued interest payable . . . . . . . . . . . . . 342 420 239 Deferred tax liability . . . . . . . . . . . . . . 5 129 - Other liabilities. . . . . . . . . . . . . . . . . 110 38 464 ------------- ------------ ------------- Total liabilities . . . . . . . . . . . . . . . 85,403 88,855 77,987 ------------- ------------ ------------- Commitments and contingencies Minority interest. . . . . . . . . . . . . . . . . . 904 945 779 ------------- ------------ ------------- Stockholders' equity Common stock, $1 par value; 100,000 shares authorized, 97,455 shares issued and outstanding 100 100 100 Additional paid-in capital . . . . . . . . . . . . 107 107 107 Retained earnings. . . . . . . . . . . . . . . . . 7,763 7,659 6,976 Net unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . . . . . . . 204 369 (118) ------------- ------------ ------------- 8,174 8,235 7,065 Less treasury stock, 2,545 shares, at cost . . . . 175 175 175 ------------- ------------ ------------- Total stockholders' equity. . . . . . . . . . . 7,999 8,060 6,890 ------------- ------------ ------------- $ 94,306 $ 97,860 $ 85,656 ============= ============ ============= The accompanying notes are an integral part of these consolidated financial statements
F-2 91 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------------------------------------ 1996 1995 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) INTEREST INCOME (In thousands) Loans, including fees. . . . . . . . . $ 1,243 $ 1,117 $ 5,025 $ 4,857 $ 4,791 Investments. . . . . . . . . . . . . . 586 449 2,062 1,983 2,598 Federal funds sold and interest bearing deposits . . . . . 8 2 27 20 61 ------------ ------------ ------------ ------------ ------------ 1,837 1,568 7,114 6,860 7,450 ------------ ------------ ------------ ------------ ------------ INTEREST EXPENSE Deposits . . . . . . . . . . . . . . . 795 558 2,780 2,346 2,773 Other borrowings . . . . . . . . . . . 124 195 732 781 726 ------------ ------------ ------------ ------------ ------------ 919 753 3,512 3,127 3,499 ------------ ------------ ------------ ------------ ------------ Net interest income . . . . . . . . 918 815 3,602 3,733 3,951 PROVISION FOR LOAN LOSSES. . . . . . . . - 15 45 97 144 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses. . . . . 918 800 3,557 3,636 3,807 ------------ ------------ ------------ ------------ ------------ OTHER INCOME Service charges. . . . . . . . . . . . 106 104 452 532 560 Net securities losses. . . . . . . . . - (14) (14) (3) (1) Gain on sale of subsidiary . . . . . . - - - 1,241 - Other. . . . . . . . . . . . . . . . . 40 22 143 116 149 ------------ ------------ ------------ ------------ ------------ 146 112 581 1,886 708 ------------ ------------ ------------ ------------ ------------ OTHER EXPENSES Salaries and employee benefits . . . . 493 617 1,626 1,592 1,643 Occupancy. . . . . . . . . . . . . . . 109 119 494 474 521 Data processing. . . . . . . . . . . . 32 32 137 118 112 Federal deposit insurance premium. . . 1 36 75 170 194 Amortization of deposit purchase premium. . . . . . . . . . . . . . . 20 20 81 81 81 Other. . . . . . . . . . . . . . . . . 199 108 466 651 734 ------------ ------------ ------------ ------------ ------------ 854 932 2,879 3,086 3,285 ------------ ------------ ------------ ------------ ------------ Earnings before income taxes and minority interest . . . . . . . . 210 (20) 1,259 2,436 1,230 INCOME TAX EXPENSE . . . . . . . . . . . 75 (7) 447 891 383 ------------ ------------ ------------ ------------ ------------ Earnings before minority interest. 135 (13) 812 1,545 847 MINORITY INTEREST. . . . . . . . . . . . (31) (24) (129) (106) (109) ------------ ------------ ------------ ------------ ------------ NET EARNINGS . . . . . . . . . . . . . . $ 104 $ (37) $ 683 $ 1,439 $ 738 ============ ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements
F-3 92 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED GAIN (LOSS) ON ADDITIONAL AVAILABLE- COMMON PAID-IN RETAINED FOR-SALE TREASURY STOCK CAPITAL EARNINGS SECURITIES STOCK TOTAL ---------- ----------- ---------- ------------ ---------- ----------- (In thousands) BALANCE AT DECEMBER 31, 1992 (UNAUDITED). . . . . . . . . . . $ 100 $ 107 $ 4,799 $ - $ (51) $ 4,955 Net earnings . . . . . . . . . . . - - 738 - - 738 Purchase of 1,820 Shares, at cost. . . . . . . . . - - - - (124) (124) Initial adoption of SFAS No. 115 . . . . . . . . . . - - - 39 - 39 ---------- ---------- ---------- ----------- --------- ---------- BALANCE AT DECEMBER 31, 1993 (UNAUDITED). . . . . . . . . . . 100 107 5,537 39 (175) 5,608 Net earnings . . . . . . . . . . . - - 1,439 - - 1,439 Net change . . . . . . . . . . . . - - - (157) - (157) ---------- ---------- ---------- ----------- --------- ---------- BALANCE AT DECEMBER 31, 1994 (UNAUDITED). . . . . . . . . . . 100 107 6,976 (118) (175) 6,890 Net earnings . . . . . . . . . . . - - 683 - - 683 Net change . . . . . . . . . . . . - - - 487 - 487 ---------- ---------- ---------- ----------- --------- ---------- BALANCE AT DECEMBER 31, 1995. . . . . . . . $ 100 $ 107 $ 7,659 $ 369 $ (175) $ 8,060 Net earnings . . . . . . . . . . . - - 104 - 104 Net change . . . . . . . . . . . . - - - (165) - (165) ---------- ---------- ---------- ----------- --------- ---------- BALANCE AT MARCH 31, 1996 (UNAUDITED). . . . . . . . . . . $ 100 $ 107 $ 7,763 $ 204 $ (175) $ 7,999 ========== ========== ========== =========== ========= ========== The accompanying notes are an integral part of these consolidated financial statements
F-4 93 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------------------------------------ 1996 1995 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES (In thousands) Net earnings . . . . . . . . . . . . . . . . . . . . . $ 104 $ (37) $ 683 $ 1,439 $ 738 Adjustments to reconcile net earnings to net cash. . . provided by operating activities: Provision for loan losses . . . . . . . . . . . . . - 15 45 97 144 Gain on sale of subsidiary bank - - - (1,241) - Net charge-offs and losses on other real estate owned - - - 23 17 Gains on sales of available-for-sale securities . . - - - (8) (8) Losses on sales of available-for-sale securities. . - 14 14 11 11 Amortization of premiums on securities. . . . . . . 7 7 36 137 182 Accretion of discounts on securities. . . . . . . . (29) (3) (23) (25) (25) Depreciation and amortization expense . . . . . . . 39 45 185 196 202 Amortization of deposit purchase premium. . . . . . 20 20 81 81 81 Gains on sales of loans . . . . . . . . . . . . . . (20) - (45) - - Proceeds from loans sold. . . . . . . . . . . . . . 1,476 - 4,343 - - Originations of loans sold. . . . . . . . . . . . . (1,456) - 4,298 - - Change in: Accrued interest receivable. . . . . . . . . . . . 137 (34) (268) (48) 60 Other assets . . . . . . . . . . . . . . . . . . . 8 (48) (15) 72 (119) Accrued interest payable . . . . . . . . . . . . . (78) 23 181 (129) (110) Other liabilities. . . . . . . . . . . . . . . . . 72 (393) (426) 318 (74) Deferred taxes . . . . . . . . . . . . . . . . . . - 1 9 - (52) Minority interest. . . . . . . . . . . . . . . . . (20) (1) 105 47 50 ---------- ----------- ---------- ----------- ----------- Net cash provided (used) by operating activities. 260 (391) 607 970 1,097 ---------- ----------- ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated, net of principal collections. . . . . . . . . . . . . . . . . . . . . 700 (2,092) (4,894) (7,143) (3,130) Proceeds from maturities of held-tomaturity securities - 945 3,764 4,850 8,032 Proceeds from sales and maturities of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . 2,278 2,983 9,977 12,953 234 Purchases of held-to-maturity securities . . . . . . . - (1,998) (6,129) (3,693) (18,622) Purchases of available-for-sale securities . . . . . . (1,951) (999) (14,736) (6,017) (990) Purchase of restricted equity securities . . . . . . . (8) - (8) (266) 15 Net change in securities purchased under an agreement to resell. . . . . . . . . . . . . . . . . . . . . . - - - - 7,766 Net additions to premises and equipment. . . . . . . . (7) (27) (74) (223) (1,297) Proceeds from sales of other real estate owned . . . . - - - 15 1 Recoveries of loans previously charged off . . . . . . - - 3 - 11 Net change in Federal funds sold . . . . . . . . . . . 900 1,100 300 (2,100) 1,300 Net change in interest bearing deposits. . . . . . . . 52 (12) (65) - (10) Proceeds from sale of subsidiary bank, including taxes paid . . . . . . . . . . . . . . . . - - - 3,989 - ---------- ----------- ---------- ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES, CARRIED FORWARD. . . . . . . . . . . . . . . . . . . . $ 1,964 $ (100) $ (11,862) $ 2,365 $ (6,690) ---------- ----------- ---------- ----------- -----------
F-5 94 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------------------------------------ 1996 1995 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) (In thousands) NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES, BROUGHT FORWARD. . . . . . . . . . . . . . . . . . . . $ 1,964 $ (100) $ (11,862) $ 2,365 $ 6,690 ---------- ----------- ---------- ----------- ----------- Net cash provided (used) by operating and investing activities . . . . . . . . . . . . . . 2,224 (491) (11,255) 3,335 (5,593) ---------- ----------- ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in non-interest bearing and interest bearing demand and savings accounts. . . . . . . . . 2,778 (1,983) 960 (6,969) 3,024 Net change in time deposits. . . . . . . . . . . . . . (623) 1,667 8,334 12,076 3,574 Increase (decrease) in other borrowings. . . . . . . . (5,477) (343) 1,690 (5,305) 3,597 Purchase of treasury stock . . . . . . . . . . . . . . - - - - (124) ---------- ----------- ---------- ----------- ----------- Net cash provided (used) by financing activities. (3,322) (659) 10,984 (198) 2,923 ---------- ----------- ---------- ----------- ----------- (Decrease) increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . (1,098) (1,150) (271) 3,137 (2,670) Cash and equivalents sold during the period. . . . . . . - - - (2,073) - Cash and cash equivalents, beginning of period . . . . . 3,710 3,981 3,981 2,897 5,567 ---------- ----------- ---------- ----------- ----------- Cash and cash equivalents, end of period . . . . . . . . $ 2,612 $ 2,831 $ 3,710 $ 3,981 $ 2,897 ========== =========== ========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest . . . . . . . $ 997 $ 730 $ 3,331 $ 3,323 $ 3,609 ========== =========== ========== =========== =========== Cash paid during the period for income taxes . . . . . $ - $ - $ 877 $ 433 $ 628 ========== =========== ========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Designation of investment securities as available-for- sale at adoption of SFAS No. 115, at amortized cost . . . . . . . . . . . . . . . . . $ - $ - $ - $ - $ 16,693 ========== =========== ========== =========== =========== Transfer of available-for-sale securities to held-to- maturity at amortized cost, net . . . . . . . . . . $ - $ - $ 19,290 $ - $ - ========== =========== ========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements
F-6 95 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 (AUDITED), 1994 AND 1993 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Peoples State Bankshares, Inc. and subsidiary are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The more significant of the principles used in preparing the consolidated financial statements are briefly described below. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Peoples State Bankshares, Inc. (Bankshares) and its subsidiary, Peoples State Bank, Topeka, Kansas (Bank). Bankshares owns 88.88% of the outstanding common stock of the Bank. All significant intercompany transactions have been eliminated. During 1994 and 1993, the consolidated financial statements also included the accounts of Citizens State Bank, Osage City, Kansas (Citizens) which was sold by Bankshares on July 31, 1994. The results of operations through this date are included in the accompanying consolidated financial statements. NATURE OF OPERATIONS The Bank operates under a state bank charter and provides full banking services, excluding trust services. As a state-regulated bank, the Bank is subject to regulation by the Kansas Banking Department and the Federal Deposit Insurance Corporation (FDIC). The area served by Peoples State Bank is Shawnee County, Kansas and services are provided at three locations in Topeka and at branches in Silver Lake and Rossville, Kansas. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. INVESTMENT SECURITIES Effective December 31, 1993, Bankshares adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain ---------------------- Investments in Debt and Equity Securities, which requires that ----------------------------------------- investments be classified in three categories and accounted for as follows: held-to-maturity securities reported at amortized cost; trading securities reported at fair value with unrealized gains and losses included in earnings; and available-for-sale securities reported at fair value with unrealized gains and losses shown as a separate component of stockholders' equity. Restricted equity securities are reported at cost which equals the estimated fair value. Gains and losses on sales of securities are determined on a specific identification method. F-7 96 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOANS RECEIVABLE Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on loans with maturities in excess of one year. On January 1, 1995, SFAS No. 114, Accounting by Creditors for --------------------------- Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for -------------------- --------------------------- Impairment of Loan-Income Recognition and Disclosure, became ---------------------------------------------------- effective. SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan if those methods are more conservative than methods required by SFAS No. 114. Interest income on installment loans is recognized over the terms of the loans by the interest method. Interest income on all other loans is credited to operations based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. The allowance is an amount management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect the borrowers' ability to pay. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line and accelerated methods based on the estimated useful lives of the related assets. F-8 97 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in SFAS No. 109, Accounting for Income Taxes. --------------------------- As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Bankshares and its subsidiary file a consolidated Federal income tax return. The parent company is reimbursed from its subsidiary for any current income tax benefits derived. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, Bankshares considers cash on hand and amounts due from banks to be cash and cash equivalents. F-9 98 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. INVESTMENT SECURITIES The amortized cost and estimated fair value of investments in debt securities were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- AVAILABLE-FOR-SALE AT DECEMBER 31, 1995 U.S. Treasury and agency securities. . . . . . . . . . . . . . . $ 21,912 $ 412 $ (30) $ 22,294 Obligations of states and political subdivisions. . . . . . . . . 3,233 92 (4) 3,321 Mortgage-backed securities. . . . . . . . 11,000 222 - 11,222 --------- ---------- ---------- --------- $ 36,145 $ 726 $ (34) $ 36,837 ========= ========== ========== ========= HELD-TO-MATURITY AT DECEMBER 31, 1994 (UNAUDITED) U.S. Treasury and agency securities. . . . . . . . . . . . . . . $ 8,698 $ - $ (50) $ 8,648 Obligations of states and political subdivisions. . . . . . . . . 2,865 38 (3) 2,900 Mortgage-backed securities. . . . . . . . 5,362 52 (134) 5,280 --------- ---------- ---------- --------- $ 16,925 $ 90 $ (187) $ 16,828 ========= ========== ========== ========= AVAILABLE-FOR-SALE AT DECEMBER 31, 1994 (UNAUDITED) U.S. Treasury and agency securities. . . . . . . . . . . . . . . $ 12,003 $ - $ (220) $ 11,783 Mortgage-backed securities. . . . . . . . 119 - (1) 118 --------- ---------- ---------- --------- $ 12,122 $ - $ (221) $ 11,901 ========= ========== ========== =========
During December 1995, investment securities with a carrying amount of approximately $19,290,000 and fair value of approximately $19,724,000 were transferred from held-to-maturity to available-for-sale with the unrealized gain of approximately $434,000 being included with the unrealized gains on securities that continue to be classified as available-for-sale. These transfers were made as part of a one-time reassessment of the appropriateness of the classifications of all securities as allowed by generally accepted accounting principles. F-10 99 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. INVESTMENT SECURITIES (CONTINUED) The amortized cost and estimated fair value of debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).
AVAILABLE-FOR-SALE ------------------------ ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less . . . . . . . . . $ 6,322 $ 6,390 Due after one year through five years . . 18,156 18,532 Due after five years through ten years. . 667 693 --------- --------- 25,145 25,615 Mortgage-backed securities. . . . . . . . 11,000 11,222 --------- --------- $ 36,145 $ 36,837 ========= =========
At December 31, 1995, investment securities with a carrying value of approximately $33,215,000 were pledged to secure public deposits and for other purposes. 3. LOANS RECEIVABLE Loans receivable are summarized as follows (in thousands):
1995 1994 ---------- ---------- (unaudited) Real estate . . . . . . . . . . . . . . $ 29,118 $ 26,868 Commercial. . . . . . . . . . . . . . . 11,937 9,870 Agricultural. . . . . . . . . . . . . . 6,052 6,184 Consumer. . . . . . . . . . . . . . . . 5,356 4,587 Other . . . . . . . . . . . . . . . . . 575 643 ---------- ---------- 53,038 48,152 Allowance for loan losses . . . . . . . (713) (673) ---------- ---------- $ 52,325 $ 47,479 ========== ==========
F-11 100 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. LOANS RECEIVABLE (CONTINUED) Changes in the allowance for loan losses are as follows (in thousands):
1995 1994 1993 -------- -------- -------- (unaudited) (unaudited) Balance, beginning of year. . . . . . . . $ 673 $ 808 $ 733 Provision for loan losses . . . . . . . . 45 97 144 Charge-offs, net of recoveries. . . . . . (5) (40) (69) Balance of subsidiary sold. . . . . . . . - (192) - -------- -------- -------- Balance, end of year. . . . . . . . . . . $ 713 $ 673 $ 808 ======== ======== ========
One impaired loan totaling approximately $118,000 and $131,000 at December 31, 1995 and 1994, respectively, has been recognized in conformity with SFAS No. 114 as amended by SFAS No. 118. The related allowance for this impaired loan at December 31, 1995 totaled approximately $18,000. There was no interest income recognized on this impaired loan during 1995. 4. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows (in thousands):
1995 1994 -------- -------- (unaudited) Land, buildings and improvements. . . . . . $ 1,882 $ 1,834 Furniture, fixtures and equipment . . . . . 899 918 Leasehold improvements. . . . . . . . . . . 461 435 -------- -------- 3,242 3,187 Accumulated depreciation and amortization . (1,272) (1,106) -------- -------- $ 1,970 $ 2,081 ======== ========
F-12 101 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. DEPOSITS Deposits are summarized as follows (in thousands):
1995 1994 -------- -------- (unaudited) Demand Noninterest-bearing . . . . . . . . . $ 9,679 $ 9,150 -------- -------- Interest-bearing NOW . . . . . . . . . . . . . . . . . 7,315 7,628 Money market. . . . . . . . . . . . . 9,032 8,070 -------- -------- 16,347 15,698 -------- -------- Savings . . . . . . . . . . . . . . . . . 5,290 5,508 Time. . . . . . . . . . . . . . . . . . . 42,814 34,480 -------- -------- $ 74,130 $ 64,836 ======== ========
Time deposits include certificates of deposit of $100,000 and over totaling approximately $4,106,000 and $3,554,000 at December 31, 1995 and 1994, respectively. At December 31, 1995, the approximate scheduled maturities of certificates of deposit are as follows (in thousands): 1996 . . . . . . . . . $ 31,926 1997 . . . . . . . . . 7,968 1998 . . . . . . . . . 1,270 1999 . . . . . . . . . 1,319 2000 and thereafter. . 331 -------- $ 42,814 ========
In January 1990, the Bank acquired approximately $60,000,000 of deposits for a purchase price of $810,000. The purchase price was identified as a core deposit intangible asset and is being amortized using the straight-line method over a period of ten years, which was determined to be the average life of the acquired deposits. F-13 102 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. OTHER BORROWINGS Other borrowings are summarized as follows (in thousands):
MARCH 31, DECEMBER 31, ----------- -------------------------- 1996 1995 1994 ----------- ----------- ----------- (unaudited) (unaudited) Securities sold under repurchase agreements . . . . . . $ 8,261 $ 10,188 $ 10,448 Federal Home Loan Bank line of credit advances. . . . . 400 3,950 2,000 ----------- ----------- ----------- $ 8,661 $ 14,138 $ 12,448 =========== =========== ===========
The weighted average interest rate on repurchase agreements was 4.84% and 5.52% at December 31, 1995 and 1994, respectively. The maturities ranged from daily to 365 days at December 31, 1995 and 1994. At December 31, 1995, the agreements were secured by investment securities with carrying and estimated fair values of approximately $21,418,000. At December 31, 1994, the agreements were secured by available-for-sale securities with carrying and estimated fair values of approximately $10,908,000, and held-to-maturity securities with carrying values of approximately $9,009,000 and estimated fair values of $8,913,000. On May 26, 1994, the Bank entered into an annually renewable agreement with the Federal Home Loan Bank of Topeka (FHLB) for a $5,000,000 line of credit which replaced the term note previously in place. Advances drawn on the line of credit bear an adjustable rate of interest which reprices daily (6.15% at December 31, 1995). The line of credit is secured by one to four family mortgage loans with a carrying value of approximately $13,281,000 and matures May 24, 1996. 7. INCOME TAXES Income tax expense (benefit) is summarized as follows (in thousands):
1995 CURRENT DEFERRED TOTAL --------- ---------- ------- Federal . . . . . . . . . . . . . . . . $ 332 $ 8 $ 340 State . . . . . . . . . . . . . . . . . 106 1 107 --------- ---------- ------- $ 438 $ 9 $ 447 ========= ========== ======= 1994 (UNAUDITED) Federal . . . . . . . . . . . . . . . . $ 709 $ 10 $ 719 State . . . . . . . . . . . . . . . . . 170 2 172 --------- ---------- ------- $ 879 $ 12 $ 891 ========= ========== ======= 1993 (UNAUDITED) Federal . . . . . . . . . . . . . . . . $ 298 $ (13) $ 285 State . . . . . . . . . . . . . . . . . 97 1 98 --------- ---------- ------- $ 395 $ (12) $ 383 ========= ========== =======
F-14 103 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. INCOME TAXES (CONTINUED) The provision for Federal income tax expense differs from that computed by applying the Federal statutory rate of 34% as indicated in the following analysis (in thousands):
1995 1994 1993 ----------------------- ----------------------- --------------------- AMOUNT % AMOUNT % AMOUNT % -------- ----- -------- ----- -------- ----- (unaudited) (unaudited) Expected Federal income tax expense . . . . . . . . . . . . . . . . $ 428 34.0 $ 828 34.0 $ 418 34.0 Municipal and disallowed interest. . . . . . . . . . . . . . . . (53) (4.2) (86) (3.5) (111) (9.0) State taxes, net of Federal income tax benefit. . . . . . . . . . . 71 5.7 114 4.7 65 5.3 Other, net. . . . . . . . . . . . . . . . 1 - 35 1.4 11 0.8 -------- ----- -------- ----- -------- ----- $ 447 35.5 $ 891 36.6 $ 383 31.1 ======== ===== ======== ===== ======== =====
The tax effects of each type of significant item that gave rise to deferred taxes at December 31, 1995 and 1994 were (in thousands):
1995 1994 ----------- ----------- (unaudited) Net unrealized (gain) loss on available-for-sale securities . . . . . $ (277) $ 89 Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . 239 223 Premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . (43) (35) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) (31) ----------- ----------- Net deferred tax (liability) asset. . . . . . . . . . . . . . . . . . $ (129) $ 246 =========== ===========
8. PROFIT SHARING AND SAVINGS PLANS The Bank has a profit sharing plan covering all full-time employees who satisfy the age and length of service requirements. The Bank's contributions to the plan are discretionary and are determined annually by the Board of Directors. The Bank's contributions were $30,000, $25,000 and $35,000 for the years ended December 31, 1995,1994 and 1993, respectively. In addition, the Bank has established a pre-tax savings plan under Section 401(k) of the Internal Revenue Code. Under the plan, eligible employees are able to contribute up to the lesser of 15% of their compensation or $9,500. The Bank matches 50% of all employees' contributions up to 3% of their annual salary. The Bank's contributions were approximately $12,000, $12,000 and $11,000 for the years ended December 31, 1995, 1994 and 1993, respectively. F-15 104 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Financial instruments which represent off-balance sheet credit risk consist of open commitments to extend credit. Open commitments to extend credit amounted to approximately $9,773,000 and $9,144,000 at December 31, 1995 and 1994, respectively. Such agreements require the Bank to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being fully 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 customer. Collateral held varies, but may include real property, accounts receivable, inventory and property, plant and equipment. 10. CONCENTRATION OF CREDIT RISK The Bank grants commercial, residential and rental real estate loans to customers in the Shawnee County, Kansas area. Although the Bank has a diversified loan portfolio, a substantial portion of the Bank's debtors' ability to honor their contracts is dependent upon the real estate economic sector. Collateral normally consists of real property. At December 31, 1995, the Bank's cash and due from banks included commercial bank deposit accounts aggregating approximately $122,000 in excess of the FDIC insured limit of $100,000 per institution. 11. RELATED PARTY MATTERS The Bank leases one of its branch locations from Rossville Insurance Agency, Inc., which is affiliated by common ownership interests with Bankshares. This operating lease renews annually with terms, which approximate the fair market rental value, of $2,700 each month or $32,400 each year. The Bank subleases a portion of the branch facility back to the lessor. The Bank makes loans and loan commitments to employees, officers, directors and stockholders in the normal course of business under substantially the same terms as it does to others. An analysis of the activity with respect to such loans and loan commitments is as follows (in thousands):
1995 1994 -------- ------------- (unaudited) Balance, beginning of year. . . . . . . . . $1,440 $1,231 New loans and loan commitments. . . . . . . 1,131 1,028 Repayments and expirations. . . . . . . . . (928) (819) -------- ------------- Balance, end of year. . . . . . . . . . . . $1,643 $1,440 ======== =============
F-16 105 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. RELATED PARTY MATTERS (CONTINUED) At December 31, 1995, Bankshares held a note receivable from major shareholders, Ronald and Joyce Lutz, with a current balance of $225,000. This note has an interest rate of 8.5% and matured January 31, 1996. The note was renewed for another year on January 25, 1996. This note is included with "other" loans in note 3. 12. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bankshares' consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of December 31, 1995, the most recent notification from the FDIC and the Kansas Department of Banking categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. To be categorized as well capitalized under prompt corrective action provisions, the Bank must maintain total risk-based capital ratios of 10.0%, Tier I risk based capital ratios of 6.0% and Tier I leverage capital ratios of 5.0%. Quantitive measures established by regulation to ensure capital adequacy also requires the Bank to maintain minimum capital ratios of total and Tier I risk-based capital (as defined by regulation) of 8% and 4%, respectively; and a Tier I leverage capital (as defined) of 4%. The Bank's actual ratios at December 31, 1995 were 13.3% and 14.5%, respectively. The Bank's leverage ratio at December 31, 1995 was 8.05%. The Bank, as a state-regulated bank, is subject to certain dividend restrictions as set forth by the Kansas Banking Department. Under such restrictions, the Bank may not, without prior approval, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. F-17 106 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The ----------------------------------------------------- estimated fair value amounts have been determined by Bankshares and the Bank using available market information and valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material impact on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD For cash, due from banks and Federal funds sold, the current carrying amount is a reasonable estimate of fair value. INTEREST BEARING DEPOSITS The current carrying amount of interest bearing deposits is a reasonable estimate of fair market value. INVESTMENT SECURITIES An estimate of the fair value for investment securities, including mortgage-backed securities, is made utilizing quoted market data for publicly traded securities, where available. A third-party pricing service that specializes in "matrix pricing" and modeling techniques provides estimated fair values for securities not actively traded. LOANS For certain homogenous categories of loans, such as some Small Business Administration guaranteed loans, student loans, residential mortgages, consumer loans, and commercial loans, fair value is estimated using quoted market prices for similar loans or securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For loans which mature or reprice within one year, the current carrying amount is a reasonable estimate of fair value. As of December 31, 1995, approximately 78% of the Bank's loan portfolio matured or repriced within one year. DEPOSITS The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. F-18 107 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) OTHER BORROWINGS For securities sold under agreement to repurchase, the current carrying amount is a reasonable estimate of fair value. The FHLB line of credit advances bear a variable rate of interest which reprices daily, therefore, the current carrying amount approximates fair value. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair value of letters of credit is based on the fees currently charged for similar agreements. These instruments were determined to have no positive or negative market value adjustments and are not listed in the following table. The estimated fair value of Bankshare's financial instruments is as follows (in thousands):
DECEMBER 31, 1995 ----------------------- CARRYING FAIR AMOUNT VALUE ---------- ------- Financial assets: Cash and cash equivalents . . . . . . . . $ 3,710 $ 3,710 Federal funds sold. . . . . . . . . . . . 900 900 Interest bearing deposits . . . . . . . . 75 75 Investment securities (note 2). . . . . . 37,364 37,364 Loans (note 3). . . . . . . . . . . . . . 52,325 51,877 Financial liabilities: Deposits (note 5) . . . . . . . . . . . . 74,130 74,161 Other borrowings (note 6) . . . . . . . . 14,138 14,138
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995 and 1994. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of the financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-19 108 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. PENDING TRANSACTION On December 19, 1995, Bankshares and the Bank adopted a resolution to enter into a reorganization agreement with Ameribanc, Inc. (Ameribanc) and Mercantile Bancorporation Inc. (Mercantile). Ameribanc is a wholly-owned subsidiary of Mercantile. The reorganization agreement calls for (i) Bankshares to exchange its share (88.88%) of the Bank's $100 par value common stock for shares of Mercantile's $5 par value common stock and (ii) the Bank to merge with a wholly-owned subsidiary of Ameribanc, whereby the remaining shares (11.12%) of the Bank's common stock will be converted into the right to receive shares of Mercantile common stock. Mercantile will issue a total of 325,843 shares of its stock on the closing date. The reorganization agreement includes various conditions which, among other things, impose certain limitations on Bankshares and the Bank related to dividends or distributions to stockholders, lending activities and investment decisions. The reorganization is contingent upon approval of various regulatory agencies and the stockholders of Bankshares and the Bank. If approved, the reorganization is expected to be consummated in the third quarter of 1996. 15. UNAUDITED FINANCIAL STATEMENTS The consolidated balance sheets for December 31, 1994 and March 31, 1996, and the statements of earnings, stockholders' equity and cash flows for the years ended December 31, 1993 and 1994 and the three months ended March 31, 1995 and 1996 are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations for the unaudited periods have been made. F-20 109 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATING BALANCE SHEET SCHEDULE 1 DECEMBER 31, 1995
PEOPLES STATE PEOPLES STATE BANKSHARES, INC. BANK ELIMINATIONS CONSOLIDATED ---------------- ------------- ------------ ------------ (In thousands) ASSETS Cash and due from banks . . . . . . $ 12 $ 3,710 $ (12) $ 3,710 Interest bearing deposits . . . . . 227 75 (227) 75 Federal funds sold. . . . . . . . . - 900 900 Investment securities . . . . . . . - 36,837 - 36,837 Restricted equity securities. . . . - 527 - 527 Loans receivable, net . . . . . . . 225 52,100 - 52,325 Premises and equipment. . . . . . . 57 1,913 - 1,970 Accrued interest receivable . . . . 7 1,125 - 1,132 Investment in subsidiary. . . . . . 7,517 - (7,517) - Core deposit intangible . . . . . . - 324 - 324 Other assets. . . . . . . . . . . . 5 55 - 60 ---------------- ------------- ------------ ------------ $ 8,050 $ 97,566 $ (7,756) $ 97,860 ================ ============= ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits. . . . . . . . . . . . . $ - $ 74,369 $ (239) $ 74,130 Other borrowings. . . . . . . . . - 14,138 - 14,138 Accrued interest payable. . . . . - 420 - 420 Deferred tax liability. . . . . . - 129 - 129 Other liabilities . . . . . . . . (10) 48 - 38 ---------------- ------------- ------------ ------------ Total liabilities . . . . . . . (10) 89,104 (239) 88,855 ---------------- ------------- ------------ ------------ Minority interest . . . . . . . . . - - 945 945 ---------------- ------------- ------------ ------------ Stockholders' equity: Common stock. . . . . . . . . . . 100 2,250 (2,250) 100 Additional paid-in capital. . . . 107 2,250 (2,250) 107 Retained earnings . . . . . . . . 7,659 3,547 (3,547) 7,659 Net unrealized gain on available-for-sale securities. . . . . . . . . . . 369 415 (415) 369 ---------------- ------------- ------------ ------------ 8,235 8,462 (8,462) 8,235 Less treasury stock . . . . . . . 175 - - 175 ---------------- ------------- ------------ ------------ Total stockholders' equity. . . 8,060 8,462 (8,462) 8,060 ---------------- ------------- ------------ ------------ $ 8,050 $ 97,566 $ (7,756) $ 97,860 ================ ============= ============ ============
See Accompanying Independent Auditors' Report. F-21 110 PEOPLES STATE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATING STATEMENT OF EARNINGS SCHEDULE 2 YEAR ENDED DECEMBER 31, 1995
PEOPLES STATE PEOPLES STATE BANKSHARES, INC. BANK ELIMINATIONS CONSOLIDATED ---------------- ------------- ------------ ------------ (In thousands) INTEREST INCOME Loans, including fees. . . . . . $ 20 $ 5,005 $ - $ 5,025 Investments. . . . . . . . . . . 8 2,054 - 2,062 Federal funds sold and . . . . . interest bearing deposits . . . 5 27 (5) 27 ---------------- ------------- ------------ ------------ 33 7,086 (5) 7,114 ---------------- ------------- ------------ ------------ INTEREST EXPENSE Deposits . . . . . . . . . . . . - 2,785 (5) 2,780 Other borrowings . . . . . . . . - 732 - 732 ---------------- ------------- ------------ ------------ - 3,517 (5) 3,512 ---------------- ------------- ------------ ------------ Net interest income. . . . . . 33 3,569 - 3,602 PROVISION FOR LOAN LOSSES. . . . . - 45 - 45 ---------------- ------------- ------------ ------------ Net interest income after provision for loan loss. . . . 33 3,524 - 3,557 ---------------- ------------- ------------ ------------ OTHER INCOME Service charges. . . . . . . . . - 452 - 452 Net securities losses. . . . . . - (14) - (14) Equity in earnings of subsidiary 1,034 - (1,034) - Other. . . . . . . . . . . . . . - 143 - 143 ---------------- ------------- ------------ ------------ 1,034 581 (1,034) 581 ---------------- ------------- ------------ ------------ OTHER EXPENSE Salaries and employee benefits . 478 1,148 - 1,626 Occupancy. . . . . . . . . . . . 55 439 - 494 Data processing. . . . . . . . . - 137 - 137 Federal deposit insurance premium. . . . . . . . . . . . - 75 - 75 Amortization of deposit purchase premium . . . . . . . - 81 - 81 Other. . . . . . . . . . . . . . 32 434 - 466 ---------------- ------------- ------------ ------------ 565 2,314 - 2,879 ---------------- ------------- ------------ ------------ Earnings before income taxes and minority interest . . . . 502 1,791 (1,034) 1,259 INCOME TAX (BENEFIT) EXPENSE . . . (181) 628 - 447 ---------------- ------------- ------------ ------------ Earnings before minority interest . . . . . . . . . . 683 1,163 (1,034) 812 MINORITY INTEREST. . . . . . . . . - - (129) (129) ---------------- ------------- ------------ ------------ NET EARNINGS . . . . . . . . . . . $ 683 $ 1,163 $ (1,163) $ 683 ================ ============= ============ ============ See Accompanying Independent Auditors' Report.
F-22 111 [letterhead of GRA, Thompson, White & Co., P.C.] INDEPENDENT AUDITORS' REPORT The Board of Directors Peoples State Bank Topeka, Kansas We have audited the accompanying balance sheet of Peoples State Bank as of December 31, 1995 and the related statements of earnings, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peoples State Bank as of December 31, 1995 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Merriam, Kansas March 27, 1996 /s/ GRA, Thompson, White & Co., P.C. F-23 112 PEOPLES STATE BANK BALANCE SHEETS
MARCH 31, DECEMBER 31, ----------- -------------------------- 1996 1995 1994 ----------- ----------- ----------- ASSETS (unaudited) (unaudited) (In thousands) Cash and due from banks. . . . . . . . . . . . . . . . $ 2,612 $ 3,710 $ 3,981 Interest bearing deposits. . . . . . . . . . . . . . . 23 75 10 Federal funds sold . . . . . . . . . . . . . . . . . . - 900 1,200 Available-for-sale securities. . . . . . . . . . . . . 36,222 36,837 11,901 Held-to-maturity securities. . . . . . . . . . . . . . - - 16,145 Restricted equity securities . . . . . . . . . . . . . 535 527 519 Loans receivable, net. . . . . . . . . . . . . . . . . 51,365 52,100 47,279 Premises and equipment . . . . . . . . . . . . . . . . 1,885 1,913 2,009 Accrued interest receivable. . . . . . . . . . . . . . 992 1,125 847 Core deposit intangible. . . . . . . . . . . . . . . . 304 324 405 Deferred tax asset . . . . . . . . . . . . . . . . . . - - 246 Other assets . . . . . . . . . . . . . . . . . . . . . 47 55 40 ----------- ----------- ----------- $ 93,985 $ 97,566 $ 84,582 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits . . . . . . . . . . . . . . . . . . . . . . $ 76,684 $ 74,369 $ 64,846 Other borrowings . . . . . . . . . . . . . . . . . . 8,661 14,138 12,448 Accrued interest payable . . . . . . . . . . . . . . 342 420 239 Deferred tax liability . . . . . . . . . . . . . . . 5 129 - Other liabilities. . . . . . . . . . . . . . . . . . 191 48 73 ----------- ----------- ----------- Total liabilities . . . . . . . . . . . . . . . . 85,883 89,104 77,606 ----------- ----------- ----------- Commitments and contingencies Stockholders' equity Common stock, $100 par value; 22,500 shares authorized, issued and outstanding. . . . . 2,250 2,250 2,250 Additional paid-in capital . . . . . . . . . . . . . 2,250 2,250 2,250 Retained earnings. . . . . . . . . . . . . . . . . . 3,373 3,547 2,609 Net unrealized gain (loss) on available- for-sale securities . . . . . . . . . . . . . . . 229 415 (133) ----------- ----------- ----------- Total stockholders' equity. . . . . . . . . . . . 8,102 8,462 6,976 ----------- ----------- ----------- $ 93,985 $ 97,566 $ 84,582 =========== =========== =========== The accompanying notes are an integral part of these financial statements
F-24 113 PEOPLES STATE BANK STATEMENTS OF EARNINGS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------- ----------------------------------------- 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) INTEREST INCOME (In thousands) Loans, including fees. . . . . . . . $ 1,238 $ 1,114 $ 5,005 $ 4,142 $ 3,601 Investments. . . . . . . . . . . . . 586 441 2,054 1,543 1,766 Federal funds sold and interest bearing deposits . . . . . . . . . 8 2 27 15 44 ----------- ----------- ----------- ----------- ----------- 1,832 1,557 7,086 5,700 5,411 ----------- ----------- ----------- ----------- ----------- INTEREST EXPENSE Deposits . . . . . . . . . . . . . . 799 558 2,785 1,915 2,002 Other borrowings . . . . . . . . . . 124 195 732 643 474 ----------- ----------- ----------- ----------- ----------- 923 753 3,517 2,558 2,476 ----------- ----------- ----------- ----------- ----------- Net interest income . . . . . . . 909 804 3,569 3,142 2,935 PROVISION FOR LOAN LOSSES. . . . . . . - 15 45 68 120 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses. . . . 909 789 3,524 3,074 2,815 ----------- ----------- ----------- ----------- ----------- OTHER INCOME Service charges. . . . . . . . . . . 106 104 452 432 393 Net securities gains (losses). . . . - (14) (14) (8) 5 Other. . . . . . . . . . . . . . . . 40 22 143 78 77 ----------- ----------- ----------- ----------- ----------- 146 112 581 502 475 ----------- ----------- ----------- ----------- ----------- OTHER EXPENSES Salaries and employee benefits . . . 293 286 1,148 1,101 1,018 Occupancy. . . . . . . . . . . . . . 96 103 439 358 353 Data processing. . . . . . . . . . . 32 32 137 118 112 Federal deposit insurance premium. . . . . . . . . . . . . . 1 36 75 137 137 Management fees. . . . . . . . . . . - - - 120 120 Amortization of deposit purchase premium. . . . . . . . . . . . . . 20 20 81 81 81 Other. . . . . . . . . . . . . . . . 191 101 434 457 438 ----------- ----------- ----------- ----------- ----------- 633 578 2,314 2,372 2,259 ----------- ----------- ----------- ----------- ----------- Earnings before income taxes. . . 422 323 1,791 1,204 1,031 INCOME TAX EXPENSE . . . . . . . . . . 146 110 628 404 342 ----------- ----------- ----------- ----------- ----------- NET EARNINGS . . . . . . . . . . . . . $ 276 $ 213 $ 1,163 $ 800 $ 689 =========== =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements
F-25 114 PEOPLES STATE BANK STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED GAIN (LOSS) ON ADDITIONAL AVAILABLE- COMMON PAID-IN RETAINED FOR-SALE STOCK CAPITAL EARNINGS SECURITIES TOTAL ---------- ---------- ---------- ----------- ---------- (In thousands) BALANCE AT DECEMBER 31, 1992 (UNAUDITED). . . . . . . . . . . . . $ 2,250 $ 2,250 $ 1,820 $ - $ 6,320 Net earnings . . . . . . . . . . . . . - - 689 - 689 Dividends. . . . . . . . . . . . . . . - - (350) - (350) Initial adoption of SFAS No. 115. . . . . . . . . . . . . . . - - - 44 44 ---------- ---------- ---------- ----------- ---------- BALANCE AT DECEMBER 31, 1993 (UNAUDITED). . . . . . . . . . . . . 2,250 2,250 2,159 44 6,703 Net earnings . . . . . . . . . . . . . - - 800 - 800 Dividends. . . . . . . . . . . . . . . - - (350) - (350) Net change . . . . . . . . . . . . . . - - - (177) (177) ---------- ---------- ---------- ----------- ---------- BALANCE AT DECEMBER 31, 1994 (UNAUDITED). . . . . . . . . . . . . 2,250 2,250 2,609 (133) 6,976 Net earnings . . . . . . . . . . . . . - - 1,163 - 1,163 Dividends. . . . . . . . . . . . . . . - - (225) - (225) Net change . . . . . . . . . . . . . . - - - 548 548 ---------- ---------- ---------- ----------- ---------- BALANCE AT DECEMBER 31, 1995. . . . . . . . . . $ 2,250 $ 2,250 $ 3,547 $ 415 $ 8,462 Net earnings . . . . . . . . . . . . . - - 276 - 276 Dividends. . . . . . . . . . . . . . . - - (450) - (450) Net change . . . . . . . . . . . . . . - - - (186) (186) ---------- ---------- ---------- ----------- ---------- BALANCE AT MARCH 31, 1996 (UNAUDITED). . . . . . $ 2,250 $ 2,250 $ 3,373 $ 229 $ 8,102 ========== ========== ========== =========== ========== The accompanying notes are an integral part of these financial statements
F-26 115 PEOPLES STATE BANK STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------------------------------------ 1996 1995 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES (In thousands) Net earnings . . . . . . . . . . . . . . . . . . . . $ 276 $ 213 $ 1,163 $ 800 $ 689 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . - 15 45 68 120 Net charge-offs and losses on other real estate owned. . . . . . . . . . . . . . - - - 23 - Gains on sales of available-for-sale securities - - - (3) (5) Losses on sales of available-for-sale securities - 14 14 11 - Amortization of premiums on securities . . . . 7 7 36 114 122 Accretion of discounts on securities . . . . . (29) (3) (23) (20) (22) Depreciation and amortization expense. . . . . 35 41 169 157 103 Amortization of deposit purchase premium . . . 20 20 81 81 81 Gains on sales of loans. . . . . . . . . . . . (20) - (45) - - Proceeds from loans sold . . . . . . . . . . . 1,476 - 4,343 - - Originations of loans sold . . . . . . . . . . (1,456) - (4,298) - - Change in: Accrued interest receivable. . . . . . . . . 133 (50) (278) 12 48 Other assets . . . . . . . . . . . . . . . . 8 (48) (15) 102 (103) Accrued interest payable . . . . . . . . . . (78) 23 181 31 (65) Other liabilities. . . . . . . . . . . . . . 143 114 (25) (68) (31) Deferred taxes . . . . . . . . . . . . . . . - 1 9 (9) (43) ---------- ----------- ---------- ----------- ----------- Net cash provided by operating activities 515 347 1,357 1,299 894 ---------- ----------- ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated, net of principal collections. . . . . . . . . . . . . . . . . . . . 735 (2,118) (4,869) (5,904) (3,480) Proceeds from maturities of held-tomaturity securities - 165 2,984 3,881 6,668 Proceeds from sales and maturities of available-for-sale securities . . . . . . . . . . . . . . . . . . . . 2,278 2,983 9,977 11,147 234 Purchases of held-to-maturity securities . . . . . . - (1,998) (6,129) (2,913) (14,234) Purchases of available-for-sale securities . . . . . (1,951) (999) (14,736) (6,017) (990) Purchases of restricted equity securities. . . . . . (8) - (8) (266) - Net change in securities purchased under agreements to resell. . . . . . . . . . . . . . . . . . . . . - - - - 7,766 Net additions to premises and equipment. . . . . . . (7) (27) (73) (168) (1,255) Proceeds from sales of other real estate owned . . . - - - 15 41 Recoveries of loans previously charged-off . . . . . - - 3 - 2 Net change in Federal funds sold . . . . . . . . . . 900 1,100 300 (1,200) - Net change in interest bearing deposits. . . . . . . 52 (12) (65) - (10) ---------- ----------- ---------- ----------- ----------- Net cash provided (used) by investing activities 1,999 (906) (12,616) (1,425) (5,258) ---------- ----------- ---------- ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES, CARRIED FORWARD. . . . . . . . . . . . . $ 2,514 $ (559) $ (11,259) $ (126) $ (4,364) ---------- ----------- ---------- ----------- -----------
F-27 116 PEOPLES STATE BANK STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ------------------------------------------ 1996 1995 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) (In thousands) NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES, BROUGHT FORWARD. . . . . . . . . . . . . $ 2,514 $ (559) $ (11,259) $ (126) $ (4,364) ---------- ----------- ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in non-interest and interest bearing demand and savings accounts. . . . . . . . . . . . 2,938 (1,690) 1,189 2,346 2,755 Net change in time deposits. . . . . . . . . . . . . (623) 1,667 8,334 977 (2,942) Increase (decrease) in other borrowings. . . . . . . (5,477) (343) 1,690 (907) 3,008 Dividends paid . . . . . . . . . . . . . . . . . . . (450) (225) (225) (350) (350) ---------- ----------- ---------- ----------- ----------- Net cash provided (used) by financing activities (3,612) (591) 10,988 2,066 2,471 ---------- ----------- ---------- ----------- ----------- (Decrease) increase in cash and cash equivalents . . . . . . . . . . . . (1,098) (1,150) (271) 1,940 (1,893) Cash and cash equivalents, beginning of period . . . . 3,710 3,981 3,981 2,041 3,934 ---------- ----------- ---------- ----------- ----------- Cash and cash equivalents, end of period . . . . . . . $ 2,612 $ 2,831 $ 3,710 $ 3,981 $ 2,041 ========== =========== ========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest . . . . . . $ 1,001 $ 781 $ 3,336 $ 2,528 $ 2,067 ========== =========== ========== =========== =========== Cash paid during the period for income taxes . . . . $ - $ - $ 657 $ 293 $ 542 ========== =========== ========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Designation of investment securities as available- for-sale at adoption of SFAS No. 115, at amortized cost . . . . . . . . . . . . . . . . $ - $ - $ - $ - $ 16,693 ========== =========== ========== =========== =========== Transfer of held-to-maturity securities to available-for-sale at amortized cost, net . . . . $ - $ - $ 19,290 $ - $ - ========== =========== ========== =========== =========== The accompanying notes are an integral part of these financial statements
F-28 117 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (AUDITED), 1994 AND 1993 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Peoples State Bank are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The more significant of the principles used in preparing the financial statements are briefly described below. NATURE OF OPERATIONS The Bank operates under a state bank charter and provides full banking services, excluding trust services. As a state-regulated bank, the Bank is subject to regulation by the Kansas Banking Department and the Federal Deposit Insurance Corporation (FDIC). The area served by Peoples State Bank is Shawnee County, Kansas and services are provided at three locations in Topeka and at branches in Silver Lake and Rossville, Kansas. Peoples State Bankshares, Inc. (Bankshares) owns 88.88% of the Bank's outstanding common stock. These financial statements represent the Bank only and are not consolidated. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. INVESTMENT SECURITIES Effective December 31, 1993, The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain ---------------------- Investments in Debt and Equity Securities, which requires that ----------------------------------------- investments be classified in three categories and accounted for as follows: held-to-maturity securities reported at amortized cost; trading securities reported at fair value with unrealized gains and losses included in earnings; and available-for-sale securities reported at fair value with unrealized gains and losses shown as a separate component of stockholders' equity. Restricted equity securities are reported at cost which equals the estimated fair value. Gains and losses on sales of securities are determined on a specific identification method. LOANS RECEIVABLE Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on loans with maturities in excess of one year. F-29 118 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) On January 1, 1995, SFAS No. 114, Accounting by Creditors for --------------------------- Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for -------------------- --------------------------- Impairment of Loan-Income Recognition and Disclosure, became ---------------------------------------------------- effective. SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan if those methods are more conservative than methods required by SFAS No. 114. Interest income on installment loans is recognized over the terms of the loans by the interest method. Interest income on all other loans is credited to operations based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. The allowance is an amount management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect the borrowers' ability to pay. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line and accelerated methods based on the estimated useful lives of the related assets. INCOME TAXES Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in SFAS No. 109, Accounting for Income Taxes. --------------------------- As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Bank files a consolidated Federal income tax return with its parent. The parent company is reimbursed from its subsidiary for any current income tax benefits derived. F-30 119 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Bank considers cash on hand and amounts due from banks to be cash and cash equivalents. 2. INVESTMENT SECURITIES The amortized cost and estimated fair value of investments in debt securities were as follows (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- AVAILABLE-FOR-SALE AT DECEMBER 31, 1995 U.S. Treasury and agency securities . . . . $ 21,912 $ 412 $ (30) $ 22,294 Obligations of states and political subdivisions. . . . . . . . . . 3,233 92 (4) 3,321 Mortgage-backed securities. . . . . . . . . 11,000 222 - 11,222 --------- ---------- ---------- --------- $ 36,145 $ 726 $ (34) $ 36,837 ========= ========== ========== ========= GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- HELD-TO-MATURITY AT DECEMBER 31, 1994 (UNAUDITED) U.S. Treasury and agency securities . . . . $ 7,918 $ - $ (49) $ 7,869 Obligations of states and political subdivisions. . . . . . . . . . 2,865 38 (3) 2,900 Mortgage-backed securities. . . . . . . . . 5,362 52 (134) 5,280 --------- ---------- ---------- --------- $ 16,145 $ 90 $ (186) $ 16,049 ========= ========== ========== ========= AVAILABLE-FOR-SALE AT DECEMBER 31, 1994 (UNAUDITED) U.S. Treasury and agency securities . . . . $ 12,003 $ - $ (220) $ 11,783 Mortgage-backed securities. . . . . . . . . 119 - (1) 118 --------- ---------- ---------- --------- $ 12,122 $ - $ (221) $ 11,901 ========= ========== ========== =========
F-31 120 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. INVESTMENT SECURITIES (CONTINUED) During December 1995, investment securities with a carrying amount of $19,290,000 and estimated fair value of approximately $19,724,000 were transferred from held-to-maturity to available-for-sale with the unrealized gain of approximately $434,000 being included with the unrealized gains on securities that continue to be classified as available-for-sale. These transfers were made as part of a one-time reassessment of the appropriateness of the classifications of all securities as allowed by generally accepted accounting principles. The amortized cost and estimated fair value of debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
AVAILABLE-FOR-SALE ----------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- ---------- Due in one year or less . . . . . . . . . . $ 6,322 $ 6,390 Due after one year through five years . . . 18,156 18,532 Due after five years through ten years. . . 667 693 --------- ---------- 25,145 25,615 Mortgage-backed securities. . . . . . . . . 11,000 11,222 --------- ---------- $ 36,145 $ 36,837 ========= ==========
At December 31, 1995, investment securities with a carrying value of for other purposes. F-32 121 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 3. LOANS RECEIVABLE Loans receivable are summarized as follows (in thousands):
1995 1994 ---------- ----------- (unaudited) Real estate . . . . . . . . . . . . . . . $ 29,118 $ 26,868 Commercial. . . . . . . . . . . . . . . . 11,937 9,870 Agricultural. . . . . . . . . . . . . . . 6,052 6,184 Consumer. . . . . . . . . . . . . . . . . 5,356 4,587 Other . . . . . . . . . . . . . . . . . . 350 443 ---------- ----------- 52,813 47,952 Allowance for loan losses . . . . . . . . (713) (673) ---------- ----------- $ 52,100 $ 47,279 ========== ===========
Changes in the allowance for loan losses are as follows (in thousands):
1995 1994 1993 (unaudited) (unaudited) ----------- ----------- ----------- Balance, beginning of year. . . . . . . $ 673 $ 621 $ 518 Provision for loan losses . . . . . . . 45 68 120 Charge-offs, net of recoveries. . . . . (5) (16) (17) ----------- ----------- ----------- Balance, end of year. . . . . . . . . . $ 713 $ 673 $ 621 =========== =========== ===========
One impaired loan totaling approximately $118,000 and $131,000 at December 31, 1995 and 1994, respectively, has been recognized in conformity with SFAS No. 114 as amended by SFAS No. 118. The related allowance for this impaired loan at December 31, 1995 totaled approximately $18,000. There was no interest income recognized on this impaired loan during 1995. 4. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows (in thousands):
1995 1994 ------------ ------------- ( unaudited ) Land, buildings and improvements. . . . . $ 1,752 $ 1,705 Furniture, fixtures and equipment . . . . 899 918 Leasehold improvements. . . . . . . . . . 461 435 ------------ ------------- 3,112 3,058 Accumulated depreciation and amortization (1,199) (1,049) ------------ ------------- $ 1,913 $ 2,009 ============ =============
F-33 122 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 5. DEPOSITS Deposits are summarized as follows (in thousands):
1995 1994 ----------- ----------- (unaudited) Demand Noninterest-bearing . . . . . . . . . $ 9,691 $ 9,160 ----------- ----------- Interest-bearing NOW . . . . . . . . . . . . . . . . . 7,315 7,628 Money market. . . . . . . . . . . . . 9,259 8,070 ----------- ----------- 16,574 15,698 ----------- ----------- Savings . . . . . . . . . . . . . . . . . 5,290 5,508 Time. . . . . . . . . . . . . . . . . . . 42,814 34,480 ----------- ----------- $ 74,369 $ 64,846 =========== ===========
Time deposits include certificates of deposit of $100,000 and over totaling approximately $4,106,000 and $3,554,000 at December 31, 1995 and 1994, respectively. At December 31, 1995, the approximate scheduled maturities of certificates of deposit were as follows (in thousands):
1996 . . . . . . . . . . $ 31,926 1997 . . . . . . . . . . 7,968 1998 . . . . . . . . . . 1,270 1999 . . . . . . . . . . 1,319 2000 and thereafter. . . 331 ---------- $ 42,814 ==========
In January 1990, the Bank acquired approximately $60,000,000 of deposits for a purchase price of $810,000. This purchase price was identified as a core deposit intangible asset and is being amortized using the straight-line method over a period of ten years, which was determined to be the average life of the acquired deposits. F-34 123 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. OTHER BORROWINGS Other borrowings are summarized as follows (in thousands):
MARCH 31, DECEMBER 31, ----------- -------------------------- 1996 1995 1994 ----------- ----------- ----------- (unaudited) (unaudited) Securities sold under repurchase agreements . . . . . . $ 8,261 $ 10,188 $ 10,448 Federal Home Loan Bank line of credit advances. . . . . 400 3,950 2,000 ----------- ----------- ----------- $ 8,661 $ 14,138 $ 12,448 =========== =========== ===========
The weighted average interest rate on repurchase agreements was 4.84% and 5.52% at December 31, 1995 and 1994, respectively. The maturities ranged from daily to 365 days at December 31, 1995 and 1994. At December 31, 1995, the agreements were secured by investment securities with carrying and estimated fair values of approximately $21,418,000. At December 31, 1994, the agreements were secured by available-for-sale securities with carrying and estimated fair values of approximately $10,908,000, and held-to-maturity securities with carrying values of approximately $9,009,000 and estimated fair values of $8,913,000. On May 26, 1994, the Bank entered into an annually renewable agreement with the Federal Home Loan Bank of Topeka (FHLB) for a $5,000,000 line of credit which replaced the term note previously in place. Advances drawn on this line of credit bear an adjustable rate of interest which reprices daily (6.15% at December 31, 1995). The line of credit is secured by one to four family mortgage loans with a carrying value of approximately $13,281,000 and matures May 24, 1996. 7. INCOME TAXES Income tax expense (benefit) is summarized as follows (in thousands):
1995 CURRENT DEFERRED TOTAL ------- -------- --------- Federal . . . . . . . . . . . . . . . . . $ 513 $ 8 $ 521 State . . . . . . . . . . . . . . . . . . 106 1 107 ------- -------- --------- $ 619 $ 9 $ 628 ======= ======== ========= 1994 (UNAUDITED) Federal . . . . . . . . . . . . . . . . . $ 317 $ 10 $ 327 State . . . . . . . . . . . . . . . . . . 75 2 77 ------- -------- --------- $ 392 $ 12 $ 404 ======= ======== ========= 1993 (UNAUDITED) Federal . . . . . . . . . . . . . . . . . $ 289 $ (12) $ 277 State . . . . . . . . . . . . . . . . . . 65 - 65 ------- -------- --------- $ 354 $ (12) $ 342 ======= ======== =========
F-35 124 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 7. INCOME TAXES (CONTINUED) The provision for Federal income tax expense differs from that computed by applying the Federal statutory rate of 34% as indicated in the following analysis (in thousands):
1995 1994 1993 ------------------ ----------------- ----------------- AMOUNT % AMOUNT % AMOUNT % ------ ------- ------ ------- ------ ------- (unaudited) (unaudited) Expected Federal income tax expense . . . . . . . . . $ 609 34.0 $ 409 34.0 $ 351 $ 34.0 Municipal interest. . . . . . . (53) (3.0) (59) (4.9) (61) (5.9) State taxes, net of Federal income tax benefit . . . . . . . . . . . 71 4.0 51 4.2 43 4.2 Other, net. . . . . . . . . . . 1 0.1 3 0.3 9 0.9 ------ ------- ------ ------- ------ ------- $ 628 35.1 $ 404 33.6 $ 342 33.2 ====== ======= ====== ======= ====== =======
The tax effects of each type of significant item that gave rise to deferred taxes at December 31, 1995 and 1994, were (in thousands):
1995 1994 ----------- ----------- (unaudited) Net unrealized (gain) loss on available-for-sale securities . $ (277) $ 89 Allowance for loan losses . . . . . . . . . . . . . . . . . . 239 223 Premises and equipment. . . . . . . . . . . . . . . . . . . . (43) (35) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) (31) ----------- ----------- Net deferred tax (liability) asset. . . . . . . . . . . . . . $ (129) $ 246 =========== ===========
F-36 125 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. PROFIT SHARING AND SAVINGS PLANS The Bank has a profit sharing plan covering all full-time employees who satisfy the age and length of service requirements. The Bank's contributions to the plan are discretionary and are determined annually by the Board of Directors. The Bank's contributions were $30,000, $25,000 and $35,000 for the years ended December 31, 1995, 1994 and 1993, respectively. In addition, the Bank has established a pre-tax savings plan under Section 401(k) of the Internal Revenue Code. Under the plan, eligible employees are able to contribute up to the lesser of 15% of their compensation or $9,500. The Bank matches 50% of employees' contributions up to 3% of their annual salary. The Bank's contributions were approximately $12,000, $12,000 and $11,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Financial instruments which represent off-balance sheet credit risk consist of open commitments to extend credit. Open commitments to extend credit amounted to approximately $9,773,000 and $9,144,000 at December 31, 1995 and 1994, respectively. Such agreements require the Bank to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being fully 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 customer. Collateral held varies, but may include real property, accounts receivable, inventory and property, plant and equipment. 10. CONCENTRATION OF CREDIT RISK The Bank grants commercial, residential and rental real estate loans to customers in the Shawnee County, Kansas area. Although the Bank has a diversified loan portfolio, a substantial portion of the Bank's debtors' ability to honor their contracts is dependent upon the real estate economic sector. Collateral normally consists of real property. At December 31, 1995, the Bank's cash and due from banks included commercial bank deposit accounts aggregating approximately $122,000 in excess of the FDIC insured limit of $100,000 per institution. F-37 126 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 11. RELATED PARTY MATTERS The Bank leases one of its branch locations from Rossville Insurance Agency, Inc., which is affiliated by common ownership interests with Bankshares. This operating lease renews annually with terms, which approximate the fair market rental value, of $2,700 each month or $32,400 each year. The Bank subleases a portion of the branch facility back to the lessor. During 1994 and 1993, the Bank paid $120,000 each year to Bankshares for management fees related to the operations of the Bank. The Bank makes loans and loan commitments to employee, officers, directors and stockholders in the normal course of business under substantially the same terms as it does to others. An analysis of the activity with respect to such loans and loan commitments is as follows (in thousands):
1995 1994 ----------- ----------- (unaudited) Balance, beginning of year. . . . . . . . $ 1,440 $ 1,231 New loans and loan commitments. . . . . . 1,131 1,028 Repayments and expirations. . . . . . . . (928) (819) ----------- ----------- Balance, end of year. . . . . . . . . . . $ 1,643 $ 1,440 =========== ===========
12. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of December 31, 1995, the most recent notification from the FDIC and the Kansas Department of Banking categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. To be categorized as well capitalized under prompt corrective action provisions, the Bank must maintain total risk-based capital ratios of 10.0%, Tier I risk based capital ratios of 6.0% and Tier I leverage capital ratios of 5.0%. Quantitive measures established by regulation to ensure capital adequacy also require the Bank to maintain minimum capital ratios of total and Tier I risk-based capital (as defined by regulation) of 8% and 4%, respectively; and a Tier I leverage capital (as defined) of 4%. The Bank's actual risk-based ratios at December 31, 1995 were 13.3% and 14.5%, respectively. The Bank's leverage ratio at December 31, 1995 was 8.05%. F-38 127 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 12. REGULATORY MATTERS (CONTINUED) The Bank, as a state-regulated bank, is subject to certain dividend restrictions as set forth by the Kansas Banking Department. Under such restrictions, the Bank may not, without prior approval, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The ----------------------------------------------------- estimated fair value amounts have been determined by the Bank using available market information and valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material impact on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD For cash, due from banks and Federal funds sold, the current carrying amount is a reasonable estimate of fair value. INTEREST BEARING DEPOSITS The current carrying amount of interest bearing deposits is a reasonable estimate of fair value. INVESTMENT SECURITIES An estimate of the fair value for investment securities, including mortgage-backed securities, is made utilizing quoted market data for publicly traded securities, where available. A third-party pricing service that specializes in "matrix pricing" and modeling techniques provides estimated fair values for securities not actively traded. LOANS For certain homogenous categories of loans, such as some Small Business Administration guaranteed loans, student loans, residential mortgages, consumer loans, and commercial loans, fair value is estimated using quoted market prices for similar loans or securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For loans which mature or reprice within one year, the current carrying amount is a reasonable estimate of fair value. As of December 31, 1995, approximately 78% of the Bank's loan portfolio matured or repriced within one year. F-39 128 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) DEPOSITS The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. OTHER BORROWINGS For securities sold under agreement to repurchase, the current carrying amount is a reasonable estimate of fair value. The FHLB line of credit advances bear a variable rate of interest which reprices daily, therefore, the current carrying amount approximates fair value. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair value of letters of credit is based on the fees currently charged for similar agreements. These instruments were determined to have no positive or negative market value adjustments and are not listed in the following table. The estimated fair value of the Bank's financial instruments is as follows (in thousands):
DECEMBER 31, 1995 ----------------------- CARRYING FAIR AMOUNT VALUE -------- -------- Financial assets: Cash and cash equivalents . . . . . . . . $ 3,710 $ 3,710 Federal funds sold. . . . . . . . . . . . 900 900 Interest bearing deposits . . . . . . . . 75 75 Investment securities (note 2). . . . . . 37,364 37,364 Loans (note 3). . . . . . . . . . . . . . 52,100 51,652 Financial liabilities: Deposits (note 5) . . . . . . . . . . . . 74,369 74,400 Other borrowings (note 6) . . . . . . . . 14,138 14,138
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of the financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-40 129 PEOPLES STATE BANK NOTES TO FINANCIAL STATEMENTS, CONTINUED 14. PENDING TRANSACTION On December 19, 1995, Bankshares and the Bank adopted a resolution to enter into a reorganization agreement with Ameribanc, Inc. (Ameribanc) and Mercantile Bancorporation Inc. (Mercantile). Ameribanc is a wholly-owned subsidiary of Mercantile. The reorganization agreement calls for (i) Bankshares to exchange its share (88.88%) of the Bank's $100 par value common stock for shares of Mercantile's $5 par value common stock and (ii) the Bank to merge with a wholly-owned subsidiary of Ameribanc, whereby the remaining shares (11.12%) of the Bank's common stock will be converted into the right to receive shares of Mercantile common stock. Mercantile will issue a total of 325,843 shares of its stock on the closing date. The reorganization agreement includes various conditions which, among other things, impose certain limitations on Bankshares and the Bank related to dividends or distributions to stockholders, lending activities and investment decisions. The reorganization is contingent upon approval of various regulatory agencies and the stockholders of Bankshares and the Bank. If approved, the reorganization is expected to be consummated in the third quarter of 1996. 15. UNAUDITED FINANCIAL STATEMENTS The balance sheets for December 31, 1994 and March 31, 1996 and the statements of earnings, stockholders' equity and cash flows for the years ended December 31, 1993 and 1994 and the three months ended March 31, 1995 and 1996 are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations for the unaudited periods have been made. F-41 130 ANNEX A ------- The following is the text of the statutory dissenters' rights as set forth in Section 17-6712 of the Kansas Corporation Code: SEC. 17-6712 PAYMENT FOR "STOCK" OF "STOCKHOLDER" OBJECTING TO MERGER OR CONSOLIDATION; "STOCKHOLDER," "STOCK" AND "SHARE" DEFINED; NOTICE TO OBJECTING STOCKHOLDERS; DEMAND FOR PAYMENT; APPRAISAL AND DETERMINATION OF VALUE BY DISTRICT COURT, WHEN; TAXATION OF COSTS; RIGHTS OF OBJECTING STOCKHOLDERS; STATUS OF STOCK; SECTION INAPPLICABLE TO CERTAIN SHARES OF STOCK. (a) When used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation. (b) The corporation surviving or resulting from any merger or consolidation, within 10 days after the effective date of the merger or consolidation, shall notify each stockholder of any corporation of this state so merging or consolidating who objected thereto in writing and whose shares either were not entitled to vote or were not voted in favor of the merger or consolidation, and filed such written objection with the corporation before the taking of the vote on the merger or consolidation, that the merger or consolidation has become effective. If any such stockholder, within 20 days after the date of mailing of the notice, shall demand in writing, from the corporation surviving or resulting from the merger or consolidation, payment of the value of the stockholder's stock, the surviving or resulting corporation shall pay to the stockholder, within 30 days after the expiration of the period of 20 days, the value of the stockholder's stock on the effective date of the merger or consolidation exclusive of any element of value arising from the expectation or accomplishment of the merger or consolidation. (c) If during a period of 30 days following the period of 20 days provided for in subsection (b), the corporation and any such stockholder fail to agree upon the value of such stock, any such stockholder, or the corporation surviving or resulting from the merger or consolidation, may demand a determination of the value of the stock of all such stockholders by an appraiser or appraisers to be appointed by the district court, by filing a petition with the court within four months after the expiration of the thirty-day period. (d) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the corporation, which shall file with the clerk of such court, within 10 days after such service, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the corporation. If the petition shall be filed by the corporation, the petition shall be accompanied by such duly verified list. The clerk of the court shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the corporation and to the stockholders shown upon the list at the addresses therein stated and notice shall also be given by publishing a notice at least once, at least one week before the day of the hearing, a newspaper of general circulation in the county in which the court is located. The court may direct such additional publication of notice as it deems advisable. The forms of the notices by mail and by publication shall be approved by the court. (e) After the hearing of such petition the court shall determine the stockholders who have complied with the provisions of this section and become entitled to the valuation of and payment for their A-1 131 shares, and shall appoint an appraiser or appraiser to determine such value. Any such appraiser may examine any of the books and records of the corporation or corporations the stock of which such appraiser is charged with the duty of valuing, and such appraiser shall make a determination of the value of the shares upon such investigation as seems proper to the appraiser. The appraiser or appraisers shall also afford a reasonable opportunity to the parties interested to submit to the appraiser pertinent evidence on the value of the shares. The appraiser or appraisers, also, shall have the powers and authority conferred upon masters by K.S.A. 60-253, and amendments thereto. (f) The appraiser or appraisers shall determine the value of the stock of the stockholders adjudged by the court to be entitled to payment therefor and shall file a report respecting such value in the office of the clerk of the court, and notice of the filing of such report shall be given by the clerk of the court to the parties in interest. Such report shall be subject to exceptions to be heard before the court both upon the law and facts. The court by its decree shall determine the value of the stock of the stockholders entitled to payment therefor and shall direct the payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto by the surviving or resulting corporation. Upon payment of the judgment of the surviving or resulting corporation, the clerk of the district court shall surrender to the corporation the certificates of shares of stock held by the clerk pursuant to subsection (g). The decree may be enforced as other judgments of the district court may be enforced, whether such surviving or resulting corporation be a corporation of this state or of any other state. (g) At the time of appointing the appraiser or appraisers, the court shall require the stockholders, who hold certificated shares and who demanded payment for their shares to submit their certificates of stock to the clerk of the court, to be held by the clerk pending the appraisal proceedings. If any stockholder fails to comply with such direction, the court shall dismiss the proceedings as to such stockholder. (h) The cost of any such appraisal, including a reasonable fee to and the reasonable expenses of the appraiser, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to such appraisal or any of them as appears to be equitable, except that the cost of giving the notice by publication and by registered or certified mail hereinabove provided for shall be paid by the corporation. The court, on application of any party in interest, shall determine the amount of interest, if any, to be paid upon the value of the stock of the stockholders entitled thereto. (i) Any stockholder who has demanded payment of the stockholder's stock as herein provided shall not thereafter be entitled to vote such for any purpose or be entitled to the payment of dividends or other distribution on the stock, except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation, unless the appointment of an appraiser or appraisers shall not be applied for within the time herein provided, or the proceeding be dismissed as to such stockholder, or unless such stockholder with the written approval of the corporation shall deliver to the corporation a written withdrawal of the stockholder's objections to and an acceptance of the merger or consolidation, in any of which cases the right to such stockholder to payment for the stockholder's stock shall cease. (j) The shares of the surviving or resulting corporation into which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. (k) This section shall not apply to the shares of any class or series of a class of Stock, which, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders at which the agreement of merger or consolidation is to be acted on, were either A-2 132 (1) registered on a national securities exchange, or (2) held of record by not less than 2,000 stockholders, unless the articles of incorporation of the corporation issuing such stock shall otherwise provide; nor shall this section apply to any of the shares of stock of the constituent corporation surviving a merger, if the merger did not require for its approval the vote of the stockholders of the surviving corporation, as provided in subsection (f) of K.S.A. 17-6701 and amendments thereto. This subsection shall not be applicable to the holders of a class or series of a class of stock of a constituent corporation if under the terms of a merger of consolidation pursuant to K.S.A. 17-6701 or 17-6702, and amendments thereto, such holders are required to accept for such stock anything except (i) stock or stock and cash in lieu of fractional shares of the corporation surviving or resulting from such merger or consolidation, or (ii) stock or stock and cash in lieu of fractional shares of any other corporation, which at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders at which the agreement of merger or consolidation is to be acted on, were either registered on a national securities exchange or held of record by not less than 2,000 stockholders, or (iii) a combination of stock or stock and cash in lieu of fractional shares as set forth in (i) and (ii) of this subsection. A-3 133 PROXY PEOPLES STATE BANKSHARES, INC. 1080 S.W. WANAMAKER ROAD, SUITE A TOPEKA, KANSAS 66604-3888 FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD --------------, 1996 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned stockholder(s) of PEOPLES STATE BANKSHARES, INC. ("Peoples Bankshares"), does hereby nominate, constitute and appoint - ---------------------- and ---------------------------, or each of them (with full power to act alone), true and lawful attorney(s), with full power of substitution, for the undersigned and in the name, place and stead of the undersigned to vote all of the shares of common stock, $1.00 par value, of Peoples Bankshares standing in the name of the undersigned on its books at the close of business on --------------------, 1996 at the Special Meeting of Stockholders to be held at -----------------, ---------------------, - -------------------------, -----------------------, on -----, --------------, 1996, at -:-0 -.m. Central Time, and at any adjournments or postponements thereof, with all the powers the undersigned would possess if personally present, as follows: 1. A proposal to approve the Agreement and Plan of Reorganization dated as of December 19, 1995 (the "Reorganization Agreement"), which provides for (i) the exchange (the "Exchange") of all of the shares of common stock of Peoples State Bank ("Peoples Bank") owned by Peoples Bankshares for shares of common stock of Mercantile Bancorporation Inc. ("MBI"), (ii) the merger (the "Merger") of Mercantile Bank of Shawnee County, a wholly owned subsidiary of Ameribanc, Inc. ("Ameribanc") in organization, with and into Peoples Bank, whereby, (x) upon consummation of the Exchange, each share of Peoples Bank common stock that is beneficially owned by Peoples Bankshares will be transferred to Ameribanc in exchange for 14.4819 shares of MBI common stock and (y) upon consummation of the Merger, each outstanding share of Peoples Bank common stock (other than the shares that have been transferred to Ameribanc pursuant to the Exchange) will be converted into 14.4819 shares of MBI common stock. / / FOR / / AGAINST / / ABSTAIN 2. To consider and vote upon a proposal to permit the Special Meeting to be adjourned or postponed, in the discretion of the proxies, which adjournment or postponement would be used for the purpose, among others, of allowing time for the solicitation of additional votes to approve the Reorganization Agreement. / / FOR / / AGAINST / / ABSTAIN THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS LISTED ABOVE. Dated: --------------- ------------------------------ Signature of Stockholder ------------------------------ Signature of Stockholder When signing as an attorney, executor, administrator, trustee or guardian, please give full title. If more than one person holds the power to vote the same shares, all must sign. All joint owners must sign. PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE. 134 PROXY PEOPLES STATE BANK 1064 S.W. WANAMAKER ROAD TOPEKA, KANSAS 66604-3888 FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ------------------, 1996 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned stockholder(s) of PEOPLES STATE BANK ("Peoples Bank"), does hereby nominate, constitute and appoint -------------------- and ---------------------, or each of them (with full power to act alone), true and lawful attorney(s), with full power of substitution, for the undersigned and in the name, place and stead of the undersigned to vote all of the shares of common stock, $100.00 par value, of Peoples Bank standing in the name of the undersigned on its books at the close of business on ------------, 1996 at the Special Meeting of Shareholders to be held at ------------------, - ----------------------, -----------------------, ------------------, on - --------------------, ------------------, 1996, at -:-0 -.m. Central Time, and at any adjournments or postponements thereof, with all the powers the undersigned would possess if personally present, as follows: 1. A proposal to approve the Agreement and Plan of Reorganization dated as of December 19, 1995 (the "Reorganization Agreement"), and the related Plan of Merger dated as of ---------------- (the "Plan of Merger," and, together with the Reorganization Agreement, the "Acquisition Agreements"), which provide for (i) the exchange (the "Exchange") of all of the shares of common stock of Peoples State Bank ("Peoples Bank") owned by Peoples Bank for shares of common stock of Mercantile Bancorporation Inc. ("MBI"), (ii) the merger (the "Merger") of Mercantile Bank of Shawnee County, a wholly owned subsidiary of Ameribanc, Inc. ("Ameribanc") in organization, with and into Peoples Bank, whereby, (x) upon consummation of the Exchange, each share of Peoples Bank common stock that is beneficially owned by Peoples Bankshares will be transferred to Ameribanc in exchange for 14.4819 shares of MBI common stock and (y) upon consummation of the Merger, each outstanding share of Peoples Bank common stock (other than the shares that have been transferred to Ameribanc pursuant to the Exchange) will be converted into 14.4819 shares of MBI common stock. / / FOR / / AGAINST / / ABSTAIN 2. To consider and vote upon a proposal to permit the Special Meeting to be adjourned or postponed, in the discretion of the proxies, which adjournment or postponement would be used for the purpose, among others, of allowing time for the solicitation of additional votes to approve the Acquisition Agreements. / / FOR / / AGAINST / / ABSTAIN THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS LISTED ABOVE. Dated: --------------- ------------------------------ Signature of Stockholder ------------------------------ Signature of Stockholder When signing as an attorney, executor, administrator, trustee or guardian, please give full title. If more than one person holds the power to vote the same shares, all must sign. All joint owners must sign. PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE. 135 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 of she 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 or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she 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 or shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred in connection with such action, suit or proceeding. Section 351.355(7) provides that a corporation may provide additional indemnification to any person indemnifiable under subsection (1) or (2), provided such additional indemnification is authorized by the corporation's articles of incorporation or an amendment thereto or by a shareholder-approved bylaw or agreement, and provided further that no person shall thereby be indemnified against conduct which was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct or which involved an accounting for profits pursuant to Section 16(b) of the Securities Exchange Act of 1934. Article 12 of the Restated Articles of Incorporation of MBI provides that MBI shall extend to its directors and executive officers the indemnification specified in subsections (1) and (2) and the additional indemnification authorized in subsection (7) and that it may extend to other officers, employees and agents such indemnification and additional indemnification. Pursuant to directors' and officers' liability insurance policies, with total annual limits of $30,000,000, MBI's directors and officers are insured, subject to the limits, retention, exceptions and other terms and conditions of such policy, against liability for any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the directors or officers of MBI, individually or collectively, or any matter claimed against them solely by reason of their being directors or officers of MBI. II-1 136 Item 21. Exhibits and Financial Statement Schedules - ---------------------------------------------------- A. Exhibits. See Exhibit Index. --------- B. Financial Statement Schedules. Not Applicable. ----------------------------- Item 22. Undertakings - ---------------------- (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of MBI pursuant to the foregoing provisions, or otherwise, MBI has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by MBI of expenses incurred or paid by a director, officer or controlling person of MBI in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, MBI will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (2) MBI hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of MBI's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) MBI hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (4) MBI undertakes that every prospectus (i) that is filed pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415 (Section 230.415 of this chapter), will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) MBI hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in the documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. II-2 137 (6) MBI hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. (7) MBI hereby undertakes: (a) To file during any period in which offers and sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof), which individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (b) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 138 SIGNATURES ---------- Pursuant to the requirements of the Securities Act of 1933, MBI has duly caused this Registration Statement relating to the acquisition of Peoples State Bank to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri, on May 10, 1996. MERCANTILE BANCORPORATION INC. By: /s/ Thomas H. Jacobsen ------------------------------- Thomas H. Jacobsen Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY We, the undersigned officers and directors of Mercantile Bancorporation Inc., hereby severally and individually constitute and appoint Thomas H. Jacobsen and John Q. Arnold, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Registration Statement on Form S-4, registering the issuance by Mercantile Bancorporation Inc. of shares of its common stock, and the preferred share purchase rights which trade therewith, in connection with the acquisition of Peoples State Bank, and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Thomas H. Jacobsen Chairman of the Board, May 10, 1996 - ------------------------------------ President, Chief Executive Thomas H. Jacobsen Officer and Director Principal Executive Officer /s/ John Q. Arnold Senior Executive Vice President and May 10, 1996 - ------------------------------------ Chief Financial Officer John Q. Arnold Principal Financial Officer /s/ Michael T. Normile Senior Vice President - Finance May 10, 1996 - ------------------------------------ and Control Michael T. Normile Principal Accounting Officer II-4 139 Signature Title Date --------- ----- ---- /s/ Harry M. Cornell, Jr. Director May 10, 1996 - ------------------------------------ Harry M. Cornell, Jr. /s/ William A. Hall Director May 10, 1996 - ------------------------------------ William A. Hall /s/ Thomas A. Hays Director May 10, 1996 - ------------------------------------ Thomas A. Hays /s/ Frank Lyon, Jr. Director May 10, 1996 - ------------------------------------ Frank Lyon, Jr. Director - ------------------------------------ Edward A. Mueller Director - ------------------------------------ Robert W. Murray /s/ Harvey Saligman Director May 10, 1996 - ------------------------------------ Harvey Saligman /s/ Craig D. Schnuck Director May 10, 1996 - ------------------------------------ Craig D. Schnuck /s/ Robert L. Stark Director May 10, 1996 - ------------------------------------ Robert L. Stark /s/ Patrick T. Stokes Director May 10, 1996 - ------------------------------------ Patrick T. Stokes /s/ John A. Wright Director March 1, 1996 - ------------------------------------ John A. Wright
II-5 140
EXHIBIT INDEX Exhibit Number Description Page - ------ ------------ ---- 2.1 Agreement and Plan of Reorganization dated as of December 19, 1995, by and between MBI and Ameribanc, as Buyers, and Peoples Bank and Peoples Bankshares, as Sellers. 2.2 Plan of Merger dated as of May 2, 1996, by and between Mercantile Bank of Shawnee County (in organization) and Peoples Bank. 2.3 Form of Voting Agreement dated as of December 19, 1995, by and between MBI and certain stockholders of Peoples Bankshares. 3.1 MBI's Restated Articles of Incorporation, as amended and currently in effect, filed as Exhibit 3(i) to MBI's Report on Form 10-Q for the quarter ended June 30, 1994, are incorporated herein by reference. 3.2 MBI's By-Laws, as amended and currently in effect, filed as Exhibit 3.2 to MBI's Report on Form 10-K for the year ended December 31, 1995, are incorporated herein by reference. 4.1 Form of Indenture Regarding Subordinated Securities between MBI and The First National Bank of Chicago, Trustee, filed as Exhibit 4.1 to MBI's Report on Form 8-K dated September 24, 1992, is incorporated herein by reference. 4.2 Rights Agreement dated as of May 23, 1988 between MBI and Mercantile Bank, as Rights Agent (including as exhibits thereto the form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and the form of Right Certificate), filed as Exhibits 1 and 2 to MBI's Registration Statement No. 0-6045 on Form 8-A, dated May 24, 1988, is incorporated herein by reference. 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 Acquisition. 10.1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10-3 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.2 The Mercantile Bancorporation Inc. Executive Incentive Compensation Plan, filed as Appendix C to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders is incorporated herein by reference. 10.3 The Mercantile Bancorporation Inc. Employee Stock Purchase Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 141 Exhibit Number Description Page - ------ ------------ ---- 10.4 The Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K for the year ended December 31, 1990 (File No. 1-11792), is incorporated herein by reference. 10.5 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-6 to MBI's Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.6 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan, filed as Appendix B to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. 10.7 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. Voluntary Deferred Compensation Plan, filed as Appendix D to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. 10.9 Form of Employment Agreement for Thomas H. Jacobsen, as amended, filed as Exhibit 10-8 to MBI's Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.10 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 Report on Form 10-K for the year ended December 31, 1989 (File No. 1-11792), is incorporated herein by reference. 10.11 Amended and Restated Agreement and Plan of Reorganization dated as of December 2, 1994 by and among MBI and TCBankshares, Inc., filed as Exhibit 2.1 to MBI's Report on Form 8-K dated December 21, 1994, is incorporated herein by reference. 10.12 Agreement and Plan of Reorganization dated August 4, 1995, by and between MBI and Hawkeye Bancorporation, filed as Exhibit 2.1 to MBI's Registration Statement No. 33-63609, is incorporated herein by reference. 10.13 Mercantile Bancorporation Inc. Supplemental Retirement Plan, filed as Exhibit 10-12 to MBI's Report on Form 10-K for the year ended December 31, 1992 (File No. 1-11792), is incorporated herein by reference. 23.1 Consent of KPMG Peat Marwick LLP with regard to the use of its reports on MBI's financial statements. 142 Exhibit Number Description Page - ------ ------------ ---- 23.2 Consent of GRA, Thompson, White & Co., P.C. with regard to the use of its reports on Peoples Bankshares and Peoples Bank's financial statements. 23.3 Consent of Thompson Coburn (included in Exhibit 5.1). 24.1 Power of Attorney (included on signature page).
EX-2.1 2 AGREEMENT AND PLAN OF REORGANIZATION 1 Exhibit 2.1 - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF REORGANIZATION among MERCANTILE BANCORPORATION INC., a Missouri corporation, and AMERIBANC, INC., a Missouri corporation, as Buyers, and PEOPLES STATE BANK, a Kansas state bank, and PEOPLES STATE BANKSHARES, INC., a Kansas corporation, as Sellers - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page Recitals 1 ARTICLE I THE ACQUISITION TRANSACTIONS 1.01 The Acquisition Transactions . . . . . . . . . . . . . . . 1 1.02 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.03 Method of Effecting Merger and Effective Time. . . . . . . 2 1.04 Charter and By-Laws. . . . . . . . . . . . . . . . . . . . 3 1.05 Board of Directors and Officers. . . . . . . . . . . . . . 3 1.06 Additional Actions . . . . . . . . . . . . . . . . . . . . 3 1.07 Conversion of Securities . . . . . . . . . . . . . . . . . 3 1.08 Exchange Procedures. . . . . . . . . . . . . . . . . . . . 4 1.09 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . 5 1.10 No Fractional Shares . . . . . . . . . . . . . . . . . . . 5 1.11 Transfer Restrictions; Closing of Stock Transfer Books . . 5 1.12 Anti-Dilution. . . . . . . . . . . . . . . . . . . . . . . 6 1.13 Reservation of Right to Revise Transaction . . . . . . . . 6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS 2.01 Organization and Authority . . . . . . . . . . . . . . . . 6 2.02 Corporate Authorization; Records . . . . . . . . . . . . . 7 2.03 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 8 2.04 Capitalization of Peoples Bank . . . . . . . . . . . . . . 8 2.05 Financial Statements . . . . . . . . . . . . . . . . . . . 8 2.06 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.07 Title to and Condition of Assets . . . . . . . . . . . . . 9 2.08 Real Property. . . . . . . . . . . . . . . . . . . . . . . 10 2.09 Loans, Commitments and Contracts . . . . . . . . . . . . . 11 2.10 Absence of Defaults. . . . . . . . . . . . . . . . . . . . 13 2.11 Absence of Undisclosed Liabilities . . . . . . . . . . . . 13 2.12 Allowance for Loan and Lease Losses; Non-Performing Assets 14 2.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.14 Material Adverse Change. . . . . . . . . . . . . . . . . . 15 2.15 Litigation and Other Proceedings . . . . . . . . . . . . . 15 2.16 Compliance with Laws . . . . . . . . . . . . . . . . . . . 15 2.17 Labor. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.18 Material Interests of Certain Persons. . . . . . . . . . . 16 2.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . 17 2.20 Conduct of Peoples Bankshares' and Peoples Bank's Businesses to Date . . . . . . . . . . . . . . . . . . . . 18 -i- 3 2.21 Registration Statement, Etc. . . . . . . . . . . . . . . . 18 2.22 Brokers and Finders; Other Liabilities . . . . . . . . . . 19 2.23 Directors' and Officers' Insurance . . . . . . . . . . . . 19 2.24 Tax and Regulatory Matters . . . . . . . . . . . . . . . . 19 2.25 Interest Rate Risk Management Instruments. . . . . . . . . 19 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE MERCANTILE ENTITIES 3.01 Organization and Authority . . . . . . . . . . . . . . . . 20 3.02 Corporate Authorization. . . . . . . . . . . . . . . . . . 20 3.03 Capitalization of Mercantile . . . . . . . . . . . . . . . 21 3.04 Mercantile Financial Statements. . . . . . . . . . . . . . 21 3.05 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.06 Material Adverse Change. . . . . . . . . . . . . . . . . . 22 3.07 Registration Statement, Proxy Statement, Etc.. . . . . . . 22 3.08 Brokers and Finders. . . . . . . . . . . . . . . . . . . . 22 3.09 Legal Proceedings or Other Adverse Facts . . . . . . . . . 22 ARTICLE IV CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME 4.01 Conduct of Businesses Prior to the Effective Time. . . . . 23 4.02 Forbearances of Peoples Bankshares and Peoples Bank. . . . 23 4.03 Forbearances of the Mercantile Entities. . . . . . . . . . 25 ARTICLE V ADDITIONAL AGREEMENTS 5.01 Access and Information; Due Diligence. . . . . . . . . . . 26 5.02 Registration Statement; Regulatory Matters . . . . . . . . 26 5.03 Shareholder Approvals. . . . . . . . . . . . . . . . . . . 27 5.04 Current Information. . . . . . . . . . . . . . . . . . . . 27 5.07 Agreements of Affiliates . . . . . . . . . . . . . . . . . 29 5.08 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.09 Miscellaneous Agreements and Consents. . . . . . . . . . . 29 5.10 Press Releases . . . . . . . . . . . . . . . . . . . . . . 30 5.11 Indemnification of Peoples Bank's Directors, Officers and Employees. . . . . . . . . . . . . . . . . . . . . . . . . 30 5.12 Employee Benefit Plans . . . . . . . . . . . . . . . . . . 30 5.13 Taxes of Peoples Bankshares. . . . . . . . . . . . . . . . 31 5.14 State Takeover Statutes. . . . . . . . . . . . . . . . . . 31 5.15 Tax Opinion Certificates . . . . . . . . . . . . . . . . . 31 5.16 Escrow Account . . . . . . . . . . . . . . . . . . . . . . 31 -ii- 4 ARTICLE VI CONDITIONS 6.01 Conditions to Each Party's Obligation To Effect the Acquisition. . . . . . . . . . . . . . . . . . . . . . . . 31 6.02 Conditions to Obligations of the Sellers . . . . . . . . . 32 6.03 Conditions to Obligations of the Mercantile Entities . . . 33 ARTICLE VII TERMINATION, AMENDMENT AND WAIVER 7.01 Termination. . . . . . . . . . . . . . . . . . . . . . . . 34 7.02 Effect of Termination. . . . . . . . . . . . . . . . . . . 34 7.03 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . 35 7.04 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE VIII GENERAL PROVISIONS 8.01 Non-Survival of Representations; Warranties and Agreements 35 8.02 Indemnification. . . . . . . . . . . . . . . . . . . . . . 35 8.03 No Assignment; Successors and Assigns. . . . . . . . . . . 36 8.04 Severability . . . . . . . . . . . . . . . . . . . . . . . 36 8.05 No Implied Waiver. . . . . . . . . . . . . . . . . . . . . 36 8.06 Headings . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.07 Entire Agreement . . . . . . . . . . . . . . . . . . . . . 36 8.08 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 36 8.09 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 37 Exhibit A Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . Exhibit B Affiliate Agreement. . . . . . . . . . . . . . . . . . . . . Exhibit C Tax Certificate. . . . . . . . . . . . . . . . . . . . . . . Exhibit D Tax Certificate. . . . . . . . . . . . . . . . . . . . . . . Exhibit E Tax Certificate. . . . . . . . . . . . . . . . . . . . . . . Exhibit F Tax Certificate. . . . . . . . . . . . . . . . . . . . . . . Exhibit G Opinion of Mercantile's Counsel. . . . . . . . . . . . . . . Exhibit H Opinion of Sellers' Counsel. . . . . . . . . . . . . . . . .
-iii- 5 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), made and entered into as of December 19, 1995 by and among MERCANTILE BANCORPORATION INC., a Missouri corporation ("Mercantile"), AMERIBANC, INC., a Missouri corporation ("Ameribanc" and, collectively with Mercantile, the "Mercantile Entities"), PEOPLES STATE BANK, a Kansas state bank ("Peoples Bank"), and PEOPLES STATE BANKSHARES, INC., a Kansas corporation ("Peoples Bankshares" and, collectively with Peoples Bank, the "Sellers"), has reference to the following facts and circumstances: A. Ameribanc desires to acquire one hundred percent (100%) of the issued and outstanding shares of common stock of Peoples Bank; and B. Peoples Bankshares is the beneficial and record owner of eighty-eight and 88/100 percent (88.88%) of the issued and outstanding shares of the common stock of Peoples Bank; and C. Mercantile is the beneficial and record owner of one hundred percent (100%) of the issued and outstanding shares of the common stock of Ameribanc, which, in turn, will be the beneficial owner of one hundred percent (100%) of the issued and outstanding shares of the common stock of a bank to be organized under the laws of the State of Kansas ("Acquisition Bank"); and D. Peoples Bankshares has agreed to exchange all shares of Peoples Bank owned beneficially and of record by Peoples Bankshares to Ameribanc in consideration of the issuance of shares of Mercantile Common Stock (as defined in Section 1.01 hereof) by Mercantile to Peoples Bankshares as described in this Agreement; and E. The Executive Committee of the Board of Directors of Mercantile and the respective Boards of Directors of Ameribanc, Acquisition Bank and Peoples Bank will approve the concurrent merger of Acquisition Bank with and into Peoples Bank pursuant to the terms of this Agreement, as a result of which Ameribanc will convert the eleven and 12/100 percent (11.12%) of the issued and outstanding shares of Peoples Bank not owned by Peoples Bankshares; and F. The Mercantile Entities and the Sellers desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the transactions contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: ARTICLE I --------- THE ACQUISITION TRANSACTIONS 1.01 The Acquisition Transactions. Subject to the terms and ---------------------------- conditions of this Agreement, Ameribanc and Peoples Bankshares will consummate an exchange of all shares of Peoples Bank common stock, $100.00 par value (the "Peoples Bank Common Stock"), owned beneficially and of record by Peoples Bankshares (the "Exchange") for shares of common stock, $5.00 par value, of Mercantile with associated "Rights" under the "Rights Agreement" (as those terms are defined in Section 3.03 hereof) (collectively, the "Mercantile Common Stock") as set forth in this Agreement. Mercantile hereby undertakes to execute and deliver or cause to be delivered all shares of Mercantile Common Stock required to be delivered to Peoples Bankshares pursuant to this Agreement. Peoples Bankshares shall 6 liquidate within six months after the Exchange (the "Liquidation") and effect a liquidating distribution to its shareholders of all shares of Mercantile Common Stock that are then owned beneficially and of record by Peoples Bankshares. Simultaneously with the Exchange, and subject to the terms and conditions of this Agreement, Acquisition Bank will merge with and into Peoples Bank (the "Merger" and, collectively with the Exchange, the "Acquisition") under the terms set forth in the related Plan of Merger (the "Plan of Merger") to be executed prior to the Closing Date by and between Peoples Bank and Acquisition Bank in substantially the form set forth in Exhibit A to this Agreement, whereby the shareholders of Peoples Bank (other - --------- than Ameribanc or Peoples Bankshares, as the case may be) will receive shares of Mercantile Common Stock as set forth in this Agreement and the Plan of Merger. Mercantile hereby undertakes to execute and deliver or cause to be delivered all shares of Mercantile Common Stock required to be delivered to the shareholders of Peoples Bank pursuant to this Agreement and the Plan of Merger. Peoples Bankshares will receive the number of shares of Mercantile Common Stock in the Exchange, and the shareholders of Peoples Bank (other than Ameribanc or Peoples Bankshares, as the case may be) will receive the number of shares of Mercantile Common Stock in the Merger, that will equal their respective percentage ownership interests in the outstanding shares of Peoples Bank Common Stock multiplied by the total number of shares of Mercantile Common Stock issuable in the Acquisition as set forth in Section 1.07 of this Agreement (the "Acquisition Consideration"). Upon consummation of the Merger, the separate corporate existence of Acquisition Bank will cease and Peoples Bank (sometimes hereinafter referred to as the "Surviving Bank") will be the surviving bank. The Surviving Bank will continue to do business under the Charter of Peoples Bank. As soon as practicable following the Merger, Mercantile Bank of Topeka will be merged with and into the Surviving Bank (the "Topeka Merger"). 1.02 Closing. The closing (the "Closing") of the Acquisition, ------- unless the parties hereto shall otherwise mutually agree, shall take place at the offices of Mercantile in St. Louis, Missouri, at 10:00 a.m., local time, on the first Business Day (the "Closing Date") of the month commencing at least five Business Days following the last to occur of the following events: (a) the receipt of the requisite approval of the Exchange and the Agreement by the shareholders of Peoples Bankshares and the Merger, the Agreement and the Plan of Merger by the shareholders of Peoples Bank as set forth in Section 2.02 of this Agreement and (b) the approval of the Acquisition by the Federal Deposit Insurance Corporation (the "FDIC"), the Kansas State Bank Commissioner (the "Commissioner") and any other bank regulatory agency that may be necessary or appropriate, and the expiration of any required waiting period. For purposes of this Agreement, "Business Day" shall mean any day that the offices of the Kansas Commissioner is open for the receipt of official filings. 1.03 Method of Effecting Merger and Effective Time. On the --------------------------------------------- Closing Date, the parties hereto will cause the Merger to be consummated by delivering to the Kansas Commissioner, for filing, copies of resolutions of the respective shareholders of Acquisition Bank and Peoples Bank approving the Plan of Merger in such form as required by, and executed and acknowledged in accordance with, the relevant provisions of Chapters 9 and 17 of the Kansas Statutes Annotated (the "Kansas Banking Act"). The Merger shall be effective on the date and at the time (the "Effective Time") that the authorization of the Kansas Commissioner is filed with the Office of the Secretary of State of the State of Kansas in accordance with the Kansas Banking Act. -2- 7 1.04 Charter and By-Laws. The Charter and By-Laws of Peoples ------------------- Bank in effect immediately prior to the Effective Time shall be the Charter and By-Laws of the Surviving Bank, in each case until amended in accordance with their respective provisions and applicable law. 1.05 Board of Directors and Officers. ------------------------------- (a) At the Effective Time, the members of the Board of Directors of the Surviving Bank and the terms of these directors shall be as designated by Ameribanc immediately prior to the Effective Time. (b) The officers of Surviving Bank shall be the persons designated by Ameribanc immediately prior to the Effective Time, and such persons will serve in their designated offices, thereafter, until their respective successors are duly elected and qualified. 1.06 Additional Actions. If, at any time after the Effective ------------------ Time, the Surviving Bank shall consider or be advised that any further deeds, assignments or assurances in law or any other acts are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in the Surviving Bank its right, title or interest in, to, or under any of the rights, properties or assets of Peoples Bank, or (b) otherwise carry out the purposes of this Agreement or the Plan of Merger, Peoples Bank and its officers and directors shall be deemed to have granted to the Surviving Bank an irrevocable power of attorney to execute and deliver all such deeds, assignments or assurances in law and to do all acts necessary or proper to vest, perfect or confirm title to and possession of such rights, properties or assets in the Surviving Bank and otherwise to carry out the purposes of this Agreement or the Plan of Merger, and the officers and directors of the Surviving Bank are authorized in the name of Peoples Bank or otherwise to take any and all such action. 1.07 Conversion of Securities. ------------------------ (a) At the Effective Time, Mercantile will issue 325,843 shares of Mercantile Common Stock as Acquisition Consideration in the Exchange and the Merger. Peoples Bankshares and each of the other shareholders of Peoples Bank at the Effective Time (other than Ameribanc) will be entitled to receive the number of shares of Mercantile Common Stock issuable as the Acquisition Consideration that is determined by multiplying such Acquisition Consideration by such shareholders' respective percentage ownership interests in Peoples Bank. (b) At the Effective Time, Peoples Bankshares, by virtue of the Exchange and without any other action on the part of the Mercantile Entities or Peoples Bankshares, will be entitled to receive its percentage interest of the Acquisition Consideration as determined in Section 1.07(a) hereof, upon delivery at Closing of the certificates evidencing its shares of Peoples Bank Common Stock. Also, at the Effective Time, by virtue of the Merger and without any action on the part of the Mercantile Entities, Peoples Bank or any Peoples Bank shareholder, each share of Peoples Bank Common Stock issued and outstanding at the Effective Time (other than any shares held by Ameribanc (other than in a fiduciary capacity or as a result of debts previously contracted), which shall be cancelled, and other than any "Dissenting Shares" (as defined in Section 1.09 hereof)), shall cease to be outstanding and shall be converted into and become the right to receive his or her percentage interest of the Acquisition Consideration as determined in Section 1.07(a) hereof. -3- 8 1.08 Exchange Procedures. ------------------- (a) Prior to the Closing Date, Mercantile shall appoint KeyCorp Shareholder Services, Inc., or such other bank or trust company selected by Mercantile and reasonably acceptable to the Sellers, as the exchange agent (the "Exchange Agent") to effect the exchange of certificates evidencing shares of Peoples Bank Common Stock for shares of Mercantile Common Stock issuable as Acquisition Consideration to each person entitled to receive such Acquisition Consideration. At the Effective Time, Mercantile shall have granted the Exchange Agent the requisite power and authority to effect for and on behalf of Mercantile the issuance of the number of shares of Mercantile Common Stock issuable as Acquisition Consideration. (b) The certificates evidencing shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares on the Closing Date, and such other documentation as shall be reasonably required by Mercantile to effect the Exchange, shall be delivered by Peoples Bankshares at Closing to the Exchange Agent in exchange for the number of full shares of Mercantile Common Stock for which the shares of Peoples Bank Common Stock evidenced by the certificate or certificates surrendered have been exchanged pursuant to this Agreement. For all other shareholders of Peoples Bank, the Exchange Agent shall mail, as soon as practicable following the Effective Time, to each such holder of record of Peoples Bank as of the Closing Date a notice of consummation of the Merger and a form of letter of transmittal, pursuant to which each such shareholder shall transmit the certificate or certificates formerly representing shares of the Peoples Bank Common Stock. As soon as practicable after surrender of such certificate to the Exchange Agent with a properly completed letter of transmittal, the Exchange Agent will promptly mail by first-class mail to such shareholder a certificate or certificates representing the number of full shares of Mercantile Common Stock into which the shares of Peoples Bank Common Stock evidenced by the certificate or certificates surrendered shall have been converted pursuant to this Agreement and the Plan of Merger. (c) The Exchange Agent shall accept such certificates upon compliance with such reasonable terms and conditions as the Exchange Agent may impose to effect an orderly exchange thereof in accordance with customary exchange practices. Each outstanding certificate that, prior to the Effective Time, represented Peoples Bank Common Stock shall, except as otherwise provided in this Agreement, until duly surrendered to the Exchange Agent be deemed to evidence ownership of the number of shares of Mercantile Common Stock into which such Peoples Bank Common Stock shall have been converted in the Merger. After the Effective Time, there shall be no further transfer on the records of Peoples Bank of certificates representing shares of capital stock of Peoples Bank, and if such certificates are presented to Peoples Bank for transfer, they shall be cancelled against delivery of the Acquisition Consideration provided therefor in this Agreement and the Plan of Merger. If the record date for any dividend or other distribution in respect of Mercantile Common Stock, including any redemption by Mercantile of the Rights associated therewith, shall occur on or after the Closing Date, the former holders of Peoples Bank Common Stock shall be entitled thereto, but no dividends declared or other distributions in respect of Mercantile Common Stock issuable as Acquisition Consideration will be remitted to any person entitled to receive Mercantile Common Stock under this Agreement until such person surrenders the certificate or certificates representing Peoples Bank Common Stock, at which time such dividends or other distributions shall be remitted to such person, without interest and less any amounts in respect of taxes that may have been imposed thereon and which are required to be withheld by the Exchange Agent or Mercantile. Neither the Exchange Agent, Mercantile nor Peoples Bank shall be liable to any holder of Peoples Bank Common Stock for any of the Acquisition Consideration paid to a public official pursuant to applicable abandoned property, escheat or similar laws. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to shares of Mercantile Common Stock held by it as Acquisition Consideration from time to time hereunder. -4- 9 (d) No transfer taxes shall be payable by Peoples Bankshares or by any of the other shareholders of Peoples Bank in respect of the issuance of certificates for Mercantile Common Stock as Acquisition Consideration, and no expenses shall be imposed on Peoples Bankshares or on any of the other shareholders of Peoples Bank in connection with the exchange or conversion at the Effective Time of shares of Peoples Bank Common Stock into shares of Mercantile Common Stock pursuant to the Acquisition as contemplated by this Agreement and the delivery of such shares to the former holder of Peoples Bank Common Stock entitled thereto, except that (i) if any certificate for shares of Mercantile Common Stock is to be issued in a name other than that in which a certificate or certificates for shares of Peoples Bank Common Stock surrendered shall have been registered, it shall be a condition to such issuance that the person requesting such issuance shall pay to Mercantile any transfer taxes payable by reason thereof or of any prior transfer of such surrendered certificate or certificates or establish to the satisfaction of Mercantile that such taxes have been paid or are not payable, and (ii) nothing herein shall relieve Peoples Bankshares or any of the other shareholders of Peoples Bank of any expenses associated with surrendering such holder's certificates evidencing Peoples Bank Common Stock to the Exchange Agent. 1.09 Dissenting Shares. ----------------- (a) "Dissenting Shares" means any shares of Peoples Bank Common Stock held by any holder who becomes entitled to payment of the value of such shares under Section 17-6712 of the Kansas Statutes Annotated ("Section 17-6712"). Any holders of Dissenting Shares shall be entitled to payment for such shares only to the extent permitted by and in accordance with the provisions of such law, and Ameribanc shall cause the Surviving Bank to pay such consideration solely with funds provided by Peoples Bank. (b) Each party hereto shall give the other prompt notice of any written demands for the payment of the fair value of such shareholder's shares, withdrawals of such objections or demands, and any other instruments, served pursuant to Section 17-6712, received by such party, and Peoples Bank shall give Mercantile the opportunity to direct all negotiations and proceedings with respect to such objections or demands. Peoples Bank shall not voluntarily make any payment with respect to any demands for payment of value and shall not, except with the prior written consent of Mercantile, settle or offer to settle any such demands. 1.10 No Fractional Shares. Notwithstanding any other -------------------- provision of this Agreement, neither certificates nor scrip for fractional shares of Mercantile Common Stock shall be issued as Acquisition Consideration. Each holder of shares of Peoples Bank Common Stock who otherwise would have been entitled to a fraction of a share of Mercantile Common Stock shall receive in lieu thereof and, at the time such holder receives the shares of Mercantile Common Stock to which the holder is entitled as Acquisition Consideration, cash (without interest) in an amount determined by multiplying the fractional share interest to which such holder would otherwise be entitled by the closing stock price of Mercantile Common Stock on the New York Stock Exchange (the "NYSE") Composite Tape as reported in The Wall Street Journal on the Closing Date. No such holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share. 1.11 Transfer Restrictions; Closing of Stock Transfer Books. ------------------------------------------------------ Peoples Bankshares agrees that from and after the date of this Agreement, Peoples Bankshares will not sell, dispose of or otherwise transfer any shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares. As to all other shares of Peoples Bank Common Stock, the stock transfer books of Peoples Bank shall be closed at the close of business on the Business Day immediately preceding the Closing Date. In the event of a transfer of ownership of Peoples Bank Common Stock which is not -5- 10 registered in the transfer records prior to the closing of such records, the Acquisition Consideration issuable in conversion of such stock pursuant to this Agreement may be delivered to a transferee, if the certificate representing such shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and all applicable stock transfer taxes are paid. Mercantile and the Exchange Agent shall be entitled to rely upon the stock transfer books of Peoples Bank to establish the identity of those persons entitled to receive the Acquisition Consideration specified in this Agreement for their shares of Peoples Bank Common Stock, which books shall be conclusive with respect to the ownership of such shares. In the event of a dispute with respect to the ownership of any such shares, Mercantile and the Exchange Agent shall be entitled to deposit any Acquisition Consideration represented thereby in escrow with an independent party and thereafter be relieved with respect to any claims to such consideration. 1.12 Anti-Dilution. If, between the date of this Agreement ------------- and the Effective Time, a share of Mercantile Common Stock shall be changed into a different number of shares of Mercantile Common Stock or a different class of shares or shares of another issuer by reason of reclassification, recapitalization, split-up, merger, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then the number of shares of Mercantile Common Stock issuable as Acquisition Consideration pursuant to Section 1.07 of this Agreement will be appropriately and proportionately adjusted so that the Acquisition Consideration shall consist of that number of shares of Mercantile Common Stock or other securities as such shares would have been converted or changed into pursuant to such reclassification, recapitalization, split-up, merger, exchange of shares or readjustment or as a result of such stock dividend had the record date therefor been immediately following the Effective Time. 1.13 Reservation of Right to Revise Transaction. The ------------------------------------------ Mercantile Entities may at any time change the method of effecting the Acquisition by the Mercantile Entities (including without limitation the provisions of this Article I) if and to the extent the Mercantile Entities deem such change to be desirable; provided, however, that no such change shall (A) alter or change the amount or kind of the Acquisition Consideration, (B) in the reasonable opinion of the tax counsel or tax advisor of the Sellers, adversely affect the tax treatment to the holders of Peoples Bank Common Stock and/or the holders of Peoples Bankshares Common Stock as a result of receiving the Acquisition Consideration or (C) materially impede or delay receipt of any approval referred to in Section 6.01(c) or the consummation of the transactions contemplated by this Agreement or the Plan of Merger. In the event Thompson & Mitchell is unable to deliver the tax opinion contemplated by Section 6.01(g) hereof, the parties hereby agree to use their reasonable best efforts to revise and/or restructure the transaction such that Thompson & Mitchell can deliver such tax opinion. ARTICLE II ---------- REPRESENTATIONS AND WARRANTIES OF SELLERS As an inducement to the Mercantile Entities to enter into and perform their respective obligations under this Agreement, and notwithstanding any examinations, inspections, audits and other investigations made by the Mercantile Entities, the Sellers hereby jointly and severally represent and warrant to the Mercantile Entities as to the following matters, except that warranties of Peoples Bank shall relate only to matters pertaining to Peoples Bank: 2.01 Organization and Authority. Peoples Bankshares is a -------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Kansas, is duly qualified to do business, and is in good standing in all jurisdictions where its ownership or leasing of property or -6- 11 the conduct of its business requires it to be so qualified, and has the corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. Peoples Bankshares is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). A current and accurate list of Peoples Bankshares' shareholders, including addresses thereof, and true and complete copies of the Articles of Incorporation and By-Laws of Peoples Bankshares, each as in effect on the date of this Agreement, are included in Schedule 2.01 hereof. - ------------- Peoples Bank is a commercial bank duly organized, validly existing and in good standing under the laws of the State of Kansas. The deposits of Peoples Bank are insured by the FDIC under the Federal Deposit Insurance Act of 1950, as amended (the "FDI Act"). Peoples Bank is qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and has the corporate power and authority to own and operate its properties and to carry out its business as and where the same is now being conducted. A current and accurate list of Peoples Bank's shareholders, including addresses thereof, and true and complete copies of the Charter, Certificate of Authority and By-Laws of Peoples Bank, each as in effect on the date of this Agreement, are included in Schedule 2.01 hereof. - ------------- 2.02 Corporate Authorization; Records. -------------------------------- (a) Peoples Bankshares has the corporate power and authority to enter into this Agreement, and Peoples Bank has the corporate power and authority to enter into this Agreement and the Plan of Merger and, subject to the approval of the Exchange and this Agreement by the shareholders of Peoples Bankshares and to the approval of the Merger, this Agreement and the Plan of Merger by the shareholders of Peoples Bank, and such approvals of governmental agencies and other governing boards having regulatory authority over Peoples Bankshares and/or Peoples Bank as may be required by applicable law, rule or regulation, to carry out their respective obligations thereunder. The only shareholder vote of Peoples Bankshares required to approve the Exchange and this Agreement is the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bankshares Common Stock. The only shareholder vote of Peoples Bank required to approve the Merger, this Agreement and the Plan of Merger is the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank Common Stock. The execution, delivery and performance of this Agreement by Peoples Bankshares and the consummation of the Exchange have been duly authorized by the Board of Directors of Peoples Bankshares. The execution, delivery and performance of this Agreement and the Plan of Merger by Peoples Bank and the consummation of the Merger have been duly authorized by the Board of Directors of Peoples Bank. Subject to the approvals, as aforesaid, this Agreement is a valid and binding obligation of Peoples Bankshares, and this Agreement and the Plan of Merger are the valid and binding obligations of Peoples Bank, enforceable against each in accordance with their respective terms. (b) Neither the execution, delivery and performance by Peoples Bankshares of this Agreement or by Peoples Bank of this Agreement or the Plan of Merger, nor the consummation of the transactions contemplated thereby, nor compliance by Peoples Bankshares or Peoples Bank with any of the provisions thereof will (a) violate, conflict with or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of Peoples Bankshares or Peoples Bank under any of the terms, conditions or provisions of (i) their respective Articles of Incorporation, Charter or By-Laws, or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Peoples Bankshares or Peoples Bank is a party or by which it may be bound, or -7- 12 to which Peoples Bankshares or Peoples Bank or any of their respective properties or assets may be subject, or (b) subject to compliance with the statutes and regulations referred to in subsection (c) of this Section 2.02, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Peoples Bankshares or Peoples Bank or any of their respective properties or assets. (c) Other than in connection or in compliance with the provisions of the Kansas Banking Act, the Securities Act of 1933 and the rules and regulations thereunder (the "Securities Act"), the Securities Exchange Act of 1934 and the rules and regulations thereunder (the "Exchange Act"), the securities or blue sky laws of the various states or filings, consents, reviews, authorizations, approvals or exemptions required under the BHC Act, or any required approvals of the FDIC and the Kansas Commissioner, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Peoples Bankshares or Peoples Bank of the transactions contemplated by this Agreement or the Plan of Merger. (d) The minute books and stock records of Peoples Bankshares and Peoples Bank are complete and correct in all respects and accurately reflect in all respects all meetings, consents and other actions of the organizers, incorporators, shareholders, Board of Directors and committees of the Board of Directors occurring since the organization of each. 2.03 Subsidiaries. Peoples Bank has no subsidiaries and does ------------ not control, or have any equity ownership interest in, any other corporation, partnership, joint venture or other business association, other than any interest pledged to Peoples Bank in the ordinary course of its business as security for the obligations of third parties to Peoples Bank or held by Peoples Bank as a consequence of its exercise of rights and remedies in respect of any interest pledged as security in respect of such obligation. 2.04 Capitalization of Peoples Bank. The authorized capital ------------------------------ stock of Peoples Bank consists of 22,500 shares of Common Stock, $100.00 par value, of which, as of the date hereof, 22,500 shares were issued and outstanding. Peoples Bankshares has and will have as of the Effective Time good and marketable title to 19,997 shares, or 88.88% of the then issued and outstanding shares of Peoples Bank Common Stock, free and clear of any liens, claims, charges, encumbrances and assessments of any kind or nature whatsoever. There are no other shares of capital stock or other Equity Securities (as defined below) of Peoples Bank outstanding. All of the issued and outstanding shares of Peoples Bank Common Stock are validly issued, fully paid and nonassessable. "Equity Securities" of an issuer means capital stock or other equity securities of such issuer, options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any capital stock or other equity securities of such issuer, or contracts, commitments, understandings or arrangements by which such issuer is or may become bound to issue additional shares of its capital stock or other equity securities of such issuer, or options, warrants, scrip or rights to purchase, acquire, subscribe to, calls on or commitments for any shares of its capital stock or other equity securities. 2.05 Financial Statements. -------------------- (a) Attached hereto as Schedule 2.05(a) are copies of ---------------- the following financial statements: (i) Balance sheets of Peoples Bankshares as of December 31, 1994, 1993 and 1992, related statements of income, changes in shareholders' equity and cash flows for the three (3) years ended December 31, 1994, together with the notes thereto compiled by Peoples Bankshares' independent auditors; -8- 13 (ii) Balance sheets of Peoples Bankshares as of June 30, 1995 and 1994 and related statements of income, changes in shareholders' equity and cash flows for the six-month periods ended June 30, 1995 and 1994; (iii) Form FR Y-6 reports of Peoples Bankshares as of December 31, 1994, 1993 and 1992, and Form FR Y-9LP and Form FR Y-9C reports filed during such periods, as furnished by Peoples Bankshares to the Federal Reserve Board; and (iv) The Consolidated Reports of Condition and Income of Peoples Bank as of and for the years ended December 31, 1994, 1993 and 1992, and as of and for the nine-month period ended September 30, 1995, as filed by Peoples Bank with the FDIC. (b) The financial statements referenced above are referred to collectively as the "Peoples Financial Statements." The Peoples Financial Statements have been prepared in accordance with the books and records of Peoples Bankshares and Peoples Bank in accordance with generally accepted accounting principles ("GAAP") or, as to the financial statements referenced in subsection (a)(iii) and (a)(iv) above, regulatory accounting principles, consistently applied, and present fairly the consolidated financial positions of Peoples Bankshares and Peoples Bank, respectively, at the dates thereof and the consolidated results of their respective operations and cash flows. (c) Peoples Bankshares and Peoples Bank have each prepared, kept and maintained through the date hereof true, correct and complete financial and other books and records of their affairs which fairly reflect their respective financial conditions, results of operations, businesses, assets, prospects or operations. 2.06 Reports. Since January 1, 1992, Peoples Bankshares and ------- Peoples Bank have filed all reports, registrations and statements, together with any required amendments thereto, that were required to be filed with any federal, state, municipal or local government, securities, banking, insurance and other governmental or regulatory authority, and the agencies and staffs thereof (such entities being referred to herein collectively as the "Regulatory Authorities and individually as a "Regulatory Authority"), having jurisdiction over the affairs of each. All such reports and statements filed with any such Regulatory Authority are collectively referred to herein as the "Peoples Reports." As of their respective dates, the Peoples Reports complied in all respects with all the rules and regulations promulgated by the applicable Regulatory Authority. With respect to the Peoples Reports filed with the Regulatory Authorities, there is no material unresolved violation, criticism or exception by any Regulatory Authority with respect to any report or statement filed by, or any examination of, Peoples Bank or Peoples Bankshares. 2.07 Title to and Condition of Assets. -------------------------------- (a) Except as may be reflected in the Peoples Financial Statements or set forth on Schedule 2.07(a) and excepting all real ---------------- property (which is the subject of Section 2.08), Peoples Bank has, and at the Closing Date will have, good and marketable title to its properties and assets, including, without limitation, those reflected on the Peoples Financial Statements, relating to Peoples Bank, free and clear of any liens, charges, pledges, encumbrances, defects, claims or rights of third parties, except for liens for taxes, assessments or other governmental charges not yet delinquent. -9- 14 (b) No assets reflected on the Peoples Financial Statements in respect of Peoples Bank have been sold, leased, transferred, assigned or otherwise disposed of since September 30, 1995, except in the ordinary course of business or as set forth in Schedule 2.07(b) under the ---------------- heading "Dispositions." (c) All furniture, fixtures, vehicles, machinery and equipment and computer software owned or used by Peoples Bank, including any of such items leased as a lessee and all facilities and improvements comprising part of any owned or leased real property, taken as a whole, with no single such item being deemed of importance, are fit for the purposes for which they were intended, are in good order and repair, free of defects and in good operating condition, subject only to normal wear and tear. The operation by Peoples Bank of such assets is in compliance in all respects with all applicable laws, ordinances and rules and regulations of any governmental authorities having jurisdiction. 2.08 Real Property. ------------- (a) The legal description of each parcel of real property owned by Peoples Bank (other than real property acquired in foreclosures or in lieu of foreclosure in the course of collection of its loans and being held by Peoples Bank for disposition as required by law) is set forth in Schedule 2.08(a) attached hereto under the heading "Owned Real ---------------- Property" (such real property being herein referred to as the "Owned Real Property"). The legal description of each parcel of real property leased by Peoples Bank as lessee is also set forth in Schedule 2.08(a) under the ---------------- heading "Leased Real Property" (such real property being herein referred to as the "Leased Real Property"). Collectively, the Owned Real Property and the Leased Real Property is herein referred to as the "Real Property." (b) There is no pending dispute involving Peoples Bank as to the title of or the right to use any of its Real Property. (c) Peoples Bank has no interest in any other real property except interests as a mortgagee, and except for real property acquired in foreclosures or in lieu of foreclosure and being held for disposition as required by law. (d) None of the buildings, structures or other improvements located on the Real Property encroaches upon or over any adjoining parcel or real estate or any easement or right-of-way or "setback" line and all such buildings, structures and improvements are located and constructed in conformity with all applicable zoning ordinances and building codes. (e) None of the buildings, structures or improvements located on the Real Property are the subject of any official complaint or notice by any governmental authority of violation of any applicable zoning ordinance or building code, and there is no zoning ordinance, building code, use or occupancy restriction or condemnation action or proceeding pending, or, to the best knowledge of the Sellers, threatened, with respect to any such building, structure or improvement. The Real Property is in generally good condition, reasonable wear and tear excepted, and has been maintained in accordance with reasonable and prudent business practices applicable to like facilities. (f) Except as may be reflected on the Peoples Financial Statements or with respect to such easements, liens, defects or encumbrances as do not individually or in the aggregate adversely affect the use or value of the parcel of Real Property, Peoples Bank has, and at the Closing Date will have, good and marketable title to its Real Property, free and clear of any liens, charges, pledges, encumbrances, defects, claims or rights of third parties. -10- 15 2.09 Loans, Commitments and Contracts. -------------------------------- (a) Schedule 2.09(a) contains a complete and accurate ---------------- listing of all contracts entered into with respect to deposits of $100,000 or more, by account or other identifying number, and all loan agreements and commitments, notes, security agreements, repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements and other documents relating to or involving extensions of credit or other commitments to extend credit by Peoples Bank with respect to any one entity or related group of entities in excess of $250,000, to which any of the foregoing is a party or by which it is bound, by account or other identifying number, and, where applicable, such other information as shall be necessary to identify any related group of entities. (b) Except for the contracts and agreements required to be listed on Schedule 2.09(a) and except as set forth in Schedule 2.09(b) ---------------- ---------------- hereto, Peoples Bank is not a party to or bound by any: (i) agreement, contract, arrangement, understanding or commitment with any labor union; (ii) franchise or license agreement; (iii) written employment, severance or termination pay, agency, consulting or similar agreement, contract, arrangement, understanding or commitment in respect of personal services; (iv) any material agreement, arrangement or commitment (A) not made in the ordinary course of business, or (B) pursuant to which the Sellers or any subsidiary of the Sellers is or may become obligated to invest in or contribute to any subsidiary of the Sellers other than pursuant to the Sellers Employee Plans (as that term is defined in Section 2.19 hereof) and agreements relating to joint ventures or partnerships set forth in Schedule 2.03, true and complete copies of which have been ------------- furnished to the Mercantile Entities; (v) any agreement, indenture or other instrument not disclosed in the Peoples Financial Statements relating to the borrowing of money by Peoples Bank, Peoples Bankshares or any of their respective subsidiaries or the guarantee by Peoples Bank, Peoples Bankshares or any of their respective subsidiaries of any such obligation (other than trade payables or instruments related to transactions entered into in the ordinary course of business by Peoples Bank, Peoples Bankshares or any of their respective subsidiaries, such as deposits, Fed Funds borrowings, Federal Home Loan Bank Board advances and repurchase and reverse repurchase agreements), other than such agreements, indentures or instruments providing for annual payments of less than $50,000; (vi) any contract containing covenants which limit the ability of Peoples Bank, Peoples Bankshares or any of their respective subsidiaries to compete in any line of business or with any person or which involves any restrictions on the geographical area in which, or method by which, Peoples Bank, Peoples Bankshares or any of their respective subsidiaries may carry on their respective businesses (other than as may be required by law or any applicable Regulatory Authority); -11- 16 (vii) any other contract or agreement which is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K as promulgated by the Securities and Exchange Commission (the "SEC") to be performed after the date of this Agreement; (viii) any lease with annual rental payments aggregating $25,000 or more; (ix) loans or other obligations payable or owing to any officer, director or employee except (A) salaries, wages and directors' fees incurred and accrued in the ordinary course of business and (B) obligations due in respect of any depository accounts maintained by any of the foregoing at Peoples Bank in the ordinary course of business; (x) loans or debts payable or owing by any executive officer or director of Peoples Bank, Peoples Bankshares or any of their respective subsidiaries or any other person or entity deemed an "executive officer" or a "related interest" of any of the foregoing, as such terms are defined in Regulation O of the Federal Reserve Board; (xi) other agreement, contract, arrangement, understanding or commitment involving an obligation by Peoples Bank, Peoples Bankshares or any of their respective subsidiaries of more than $50,000 and extending beyond six months from the date hereof that cannot be cancelled without cost or penalty upon notice of 30 days or less, other than contracts entered into in respect of deposits, loan agreements and commitments, notes, security agreements, repurchase and reverse repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements and other documents relating to transactions entered into by Peoples Bank, Peoples Bankshares or any of their respective subsidiaries in the ordinary course of business and not involving extensions of credit with respect to any one entity or related group of entities in excess of $250,000. (c) Peoples Bank carries property, casualty, liability, directors and officer errors and omissions, products liability and other insurance coverages as set forth in Schedule 2.09(c) under the heading ---------------- "Insurance." (d) True, correct and complete copies of the agreements, contracts, leases, insurance policies and other documents referred to in Schedule 2.09(c) shall be furnished or made available to the ---------------- Mercantile Entities. (e) To the best knowledge of the Sellers, each of the agreements, contracts, leases, insurance policies and other documents referred to in Schedule 2.09(a), Schedule 2.09(b) and Schedule 2.09(c) is a valid, ---------------- ---------------- ---------------- binding and enforceable obligation of the parties sought to be bound thereby, except as the enforceability thereof against the parties thereto (other than Peoples Bank) may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws now or hereafter in effect relating to the enforcement of creditors' rights generally, and except that equitable principles may limit the right to obtain specific performance or other equitable remedies. (f) Schedule 2.09(f) under the heading "Loans" contains ---------------- a true, correct and complete listing, as of the date of this Agreement, by account or other identifying number, of (i) all -12- 17 loans in excess of $200,000, of Peoples Bank which have been accelerated during the past twelve months, (ii) all loan commitments or lines of credit of Peoples Bank in excess of $100,000 which have been terminated by Peoples Bank during the past twelve months by reason of default or adverse developments in the condition of the borrower or other events or circumstances affecting the credit of the borrower, (iii) all loans, lines of credit and loan commitments in excess of $100,000 as to which Peoples Bank has given written notice to the borrower or customer of Peoples Bank's intent to terminate during the past twelve months, (iv) with respect to all loans in excess of $100,000, all notification letters and other written communications from Peoples Bank to any of its borrowers, customers or other parties during the past twelve months wherein Peoples Bank has requested or demanded that actions be taken to correct existing defaults or facts or circumstances which may become defaults, (v) each borrower, customer or other party which has notified Peoples Bank during the past twelve months of, or asserted against Peoples Bank, in writing, any "lender liability" or similar claim, and each borrower, customer or other party which has given Peoples Bank any oral notification of, or asserted against Peoples Bank, any such claim, and (vi) all loans in excess of $50,000 (1) that are contractually past due 90 days or more in the payment of principal and/or interest, (2) that are on non-accrual status, (3) where a reasonable doubt exists as to the timely future collectibility of future principal and interest, whether or not interest is still accruing or the loan is less than 90 days past due, (4) the interest rate terms have been reduced and/or the maturity dates have been extended subsequent to the agreement under which the loan was originally created due to concerns regarding the borrower's ability to pay in accordance with such initial terms, (5) where a specific reserve allocation exists in connection therewith, or (6) that have been classified "substandard," "doubtful" or "loss" or the equivalent thereof by any Regulatory Authority. 2.10 Absence of Defaults. Except as set forth in Schedule ------------------- -------- 2.10 attached hereto under the heading "Defaults," there are no pending - ---- disputes between Peoples Bank and the other parties to the agreements, contracts, leases, insurance policies and other documents referred to in Schedule 2.09, and to the best knowledge of the Sellers, all such agreements, - -------------- contracts, leases, insurance policies and other documents are in full force and effect and not in default with respect to Peoples Bank or any other party thereto, and will continue in full force and effect immediately after the Closing Date. 2.11 Absence of Undisclosed Liabilities. Except as disclosed ---------------------------------- in Schedule 2.11 or in any other Schedule attached hereto: ------------- (a) As of the date hereof, Peoples Bank has no debts, liabilities or obligations, equal to or exceeding $25,000, individually, or $50,000, in the aggregate, whether accrued, absolute, contingent or otherwise and whether due or to become due, which are required to be reflected in the Peoples Financial Statements or the notes thereto in accordance with GAAP consistently applied except: (i) liabilities reflected in the Peoples Financial Statements, and (ii) debts, liabilities or obligations incurred since September 30, 1995, in the ordinary and usual course of its businesses, none of which are for breach of contract, breach of warranty, torts, infringements or lawsuits, and none of which adversely affect its financial positions or results of operations, businesses, assets, prospects or operations; and (b) to the best knowledge of the Sellers, Peoples Bank was not, as of September 30, 1995, and since such date to the date hereof has not become a party to, any contract or agreement, excluding deposits, loan agreements and commitments, notes, security agreements, repurchase and reverse repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments -13- 18 to issue letters of credit, participation agreements and other documents relating to transactions entered into by Peoples Bank in the ordinary course of business which affected, affects or may reasonably be expected to affect, materially and adversely, its financial position, results of operations, business, assets or operations. 2.12 Allowance for Loan and Lease Losses; Non-Performing --------------------------------------------------- Assets. - ------ (a) All of the accounts, notes and other receivables which are reflected in the balance sheet of Peoples Bank as of September 30, 1995 were acquired in the ordinary course of business and are collectible in full in the ordinary course of business, except for possible loan and lease losses which are adequately provided for in accordance with GAAP in the allowance for loan and lease losses in such balance sheet, and (ii) the collection experience of Peoples Bank since September 30, 1995 to the date hereof has not been materially adverse to the credit and collection experience of Peoples Bank in the nine months ended September 30, 1995 and the year ended December 31, 1994. (b) The allowance for loan losses contained in the balance sheet of Peoples Bank as of September 30, 1995 was established in accordance with the past practices and experiences of Peoples Bank and the such allowance was adequate in all material respects under the requirements of GAAP to provide for possible losses on loans and leases (including, without limitation, accrued interest receivable) and credit commitments (including, without limitation, stand-by letters of credit) as of the date of such balance sheet; provided, however, nothing herein contained shall be construed as a warranty of the collectibility of any loan or that the actual loan losses incurred will not exceed the amount of the allowance. (c) Schedule 2.12(c) sets forth as of the date of this ---------------- Agreement all assets classified as real estate acquired through foreclosure, including in-substance foreclosed real estate ("Non-Performing Assets"). (d) The aggregate amount of all loans described by Section 2.09(f)(vi) and all Non-Performing Assets pursuant to Section 2.12(c) shall not exceed $300,000. 2.13 Taxes. Each of Peoples Bankshares and Peoples Bank has ----- timely filed or will timely file (including all extensions) all tax returns required to be filed at or prior to the Closing Date ("Peoples Returns"). Each of Peoples Bankshares and Peoples Bank has paid, or has set up adequate reserves on the Peoples Financial Statements for the payment of, all taxes required to be paid in respect of the periods covered by such returns and has set up adequate reserves on the Peoples Financial Statements for the payment of all taxes anticipated to be payable in respect of the period subsequent to the last of said periods (treating for this purpose the Closing Date as the last day of an applicable period, whether or not it is in fact the last day of a taxable period). Each of Peoples Bankshares and Peoples Bank will not have any liability for any such taxes in excess of the amounts so paid or reserves so established and no deficiencies for any tax, assessment or governmental charge have been proposed, asserted or assessed (tentatively or definitely) against Peoples Bankshares or Peoples Bank which would not be covered by existing reserves. Neither Peoples Bankshares nor Peoples Bank is delinquent in the payment of any tax, assessment or governmental charge, nor has it requested any extension of time within which to file any tax returns in respect of any fiscal year which have not since been filed and no requests for waivers of the time to assess any tax are pending. The federal, state and foreign income tax returns of each of Peoples Bankshares and Peoples Bank have not been audited by the Internal Revenue Service (the "IRS") or the state or foreign taxing authority during the previous seven years. Neither Peoples Bankshares nor Peoples Bank has made any election under Income Tax Regulation Section Section 1.1502-33(d)(3) or 1.1552-1(c), each of which relates to the allocation of the consolidated federal income tax liability, -14 19 and, other than the Tax Sharing Agreement dated July 15, 1993 by and between Peoples Bankshares and Peoples Bank (the "Tax Sharing Agreement"), neither Peoples Bankshares nor Peoples Bank is a party to or bound by any tax indemnity, tax sharing or tax allocation agreement, or any other contractual obligation to pay or contribute to the tax obligations of any other person. There is no deficiency or refund litigation or matter in controversy with respect to Peoples Returns. Neither Peoples Bankshares nor any of its subsidiaries has extended or waived any statute of limitations on the assessment of any tax due that is currently in effect. 2.14 Material Adverse Change. Since September 30, 1995, ----------------------- there has been no material adverse change in the financial condition, results of operations, business, assets, prospects or operations of Peoples Bank, other than changes in banking laws or regulations, or interpretations thereof, or other conditions that affect the banking industry generally, or changes in the general level of interest rates. 2.15 Litigation and Other Proceedings. Except as set forth -------------------------------- in Schedule 2.15, Peoples Bank is not a party to any pending or, to the best ------------- knowledge of the Sellers, threatened, claim, action, suit, investigation or proceeding, or is subject to any order, judgment or decree, except for matters which, in the aggregate, will not have, or cannot reasonably be expected to have, an adverse effect on the business, financial condition, results of operations or prospects of Peoples Bank. Without limiting the generality of the foregoing, except as set forth in Schedule 2.15, there are no actions, suits or ------------- proceedings pending or, to the best knowledge of the Sellers, threatened against Peoples Bankshares or Peoples Bank or any of their respective officers or directors by any shareholder of Peoples Bankshares or Peoples Bank (or any former shareholder) or involving claims under the Community Reinvestment Act of 1977, Bank Secrecy Act, the fair lending laws or any other laws applicable to Peoples Bank. 2.16 Compliance with Laws. -------------------- (a) To the best knowledge of the Sellers, Peoples Bankshares and Peoples Bank have all permits, licenses, authorizations, orders and approvals of, and have made all filings, applications and registrations with, all Regulatory Authorities that are required in order to permit them to own or lease their respective properties and assets and to carry on their respective businesses as presently conducted; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and no suspension or cancellation of any of them is threatened; and all such filings, applications and registrations are current; in each case except for permits, licenses, authorizations, orders, approvals, filings, applications and registrations the failure to have (or have made) would not have a material adverse effect on the financial condition, results of operations, business or prospects of Peoples Bank. (b) Each of Peoples Bankshares and Peoples Bank has complied with all laws, regulations and orders (including, without limitation, zoning ordinances, building codes, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and securities, tax, environmental, civil rights and occupational health and safety laws and regulations and including, without limitation, in the case of Peoples Bank, all statutes, rules, regulations and policy statements pertaining to the conduct of a banking, deposit-taking, lending or related business, or to the exercise of trust powers) and governing instruments applicable to it and to the conduct of its business, and (ii) neither Peoples Bankshares nor Peoples Bank is in default under, and no event has occurred which, with the lapse of time or notice or both, could result in the default under, the terms of any judgment, order, writ, decree, permit or license of any Regulatory Authority or court, whether federal, state, municipal or local and whether at law or in equity. -15- 20 (c) Except as set forth in Schedule 2.15, Peoples Bank ------------- is not subject to or reasonably likely to incur a liability as a result of its ownership, operation or use of any Property (as defined below) of the Sellers (whether directly or as a consequence of such Property being part of the investment portfolio of Peoples Bank) (A) that is contaminated by or contains any hazardous waste, toxic substance or related materials, including, without limitation, asbestos, PCBs, pesticides, herbicides and any other substance or waste that is hazardous to human health or the environment (collectively, a "Toxic Substance"), or (B) on which any Toxic Substance has been stored, disposed of, placed, or used in the construction thereof. "Property" shall include all property (real or personal, tangible or intangible) owned or controlled by Peoples Bank, including, without limitation, property under foreclosure, property held by Peoples Bank in its capacity as a trustee and property in which any venture capital or similar unit of Peoples Bank has an interest. No claim, action, suit or proceeding is pending against Peoples Bank relating to the Property before any court or other Regulatory Authority or arbitration tribunal relating to Toxic Substances, pollution or the environment, and there is no outstanding judgment, order, writ, injunction, decree or award against or affecting Peoples Bank with respect to the same. Except for statutory or regulatory restrictions of general application, no Regulatory Authority has placed any restriction on the business of Peoples Bank which reasonably could be expected to have a material adverse effect on the condition of Peoples Bank. (d) Since December 31, 1991, neither Peoples Bankshares nor Peoples Bank has received any notification or communication which has not been favorably resolved from any Regulatory Authority (i) asserting that Peoples Bankshares or any subsidiary of Peoples Bankshares is not in substantial compliance with any of the statutes, regulations or ordinances that such Regulatory Authority enforces, except with respect to matters which (A) are set forth on Schedule 2.15(c) or in any writing previously furnished to the ---------------- Mercantile Entities and (B) reasonably could not be expected to have a material adverse effect on the condition of Peoples Bank, (ii) threatening to revoke any license, franchise, permit or governmental authorization that is material to the condition of Peoples Bank including, without limitation, such company's status as an insured depository institution under the Federal Deposit Insurance Act, (iii) requiring or threatening to require Peoples Bankshares or Peoples Bank, or indicating that Peoples Bankshares or Peoples Bank may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting or purporting to direct, restrict or limit in any manner the operations of Peoples Bankshares or Peoples Bank, including, without limitation, any restriction on the payment of dividends. No such cease and desist order, agreement or memorandum of understanding or other agreement is currently in effect. (e) Neither Peoples Bankshares nor Peoples Bank is required by Section 32 of the Federal Deposit Insurance Act to give prior notice to any federal banking agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive officer. 2.17 Labor. No work stoppage involving Peoples Bank is pending ----- or, to the best knowledge of Sellers, threatened. Peoples Bank is not involved in, or threatened with or affected by, any labor dispute, arbitration, lawsuit or administrative proceeding which could adversely affect the business of Peoples Bank. Employees of Peoples Bank are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. 2.18 Material Interests of Certain Persons. Except as set ------------------------------------- forth on Schedule 2.18, no officer or director of Peoples Bankshares, Peoples ------------- Bank or any subsidiary of Peoples Bankshares, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any interest in any contract or property (real or personal, tangible or intangible), used in, or pertaining to the business of, Peoples Bank which would be required to be disclosed by Item 404 of -16- 21 Regulation S-K promulgated by the SEC if Peoples Bank had a class of securities registered under Section 12 of the Exchange Act. 2.19 Employee Benefit Plans. ---------------------- (a) Schedule 2.19(a) lists all pension, retirement, ---------------- supplemental retirement, stock option, stock purchase, stock ownership, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, medical, disability, workers' compensation, vacation, group insurance, severance and other employee benefit, incentive and welfare policies, contracts, plans and arrangements, and all trust agreements related thereto, maintained by or contributed to by Peoples Bankshares or Peoples Bank in respect of any of the present or former directors, officers or other employees of and/or consultants to Peoples Bank (collectively, the "Sellers Employee Plans"). The Sellers have furnished the Mercantile Entities with the following documents with respect to each of the Sellers Employee Plans: (i) a true and complete copy of all written documents comprising such Sellers Employee Plan (including amendments and individual agreements relating thereto) or, if there is no such written document, an accurate and complete description of the Sellers Employee Plan; (ii) the most recently filed Form 5500 or Form 5500-C (including all schedules thereto), if applicable; (iii) the most recent financial statements and actuarial reports, if any; (iv) the summary plan description currently in effect and all material modifications thereof, if any; and (v) the most recent IRS determination letter, if any. Without limiting the generality of the foregoing, the Sellers have furnished the Mercantile Entities with true and complete copies of each form of stock option grant or stock option agreement that is outstanding under any stock option plan of Peoples Bank. (b) All of the Sellers Employee Plans have been maintained and operated in all material respects in accordance with their terms and the requirements of all applicable statutes, orders, rules and final regulations, including, without limitation, to the extent applicable, ERISA and the Code. All contributions required to be made to the Sellers Employee Plans have been made. (c) With respect to each of the Sellers Employee Plans which is a pension plan (as defined in Section 3(2) of ERISA) (the "Pension Plans"): (i) each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined to be so qualified by the IRS and, to the best knowledge of the Sellers, such determination letter may still be relied upon, and each related trust is exempt from taxation under Section 501(a) of the Code; (ii) the present value of all benefits vested and all benefits accrued under each Pension Plan which is subject to Title IV of ERISA did not, in each case, as of the last applicable annual valuation date (as indicated on Schedule 2.19(a)), exceed ---------------- the value of the assets of the Pension Plan allocable to such vested or accrued benefits; (iii) to the best knowledge of the Sellers, there has been no "prohibited transaction," as such term is defined in Section 4975 of the Code or Section 406 of ERISA, which could subject any Pension Plan or associated trust, or, to the best knowledge of the Sellers, Peoples Bank, to any tax or penalty; (iv) except as set forth in Schedule 2.19(c), no Pension ---------------- Plan or any trust created thereunder has been terminated, nor to the best knowledge of the Sellers have there been any "reportable events" with respect to any Pension Plan, as that term is defined in Section 4043 of ERISA since January 1, 1987; and (v) no Pension Plan or any trust created thereunder has incurred any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA (whether or not waived). Except as set forth in Schedule 2.19(c), no Pension Plan is a "multiemployer plan" as that term is - ---------------- defined in Section 3(37) of ERISA. (d) Except as set forth on Schedule 2.19(d), Peoples ---------------- Bank does not have any liability for any post-retirement health, medical or similar benefit of any kind whatsoever, except as required by statute or regulation. -17- 22 (e) Peoples Bank does not have any material liability under ERISA or the Code as a result of its being a member of a group described in Sections 414(b), (c), (m) or (o) of the Code. (f) Except as set forth on Schedule 2.19(f), neither ---------------- the execution nor delivery of this Agreement or the Plan of Merger, nor the consummation of any of the transactions contemplated hereby and thereby, will (i) result in any payment (including, without limitation, severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of Peoples Bank, (ii) increase any benefit otherwise payable under any of the Sellers Employee Plans or (iii) result in the acceleration of the time of payment of any such benefit. The Sellers shall use their best efforts to insure that no amounts paid or payable by Peoples Bank or the Mercantile Entities to or with respect to any employee or former employee of Peoples Bank will fail to be deductible for federal income tax purposes by reason of Section 280G of the Code. 2.20 Conduct of Peoples Bankshares' and Peoples Bank's ------------------------------------------------- Businesses to Date. Except as disclosed in Schedule 2.20 or otherwise in - ------------------ ------------- this Agreement, from and after September 30, 1995: (a) Peoples Bank has carried on its business in the ordinary and usual course consistent with past practices, (b) neither Peoples Bankshares nor Peoples Bank has issued or sold any of its capital stock or any corporate debt securities which would be classified as long-term debt on its balance sheet, (c) neither Peoples Bankshares nor Peoples Bank has granted any option for the purchase of its capital stock, effected any stock split or otherwise changed its capitalization, (d) Peoples Bank has not declared, set aside or paid any dividend or other distribution in respect of its capital stock, or, directly or indirectly, redeemed or otherwise acquired any of its capital stock, (e) Peoples Bank has not incurred any obligation or liability (absolute or contingent), except normal trade or business obligations or liabilities incurred in the ordinary course of business, or mortgaged, pledged or subjected to lien, claim, security interest, charge, encumbrance or restriction any of its assets or properties, (f) Peoples Bank has not discharged or satisfied any lien, mortgage, pledge, claim, security interest, charge, encumbrance, or restriction or paid any obligation or liability (absolute or contingent), other than in the ordinary course of business, (g) Peoples Bank has not sold, assigned, transferred, leased, exchanged or otherwise disposed of any of its properties or assets other than for a fair consideration in the ordinary course of business, (h) Peoples Bank has not increased the rate of compensation of, or paid any bonus to, any of its directors, officers or other employees, except merit or promotion increases in accordance with existing policy, entered into any new, or amended or supplemented any existing, employment, management, consulting, deferred compensation, severance or other similar contract, entered into, terminated or substantially modified any Sellers Employee Plan in respect of any of its present or former directors, officers or other employees, or agreed to do any of the foregoing, (i) Peoples Bank has not suffered any damage, destruction or loss, whether as the result of fire, explosion, earthquake, accident, casualty, labor trouble, requisition or taking of property by any government or any agency of any government, flood, windstorm, embargo, riot, act of God or the enemy or other similar or dissimilar casualty or event or otherwise, and whether or not covered by insurance, and (j) Peoples Bank has not entered into any transaction, contract or commitment outside the ordinary course of its business. 2.21 Registration Statement, Etc. None of the information ---------------------------- regarding Peoples Bankshares and/or Peoples Bank supplied or to be supplied by either of them for inclusion or included in (a) a Registration Statement on Form S-4 to be filed with the SEC by Mercantile for the purpose of registering the shares of Mercantile Common Stock to be issuable as Acquisition Consideration pursuant to the provisions of this Agreement (the "Registration Statement"), (b) the Proxy Statement to be mailed to shareholders of Peoples Bankshares and to shareholders of Peoples Bank in connection with the meetings to be called to consider the approval of the Exchange, the Merger, this Agreement and the Plan of Merger (the "Proxy Statement") and (c) any other documents to be filed with the SEC or any -18- 23 regulatory authority in connection with the transactions contemplated hereby will, at the respective times such documents are filed with the SEC or any regulatory authority and, in the case of the Registration Statement, when it becomes effective and, with respect to the Proxy Statement, when mailed, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the special meetings of Peoples Bankshares' shareholders and of Peoples Bank's shareholders referred to in Section 5.03, be false or misleading with respect to any fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. All documents which Peoples Bankshares and/or Peoples Bank is responsible for filing with any regulatory authority in connection with the Acquisition will comply as to form with the provisions of applicable law. 2.22 Brokers and Finders; Other Liabilities. Except as set -------------------------------------- forth on Schedule 2.22, neither Peoples Bankshares nor Peoples Bank nor any ------------- of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Peoples Bankshares and/or Peoples Bank in connection with this Agreement or the Plan of Merger or the transactions contemplated hereby and thereby. Peoples Bank shall be liable in respect of all reasonable fees and expenses of counsel and accountants for Peoples Bank. 2.23 Directors' and Officers' Insurance. Peoples Bank has ---------------------------------- taken or will take all requisite action (including, without limitation, the making of claims and the giving of notices) pursuant to its directors' and officers' liability insurance policy or policies in order to preserve all rights thereunder with respect to all matters (other than matters arising in connection with this Agreement or the Plan of Merger and the transactions contemplated hereby and thereby) occurring prior to the Effective Time that are known to the Sellers, except for such matters which, individually or in the aggregate, will not have and reasonably could not be expected to have a material adverse effect on the condition of Peoples Bank. Set forth on Schedule 2.09(c) is a list of all insurance policies maintained by or for the - ---------------- benefit of Peoples Bank as of the date hereof for its directors, officers, employees or agents. 2.24 Tax and Regulatory Matters. Neither Peoples Bankshares -------------------------- nor Peoples Bank has taken or agreed to take any action or has any knowledge of any fact or circumstance that would (i) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code or (ii) materially impede or delay receipt of any approval referred to in Section 6.01(c) or the consummation of the transactions contemplated by this Agreement and the Plan of Merger. 2.25 Interest Rate Risk Management Instruments. Peoples Bank ----------------------------------------- is not a party to, nor are any of its properties or assets bound by, interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements, except that certain variable rate loans and investment securities held by Peoples Bank contain floors and caps. ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES OF THE MERCANTILE ENTITIES As an inducement to the Sellers to enter into and perform their respective obligations under this Agreement, and notwithstanding any examinations, inspections, audits or other investigations made by the Sellers, the Mercantile Entities hereby jointly and severally represent and warrant to the Sellers as to the following matters: -19- 24 3.01 Organization and Authority. Mercantile and Ameribanc -------------------------- are each corporations duly organized, validly existing and in good standing under the laws of the State of Missouri, each is duly qualified to do business and each is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified, and each has the corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. Mercantile and Ameribanc are each registered as a bank holding company with the Federal Reserve Board under the BHC Act. Acquisition Bank will, prior to the Closing date, be chartered as a Kansas state bank by the Kansas Commissioner, will be duly organized, validly existing and in good standing under the laws of the State of Kansas, will be duly qualified to do business and will be in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified, and will have the corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. Acquisition Bank will be a bank insured by the FDIC under the FDI Act. 3.02 Corporate Authorization. ----------------------- (a) Mercantile and Ameribanc each have the corporate power and authority to enter into this Agreement and to carry out their respective obligations hereunder. The execution, delivery and performance of this Agreement by Mercantile and Ameribanc and the consummation of the transactions contemplated hereby have been duly authorized by the Executive Committee of the Board of Directors of Mercantile and the Board of Directors of Ameribanc, and no other approval of the respective Boards or shareholders or any committees thereof is required. Subject to such approvals of governmental agencies and other governing boards having regulatory authority over Mercantile and Ameribanc as may be required by statute or regulation, this Agreement is a valid and binding obligation of Mercantile and Ameribanc, enforceable against each in accordance with its terms. (b) Neither the execution, delivery and performance by Mercantile or Ameribanc of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by Mercantile or Ameribanc with any of the provisions hereof, will (a) violate, conflict with or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of Mercantile or Ameribanc under any of the terms, conditions or provisions of (i) their respective Articles of Incorporation or By-Laws or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Mercantile or Ameribanc is a party or by which it may be bound, or to which Mercantile or Ameribanc or any of its properties or assets may be subject, or (b) subject to compliance with the statutes and regulations referred to in subsection (c) of this Section 3.02, to the best knowledge of the Mercantile Entities, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Mercantile or Ameribanc or any of their properties or assets. (c) Other than in connection with or in compliance with the provisions of the Kansas Banking Act, the Securities Act, the Exchange Act, the securities or blue sky laws of the various states or filings, consents, reviews, authorizations, approvals or exemptions required under the BHC Act, or any required approvals of the FDIC or the Kansas Commissioner, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Mercantile, Ameribanc and Acquisition Bank of the transactions contemplated by this Agreement and the Plan of Merger. -20- 25 3.03 Capitalization of Mercantile. The authorized capital ---------------------------- stock of Mercantile consists of (a) 100,000,000 shares of Mercantile Common Stock, of which, as of September 30, 1995, 55,333,878 shares were issued and outstanding and (b) 5,000,000 shares of preferred stock, no par value ("Mercantile Preferred Stock"), issuable in series, of which 5,306 shares of Series B-1 Preferred Stock and 9,500 shares of Series B-2 Preferred Stock were issued and outstanding. Mercantile has designated 1,000,000 shares of Mercantile Preferred Stock as "Series A Junior Participating Preferred Stock" and has reserved such shares under a Rights Agreement dated May 23, 1988 (the "Mercantile Rights Agreement") between Mercantile and Mercantile Bank of St. Louis National Association, as Rights Agent. As of November 30, 1995, Mercantile had reserved (i) 4,278,691 shares of Mercantile Common Stock for issuance under various Mercantile employee and/or director stock option, incentive and/or benefit plans ("Mercantile Employee/Director Stock Grants"); (ii) 322,000 shares of Mercantile Common Stock for issuance upon the acquisition of Security Bank of Conway, F.S.B. ("Conway") pursuant to the Amended and Restated Agreement and Plan of Reorganization dated as of July 7, 1995, as amended and restated as of September 18, 1995, by and between Conway, Mercantile and Mercantile Bancorporation Inc. of Arkansas, (iii) 521,424 shares of Mercantile Common Stock for issuance upon the acquisition of First Sterling Bancorp, Inc. ("Sterling") pursuant to the Agreement and Plan of Merger dated as of July 24, 1995 by and between Sterling, Mercantile and Mercantile Bancorporation Incorporated of Illinois ("MBII"), (iv) 7,996,952 shares of Mercantile Common Stock for issuance upon the acquisition of Hawkeye Bancorporation ("Hawkeye") pursuant to the Agreement and Plan of Merger dated as of August 4, 1995, by and between Hawkeye and Mercantile and (v) 199,446 shares of Mercantile Common Stock for issuance upon the acquisition of Metro Savings Bank, F.S.B. ("Metro") pursuant to the Agreement and Plan of Reorganization dated as of September 15, 1995 by and between Metro, Mercantile and MBII. From November 30, 1995 through the date of this Agreement, no shares of Mercantile Common Stock have been issued, excluding any such shares which may have been issued in connection with Mercantile Employee/Director Stock Grants. Mercantile continually evaluates possible acquisitions and may prior to the Effective Time enter into one or more agreements providing for, and may consummate, the acquisition by Mercantile of another bank, bank holding company or other company (or the assets and/or liabilities thereof) for consideration that may include equity securities. In addition, prior to the Effective Time, Mercantile may, depending on market conditions and other factors, otherwise determine to issue equity, equity-linked or other securities for financing purposes. Except in connection with currently pending and/or subsequent acquisition transactions and except for securities to be issued pursuant to various Mercantile stock option, incentive and/or benefit plans, there are no other Equity Securities of Mercantile outstanding. All of the issued and outstanding shares of Mercantile Common Stock are validly issued, fully paid and nonassessable, and have not been issued in violation of any preemptive right of any shareholder of Mercantile. At the Effective Time, the Mercantile Common Stock issued pursuant to this Agreement will be duly authorized, validly issued and in compliance with all applicable federal and state securities laws, fully paid and nonassessable and not subject to preemptive rights. 3.04 Mercantile Financial Statements. The supplemental ------------------------------- consolidated balance sheets of Mercantile and its subsidiaries (hereinafter sometimes referred to collectively as "Mercantile Subsidiaries") as of December 31, 1994, 1993 and 1992 and related supplemental consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994, together with the notes thereto, audited by KPMG Peat Marwick LLP, and the consolidated balance sheet of Mercantile and the Mercantile Subsidiaries as of September 30, 1995 and related consolidated statements of income and cash flows for the nine-month period ended September 30, 1995, as filed with the SEC (collectively, the "Mercantile Financial Statements"), have been prepared in accordance with GAAP, present fairly the consolidated financial position of Mercantile and the Mercantile Subsidiaries at the dates thereof and the consolidated results of operations, changes in shareholders' equity -21- 26 and cash flows of Mercantile and the Mercantile Subsidiaries for the periods stated therein and are derived from the books and records of Mercantile and the Mercantile Subsidiaries. 3.05 Reports. Since January 1, 1992, Mercantile and each of ------- the Mercantile Subsidiaries have filed all reports, registrations and statements, together with any required amendments thereto, that they were required to file with (i) the SEC, including, but not limited to, Annual Report on Form 10-K, Forms 10-Q, Forms 8-K and proxy statements, (ii) the Federal Reserve Board, (iii) the FDIC, (iv) the Office of the Comptroller of the Currency (the "OCC"), and (v) any applicable state securities or banking authorities. All such reports and statements filed with any such regulatory body or authority are collectively referred to herein as the "Mercantile Reports." As of their respective dates, the Mercantile Reports complied with all the rules and regulations promulgated by the SEC, the Federal Reserve Board, the FDIC, the OCC and any applicable state securities or banking authorities, as the case may be, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.06 Material Adverse Change. Since September 30, 1995, ----------------------- there has been no material adverse change in the financial condition, results of operations or prospects of Mercantile and the Mercantile Subsidiaries taken as a whole, other than changes in banking laws or regulations, or interpretations thereof, or other conditions that affect the banking industry generally, or changes in the general level of interest rates. 3.07 Registration Statement, Proxy Statement, Etc. None of --------------------------------------------- the information regarding Mercantile and the Mercantile Subsidiaries supplied or to be supplied by Mercantile for inclusion or included in (a) the Registration Statement, (b) the Proxy Statement, or (c) any other documents to be filed with the SEC or any regulatory authority in connection with the transactions contemplated hereby will, at the respective times such documents are filed with the SEC or any regulatory authority and, in the case of the Registration Statement, when it becomes effective and, with respect to the Proxy Statement, when mailed, to the best knowledge of the Mercantile Entities be false or misleading with respect to any fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the special meetings of shareholders of Peoples Bankshares and Peoples Bank referred to in Section 5.03, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for either such meeting. All documents which the Mercantile Entities are responsible for filing with the SEC and any regulatory authority in connection with the Acquisition will comply as to form and contents in all respects with the provisions of applicable law. 3.08 Brokers and Finders. Neither Mercantile, Ameribanc nor ------------------- any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Mercantile or Ameribanc in connection with this Agreement and the Plan of Merger or the transactions contemplated hereby and thereby. 3.09 Legal Proceedings or Other Adverse Facts. There is no ---------------------------------------- legal action or governmental proceeding or investigation pending, or to the best knowledge of the Mercantile Entities, threatened against Mercantile or Ameribanc that could prevent or adversely affect or seeks to prohibit the consummation of the transactions contemplated hereby, nor is Mercantile or Ameribanc subject to any order of a court or governmental authority having any such effect. Neither Mercantile nor Ameribanc -22- 27 has knowledge of any other fact that could prevent or adversely affect the consummation of the transactions contemplated hereby. ARTICLE IV ---------- CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME 4.01 Conduct of Businesses Prior to the Effective Time. During ------------------------------------------------- the period from the date of this Agreement to the Effective Time, Peoples Bankshares and Peoples Bank shall conduct their respective businesses according to the ordinary and usual course consistent with past and current practices and shall use their best efforts to maintain and preserve their respective business organizations, employees and advantageous business relationships and retain the services of its officers and key employees. 4.02 Forbearances of Peoples Bankshares and Peoples Bank. --------------------------------------------------- During the period from the date of this Agreement to the Closing Date, neither Peoples Bankshares nor Peoples Bank shall, without the prior written consent of the Mercantile Entities: (a) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock, except that (i) Peoples Bank may declare and pay a cash dividend of not more than $20.00 per share on the Peoples Bank Common Stock in January of 1996 for the year ended December 31, 1995 and (ii) Peoples Bank may declare and pay dividends of not more than $5.00 per share for each of the first and second quarter of 1996; provided, however, Peoples Bank shall coordinate the record and payment dates of each such quarterly dividend such that the record and payment dates for a given quarterly dividend are the same as Mercantile's record and payment dates for its regular quarterly dividend for that quarter; provided, further, however, if the Effective Time shall not have occurred on or before September 10, 1996, Peoples Bank may declare and pay a dividend for each quarter ending thereafter in which the Mercantile Board of Directors shall declare a dividend on shares of Mercantile Common Stock that in the aggregate is not in excess of the greater of (A) the aggregate quarterly dividend that would have been paid by Mercantile on the Acquisition Consideration if the Acquisition had been consummated on September 10, 1996 and (B) $112,500; provided, further, however, Peoples Bank shall not declare or pay its quarterly dividend for any quarter in which Peoples Bank's shareholders will be entitled to receive a regular quarterly dividend on the shares of Mercantile Common Stock to be issued in the Acquisition. (b) enter into or amend any employment, severance or similar agreement or arrangement with any director or officer or employee, or materially modify any of the Sellers Employee Plans or grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except (i) normal individual increases in compensation to employees consistent with past practice, (ii) as required by law or contract and (iii) such increases of which the Sellers notify the Mercantile Entities in writing and which the Mercantile Entities do not disapprove within 10 days of the receipt of such notice; (c) authorize, recommend, propose or announce an intention to authorize, so recommend or propose, or enter into an agreement in principle with respect to, any merger, consolidation or business combination (other than the Acquisition and the Topeka 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; -23- 28 (d) propose or adopt any amendments to its articles of incorporation or other charter document or By-Laws; (e) issue, sell, grant, confer or award any of its Equity Securities or effect any stock split or adjust, combine, reclassify or otherwise change its capitalization as it existed on the date of this Agreement; (f) purchase, redeem, retire, repurchase or exchange, or otherwise acquire or dispose of, directly or indirectly, any of its Equity Securities, whether pursuant to the terms of such Equity Securities or otherwise; (g) (i) without first consulting with Mercantile, enter into, renew or increase any loan or credit commitment (including stand-by letters of credit) to, or invest or agree to invest in any person or entity or modify any of the material provisions or renew or otherwise extend the maturity date of any existing loan or credit commitment (collectively, "Lend to") in an amount in excess of $250,000 or in any amount which, when aggregated with any and all loans or credit commitments of Peoples Bank to such person or entity, would be in excess of $250,000, provided no such consultation shall be required in respect of single-family residential loans or credits that (A) remain in Peoples Bank's loan portfolio, (B) do not exceed $125,000 and (C) are saleable in recognized secondary markets pursuant to Peoples Bank's lending policies as in effect on the date hereof; (ii) without first obtaining the written consent of Mercantile, Lend to any person or entity in an amount in excess of $400,000 or in any amount which, when aggregated with any and all loans or credit commitments of Peoples Bank to such person or entity, would be in excess of $400,000; (iii) Lend to any person other than in accordance with Peoples Bank's lending policies as in effect on the date hereof, provided that in the case of clauses (i) and (ii) Peoples Bank may make any such loan in the event (A) Peoples Bank has delivered to Mercantile or its designated representative a notice of its intention to make such loan and such information as Mercantile or its designated representative may reasonably require in respect thereof and (B) Mercantile or its designated representative shall not have reasonably objected to such loan by giving written or facsimile notice of such objection within two business days following the delivery to Mercantile or its designated representative of the notice of intention and information as aforesaid; or (iv) Lend to any person or entity any of the loans or other extensions of credit to which or investments in which are on a "watch list" or similar internal report of Peoples Bank (except those denoted "pass" thereon), in an amount in excess of $25,000; provided, however, that nothing in this paragraph shall prohibit Peoples Bank from honoring any contractual obligation in existence on the date of this Agreement or, with respect to loans described in clause (i) above, making such loans after consulting with Mercantile. Notwithstanding clauses (i) and (ii) of this Section 4.02(g), the Sellers shall be authorized, without first consulting with the Mercantile Entities or obtaining the Mercantile Entities' prior written consent, to increase the aggregate amount of any credit facilities theretofore established in favor of any person or entity (each a "Pre-Existing Facility"), provided that the aggregate amount of any and all such increases shall not be in excess of the lesser of five percent (5%) of such Pre-Existing Facilities or $25,000; (h) directly or indirectly (including through its officers, directors, employees or other representatives) (i) initiate, solicit or encourage any discussions, inquiries or proposals with any third party (other than the Mercantile Entities or the affiliates thereof) relating to the disposition of any significant portion of the business or assets of Peoples Bankshares or Peoples Bank or the acquisition of Equity Securities of Peoples Bankshares or Peoples Bank or the merger of Peoples Bankshares or Peoples Bank with any person (other than the Mercantile Entities or the affiliates thereof) or any similar transaction (each such transaction being referred to herein as an "Acquisition Transaction"), or (ii) provide any such person with information or assistance or negotiate with any such person with respect to an Acquisition Transaction, and Peoples Bankshares and Peoples Bank shall -24- 29 promptly notify Mercantile orally of all the relevant details relating to all inquiries, indications of interest and proposals which it may receive with respect to any Acquisition Transaction; (i) take any action that would (i) materially impede or delay the consummation of the transactions contemplated by this Agreement and the Plan of Merger or the ability of the Mercantile Entities and the Sellers to obtain any approval of any Regulatory Authority required for the transactions contemplated by this Agreement and the Plan of Merger or to perform its covenants and agreements under this Agreement or the Plan of Merger or (ii) prevent or impede the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code; (j) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity; (k) in the case of Peoples Bank, 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 of greater than $500,000 for U.S. Treasury Securities and Federal Agency securities and $100,000 for all other investment instruments, provided that for purposes of this Subsection (k), such consent shall not be unreasonably withheld; (l) agree in writing or otherwise take any of the foregoing actions or engage in any activity, enter into any transaction or intentionally take or omit to take any other act which would make any of the representations and warranties in Article II of this Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other act; or (m) enter into or increase any loan or credit commitment (including standby letters of credit) to any executive officer or director of Peoples Bankshares or Peoples Bank, any shareholder of Peoples Bankshares or Peoples Bank, or any entity controlled, directly or indirectly, by any of the foregoing or engage in any transaction with any of the foregoing which is of the type or nature sought to be regulated in 12 U.S.C. 371c and 12 U.S.C. 371c-1, without first obtaining the prior written consent of Mercantile, which consent shall not be unreasonably withheld. For purposes of this subsection (m), "control" shall have the meaning associated with that term under 12 U.S.C. 371c. 4.03 Forbearances of the Mercantile Entities. During the --------------------------------------- period from the date of this Agreement to the Closing Date, the Mercantile Entities shall not, without the prior consent of the Sellers, agree in writing or otherwise engage in any activity, enter into any transaction or take or omit to take any other action which would make any of the representations and warranties of Article III of this Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other action. -25- 30 ARTICLE V --------- ADDITIONAL AGREEMENTS 5.01 Access and Information; Due Diligence. ------------------------------------- (a) Peoples Bankshares and Peoples Bank each shall afford to the Mercantile Entities, and to the Mercantile Entities' accountants, counsel and other representatives, full access during normal business hours, during the period prior to the Closing Date, to all its properties, books, contracts, commitments and records and, during such period, shall furnish promptly to the Mercantile Entities (i) a copy of each report, schedule and other document filed or received by it during such period pursuant to the requirements of federal and state securities or banking laws and (ii) all other information concerning its business, properties and personnel as the Mercantile Entities may reasonably request. In the event of the termination of this Agreement, the Mercantile Entities shall, and shall cause their respective advisors and representatives to, (1) hold confidential all information obtained in connection with any transaction contemplated hereby with respect to the other party which is not otherwise public knowledge, (2) return to Peoples Bankshares and Peoples Bank all documents (including copies thereof) obtained hereunder from Peoples Bankshares and Peoples Bank and (3) use their best efforts to cause all information obtained pursuant to this Agreement or in connection with the negotiation hereof to be treated as confidential and not use, or knowingly permit others to use, any such information unless such information becomes generally available to the public. (b) Mercantile, promptly following the date of this Agreement, shall commence its review of Peoples Bankshares and Peoples Bank and their respective operations, business affairs, prospects and financial conditions, including, without limitation, those matters which are the subject of Peoples Bankshares' and Peoples Bank's representations and warranties included herein (the "Mercantile Due Diligence Review"). Mercantile shall conclude such review by not later than twenty (20) business days after the date of this Agreement (the "Mercantile Due Diligence Period"), but the pendency of such Mercantile Due Diligence Review shall not delay Mercantile's obligation pursuant to Section 5.02 of this Agreement to file a Registration Statement with the SEC and all other necessary applications and filings with the appropriate federal and state regulatory agencies. Mercantile shall advise Peoples Bankshares and Peoples Bank of any situation, event, circumstance or other matter which first came to the attention of Mercantile during the Mercantile Due Diligence Review which could result in the termination of this Agreement by Mercantile pursuant to Section 7.01(d) hereof, or, if applicable, of the absence of any situation, event, circumstance or other matter, it being the intention of Mercantile to provide notice to Peoples Bankshares and Peoples Bank, as promptly as possible, of any perceived impediment to the consummation of the Acquisition. Notwithstanding anything hereinabove contained or implied to the contrary, the Mercantile Due Diligence Review shall not limit, restrict or preclude, or be construed to limit, restrict or preclude, Mercantile, at any time or from time to time thereafter, from conducting further such reviews or from exercising any rights available to it hereunder as a result of the existence or occurrence prior to the Mercantile Due Diligence Period of any event or condition which was not detected in the Mercantile Due Diligence Review by Mercantile and which would constitute a breach of any representation, warranty or agreement of Peoples Bankshares or Peoples Bank under this Agreement. 5.02 Registration Statement; Regulatory Matters. ------------------------------------------ (a) Mercantile shall prepare and, subject to the review and consent of the Sellers with respect to matters relating to the Sellers, file with the SEC, as soon as is reasonably practicable, the Registration Statement with respect to the shares of Mercantile Common Stock issuable -26- 31 as Acquisition Consideration and shall use its best efforts to cause the Registration Statement to become effective. Mercantile shall also take any action required to be taken under any applicable state blue sky or securities laws in connection with the issuance of such shares, and Peoples Bankshares and Peoples Bank shall furnish Mercantile all information concerning Peoples Bankshares and Peoples Bank as Mercantile may reasonably request in connection with any such action. (b) Each of the parties hereto shall cooperate and use their respective best efforts to prepare all documentation, to effect all filings and to obtain all permits, consents, approvals and authorizations of all third parties and governmental bodies necessary to consummate the transactions contemplated by this Agreement and the Plan of Merger as soon as is reasonably practicable after the date of this Agreement, including, without limitation, Mercantile filing the necessary applications with the FDIC and the Kansas Commissioner. 5.03 Shareholder Approvals. Peoples Bankshares shall call a --------------------- special meeting of its shareholders to be held as soon as is reasonably practicable for the purpose of voting upon the Exchange and this Agreement and related matters. Peoples Bank shall call a special meeting of its shareholders to be held as soon as is reasonably possible for the purpose of voting upon the Merger, this Agreement and the Plan of Merger and related matters. In connection with such meetings, Mercantile shall prepare, subject to the review and consent of Peoples Bankshares and Peoples Bank, the Proxy Statement (which shall be a part of the Registration Statement to be filed with the SEC by Mercantile) and mail it to the respective shareholders. The respective Boards of Directors of Peoples Bankshares and of Peoples Bank shall submit and recommend for approval of their respective shareholders the matters to be voted upon at such meetings. The Boards of Directors of Peoples Bankshares and Peoples Bank hereby do and will recommend this Agreement, the Plan of Merger and the transactions contemplated hereby and thereby to their respective shareholders and use their respective best efforts to obtain the votes and approvals of their respective shareholders necessary for the approval and adoption of the matters contemplated hereby. Peoples Bankshares, upon approval of the Exchange by the shareholders of Peoples Bankshares, agrees to vote all shares of Peoples Bank Common Stock that it owns beneficially and of record for the approval of the Merger, this Agreement and the Plan of Merger at the special meeting of shareholders of Peoples Bank. 5.04 Current Information. During the period from the date of ------------------- this Agreement to the Closing Date, each party will promptly furnish all other parties with copies of all monthly and other interim financial statements as the same become available and shall cause one or more of its designated representatives to confer on a regular and frequent basis with representatives of the other party. Each party shall promptly notify the other parties of the following events immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the affected party with respect thereto: (a) the occurrence of any event which could cause any representation or warranty of such party or any schedule, statement, report, notice, certificate or other writing furnished by such party to be untrue or misleading in any respect; (b) any material change in its business, financial condition, results of operations or prospects; (c) the issuance or commencement of any governmental and/or regulatory agency complaint, investigation or hearing or any communications indicating that the same may be contemplated and, as to any such matter which shall now or hereafter be in effect, any communications pertaining thereto; or (d) the institution or the threat of any material litigation involving such party. 5.05 Conforming Entries. ------------------ (a) Notwithstanding that the Sellers believe that the Sellers have established all reserves and taken all provisions for possible loan losses required by GAAP and applicable -27- 32 laws, rules and regulations, the Sellers recognize that Mercantile may have adopted different loan, accrual and reserve policies (including loan classifications and levels of reserves for possible loan losses). From and after the date of this Agreement to the Effective Time, the Sellers and Mercantile shall consult and cooperate with each other with respect to conforming the loan, accrual and reserve policies of Peoples Bank to those policies of Mercantile, as specified in each case in writing to the Seller, based upon such consultation and as hereinafter provided. (b) In addition, from and after the date of this Agreement to the Effective Time, the Sellers and Mercantile shall consult and cooperate with each other with respect to determining (i) appropriate Peoples Bank accruals, reserves and charges to establish and take in respect of excess equipment write-off or write-down of various assets and other appropriate charges and accounting adjustments taking into account the parties' business plans following the Acquisition, and (ii) appropriate structuring of Peoples Bank's investment securities portfolio giving due regard to, among other things, rate sensitivity, maturity and credit quality issues, as specified in each case in writing to the Sellers, based upon such consultation and as hereinafter provided. (c) The Sellers and Mercantile shall consult and cooperate with each other with respect to determining the amount and the timing for recognizing for financial accounting purposes the Seller's expenses of the Acquisition and the restructuring charges related to or to be incurred in connection with the Acquisition. (d) Subject to the language contained in the second sentence hereof, at the request of Mercantile, the Sellers shall (i) establish and take such reserves and accruals to conform Peoples Bank's loan, accrual and reserve policies to Mercantile's policies, (ii) establish and take such accruals, reserves and charges in order to implement such policies in respect of excess facilities and equipment capacity, severance costs, litigation matters, write-off or write-down of various assets and other appropriate accounting adjustments, and to recognize for various accounting purposes such expenses of the Acquisition and restructuring charges related to or to be incurred in connection with the Acquisition, and (iii) effect such divestitures or otherwise implement such restructuring in respect of Peoples Bank's investment securities portfolio to conform Peoples Bank's investment securities portfolio policies to Mercantile's policies, in the case of each of the foregoing at such times as are requested by Mercantile in a written notice to the Sellers. It is the objective of Mercantile and the Sellers that such reserves, accruals, charges and divestitures, if any, to be taken shall be consistent with GAAP and taken only after the approval conditions set forth in Section 6.01(c) hereof have been satisfied or waived (except to the extent that any waiting period associated therewith may then have commenced but not expired) and Mercantile has informed the Sellers that it is not aware of any facts which would indicate that the other Closing conditions in Article VI hereof cannot be met at Closing. 5.06 Environmental Reports. The Sellers shall provide to the --------------------- Mercantile Entities as soon as reasonably practicable, but not later than twenty (20) business days, after the acquisition, leasing, foreclosure or repossession by Peoples Bank of any real property subsequent to the date hereof, a report of a phase one environmental investigation of such real property (excluding space in retail or similar establishments leased by Peoples Bank for automatic teller machines or bank branch facilities where the space leased comprises less than 20% of the total space leased to all tenants of such property). If required by the phase one report with respect to any parcel of real property referred to above, in the reasonable opinion of the Mercantile Entities, the Sellers shall also provide to the Mercantile Entities a phase two investigation report on such designated parcels as soon as practicable. The Mercantile Entities shall have fifteen (15) business days from the receipt of any such phase two investigation report to notify the Sellers of any dissatisfaction with the contents of such report. If the estimated costs of all remedial or other corrective actions or measures with regard to the real property referred to above required by -28- 33 applicable law exceed $250,000 in the aggregate, as reasonably estimated by an environmental expert retained for such purpose by the Sellers upon the Mercantile Entities' reasonable request and such costs will be incurred by Peoples Bank, or if such cost cannot be so reasonably estimated by such expert to be such amount or less with any reasonable degree of certainty, then the Mercantile Entities, after providing the Sellers with written notice of the Mercantile Entities' intent to do so and allowing the Sellers a six-month period from the date of such notice to take and complete, to the reasonable satisfaction of the Mercantile Entities, all such remedial or other corrective actions and measures (the aggregate cost which will be incurred by Peoples Bank shall not exceed $250,000) and shall have the right pursuant to Section 7.01(f) hereof to terminate this Agreement. 5.07 Agreements of Affiliates. Set forth as Schedule 5.07 is ------------------------ ------------- a list (which includes individual and beneficial ownership) of all persons whom the Sellers believe to be "affiliates" of either Peoples Bankshares and/or Peoples Bank for purposes of Rule 145 under the Securities Act. Seller shall use its best efforts to cause each person who is identified as an "affiliate" to deliver to Mercantile, as of the date hereof, or as soon as practicable hereafter, a written agreement in substantially the form set forth as Exhibit B to this Agreement providing that each such person will --------- agree not to sell, pledge, transfer or otherwise dispose or any shares of Mercantile Common Stock to be received by such person in the Merger and/or the Exchange except in compliance with the applicable provisions of the Securities Act and the rules and regulations promulgated thereunder. Prior to the Effective Time, and via letter, the Sellers shall amend and supplement Schedule 5.07 and use all reasonable efforts to cause each additional person - ------------- who is identified as an "affiliate" to execute a written agreement as set forth in Section 5.07. 5.08 Expenses. Each party hereto shall bear its own expenses -------- incident to preparing, entering into and carrying out this Agreement and the Plan of Merger and consummating the Acquisition, except that Ameribanc shall pay all printing expenses and filing fees incurred in connection with this Agreement, the Registration Statement and the Proxy Statement. 5.09 Miscellaneous Agreements and Consents. ------------------------------------- (a) Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Plan of Merger as expeditiously as possible, including, without limitation, using their respective best efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby and thereby. The Sellers and the Mercantile Entities shall use their best efforts to obtain consents of all third parties and governmental bodies necessary or, in the opinion of any of the foregoing, desirable for the consummation of the transactions contemplated by this Agreement and the Plan of Merger. (b) The Sellers, prior to the Effective Time, shall (i) consult and cooperate with the Mercantile Entities regarding implementation of those policies and procedures established by the Mercantile Entities for their governance and that of their respective subsidiaries and not otherwise referenced in Section 5.05 hereof, including, without limitation, policies and procedures pertaining to the accounting, asset/liability management, audit, credit, human resources, treasury and legal functions, and (ii) at the request of the Mercantile Entities, conform the Seller's existing policies and procedures in respect of such matters to the Mercantile Entities' policies and procedures or, in the absence of any existing policy or procedure of the Sellers regarding any such function, introduce the Mercantile Entities' policies and procedures in respect thereof (to the extent deemed reasonable by the Sellers), unless to do so would cause Peoples Bankshares and/or Peoples Bank to be in violation of any law, rule or regulation -29- 34 or any Regulatory Authority having jurisdiction over Peoples Bankshares and/or Peoples Bank. No action taken in connection with the foregoing shall be the basis to assert the violation of a representation, warranty or covenant of the Sellers herein. 5.10 Press Releases. The Sellers and the Mercantile Entities -------------- shall consult with each other as to the form and substance of any proposed press release or other proposed public disclosure of matters related to this Agreement, the Plan of Merger or any of the transactions contemplated hereby or thereby. 5.11 Indemnification of Peoples Bank's Directors, Officers ---------------------------------------------------- and Employees. Mercantile agrees that the Merger shall not affect or - ------------- diminish any of Peoples Bank's duties and obligations of indemnification existing at the Effective Time of Merger in favor of employees, agents, directors or officers of Peoples Bank arising by virtue of its Charter or By-Laws in the form in effect at the date hereof or arising by operation of law or arising by virtue of any contract, resolution, or other agreement or document existing at the date hereof, and such duties and obligations shall continue in full force and effect for so long as they would otherwise survive and continue in full force and effect. To the extent that Peoples Bank's existing directors' and officers' liability insurance policy would provide coverage for any action or omission occurring prior to the Effective Time, the Sellers agree to give proper notice to the insurance carrier and to the Mercantile Entities of a potential claim thereunder so as to preserve Peoples Bank's rights to such insurance coverage. Mercantile represents that the directors' and officers' liability insurance policy maintained by it provides for coverage of "prior acts" for directors and officers of entities acquired by Mercantile, including Peoples Bank, on and after the Effective Time. 5.12 Employee Benefit Plans. ---------------------- (a) Following the Effective Time, the Mercantile Entities shall cause the Surviving Bank to honor in accordance with their terms all employment, severance and other compensation contracts set forth on Schedule 5.12 between Peoples Bank and any current or former director, - ------------- officer, employee or agent thereof, and all provisions for vested benefits or other vested amounts earned or accrued through the Effective Time under the Sellers Employee Plans. (b) The provisions of any plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of Peoples Bank shall be deleted and terminated as of the Effective Time, and the Sellers shall ensure that following the Effective Time no holder of options to acquire shares of capital stock of Peoples Bank or any participant in any Seller Stock Plans shall have any right thereunder to acquire any securities of Peoples Bank. (c) The Sellers Employee Plans shall not be terminated by reason of the Merger but shall continue thereafter as plans of the Surviving Bank until such time as the employees of Peoples Bank are integrated into Mercantile's employee benefit plans that are available to other employees of Mercantile and its subsidiaries, subject to the terms and conditions specified in such plans and to such changes therein as may be necessary to reflect the consummation of the Merger. Mercantile shall take such steps as are necessary or required to integrate the employees of Peoples Bank in Mercantile's employee benefit plans available to other employees of Mercantile and its subsidiaries as soon as practicable after the Effective Time, with (i) full credit for prior service with Peoples Bank for purposes of vesting and eligibility for participation (but not benefit accruals under any defined benefit plan), and co-payments and deductibles, and (ii) waiver of all waiting periods and pre-existing condition exclusions or penalties. -30- 35 5.13 Taxes of Peoples Bankshares. Any liability in respect --------------------------- of any consolidated, combined or unitary tax imposed upon the Sellers (including any federal income tax liability shown to be due on the final return of Peoples Bankshares) (i) with respect to a taxable period ending on or before the Closing Date or (ii) with respect to a taxable period beginning on or before the Closing Date and ending after the Closing Date, but only with respect to the portion of such period up to and including the Closing Date, shall be allocated between Peoples Bankshares and Peoples Bank pursuant to (or in accordance with the principles of) Income Tax Regulation Sec. 1.1552-1(a)(1); any such liability (i) with respect to a taxable period beginning after the Closing Date or (ii) with respect to a period that begins on or before the Closing Date and ends thereafter, but only with respect to the portion of such period after the Closing Date, shall be allocated to Peoples Bankshares. Any refund in respect of any taxable period beginning on or before the Closing Date shall be allocated between Peoples Bank and Peoples Bankshares proportionately in accordance with the allocation of the tax liability for such period under the preceding sentence. Peoples Bankshares, with the assistance and review of the Mercantile Entities, shall prepare and timely file all tax declarations, information returns, returns and statements required to be filed by it after the Closing Date. On or before the Closing Date, Peoples Bankshares and Peoples Bank shall have taken all actions required to terminate the Tax Sharing Agreement. 5.14 State Takeover Statutes. The Sellers will take all ----------------------- steps necessary to exempt the transactions contemplated by this Agreement, the Plan of Merger and any agreement contemplated hereby or thereby from, and if necessary challenge the validity of, any applicable state takeover law. 5.15 Tax Opinion Certificates. The Sellers shall cause such ------------------------ of their executive officers and/or directors and such holders of Peoples Bankshares Common Stock and/or Peoples Bank Common Stock, in each case, as may reasonably requested by Thompson & Mitchell, counsel to the Mercantile Entities, to timely execute and deliver to Thompson & Mitchell certificates substantially in the forms of Exhibit C, Exhibit D, Exhibit E and Exhibit F --------- --------- --------- --------- hereto. 5.16 Escrow Account. Contemporaneously with the Closing, -------------- Peoples Bank shall deposit with an escrow agent (the "Escrow Agent"), which shall be selected by Mercantile, such funds as Mercantile shall reasonably determine are necessary to provide for (i) any payments to dissenters pursuant to Section 1.09 hereof and (ii) any and all claims incurred in connection with preparing for, entering into and carrying out this Agreement or the consummation of the Merger (collectively, the "Obligations"). Upon payment of the Obligations, the Escrow Agent shall remit to Peoples Bank any funds remaining in the escrow account. Peoples Bank hereby agrees to execute an escrow agreement in a form approved by Mercantile and that Peoples Bank, upon transfer of the funds to the Escrow Agent, shall have no further claim or right to or interest in such funds. ARTICLE VI ---------- CONDITIONS 6.01 Conditions to Each Party's Obligation To Effect the --------------------------------------------------- Acquisition. The respective obligations of each party to effect the Acquisition - ----------- shall be subject to the fulfillment or waiver at or prior to the Closing Date of the following conditions: (a) The approval of the Exchange and this Agreement shall have received the requisite vote of shareholders of Peoples Bankshares at the special meeting of shareholders called pursuant to Section 5.03 hereof. -31- 36 (b) The approval of the Merger, this Agreement and the Plan of Merger shall have received the requisite vote of shareholders of Peoples Bank at the special meeting of shareholders called pursuant to Section 5.03 hereof. (c) This Agreement, the Plan of Merger and the transactions contemplated hereby and thereby shall have been approved by the FDIC, the Kansas Commissioner and any other federal and/or state regulatory agencies whose approval is required for consummation of the transactions contemplated hereby. (d) The Registration Statement shall have been declared effective and shall not be subject to a stop order or any threatened stop order. (e) Neither Peoples Bankshares, Peoples Bank, Mercantile, Ameribanc nor Acquisition Bank shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Acquisition. (f) The Mercantile Entitles and Peoples Bankshares shall have taken all such actions as are necessary to effect the Exchange simultaneously with the Merger. (g) Each of Mercantile and the Sellers shall have received from Thompson & Mitchell an opinion (which opinion shall not have been withdrawn at or prior to the Effective Time) reasonably satisfactory in form and substance to it to the effect that the Acquisition will constitute a reorganization within the meaning of Section 368 of the Code and that no gain or loss will be recognized by the shareholders of Peoples Bankshares and/or Peoples Bank to the extent they receive Mercantile Common Stock in exchange for shares of Peoples Bankshares Common Stock and/or Peoples Bank Common Stock. 6.02 Conditions to Obligations of the Sellers. The ---------------------------------------- obligations of the Sellers to effect the Acquisition shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (a) Representations and Warranties. The ------------------------------ representations and warranties of the Mercantile Entities set forth in Article III hereof shall be true and correct in all material respects, except such as are not of a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of Mercantile and its subsidiaries, taken as a whole, as of the date of this Agreement and as of the Closing Date, (as though made on and as of the Closing Date except (i) to the extent such representations and warranties are by their express provisions made as of a specified date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the condition of Mercantile and its subsidiaries taken as a whole and (iii) for the effect of transactions contemplated by this Agreement) and the Sellers shall have received a signed certificate which is to the best knowledge of any Executive Vice President of Mercantile, signing solely in his capacity as an officer of Mercantile, and is to that effect. (b) Performance of Obligations. The Mercantile -------------------------- Entities shall have performed in all material respects all obligations required to be performed by each under this Agreement prior to the Effective Time, and the Sellers shall have received a signed certificate which is to the knowledge of any Executive Vice President of Mercantile, signing solely in his capacity as an officer of Mercantile, and is to that effect. -32- 37 (c) Permits, Authorizations, etc. The Mercantile ----------------------------- Entities shall have obtained any and all material permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the Acquisition. (d) No Material Adverse Change. Since the date of -------------------------- this Agreement, there shall have been no material adverse change in the business, financial condition, results of operations or prospects of Mercantile and its subsidiaries, taken as a whole. (e) Opinion of Counsel. Mercantile shall have ------------------ delivered to the Sellers an opinion of counsel to Mercantile dated as of the Closing Date or a mutually agreeable earlier date in substantially the form set forth as Exhibit G to this Agreement. --------- 6.03 Conditions to Obligations of the Mercantile Entities. ---------------------------------------------------- The obligations of the Mercantile Entities to effect the Acquisition shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (a) Representations and Warranties. The ------------------------------ representations and warranties of the Sellers set forth in Article II hereof shall be true and correct in all material respects, except such as are not of a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of Peoples Bank, as of the date of this Agreement and as of the Closing Date (as though made on and as of the Closing Date except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a material adverse effect on the condition of Peoples Bank and (iii) for the effect of transactions contemplated by this Agreement) and Mercantile shall have received a signed certificate which is to the best knowledge of the Chairman and Chief Executive Officer and President of each of Peoples Bankshares and Peoples Bank, signing solely in their capacities as officers of Peoples Bankshares and Peoples Bank, and is to that effect. (b) Performance of Obligations. The Sellers shall -------------------------- have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date, and Mercantile shall have received a signed certificate which is to the knowledge of the Chairman and the Chief Executive Officer and President of each of Peoples Bankshares and Peoples Bank, signing solely in their capacities as officers of Peoples Bankshares and Peoples Bank, and is to that effect. (c) Permits, Authorizations, etc. The Sellers shall ----------------------------- have obtained any and all material consents or waivers from other parties to loan agreements, leases or other contracts material to the Peoples Bank's businesses required for the consummation of the Acquisition, and the Sellers shall have obtained any and all material permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the Acquisition. (d) No Material Adverse Change. Since the date of -------------------------- this Agreement, there shall have been no material adverse change in the business, financial condition, results of operations or prospects of Peoples Bank. (e) Opinion of Counsel. The Sellers shall have ------------------ delivered to Mercantile an opinion of counsel to the Sellers dated as of the Closing Date or a mutually agreeable earlier date in substantially the form set forth as Exhibit H to this Agreement. --------- -33- 38 (f) Delivery of Certificates. Peoples Bankshares ------------------------ shall have delivered to the Exchange Agent the certificates evidencing shares of Peoples Bank Common Stock owned beneficially or of record by Peoples Bankshares, and such other documentation as shall be reasonably required by Mercantile or the Exchange Agent to effect the Exchange. ARTICLE VII ----------- TERMINATION, AMENDMENT AND WAIVER 7.01 Termination. This Agreement may be terminated at any ----------- time prior to the Closing Date, whether before or after approval by the shareholders of Peoples Bankshares and Peoples Bank: (a) by mutual consent by the Executive Committee of the Board of Directors of Mercantile and the Board of Directors of each other party hereto; or (b) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of each other party hereto at any time after December 31, 1996 if the Acquisition shall not theretofore have been consummated; or (c) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of each other party hereto if the FDIC, the Kansas Commissioner or any other federal and/or state regulatory agency whose approval is required for the consummation of the Acquisition shall have denied approval of such transaction; or (d) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Ameribanc, at any time prior to the completion of the Mercantile Due Diligence Period, in the event any situation, event, circumstance or other matter shall come to the attention of Mercantile during the course of the Mercantile Due Diligence Review conducted pursuant to Section 5.01(b) hereof which Mercantile shall, in a good faith exercise of its reasonable discretion, determine to be of type or nature which is of such a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of Peoples Bank and is not capable of being expeditiously or effectively resolved or remedied in a manner acceptable to Mercantile; or (e) by the Executive Committee of the Board of Directors of Mercantile or the Boards of Directors of Ameribanc, on the one hand or by the Boards of Directors of Peoples Bankshares and Peoples Bank, on the other hand, in the event of a breach by the other of any representation, warranty or agreement contained in this Agreement, which breach is of such a magnitude as to be materially adverse to the business, financial condition, results of operations or prospects of the breaching party and its subsidiaries taken as a whole and is not cured after 45 days' written notice thereof is given to the party committing such breach or waived by such other party(ies). (f) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Ameribanc pursuant to and in accordance with the provisions of Section 5.06 hereof. 7.02 Effect of Termination. In the event of termination of --------------------- this Agreement as provided in Section 7.01 above, this Agreement shall forthwith become void and without further effect and there shall be no liability on the part of any party hereto or the respective officers and directors of -34- 39 each, except as set forth in the second sentence of Section 5.01(a) and in Sections 5.08 and 8.02, and, except that no termination of this Agreement pursuant to subsection (e) of Section 7.01 shall relieve the non-performing party of any liability to any other party hereto arising from the intentional, deliberate and willful non-performance of any covenant herein, after the giving of notice and the opportunity to cure. 7.03 Amendment. This Agreement, the Exhibits and the --------- Schedules hereto may be amended by the parties hereto, by action taken by or on behalf of the respective Executive Committees of the Board of Directors or the respective Boards of Directors, at any time before or after approval of this Agreement by the shareholders of Peoples Bankshares and Peoples Bank; provided, however, that after any such approval no such modification shall (A) alter the amount or change the form of the Acquisition Consideration contemplated by this Agreement to be received by Peoples Bankshares or the other shareholders of Peoples Bank, (B) adversely affect the tax treatment of the shareholders of the Sellers, as generally described in Section 6.01(g) hereof, (C) alter or change any of the terms of this Agreement if such alteration or change would adversely affect the shareholders of Peoples Bank or (D) impede or delay receipt of any approvals, referred to in Section 6.01(c) or the consummation of the transactions contemplated by this Agreement and the Plan of Merger. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 7.04 Waiver. Any term, condition or provision of this ------ Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. ARTICLE VIII ------------ GENERAL PROVISIONS 8.01 Non-Survival of Representations; Warranties and ----------------------------------------------- Agreements. No investigation by the parties hereto made heretofore or - ---------- hereafter shall affect the representations and warranties of the parties which are contained herein and each such representation and warranty shall survive such investigation. Except as set forth below in this Section 8.01, all representations, warranties and agreements in this Agreement of the Mercantile Entities, the Sellers or in any instrument delivered by the Mercantile Entities or the Sellers pursuant to this Agreement shall expire at the Effective Time or upon termination of this Agreement in accordance with its terms. In the event of termination of this Agreement in accordance with its terms, the agreements contained in Sections 5.01 (second sentence), 5.08, 7.02 and 8.02 shall survive such termination. 8.02 Indemnification. The Sellers and the Mercantile --------------- Entities (hereinafter, in such capacity being referred to individually and/or collectively, as the "Indemnifying Party") agree to indemnify and hold harmless each other and their officers, directors and controlling persons (each such other party being hereinafter referred to, individually and/or collectively, as the "Indemnified Party") against any and all losses, claims, damages or liabilities, joint or several, to which the Indemnifying Party may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (a) arise out of any information furnished to the Indemnified Party by the Indemnifying Party or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in the Proxy Statement, or in any amendment thereof or supplement thereto, and provided for inclusion thereof by the Indemnifying Party, or (b) arise out of or are based upon the omission or alleged omission by the Indemnifying Party to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such Indemnified Party, as incurred, for -35- 40 any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. The obligations of the Indemnifying Party under this Section 8.02 shall survive any termination of this Agreement. 8.03 No Assignment; Successors and Assigns. This Agreement ------------------------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but neither this Agreement nor any right or obligation set forth in any provision hereof may be transferred or assigned by any party hereto without the prior written consent of all other parties, and any purported transfer or assignment in violation of this Section 8.03 shall be void and of no effect. There shall not be any third party beneficiaries of any provisions hereof except for Sections 1.08, 5.11, 5.12 and 8.02 which may be enforced against obligated party by the parties therein identified. 8.04 Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Agreement. 8.05 No Implied Waiver. No failure or delay on the part of ----------------- either party hereto to exercise any right, power or privilege hereunder or under any instrument executed pursuant hereto shall operate as a waiver nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 8.06 Headings. Article, section, subsection and paragraph -------- titles, captions and headings herein are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent or meaning of any provision hereof. 8.07 Entire Agreement. This Agreement and the Appendices and ---------------- Schedules hereto constitutes the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior negotiations, representations, warranties, commitments, offers, letters of interest or intent, proposal letters, contracts, writings or other agreements or understandings with respect thereto. No waiver, and no modification or amendment of any provision of this Agreement shall be effective unless specifically made in writing and duly signed by all parties thereto. 8.08 Counterparts. This Agreement may be executed in one or ------------ more counterparts, and any party to this Agreement may execute and deliver this Agreement by executing and delivering any of such counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 8.09 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed to be duly received (a) on the date given if delivered personally or by cable, telegram or telex or (b) on the date received if mailed by registered or certified mail (return receipt requested), to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): -36- 41 (i) if to the Mercantile Entities: Mercantile Bancorporation Inc. Mercantile Tower P.O. Box 524 St. Louis, MO 63166-0524 Attention: John W. Rowe Executive Vice President Mercantile Bank of St. Louis National Association Telecopy: (314) 425-2752 Copies to: Jon W. Bilstrom, Esq. General Counsel Mercantile Bancorporation Inc. Mercantile Tower P.O. Box 524 St. Louis, Missouri 63166-0524 Telecopy: (314) 425-1386 and Thompson & Mitchell One Mercantile Center St. Louis, Missouri 63101 Attention: Robert M. LaRose, Esq. Telecopy: (314) 342-1717 (ii) if to Sellers: Peoples State Bankshares, Inc. 1080 S.W. Wanamaker Road, Suite A Topeka, Kansas 66604-3888 Attention: Ronald D. Lutz Chairman and Chief Executive Officer Telecopy: (913) 271-8085 Copy to: Stinson, Mag & Fizzell 1201 Walnut Street, Suite 2800 Kansas City, Missouri 64106-2150 Attention: Howard H. Mick, Esq. Telecopy: (816) 691-3495 8.10 Governing Law. This Agreement shall be governed by and ------------- controlled as to validity, enforcement, interpretation, effect and in all other respects by the internal laws of the State of Missouri applicable to contracts made in that state. -37- 42 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be affixed hereto, all as of the date first written above. "MERCANTILE ENTITIES" MERCANTILE BANCORPORATION INC. ATTEST: /s/ William A. Hayter By: /s/ John W. Rowe - -------------------------------- ------------------------------------ William A. Hayter John W. Rowe Senior Vice President Executive Vice President Mercantile Bank of St. Louis Mercantile Bank of St. Louis National Association National Association, Authorized Officer AMERIBANC, INC. ATTEST: /s/ Jon W. Bilstrom By: /s/ Michael T. Normile - -------------------------------- -------------------------------------- Jon W. Bilstrom Michael T. Normile Secretary Vice President "SELLERS" PEOPLES STATE BANKSHARES, INC. ATTEST: /s/ Joyce M. Lutz By: /s/ Ronald Lutz - -------------------------------- -------------------------------------- Joyce M. Lutz Ronald Lutz Secretary and Treasurer Chairman and Chief Executive Officer PEOPLES STATE BANK ATTEST: /s/ Joyce M. Lutz By: /s/ Ronald Lutz - -------------------------------- -------------------------------------- Joyce M. Lutz Ronald Lutz Secretary and Vice President Chairman and Chief Executive Officer -38- EX-2.2 3 PLAN OF MERGER 1 Exhibit 2.2 PLAN OF MERGER This Plan of Merger (the "Plan") dated as of May 2, 1996 by and between PEOPLES STATE BANK, a Kansas state bank ("Peoples Bank"), and MERCANTILE BANK OF SHAWNEE COUNTY, a Kansas state bank in organization ("Mercantile-Shawnee"), such banks being hereinafter collectively referred to as the "Constituent Banks." W I T N E S S E T H: - - - - - - - - - - WHEREAS, Peoples Bank is chartered as a Kansas state bank by the Kansas State Bank Commissioner, is duly authorized, validly existing and in good standing under the laws of the State of Kansas, having an authorized capital of 22,500 shares of common stock, $100.00 par value (the "Peoples Bank Common Stock"), of which 22,500 shares will be issued and outstanding as of the Effective Time, as herein defined; and WHEREAS, Mercantile-Shawnee will be organized as a Kansas state bank chartered by the Kansas State Bank Commissioner, duly authorized, validly existing and in good standing under the laws of the State of Kansas, having authorized capital of 10,000 shares of common stock, $100.00 par value (the "Mercantile-Shawnee Common Stock"), of which 10,000 shares will be issued and outstanding as of the Effective Time and which will be owned beneficially and of record by Ameribanc, Inc., a Missouri corporation ("Ameribanc"); and WHEREAS, the respective Boards of Directors of Peoples Bank and Mercantile-Shawnee each will have duly approved this Plan providing for the merger of Mercantile-Shawnee with and into Peoples Bank as the surviving bank as authorized by the statutes of the State of Kansas (the "Merger"); and WHEREAS, Peoples Bank, Peoples State Bankshares, Inc., a Kansas corporation and holder of eighty-eight and 88/100 percent (88.88%) of the Peoples Bank Common Stock ("Peoples Bankshares"), Ameribanc and Mercantile Bancorporation Inc., a Missouri corporation and holder of all of the issued and outstanding stock of Ameribanc ("Mercantile"), have entered into an Agreement and Plan of Reorganization (the "Agreement"), pursuant to which Ameribanc and Peoples Bankshares will consummate an exchange of all shares of Peoples Bank Common Stock owned beneficially and of record by Peoples Bankshares (the "Exchange") for shares of the common stock, $5.00 par value, of Mercantile ("Mercantile Common Stock"), and, simultaneously with the Exchange, Mercantile-Shawnee will merge with and into Peoples Bank (the "Merger" and together with the Exchange, the "Acquisition"), whereby, (1) upon consummation of the Exchange, each share of Peoples Bank Common Stock that is beneficially owned by Peoples Bankshares will be transferred to Ameribanc in exchange for approximately 14.4819 shares of Mercantile Common Stock and (2) upon consummation of the Merger, each outstanding share of Peoples Bank Common Stock (other than shares transferred to Ameribanc pursuant to the Exchange or shares as to which the holder thereof has perfected dissenters' rights under Section 17-6712 of the Kansas Statutes Annotated) will be converted into approximately 14.4819 shares of Mercantile Common Stock; and WHEREAS, Ameribanc owns all the outstanding shares of Mercantile-Shawnee; NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and for the purpose of setting forth the terms and conditions of the Merger, the manner and the basis of causing the shares of Peoples Bank Common Stock (other than shares owned 2 by Ameribanc or any dissenters) to be converted into Mercantile Common Stock, as herein provided, and such other details and provisions as are deemed necessary or proper, the parties hereto have agreed, subject to the approval and adoption of this Plan by the requisite vote of the shareholders of each Constituent Bank, and subject to the conditions hereinafter set forth, as follows: ARTICLE I Merger and Name of Surviving Bank --------------------------------- At the Effective Time (as defined herein), Mercantile-Shawnee shall be merged with and into Peoples Bank, which is hereby designated as the "Surviving Bank," the name of which upon and after the Effective Time shall be "Peoples State Bank." ARTICLE II Terms and Conditions of Merger ------------------------------ The terms and conditions of the Merger are (in addition to those set forth elsewhere in this Plan) as follows: Section 1. At the Effective Time: (a) Mercantile-Shawnee shall be merged with and into Peoples Bank, and Peoples Bank shall be, and is designated herein as, the Surviving Bank. (b) The separate existence of Mercantile-Shawnee shall cease. (c) The Surviving Bank shall thereupon and thereafter possess all the rights, privileges, immunities and franchises, of a public as well as of a private nature, of each of the Constituent Banks; and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all other choses in action, and all and every other interest, of or belonging to or due to each of the Constituent Banks, shall be taken and deemed to be transferred to and vested in the Surviving Bank without further act or deed; and the title to any real estate, or any interest therein, vested in either Constituent Bank shall not revert or be in any way impaired by reason of the Merger; the Surviving Bank shall thenceforth be responsible and liable for all the liabilities and obligations of each of the Constituent Banks; and any claim existing or action or proceeding pending by or against either of such Constituent Banks may be prosecuted to judgment as if the Merger had not taken place, or such Surviving Bank may be substituted in its place. Neither the rights of creditors nor any liens upon the property of either of the Constituent Banks shall be impaired by the Merger. Section 2. At the Effective Time, the Charter of the Surviving Bank shall be the Charter of Peoples Bank until amended in accordance with its provisions and applicable law. Surviving Bank's capital account and surplus account shall equal the combined capital accounts and surplus accounts, respectively, of Peoples Bank and of Mercantile-Shawnee. Section 3. At the Effective Time the members of the Board of Directors and the terms of those directors of Surviving Bank shall be as designated by Ameribanc immediately prior to the Effective Time. -2- 3 Section 4. At the Effective Time, the officers of Surviving Bank shall be the persons designated by Ameribanc immediately prior to the Effective Time and such persons will serve in their designated offices, thereafter, until their respective successors are duly elected and qualified. ARTICLE III Manner and Basis of Converting Shares ------------------------------------- The manner and basis of converting the shares of Peoples Bank into the right to receive Mercantile Common Stock and the mode of carrying the Merger into effect are as follows: Section 1. Conversion of Bank Common Stock ------------------------------- At the Effective Time, the 10,000 shares of Mercantile-Shawnee Common Stock outstanding shall be converted into 10,000 shares of Surviving Bank common stock. Section 2. Conversion of Peoples Bank Common Stock --------------------------------------- (a) At the Effective Time, Mercantile will issue 325,843 shares of Mercantile Common Stock in the Exchange and the Merger (hereinafter such shares shall be referred to in the aggregate as the "Acquisition Consideration"). (b) At the Effective Time, Peoples Bankshares, by virtue of the Exchange and without any other action on the part of the Mercantile Entities or Peoples Bankshares, will be entitled to receive approximately 14.4819 shares of Mercantile Common Stock for each share of Peoples Bank Common Stock then beneficially owned by Peoples Bankshares upon delivery at the closing of the Acquisition of the certificates evidencing its shares of Peoples Bank Common Stock. Also at the Effective Time, by virtue of the Merger and without any action on the part of the Mercantile, Ameribanc, Mercantile- Shawnee, Peoples Bank or any Peoples Bank shareholder, each share of Peoples Bank Common Stock issued and outstanding at the Effective Time (other than any shares transferred to Ameribanc pursuant to the Exchange and any shares as to which the holder thereof has perfected dissenters' rights under Section 17-6712 of the Kansas Statutes Annotated), shall cease to be outstanding and shall be converted into and become the right to receive approximately 14.4819 shares of Mercantile Common Stock. (c) Neither certificates nor scrip for fractional shares of Mercantile Common Stock shall be issued as Acquisition Consideration. Each holder of shares of Peoples Common Stock who otherwise would have been entitled to a fraction of a share of Mercantile Common Stock shall receive in lieu thereof and, at the time such holder receives the shares of Mercantile Common Stock to which the holder is entitled as Acquisition Consideration, cash (without interest) in an amount determined by multiplying the fractional share interest to which such holder would otherwise be entitled by the closing stock price of Mercantile Common Stock on the New York Stock Exchange Composite Tape as reported in The Wall Street Journal on the Closing Date. No such holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share. Section 3. Dissenting Peoples Shareholders ------------------------------- Any shareholder of Peoples Bank who (1) votes against or fails to vote in favor of the Merger at the shareholder meeting of Peoples Bank called to vote upon the Merger and (2) gives notice in writing at or prior to the meeting of his or her objection to the Merger shall be entitled to receive the value of the shares held by him or her, valued as of the effective date of the Merger, if demand is made -3- 4 before twenty days after the date of mailing by the Surviving Bank of notice that the Merger has become effective. Section 4. Peoples Bank Common Stock Certificates -------------------------------------- After the Effective Time, each holder of an outstanding certificate which prior thereto represented shares of Peoples Bank Common Stock shall be entitled, upon surrender thereof to Mercantile or its designee, to receive in exchange therefor the number of shares of Mercantile Common Stock into which it has been converted. Until so surrendered, each such outstanding certificate which, prior to the Effective Time, represented shares of Peoples Bank Common Stock shall for all purposes evidence the right to receive the Mercantile Common Stock into which such shares shall have been so converted; provided that dividends or other distributions which are payable in respect of shares of Mercantile Common Stock into which shares of Peoples Bank Common Stock shall have been so converted shall be set aside by Mercantile and shall not be paid to holders of certificates representing such shares of Peoples Common Stock until such certificates shall have been so surrendered in exchange for certificates representing such Mercantile Common Stock. Upon such surrender the holders of such shares shall be entitled to receive such dividends without interest. The Mercantile Common Stock into which shares of the Peoples Common Stock shall have been converted pursuant to this Article III shall be issued in full satisfaction of all rights pertaining to such converted shares. ARTICLE IV Other Provisions with Respect to Merger --------------------------------------- Section 1. This Plan shall be submitted to the shareholders of each Constituent Bank as provided by Chapter 9 of the Kansas Statutes Annotated (the "Kansas Banking Act"). After the approval or adoption thereof by the shareholders of each Constituent Bank in accordance with the requirements of the laws of the Kansas Banking Act, all required documents shall be executed, filed and recorded and all required acts shall be done in order to accomplish the Merger pursuant to the Kansas Banking Act subject to the terms and conditions of the Agreement. Section 2. Termination. If the Agreement is terminated, then this Plan shall simultaneously terminate without further action by the Constituent Banks. In the event of such termination, the Board of Directors of each of the Constituent Banks shall direct its officers not to file this Plan as provided above notwithstanding favorable action on this Plan by the shareholders of Peoples or Bank. Section 3. Approval of Commissioner. The parties agree to submit this Plan to the Kansas State Bank Commissioner (the "Kansas Commissioner") for approval, together with certified copies of the authorizing resolutions of the Boards of Directors of Mercantile-Shawnee and Peoples Bank showing approval by a majority of the entire Board of each. Whether approved or disapproved by the Kansas Commissioner, Mercantile-Shawnee and Peoples Bank shall pay all expenses incurred by the Commissioner in connection with the examination of this Plan. Section 4. Retention of Branches. Pursuant to the Kansas Banking Act and with the approval of the Kansas Commissioner, immediately following the Effective Time (as hereinafter defined) the Surviving Bank shall maintain and operate branches at each of the locations set forth in Exhibit A --------- -4- 5 attached hereto and made a part hereof. This section shall not limit the Surviving Bank's right to future branching opportunities as set forth in the Kansas Banking Act. ARTICLE V Approval and Effective Time of Merger; Miscellaneous Matters ------------------------------------------------------------ Section 1. The Merger shall become effective when all the following actions have been taken: (i) this Plan shall be (a) authorized, adopted and approved on behalf of each Constituent Bank in accordance with the Kansas Statute, and (b) filed with the Kansas Commissioner and the Kansas Commissioner shall have granted his approval of the Merger; (ii) the approval necessary under the Federal Deposit Insurance Act shall have been received and all applicable waiting periods shall have expired; and (iii) copies of resolutions of the shareholders of each merging bank approving it, certified by the Mercantile-Shawnee's president or vice-president or the cashier, shall be filed with the Kansas Commissioner. The time at which such actions are completed and the required documentation is filed by the Kansas Commissioner with the Office of the Secretary of State of the State of Kansas is herein referred to as the "Effective Time." Section 2. If at any time the Surviving Bank shall deem or be advised that any further grants, assignments, confirmations or assurances are necessary or desirable to vest, perfect or confirm, of record or otherwise, in the Surviving Bank the title to any property of Peoples Bank acquired or to be acquired by or as a result of the Merger, the officers or any of them and directors of the Surviving Bank shall be and they hereby are severally and fully authorized to execute and deliver any and all such deeds, assignments, confirmations and assurances and to do all things necessary or proper so as to best prove, confirm and ratify title to such property in the Surviving Bank and otherwise carry out the purposes of the Merger and the terms of this Plan. Section 3. For the convenience of the parties and to facilitate the filing and recording of this Plan, any number of counterparts hereof may be executed, and each such counterpart shall be deemed to be an original instrument and all such counterparts together shall be considered one instrument. Section 4. This Plan cannot be altered or amended except pursuant to an instrument in writing signed on behalf of the parties hereto. [the remainder of this page is left intentionally blank] -5- 6 IN WITNESS WHEREOF, each Constituent Bank has caused this Plan to be executed, all as of the date first above written. PEOPLES STATE BANK [SEAL] By:/s/ Ronald D. Lutz ---------------------------------- ATTEST: Ronald D. Lutz, Chairman and Chief Executive Officer /s/ Joyce M. Lutz - ------------------------------------ Joyce M. Lutz, Secretary MERCANTILE BANK OF SHAWNEE COUNTY, IN ORGANIZATION By:/s/ P. Stephen Appelbaum ------------------------------------- P. Stephen Appelbaum By:/s/ Michael T. Normile ------------------------------------- Michael T. Normile By:/s/ Jon W. Bilstrom ------------------------------------- Jon W. Bilstrom By:/s/ Audrey Polite ------------------------------------- Audrey Polite By:/s/ Michael J. Marshall ------------------------------------- Michael J. Marshall [SEAL] Constituting all of the incorporators of Mercantile Bank of Shawnee County, In Organization ATTEST: /s/ Joy L. Moore - ------------------------------------ Joy L. Moore, Secretary -6- 7 STATE OF KANSAS ) ) SS. COUNTY OF SHAWNEE ) On this 8th day of May, 1996, before me personally appeared Ronald D. Lutz, to me personally known, who, being by me duly sworn, did say that he is the Chairman and Chief Executive Officer of Peoples State Bank, a Kansas state-chartered bank, and that the foregoing instrument was signed on behalf of said bank by authority of its Board of Directors; and said Ronald D. Lutz acknowledged said instrument to be the free act and deed of said bank. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the County and State aforesaid, the day and year first above written. /s/ Barbara J. Pritz ------------------------------------- Notary Public [SEAL] STATE OF MISSOURI ) ) SS. CITY OF ST. LOUIS ) On this 10th day of May, 1996, before me personally appeared P. Stephen Appelbaum, Michael T. Normile, Jon W. Bilstrom, Audrey Polite and Michael J. Marshall, to me personally known, who, being by me duly sworn, did each say that he or she is an incorporator of Mercantile Bank of Shawnee County, a Kansas state-chartered bank in organization, and that the foregoing instrument was signed on behalf of said bank; and said P. Stephen Appelbaum, Michael T. Normile, Jon W. Bilstrom, Audrey Polite and Michael J. Marshall acknowledged said instrument to be the free act and deed of said bank. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the City and State aforesaid, the day and year first above written. /s/ Harlon D. Keel ------------------------------------- [SEAL] Notary Public -7- 8 Exhibit A --------- 1064 S.W. Wanamaker Road Topeka, Kansas 66604-3888 5730 S.W. 21st Street Topeka, Kansas 66604-3795 3625 N.W. 46th Street Topeka, Kansas 66618 443 Main Steet Rossville, Kansas 66533-9637 Country Center Silver Lake, Kansas 66539 953380018/9 EX-2.3 4 VOTING AGREEMENT 1 Exhibit 2.3 VOTING AGREEMENT This Voting Agreement dated as of December 19, 1995, is entered into between Mercantile Bancorporation Inc. ("Mercantile"), and the undersigned director and shareholder ("Shareholder") of Peoples State Bankshares, Inc. ("Peoples Bankshares"). WHEREAS, Peoples Bankshares, Mercantile, Ameribanc, Inc. ("Ameribanc") and Peoples State Bank ("Peoples Bank") have proposed to enter into an Agreement and Plan of Reorganization (the "Agreement"), dated as of today, whereby Ameribanc and Peoples Bankshares will consummate an exchange of all shares of Peoples Bank common stock, $100.00 par value (the "Peoples Bank Common Stock"), owned beneficially and of record by Peoples Bankshares (the "Exchange") for shares of common $5.00 par value, of Mercantile ("Mercantile Common Stock"), and, simultaneously with the Exchange, a Kansas State bank to be owned by Ameribanc will be merged with and into Peoples Bank (the "Merger" and together with the Exchange, the "Acquisition"), and the shareholders of Peoples Bank (other than Ameribanc and Peoples Bankshares) will receive shares of Mercantile Common Stock in conversion of their shares of Peoples Bank Common Stock; and WHEREAS, Mercantile is willing to expend the substantial time, effort and expense necessary to implement the Acquisition, only if Shareholder enters into this Voting Agreement; and WHEREAS, the Shareholder believes that the Acquisition is in his best interest and the best interest of Peoples Bankshares; NOW, THEREFORE, in consideration of the premises, Shareholder hereby agrees as follows: 1. Voting Agreement. Shareholder will vote, or cause to be voted, ---------------- all of the shares of Peoples Bankshares Common Stock he now owns or hereafter acquires and over which he now has, or prior to the record date for voting at the Meeting (as hereafter defined) acquires, voting control in favor of the Exchange at the meeting of shareholders of Peoples Bankshares to be called for the purpose of approving the Exchange (the "Meeting"). 2. No Competing Transaction. Shareholder will not, directly or ------------------------ indirectly, cause the initiation, solicitation or encouragement or voting any of the shares of Peoples Bankshares Common Stock now or hereafter acquired by Shareholder in favor of any other merger or sale of all or substantially all the assets of Peoples Bankshares to any person other than Mercantile or its affiliates until the earlier to occur of: (i) the closing of the Exchange and the Merger, (ii) the termination of the Agreement or (iii) the abandonment of the Exchange and the Merger by the mutual agreement of Peoples Bankshares, Peoples Bank, Ameribanc and Mercantile. 3. Transfers Restricted. From and after the date of this Shareholder -------------------- Agreement, Shareholder will not sell, dispose of or otherwise transfer any shares of Peoples Bankshares Common Stock owned beneficially or of record by him, unless the transferee, prior to such transfer, executes a voting agreement with respect to the transferred shares substantially to the effect of this Voting Agreement and satisfactory to Mercantile. 4. Meeting. At Mercantile's request, Shareholder shall use his best ------- efforts to cause the Meeting to be held as soon as practicable. 5. Representations and Warranties True and Correct. Shareholder ----------------------------------------------- acknowledges that he has reviewed the representations and warranties of Peoples Bankshares set forth in Article II of the Agreement 2 and certifies that to the best knowledge of Shareholder, such representations and warranties are true and correct in all material respects. 6. No Ownership Interest. Nothing contained in this Shareholder --------------------- Agreement shall be deemed to vest in Mercantile any direct or indirect ownership or incidence of ownership of or with respect to any shares of Peoples Bankshares Common Stock. All rights, ownership and economic benefits of and relating to the shares of Peoples Bankshares Common Stock owned by Shareholder shall remain and belong to Shareholder, and Mercantile shall have no authority to manage, direct, superintend, restrict, regulate, govern or administer any of the policies or operations of Peoples Bankshares or exercise any power or authority to direct Shareholder in the voting of any of his shares of Peoples Bankshares Common Stock, except as otherwise expressly provided herein, or the performance of his duties or responsibilities as a director of Peoples Bankshares. 7. Evaluation of Investment. Shareholder, by reason of his knowledge ------------------------ and experience in financial and business matters and in his capacity as a director and executive officer of Peoples Bankshares, believes himself capable of evaluating the merits and risks of the potential investment in Mercantile Common Stock contemplated by the Agreement. 8. Documents Delivered. Shareholder acknowledges having reviewed the ------------------- Agreement and its attachments and the related Plan of Merger and that reports, proxy statements and other information with respect to Mercantile filed with the Securities and Exchange Commission were, prior to his execution of this Shareholder Agreement, available for inspection and copying at the offices of Mercantile and that Mercantile delivered the following such documents to Peoples Bankshares and Peoples Bank: (a) Mercantile's Annual Report on Form 10-K for the year ended December 31, 1994; (b) Mercantile's Annual Report to Shareholders for the year ended December 31, 1994; and (c) Mercantile's Quarterly Report on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995. 9. Amendment and Modification. This Shareholder Agreement may be -------------------------- amended, modified or supplemented at any time by the written approval of such amendment, modification or supplement by Shareholder and Mercantile. 10. Entire Agreement. This Shareholder Agreement evidences the entire ---------------- agreement among the parties hereto with respect to the matters provided for herein and there are no agreements, representations or warranties with respect to the matters provided for herein other than those set forth herein and in the Agreement. This Shareholder Agreement supersedes any agreements among Peoples Bankshares and Shareholder concerning the Exchange, the Merger or the disposition or control of the capital stock of Peoples Bankshares. 11. Severability. The parties agree that if any provision of this ------------ Shareholder Agreement shall under any circumstances be deemed invalid or inoperative, this Shareholder Agreement shall be construed with the invalid or inoperative provisions deleted and the rights and obligations of the parties shall be construed and enforced accordingly. -2- 3 12. Counterparts. This Shareholder Agreement may be executed in ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. Governing Law. The validity, construction, enforcement and effect ------------- of this Shareholder Agreement shall be governed by the internal laws of the State of Missouri. 14. Headings. The headings for the paragraphs of this Shareholder -------- Agreement are inserted for convenience only and shall not constitute a part hereof or affect the meaning or interpretation of this Shareholder Agreement. 15. Successors. This Shareholder Agreement shall be binding upon and ---------- inure to the benefit of Mercantile and its successors, and Shareholder and Shareholder's spouse and their respective executors, personal representatives, administrators, heirs, legatees, guardians and other legal representatives. This Shareholder Agreement shall survive the death or incapacity of Shareholder. This agreement may be assigned by Mercantile only to an affiliate of Mercantile. IN WITNESS WHEREOF, the parties have caused this Shareholder Agreement to be executed as of the date first above written. MERCANTILE BANCORPORATION INC. By: -------------------------------------------------- John W. Rowe Executive Vice President Mercantile Bank of St. Louis National Association Authorized Officer SHAREHOLDER ----------------------------------------------------- -3- EX-5.1 5 OPINION RE LEGALITY 1 Exhibit 5.1 [Letterhead of Thompson Coburn] May 10, 1996 Mercantile Bancorporation Inc. P.O. Box 524 St. Louis, Missouri 63166-0524 Re: Registration Statement on Form S-4 ---------------------------------- Gentlemen: We refer you to the Registration Statement on Form S-4 filed by Mercantile Bancorporation Inc. (the "Company") on May 10, 1996 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended, pertaining to the proposed issuance by the Company of up to 325,843 shares of the Company's common stock, $5.00 par value (the "Shares"), in connection with the acquisition by reorganization of Peoples State Bank ("Peoples") pursuant to the Agreement and Plan of Reorganization dated December 19, 1995 (the "Reorganization Agreement"), by and among the Company, Ameribanc, Inc., Peoples and Peoples State Bankshares, Inc., all as provided in the Registration Statement. In rendering the opinions set forth herein, we have examined such corporate records of the Company, such laws and such other information as we have deemed relevant, including the Company's Restated Articles of Incorporation and Bylaws, as amended and currently in effect, the resolutions adopted by the Executive Committee of the Company's Board of Directors relating to the reorganization transaction, certificates received from state officials and statements we have received from officers and representatives of the Company. In delivering this opinion, the undersigned assumed the genuineness of all signatures; the authenticity of all documents submitted to us as originals; the conformity to the originals of all documents submitted to us as certified, photostatic or conformed copies; the authenticity of the originals of all such latter documents; and the correctness of statements submitted to us by officers and representatives of the Company. Based only on the foregoing, the undersigned is of the opinion that: 1. The Company has been duly incorporated and is validly existing under the laws of the State of Missouri; and 2. The Shares to be sold by the Company, when issued as provided in the Reorganization Agreement, will be duly authorized, duly and validly issued and fully paid and nonassessable. 2 Mercantile Bancorporation, Inc. May 10, 1996 Page 2 We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the section of the Proxy Statement/Prospectus entitled "Legal Matters." Very truly yours, /s/ Thompson Coburn EX-8.1 6 OPINION RE TAX 1 Exhibit 8.1 [Letterhead of Thompson Coburn] May 10, 1996 Board of Directors Peoples State Bankshares, Inc. 1080 S.W. Wanamaker Road, Suite A Topeka, Kansas 66604 Board of Directors Peoples State Bank 1064 S.W. Wanamaker Road Topeka, Kansas 66604 Ladies and Gentlemen: You have requested our opinion with regard to certain federal income tax consequences of the proposed acquisition of all of the issued and outstanding stock of Peoples State Bank, a Kansas state bank ("Bank"), by Ameribanc, Inc., a Missouri corporation ("Ameribanc"). Ameribanc is a wholly owned subsidiary of Mercantile Bancorporation Inc., a Missouri corporation ("MBI"). The proposed acquisition will be accomplished in two simultaneous steps consisting of (i) an exchange by Ameribanc of solely MBI common stock, par value $5.00 per share ("MBI Common Stock"), in return for all Bank common stock, par value $100.00 per share ("Bank Common Stock") owned by Peoples State Bankshares, Inc., a Kansas corporation ("Bankshares") (the "Exchange"), and (ii) the merger of a to-be-formed, wholly owned subsidiary of Ameribanc with and into Bank (the "Merger") pursuant to which the stockholders of Bank (other than Ameribanc) who do not dissent from the Merger will receive solely MBI Common Stock in exchange for their Bank Common Stock. In connection with the Exchange, Bankshares will distribute the MBI Common Stock received and all of its remaining properties in complete liquidation (the "Liquidation") and will dissolve in connection with the Liquidation. As soon as practicable after the Merger, Mercantile Bank of Topeka will be merged with and into Bank. In connection with the preparation of our opinion, we have examined and have relied upon the following: (i) The Agreement and Plan of Reorganization among MBI, Ameribanc, Bank and Bankshares dated as of December 19, 1995, including the schedules and exhibits thereto (the "Agreement"); (ii) MBI's Registration Statement on Form S-4, including the Joint Proxy Statement/Prospectus contained therein, filed with the Securities and Exchange Commission on May 10, 1996 (the "Registration Statement"); (iii) the "Voting Agreements" (as defined in the Registration Statement) and that agreement described under the caption "Interests of Certain Persons in the Acquisition" in the Registration Statement; (iv) The representations and undertaking of MBI substantially in the form of Exhibit A hereto; 2 Peoples State Bankshares, Inc. Peoples State Bank May 10, 1996 Page 2 (v) The representations and undertakings of Bankshares and Bank substantially in the forms of Exhibit B and Exhibit C hereto, respectively; (vi) The representations and undertakings of certain holders of Bankshares common stock, par value $1.00 per share ("Bankshares Common Stock"), and certain holders of Bank Common Stock, generally in the forms of Exhibit D and Exhibit E hereto, respectively; and (vii) The Rights Plan between MBI and Mercantile Bank of St. Louis National Association as rights agent dated May 23, 1988. Our opinion is based solely upon applicable law and the factual information and undertakings contained in the above-mentioned documents. In rendering our opinion, we have assumed the accuracy of all information and the performance of all undertakings contained in each of such documents. We also have assumed the authenticity of all original documents, the conformity of all copies to the original documents, and the genuineness of all signatures. We have not attempted to verify independently the accuracy of any information in any such document, and we have assumed that such documents accurately and completely set forth all material facts relevant to this opinion. All of our assumptions were made with your consent. If any fact or assumption described herein or below is incorrect, any or all of the federal income tax consequences described herein may be inapplicable. OPINION Subject to the foregoing, to the conditions and limitations expressed elsewhere herein, and assuming that the Merger is consummated in accordance with the Agreement, we are of the opinion that for federal income tax purposes, each of the Exchange and the Merger will constitute a reorganization within the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), with the following federal income tax consequences: 1. No gain or loss will be recognized by Bankshares on its transfer of Bank Common Stock solely in exchange for MBI Common Stock in the Exchange. 2. No gain or loss will be recognized by Bankshares on its distribution of MBI Common Stock in the Liquidation. 3. Each stockholder of Bankshares who exchanges, in the Liquidation, his or its shares of Bankshares Common Stock solely for shares of MBI Common Stock: a) will recognize no gain or loss as a result of the exchange, except with regard to cash received in lieu of a fractional share, as discussed below (Code section 354(a)(1)); b) will have an aggregate basis for the shares of MBI Common Stock received equal to the aggregate adjusted tax basis of the shares of Bank Common Stock surrendered (Code section 358(a)(1)); and 3 Peoples State Bankshares, Inc. Peoples State Bank May 10, 1996 Page 3 c) will have a holding period for the shares of MBI Common Stock received which includes the period during which the shares of Bank Common Stock surrendered were held, provided that the shares of Bank Common Stock surrendered were capital assets in the hands of such holder at the time of the Liquidation (Code section 1223(1)). 4. Each stockholder of Bank who exchanges, in the Merger, his or its shares of Bank Common Stock solely for shares of MBI Common Stock: a) will recognize no gain or loss as a result of the exchange, except with regard to cash received in lieu of a fractional share, as discussed below (Code section 354(a)(1)); b) will have an aggregate basis for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 5, below) equal to the aggregate adjusted tax basis of the shares of Bank Common Stock surrendered (Code section 358(a)(1)); and c) will have a holding period for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 5, below) which includes the period during which the shares of Bank Common Stock surrendered were held, provided that the shares of Bank Common Stock surrendered were capital assets in the hands of such holder at the time of the Merger (Code section 1223(1)). 5. Each stockholder of Bank who receives, in the Merger, cash in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received in the Merger and then redeemed by MBI. Provided that the shares of Bank Common Stock surrendered were capital assets in the hands of such holder at the time of the Merger, the receipt of such cash will cause the recipient to recognize capital gain or loss, equal to the difference between the amount of cash received and the portion of such holder's basis in the shares of MBI Common Stock allocable to the fractional share (Code sections 1001 and 1222; Rev. Rul. 66-365, 1966-2 C.B. 116; Rev. Proc. 77-41, 1977-2 C.B. 574). * * * * * * * * * * * * We express no opinion with regard to (1) the federal income tax consequences of the Merger not addressed expressly by this opinion, including without limitation, (i) the tax consequences, if any, to those stockholders of Bank who acquired shares of Bank Common Stock pursuant to the exercise of employee stock options or otherwise as compensation, and (ii) the tax consequences to special classes of stockholders, if any, including without limitation, foreign persons, insurance companies, tax-exempt entities, retirement plans, and dealers in securities; and (2) federal, state, local, or foreign taxes (or any other federal, state, local, or foreign laws) not specifically referred to and discussed herein. Further, our opinion is based upon the Code, Treasury Regulations proposed or promulgated thereunder, and administrative interpretations and judicial precedents relating thereto, all of which are subject to change at any time, possibly with retroactive effect, and 4 Peoples State Bankshares, Inc. Peoples State Bank May 10, 1996 Page 4 we assume no obligation to advise you of any subsequent change thereto. If there is any change in the applicable law or regulations, or if there is any new administrative or judicial interpretation of the applicable law or regulations, any or all of the federal income tax consequences described herein may become inapplicable. The foregoing opinion reflects our legal judgment solely on the issues presented and discussed herein. This opinion has no official status or binding effect of any kind. Accordingly, we cannot assure you that the Internal Revenue Service or any court of competent jurisdiction will agree with this opinion. We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to all references made to this letter and to this firm in the Registration Statement. Very truly yours, /s/ Thompson Coburn 5 Exhibit A CERTIFICATE ----------- The undersigned, * , [Undersigned's Title] of ---------------- Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Agreement and Plan of Reorganization among MBI, Ameribanc, Inc., a Missouri corporation ("Ameribanc"), Peoples State Bank, a Kansas state bank ("Bank"), and Peoples State Bankshares, Inc., a Kansas corporation ("Bankshares") dated as of December 19, 1995, including the schedules and exhibits thereto (the "Agreement"), and (b) I am aware that, pursuant to the Agreement, Ameribanc will acquire all outstanding Bank common stock, par value $100.00 per share ("Bank Common Stock"), solely in exchange for MBI common stock, par value $5.00 per share ("MBI Common Stock"), in two simultaneous transactions consisting of (i) an exchange by Bankshares of its Bank Common Stock solely in return for MBI Common Stock to be issued on behalf of Ameribanc (the "Exchange"), and (ii) the merger of a to-be-formed, wholly owned subsidiary of Ameribanc ("Acquisition Bank") with and into Bank (the "Merger" and, collectively with the Exchange, the "Acquisition") pursuant to which the stockholders of Bank (other than Ameribanc) who do not dissent from the Merger will receive solely MBI Common Stock; and (c) I am aware that (i) this Certificate will be relied on by Thompson Coburn, counsel for MBI and Ameribanc, in rendering its opinion to Bankshares and Bank that the Exchange and the Merger will each constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Exchange and the Merger. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF MBI, that: (1) Neither MBI nor any other member of MBI's "affiliated group" (as the quoted term is defined in Code section 1504, the "MBI Affiliated Group") has owned, directly or indirectly, any stock of Bank within the last five years. (2) Before the Merger, Ameribanc will be in control of Acquisition Bank within the meaning of section 368(c) of the Code. (3) Before the Merger, Acquisition Bank will have no assets or liabilities other than assets, if any, received from Ameribanc to satisfy Acquisition Bank's capitalization requirements 6 (the "Minimum Assets"). MBI will cause the Minimum Assets to be returned to Ameribanc within thirty (30) days after the Merger by means of a dividend distribution or other payment. (4) No indebtedness between Bankshares, Bank, or any other member of Bankshares's "affiliated group" (as the quoted term is defined in Code section 1504, the "Bankshares Affiliated Group"), on the one hand, and MBI or any other member of the MBI Affiliated Group, on the other hand, exists or will exist prior to the Acquisition that (a) was issued or acquired at a discount, (b) will be settled, as a result of the Acquisition, at a discount, or (c) will result in the recognition of gain under Treasury Regulation Sec. 1.1502-13. No "installment obligation" (as the quoted term is defined for purposes of Code section 453B) between Bank, on the one hand, and MBI or Acquisition Bank, on the other hand, exists or will exist prior to the Merger that will be extinguished as a result of the Merger. (5) The fair market value of the MBI Common Stock to be received by each Bank stockholder in the Acquisition (including cash to be received in lieu of fractional shares of MBI Common Stock, if any) will be approximately equal to the fair market value of the Bank Common Stock surrendered in the Acquisition by each such stockholder. (6) Except as otherwise set forth by the undersigned on an attachment hereto, MBI is aware of no plan, intention or arrangement (including any option or pledge) on the part of any holder of Bankshares Common Stock or Bank Common Stock to sell, exchange or otherwise dispose of any of the MBI Common Stock to be received in connection with the Acquisition or the subsequent liquidation of Bankshares, with the exception of fractional shares of MBI Common Stock to be exchanged for cash pursuant to the Acquisition. (7) The payment of cash in lieu of fractional shares of MBI Common Stock in the Acquisition will be solely for the purpose of avoiding the expense and inconvenience to MBI of issuing fractional shares and will not represent separately bargained-for consideration. The total cash consideration that will be paid in the Acquisition to the stockholders of Bankshares and Bank in lieu of fractional shares of MBI Common Stock will not exceed one percent of the total consideration that will be issued in the Acquisition. The fractional share interests of each Bank stockholder will be aggregated, and no Bank stockholder will receive cash in lieu of fractional share interests in an amount equal to or greater than the value of one full share of MBI Common Stock. 7 (8) MBI, Acquisition Bank, Bankshares, the stockholders of Bankshares, Bank, and the stockholders of Bank will each pay their respective expenses, if any, incurred in connection with the Acquisition; provided, however, that Ameribanc (and not MBI) will pay or assume those expenses set forth in Section 5.08 of the Agreement. (9) Except with regard to Transaction Costs (as defined below), neither MBI nor any other member of the MBI Affiliated Group will pay (or lend) any amount or incur (or guarantee) any liability to or for the benefit of, or assume or cancel any liability of, Bankshares, Bank, any stockholder of Bankshares, any stockholder of Bank or any other member of the Bankshares Affiliated Group in connection with the Exchange or the Merger, and no liability to which Bank Common Stock or Bankshares Common Stock is subject will be extinguished as a result of the Merger. For purposes of this representation, any payment (or loan) to or for the benefit of Bankshares or any stockholder of Bankshares or Bank (including without limitation, any payment from Bankshares or Bank in the form of a dividend, distribution, or redemption, or any payment to a dissenter) with cash or other property furnished (or reimbursed), directly or indirectly, by MBI or any other member of the MBI Affiliated Group will be treated as a payment by MBI to or for the benefit of a stockholder of Bankshares or Bank. For purposes of this representation, the term "liability" shall include any undertaking to pay or to cause the reduction, release, or extinguishment of any obligation, without regard to whether any such undertaking or obligation is contingent or legally enforceable (for example and without limitation, the term "liability" includes an unenforceable agreement to cause the repayment of an obligation guaranteed by a stockholder of Bankshares or Bank or to cause by other means the release of such guaranty). For purposes of this representation, the term "Transaction Costs" shall mean amounts paid or liabilities incurred in connection with the Merger (i) to Bank stockholders with respect to the MBI Common Stock (including cash in lieu of fractional shares thereof) to be delivered in the Merger, (ii) by MBI or any other member of the MBI Affiliated Group for legal, accounting, and investment banking and/or advisor services rendered to MBI or any other member of the MBI Affiliated Group, (iii) for those expenses payable or assumable by Ameribanc in accordance with representation 8 above, (iv) as compensation to any employee of MBI or of any member of the MBI Affiliated Group for services rendered in the ordinary course of his or her employment, and (v) compensation to any employee of Bank that qualifies under representation (15) below. 8 (10) All payments made to dissenters, if any, and all expenses incurred by Bank in connection with the Acquisition and not paid by Bank before the Effective Date will be funded with Bank assets from an escrow to be established and funded before the Acquisition by Bank for that purpose, as described in Section 5.16 of the Agreement (the "Escrow"). (11) Neither MBI nor any other member of the MBI Affiliated Group has any plan or intention to redeem or otherwise reacquire any of the MBI Common Stock issued to the stockholders of Bank in the Merger. (12) After the Merger, (a) Ameribanc will not issue additional shares of its stock that would result in MBI losing control of Ameribanc within the meaning of section 368(c) of the Code, and (b) neither Ameribanc nor any other member of the MBI Affiliated Group will have outstanding any warrants, options, convertible securities, or any other type of right (including any preemptive right) pursuant to which any person could acquire stock in Ameribanc that, if exercised or converted, would affect MBI's retention of control of Ameribanc (as defined above). (13) Neither MBI nor any other member of the MBI Affiliated Group has any plan or intention (a) to liquidate Bank or Ameribanc, (b) to merge Bank or Ameribanc with and into another corporation, (c) except for transfers of Bank stock to controlled corporations (as described in section 368(a)(2)(C) of the Code), to sell or otherwise dispose of (whether by dividend distribution or otherwise) the stock of Bank or Ameribanc, or (d) except for dispositions made in the ordinary course of business or dispositions approved in writing by Thompson Coburn, to cause, suffer, or permit Bank to sell or otherwise dispose of (whether by dividend distribution or otherwise) (i) any assets of Bank (excluding any assets of Acquisition Bank acquired by Bank as a result of the Merger and excluding any funds deposited in the Escrow that are paid out by the Escrow in accordance with the terms of the Escrow) or (ii) any assets of any other member of the Bankshares Affiliated Group. The proposed merger of Mercantile Bank of Topeka, a Kansas state bank, with and into Bank (the "Topeka Merger") after the Acquisition is not a plan or intention described in this representation 13. There will be no dissenters to the Topeka Merger, Bank will not dispose of any of its assets (or any assets of any other member of the Bankshares Affiliated Group) in connection with the Topeka Merger, and Bank (and its Kansas banking charter, as may be amended in connection with the Topeka Merger) will survive the Topeka Merger. 9 (14) After the Merger, Ameribanc and Bank will continue the historic businesses of Bank and the other members of the Bankshares Affiliated Group, or will use a significant portion of the historic business assets of the members of the Bankshares Affiliated Group in a business (no stock of any member of the Bankshares Affiliated Group shall be treated as a business asset for purposes of this representation). (15) None of the compensation to be paid or accrued after the Merger to or for the benefit of any stockholder-employee of Bank will be separate consideration for, or allocable to, any of his or her shares of Bank Common Stock; none of the shares of MBI Common Stock received in the Merger by any Bank stockholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation to be paid or accrued after the Merger to or for the benefit of any Bank stockholder- employee will be for services actually rendered in the ordinary course of his or her employment and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (16) With regard to the Rights Plan between MBI and Mercantile Bank of St. Louis National Association as rights agent, dated May 23, 1988 (the "Rights Agreement"), no "Distribution Date" (as the quoted term is defined in the Rights Agreement) has occurred, and the Acquisition will not cause the occurrence of a Distribution Date. (17) The Agreement, the "Voting Agreements" (as defined in the Registration Statement) and that agreement described under the caption "Interests of Certain Persons in the Acquisition" in the Registration Statement (including, in each case, the schedules and exhibits thereto, collectively, the "Acquisition Documents") represent all of the agreements and understandings between or among MBI, Bankshares, Bank or the stockholders and employees of each of Bankshares and Bank in connection with the Exchange and the Merger. No terms of the Acquisition Documents have been waived or modified. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson Coburn at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made again immediately before the Merger. 10 IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of MBI this ----- day of ------------, 1996. -------------------------------- 11 Exhibit B CERTIFICATE ----------- The undersigned, , [Undersigned's Title] of ------------------- Peoples State Bankshares, Inc., a Kansas corporation ("Bankshares"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Agreement and Plan of Reorganization among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Ameribanc, Inc., a Missouri corporation ("Ameribanc"), Peoples State Bank, a Kansas state bank ("Bank"), and Bankshares dated as of December 19, 1995, including the schedules and exhibits thereto (the "Agreement"), and (b) I am aware that, pursuant to the Agreement, Ameribanc will acquire all outstanding Bank common stock, par value $100.00 per share ("Bank Common Stock"), solely in exchange for MBI common stock, par value $5.00 per share ("MBI Common Stock"), in two simultaneous transactions consisting of (i) an exchange by Bankshares of its Bank Common Stock solely in return for MBI Common Stock to be issued on behalf of Ameribanc (the "Exchange"), and (ii) the merger of a to-be-formed, wholly owned subsidiary of Ameribanc with and into Bank (the "Merger") pursuant to which the stockholders of Bank (other than Ameribanc) who do not dissent from the Merger will receive solely MBI Common Stock; and (c) I am aware that (i) this Certificate will be relied on by Thompson Coburn, counsel for MBI and Ameribanc, in rendering its opinion to Bankshares and Bank that the Exchange and the Merger will each constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Exchange and the Merger. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF Bankshares, that: (1) To the best knowledge of the undersigned, neither MBI nor any other member of MBI's "affiliated group" (as the quoted term is defined in Code section 1504, the "MBI Affiliated Group") has owned, directly or indirectly, any stock of Bankshares or Bank within the last five years. (2) No indebtedness between Bankshares or any other member of Bankshares's "affiliated group" (as the quoted term is defined in Code section 1504, the "Bankshares Affiliated Group"), on the one hand, and MBI or any other member of the MBI Affiliated Group, on the other hand, exists or will exist prior to the effective time of the Exchange (the "Effective Time") that (a) was issued or acquired at a discount, (b) will be settled, as a result of the Exchange, at a discount, or (c) will result in the recognition of gain under Treasury Regulation Sec. 1.1502-13. No "installment 12 obligation" (as the quoted term is defined for purposes of Code section 453B), between Bankshares, on the one hand, and MBI or Ameribanc, on the other hand, exists or will exist prior to the Exchange that will be extinguished as a result of the Exchange. (3) At the Effective Time and except with regard to Transaction Costs (as defined below), each liability of Bankshares and each liability to which an asset of Bankshares is subject will have been incurred by Bankshares in the ordinary course of business and no such liability will have been incurred in anticipation of the Exchange. In addition, at the time of the Exchange and except with regard to Transaction Costs, Bankshares will not, directly or indirectly, have paid (or loaned) any amount or incurred any liability to or for the benefit of, or assumed or cancelled any liability of, any stockholder of Bankshares or Bank in connection with the Exchange or the Merger. No liabilities of Bankshares will be assumed (or guaranteed) by MBI or any other member of the MBI Affiliated Group, and the Bank Common Stock to be acquired by Ameribanc will not be subject to any liabilities at the Effective Time. No liabilities of Bankshares will be assumed by Bank in connection with the Exchange or the Merger, and all shared liabilities of Bankshares and Bank (including joint and several liabilities for such items as federal income taxes and certain pension liabilities) will be allocated between Bankshares and Bank pursuant to agreements containing terms similar to those contained in arm's length agreements between unrelated parties. For purposes of this representation, (a) the term "Bankshares" shall be deemed also to refer to each other member of the Bankshares Affiliated Group, (b) the term "liability" shall include any undertaking to pay or to cause the reduction, release, or extinguishment of, any obligation, without regard to whether any such undertaking or obligation is contingent or legally enforceable (for example and without limitation, the term "liability" includes an unenforceable agreement to cause the repayment of an obligation guaranteed by a Bankshares stockholder or to cause by other means the release of such guaranty), and (c) the term "Transaction Costs" shall mean amounts paid or liabilities incurred in connection with the Exchange or the Merger (i) to dissenters, if any, (ii) for legal, accounting, and investment banking and/or advisor services rendered to Bankshares or any other member of the Bankshares Affiliated Group, if any, and (iii) as compensation to any employee of Bankshares or any other member of the Bankshares Affiliated Group for services rendered in the ordinary course of his or her employment. (4) At the Effective Time, neither Bankshares nor any other member of the Bankshares Affiliated Group will have outstanding any warrants, options, convertible securities, or 13 any other type of right (including any preemptive right) pursuant to which any person could acquire stock in Bank. (5) In the Exchange, Bankshares will transfer to Ameribanc assets representing at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, in each case, that were held by Bankshares immediately prior to the Exchange. For purposes of this representation, Bankshares assets used to pay stockholders who receive cash, and Bankshares assets used to pay expenses of the Exchange or the Merger or to fund any redemption or distribution within 24 months before the Effective Time (except for regular, normal dividends) shall be included as assets of Bankshares held immediately prior to the Exchange. For purposes of this representation, any asset of Bankshares or any other member of the Bankshares Affiliated Group that is disposed of within 24 months before the Effective Time other than in the ordinary course of business also shall be included as an asset of Bankshares held immediately prior to the Exchange (including, for example and without limitation, funds to be deposited by Bank in the escrow described in Section 5.16 of the Agreement for the purpose of paying dissenters and expenses of the Merger (the "Escrow"), but excluding the August 1994 disposition of Citizens State Bank, a Kansas state bank ("Citizens")). (6) At the time of the disposition of Citizens in August 1994, there was no plan, intention or arrangement to dispose of Bank. In excess of 90 percent of the proceeds from such disposition (i) were used by Bankshares to fund operating expenses, to repay loans incurred to purchase the stock of Citizens and/or Bank, or (ii) have been retained by Bankshares. A portion of the proceeds were used to pay bonuses to employee stockholders of Bankshares in January of 1995, none of which bonuses constituted unreasonable compensation. Other than these bonuses, none of such proceeds were used to fund any distribution to stockholders of Bankshares. (7) The fair market value of the MBI Common Stock to be received by each Bankshares stockholder in connection with the Exchange (pursuant to the subsequent liquidation of Bankshares) will be approximately equal to the fair market value of the Bankshares common stock, par value $1.00 per share ("Bankshares Common Stock"), surrendered in connection with the Exchange by each such stockholder. (8) None of the compensation paid or accrued to or for the benefit of any Bankshares stockholder-employee will be separate consideration for, or allocable to, any of his or her 14 shares of Bankshares Common Stock; none of the shares of MBI Common Stock received in the Exchange by any Bankshares stockholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation paid or accrued to or for the benefit of any Bankshares stockholder-employee will be for services actually rendered in the ordinary course of his or her employment and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services and Bankshares's past practices. (9) There is no plan, intention or other arrangement (including any option or pledge) on the part of the holders of 1% or more of the Bankshares Common Stock and, to the best knowledge of the undersigned, there is no plan, intention or other arrangement (including any option or pledge) on the part of the other holders of Bankshares Common Stock to sell, exchange or otherwise dispose of a number of shares of MBI Common Stock received by such holders in the Exchange that would reduce such holders' aggregate ownership of MBI Common Stock to a number of shares having a value, as of the Effective Time, of less than 50 percent of the value of all of the formerly outstanding Bankshares Common Stock as of the Effective Time. For purposes of this representation, shares of Bankshares Common Stock exchanged for cash or other property, surrendered by dissenters, or exchanged for cash in lieu of fractional shares of MBI Common Stock will be treated as outstanding as of the Effective Time. Moreover, all shares of Bankshares Common Stock and shares of MBI Common Stock held by Bankshares stockholders and otherwise sold, redeemed, or disposed of before or after the Effective Time will be taken into account in making this representation. All of the MBI Common Stock received by Bankshares in the Exchange will be distributed by Bankshares in the liquidation of Bankshares described in representation (13) below. (10) The total cash consideration that will be paid in the Exchange to Bankshares in lieu of a fractional share of MBI Common Stock will not exceed the value of one share of MBI Common Stock. (11) Expenses, if any, that are incurred in connection with the Exchange and are properly attributable to Bankshares's stockholders will be paid by those stockholders and not by Bankshares. Bankshares will pay its own expenses that are incurred in connection with the Exchange. (12) Bankshares is not an investment company as defined in section 368(a)(2)(F)(iii) and (iv) of the Code. 15 (13) No stock of Bankshares will be issued after the execution date of the Agreement. Bankshares will distribute all of its properties (including the MBI Common Stock received in the Exchange) and liabilities to its stockholders no later than six months after the Effective Time and will at that time be dissolved. Bankshares will make all liquidating and other distributions after the Effective Time on a pro rata basis in accordance with the fair market value of the Bankshares Common Stock held by each stockholder of Bankshares at the Effective Time. (14) The Agreement, the "Voting Agreements" (as defined in the Registration Statement) and that agreement described under the caption "Interests of Certain Persons in the Acquisition" in the Registration Statement (including, in each case, the schedules and exhibits thereto, collectively, the "Acquisition Documents") represent all of the agreements and understandings between or among MBI, Bankshares, Bank or the stockholders and employees of each of Bankshares and Bank in connection with the Exchange and the Merger. No terms of the Acquisition Documents have been waived or modified. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson Coburn at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made again immediately before the Exchange. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of Bankshares this ----- day of ---------------, 1996. -------------------------------- 16 Exhibit C CERTIFICATE ----------- The undersigned, , [Undersigned's Title] of ------------------- Peoples State Bank, a Kansas state bank ("Bank"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Agreement and Plan of Reorganization among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Ameribanc, Inc., a Missouri corporation ("Ameribanc"), Bank, and Peoples State Bankshares, Inc., a Kansas corporation ("Bankshares"), dated as of December 19, 1995, including the schedules and exhibits thereto (the "Agreement"), and (b) I am aware that, pursuant to the Agreement, Ameribanc will acquire all outstanding Bank common stock, par value $100.00 per share ("Bank Common Stock"), solely in exchange for MBI common stock, par value $5.00 per share ("MBI Common Stock"), in two simultaneous transactions consisting of (i) an exchange by Bankshares of its Bank Common Stock solely in return for MBI Common Stock to be issued on behalf of Ameribanc (the "Exchange"), and (ii) the merger of a to-be-formed, wholly owned subsidiary of Ameribanc with and into Bank (the "Merger") pursuant to which the stockholders of Bank (other than Ameribanc) who do not dissent from the Merger will receive solely MBI Common Stock; and (c) I am aware that (i) this Certificate will be relied on by Thompson Coburn, counsel for MBI and Ameribanc, in rendering its opinion to Bankshares and Bank that the Exchange and the Merger will each constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the representations and undertaking recited herein will survive the Exchange and the Merger. The undersigned HEREBY FURTHER CERTIFIES, ON BEHALF OF Bank, that: (1) To the best knowledge of the undersigned, neither MBI nor any other member of MBI's "affiliated group" (as the quoted term is defined in Code section 1504, the "MBI Affiliated Group") has owned, directly or indirectly, any stock of Bankshares or Bank within the last five years. (2) No indebtedness between Bank or any other member of Bankshares's "affiliated group" (as the quoted term is defined in Code section 1504, the "Bankshares Affiliated Group"), on the one hand, and MBI or any other member of the MBI Affiliated Group, on the other hand, exists or will exist prior to the effective time of the Merger (the "Effective Time") that (a) was issued or acquired at a discount, (b) will be settled, as a result of the Merger, at a discount, or (c) will result in the recognition of gain under Treasury Regulation Sec. 1.1502-13. No "installment 17 obligation" (as the quoted term is defined for purposes of Code section 453B), between Bank, on the one hand, and Ameribanc or Mercantile Bank of Topeka, a Kansas state bank, on the other hand, exists or will exist prior to the Merger that will be extinguished as a result of the Merger. (3) At the Effective Time, the fair market value of the assets of Bank will exceed the sum of the amount of liabilities of Bank, plus the amount of liabilities, if any, to which Bank's assets are then subject. (4) At the Effective Time and except with regard to Transaction Costs (as defined below), each liability of Bank and each liability to which an asset of Bank is subject will have been incurred by Bank in the ordinary course of business and no such liability will have been incurred in anticipation of the Merger. In addition, at the time of the Merger and except with regard to Transaction Costs, Bank will not, directly or indirectly, have paid (or loaned) any amount or incurred any liability to or for the benefit of, or assumed or cancelled any liability of, any stockholder of Bank or Bankshares in connection with the Merger. No liabilities of Bank will be assumed (or guaranteed) by MBI or any other member of the MBI Affiliated Group. No liabilities of Bankshares will be assumed by Bank in connection with the Exchange or the Merger, and all shared liabilities of Bankshares and Bank (including joint and several liabilities for such items as federal income taxes and certain pension liabilities) will be allocated between Bankshares and Bank pursuant to agreements containing terms similar to those contained in arm's length agreements between unrelated parties. For purposes of this representation, (a) the term "Bank" shall be deemed also to refer to each other member of the Bankshares Affiliated Group, (b) the term "liability" shall include any undertaking to pay or to cause the reduction, release, or extinguishment of, any obligation, without regard to whether any such undertaking or obligation is contingent or legally enforceable (for example and without limitation, the term "liability" includes an unenforceable agreement to cause the repayment of an obligation guaranteed by a Bank stockholder or to cause by other means the release of such guaranty), and (c) the term "Transaction Costs" shall mean amounts paid or liabilities incurred in connection with the Merger (i) to dissenters, if any, (ii) for legal, accounting, and investment banking and/or advisor services rendered to Bank or any subsidiary of Bank, if any, and (iii) as compensation to any employee of Bank or any subsidiary of Bank for services rendered in the ordinary course of his or her employment. 18 (5) At the Effective Time, neither Bank nor any other member of the Bankshares Affiliated Group will have outstanding any warrants, options, convertible securities, or any other type of right (including any preemptive right) pursuant to which any person could acquire stock in Bank. (6) The fair market value of the MBI Common Stock to be received by each Bank stockholder in the Merger (including cash to be received in lieu of fractional shares of MBI Common Stock, if any) will be approximately equal to the fair market value of the Bank Common Stock surrendered in the Merger by each such stockholder. (7) None of the compensation paid or accrued before the Merger to or for the benefit of any Bank stockholder-employee will be separate consideration for, or allocable to, any of his or her shares of Bank Common Stock; none of the shares of MBI Common Stock received in the Merger by any Bank stockholder-employee will be separate consideration for, or allocable to, any employment agreement; and all compensation paid or accrued before the Merger to or for the benefit of any Bank stockholder-employee will be for services actually rendered in the ordinary course of his or her employment and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (8) There is no plan, intention or other arrangement (including any option or pledge) on the part of the holders of 1% or more of the Bank Common Stock and, to the best knowledge of the undersigned, there is no plan, intention or other arrangement (including any option or pledge) on the part of the other holders of Bank Common Stock to sell, exchange or otherwise dispose of a number of shares of MBI Common Stock received by such holders in the Merger that would reduce such holders' aggregate ownership of MBI Common Stock to a number of shares having a value, as of the Effective Time, of less than 50 percent of the value of all of the formerly outstanding Bank Common Stock as of the Effective Time. For purposes of this representation, shares of Bank Common Stock exchanged for cash or other property, surrendered by dissenters, or exchanged for cash in lieu of fractional shares of MBI Common Stock will be treated as outstanding as of the Effective Time. Moreover, all shares of Bank Common Stock and shares of MBI Common Stock held by Bank stockholders and otherwise sold, redeemed, or disposed of before or after the Effective Time will be taken into account in making this representation. (9) The payment of cash in lieu of fractional shares of MBI Common Stock will be solely for the purpose of avoiding the expense and inconvenience to MBI of issuing fractional 19 shares and will not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to the Bank stockholders in lieu of fractional shares of MBI Common Stock will not exceed one percent of the total consideration that will be issued in the transaction to the Bank stockholders in exchange for their shares of Bank Common Stock. The fractional share interests of each Bank stockholder will be aggregated, and no Bank stockholder will receive cash in lieu of fractional share interests in an amount equal to or greater than the value of one full share of MBI Common Stock. (10) Expenses, if any, that are incurred in connection with the Merger and are properly attributable to Bank's stockholders (including Bankshares) will be paid by those stockholders and not by Bank. Bank will pay its own expenses that are incurred in connection with the Merger. (11) All payments made to dissenters and all expenses of Bank incurred in connection with the Merger that remain unpaid at the Effective Time, if any, will be paid from the escrow described in Section 5.16 of the Agreement (the "Escrow"). The Escrow will be established and funded with Bank assets for that purpose before the Merger. (12) The assets held by Bank immediately after the Effective Time would be sufficient to enable Bank to continue all its operations at current levels of activity and in accordance with past practice, without resort to additional capital or borrowed funds. For purposes of this representation, Bank assets used to pay dissenters or to pay stockholders who receive cash, and Bank assets used to pay expenses of the Merger or to fund the Escrow shall not be treated as assets held by Bank immediately prior to the Merger. (13) Immediately after the Effective Time, Bank will hold assets representing at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, in each case, that were held by Bank immediately prior to the Merger. For purposes of this representation, Bank assets used to pay dissenters or to pay stockholders who receive cash, and Bank assets used to pay expenses of the Merger, to fund the Escrow or to fund any redemption or distribution within 24 months before the Merger (except for regular, normal dividends) shall be included as assets of Bank held immediately prior to the Merger. For purposes of this representation, any asset of Bank or any subsidiary of Bank that is disposed of within 24 months before the Merger other than in the ordinary course of business also shall be included as an asset of Bank held immediately prior to the Merger. 20 (14) The Agreement, the "Voting Agreements" (as defined in the Registration Statement) and that agreement described under the caption "Interests of Certain Persons in the Acquisition" in the Registration Statement (including, in each case, the schedules and exhibits thereto, collectively, the "Acquisition Documents") represent all of the agreements and understandings between or among MBI, Bankshares, Bank or the stockholders and employees of each of Bankshares and Bank in connection with the Exchange and the Merger. No terms of the Acquisition Documents have been waived or modified. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson Coburn at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made again immediately before the Merger. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of Bank this ----- day of ---------------, 1996. -------------------------------- 21 Exhibit D CERTIFICATE ----------- The undersigned stockholder of Peoples State Bankshares, Inc., a Kansas corporation ("Bankshares"), [stockholder's name], a holder of * -------------------- ----- shares of Bankshares common stock, par value $1.00 per share ("Bankshares Common Stock"), HEREBY CERTIFIES that (a) I am familiar with the terms and conditions of the Agreement and Plan of Reorganization among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Ameribanc, Inc., a Missouri corporation ("Ameribanc"), Peoples State Bank, a Kansas state bank ("Bank"), and Bankshares dated as of December 19, 1995 (the "Agreement"), and (b) I am aware that, pursuant to the Agreement, Ameribanc will acquire all outstanding Bank common stock, par value $100.00 per share ("Bank Common Stock"), solely in exchange for MBI common stock, par value $5.00 per share ("MBI Common Stock"), in two simultaneous transactions consisting of (i) an exchange by Bankshares of its Bank Common Stock solely in return for MBI Common Stock to be issued on behalf of Ameribanc (the "Exchange"), and (ii) the merger of a to-be-formed, wholly owned subsidiary of Ameribanc with and into Bank pursuant to which the stockholders of Bank (other than Ameribanc) who do not dissent from the Merger will receive solely MBI Common Stock; and (c) I am aware that (i) this Certificate will be relied on by Thompson Coburn, counsel for MBI and Ameribanc, in rendering its opinion to Bankshares and Bank that the Exchange and the Merger will each constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended, and (ii) the representations and undertaking recited herein will survive the Exchange and the Merger. The undersigned HEREBY FURTHER CERTIFIES that the undersigned has no plan, intention or arrangement to sell, exchange or otherwise dispose of (including any option, pledge or transfer in trust) any of the MBI Common Stock to be received in connection with the Exchange and subsequent liquidation of Bankshares. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson Coburn at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made again immediately before the Merger. 22 IN WITNESS WHEREOF, the undersigned has executed this certificate, or caused this certificate to be executed by its duly authorized representative, this ----- day of ---------------, 1996. -------------------------------- 23 Exhibit E CERTIFICATE ----------- The undersigned stockholder of Peoples State Bank, a Kansas state bank ("Bank"), [stockholder's name], a holder of * shares of Bank -------------------- ----- common stock, par value $100.00 per share ("Bank Common Stock"), HEREBY CERTIFIES that (a) I have been advised that an Agreement and Plan of Reorganization has been entered into among Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), Ameribanc, Inc., a Missouri corporation ("Ameribanc"), Bank and Peoples State Bankshares, a Kansas corporation ("Bankshares") dated as of December 19, 1995, and (b) I am aware that, pursuant to the Agreement, Ameribanc will acquire all outstanding Bank common stock, par value $100.00 per share ("Bank Common Stock"), solely in exchange for MBI common stock, par value $5.00 per share ("MBI Common Stock"), in two simultaneous transactions consisting of (i) an exchange by Bankshares of its Bank Common Stock solely in return for MBI Common Stock to be issued on behalf of Ameribanc, and (ii) the merger of a to-be-formed, wholly owned subsidiary of Ameribanc with and into Bank (the "Merger") pursuant to which the stockholders of Bank (other than Ameribanc) who do not dissent from the Merger will receive solely MBI Common Stock; and (c) I am aware that (i) this Certificate will be relied on by Thompson Coburn, counsel for MBI and Ameribanc, in rendering its opinion to Bankshares and Bank that the Exchange and the Merger will each constitute a reorganization within the meaning of section 368 of the Internal Revenue Code of 1986, as amended, and (ii) the representations and undertaking recited herein will survive the Exchange and the Merger. The undersigned HEREBY FURTHER CERTIFIES that the undersigned has no plan, intention or arrangement to sell, exchange or otherwise dispose of (including any option, pledge or transfer in trust) any of the MBI Common Stock to be received in the Merger, with the exception of any fractional share of MBI Common Stock to be exchanged for cash pursuant to the Merger. The undersigned HEREBY AGREES to immediately communicate in writing to Thompson Coburn at One Mercantile Center, St. Louis, Missouri 63101, to the attention of Charles H. Binger, any information that could indicate (i) any of the foregoing representations was inaccurate when made, or (ii) any of the foregoing representations would be inaccurate if it were made again immediately before the Merger. 24 IN WITNESS WHEREOF, the undersigned has executed this certificate, or caused this certificate to be executed by its duly authorized representative, this ----- day of ---------------, 1996. -------------------------------- EX-23.1 7 INDEPENDENT AUDITORS' CONSENT 1 Exhibit 23.1 Independent Auditors' Consent ----------------------------- The Board of Directors and Stockholders Mercantile Bancorporation Inc.: We consent to the use of our reports 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 May 10, 1996 EX-23.2 8 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) of Mercantile Bancorporation Inc. We also consent to the inclusion of our reports dated March 27, 1996, with respect to (i) the consolidated balance sheet of Peoples State Bankshares, Inc. and Subsidiary as of December 31, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended, and (ii) the balance sheet of Peoples State Bank, Topeka, Kansas as of December 31, 1995, and the related statements of earnings, stockholders' equity and cash flows for the year then ended. /s/ GRA, Thompson, White & Co., P.C. GRA, THOMPSON, WHITE & CO., P.C. Merriam, Kansas May 8, 1996 -----END PRIVACY-ENHANCED MESSAGE-----