-----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, Paxkle983yB/igXT9MSybWeyFn6zNC2/1Gkq5TOOoMWmQnAA5ycA2RGWH4TdPjyo uTNyTs0VkG2n6fAPzFdIfw== 0000950114-97-000506.txt : 19971125 0000950114-97-000506.hdr.sgml : 19971125 ACCESSION NUMBER: 0000950114-97-000506 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971124 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: SEC FILE NUMBER: 333-40911 FILM NUMBER: 97727361 BUSINESS ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166-0524 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 S-4 1 MERCANTILE BANCORPORATION INC. FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997 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. GARLAND W. BINNS, JR., ESQ. Chief Financial Officer Thompson Coburn Horne, Hollingsworth & Parker Mercantile Bancorporation Inc. One Mercantile Center 401 West Capitol, Suite 501 P.O. Box 524 St. Louis, Missouri 63101 Little Rock, Arkansas 72203 St. Louis, Missouri 63166-0524 (314) 552-6000 (501) 376-4731 (314) 425-2525
------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
=================================================================================================================================== Title of each class of Amount to be Proposed maximum Proposed maximum Amount of securities to be registered registered offering price per unit aggregate offering price registration fee - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value 2,550,000 shares $18.41 $46,955,855 $14,230 =================================================================================================================================== Includes one attached Preferred Share Purchase Right per share. The proposed maximum offering price per unit has been determined by dividing the proposed maximum aggregate offering price by the number of shares being registered. Estimated solely for purposes of computing the Registration Fee pursuant to the provisions of Rule 457(f), and based upon the $46,955,855 aggregate book value of 632,743 shares of Common Stock, $1.00 par value, of Horizon Bancorp, Inc. as of October 31, 1997.
--------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 [LETTERHEAD OF HORIZON BANCORP, INC.] ----------------, 1997 Dear Fellow Shareholder: The Board of Directors cordially invites you to attend a Special Meeting of Shareholders of Horizon Bancorp, Inc. ("Horizon") to be held at ----- a.m. Central Time, on -----------------, -------------------, 1998, at the offices of Horizon, 526 Main Street, Suite 204, Arkadelphia, Arkansas (the "Special Meeting"). At the Special Meeting, you will be asked to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated July 31, 1997 (the "Merger Agreement"), and each of the transactions contemplated thereby, pursuant to which Horizon will be merged (the "Merger") with and into Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"). Upon consummation of the Merger, each share of Horizon common stock will be converted into the right to receive 4.0301 shares of MBI common stock, all as more fully described in the accompanying Proxy Statement/Prospectus. I have enclosed the following items relating to the Special Meeting and the Merger: 1. Proxy Statement/Prospectus; 2. Proxy card; and 3. A pre-addressed return envelope to Horizon for the proxy card. The Proxy Statement/Prospectus and related proxy materials set forth, or incorporate by reference, financial data and other important information relating to Horizon and MBI and describe the terms and conditions of the Merger. The Board of Directors requests that you carefully review these materials before completing the enclosed proxy card or attending the Special Meeting. THE BOARD OF DIRECTORS OF HORIZON CAREFULLY CONSIDERED AND APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST INTEREST OF HORIZON AND ITS SHAREHOLDERS. THE HORIZON BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE --- PROPOSAL TO APPROVE THE MERGER AGREEMENT. APPROVAL OF THE MERGER AGREEMENT BY THE HORIZON SHAREHOLDERS IS A CONDITION TO THE CONSUMMATION OF THE MERGER. Accordingly, it is important that your shares be represented at the Special Meeting, whether or not you plan to attend the Special Meeting in person. Please complete, date and sign the enclosed proxy card and return it to Horizon 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 Horizon a written notice of revocation or another proxy relating to the same shares bearing a later date than the proxy being revoked or by attending the Special Meeting and voting in person. Attendance at the Special Meeting will not in itself constitute a revocation of an earlier dated proxy. If you need assistance in completing your proxy card or if you have any questions about the Proxy Statement/Prospectus, please feel free to contact me at (870) 246-8070. Sincerely, Ross M. Whipple Chairman and Chief Executive Officer 3 HORIZON BANCORP, INC. 526 MAIN STREET, SUITE 204 ARKADELPHIA, ARKANSAS 71923 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ----------------------, 1998 TO THE SHAREHOLDERS OF HORIZON BANCORP, INC.: Notice is hereby given that a special meeting (the "Special Meeting") of shareholders of HORIZON BANCORP, INC., an Arkansas corporation ("Horizon"), will be held at the offices of Horizon, 526 Main Street, Suite 204, Arkadelphia, Arkansas on ---------------, 1998, at ----- a.m. Central Time, for the following purposes: (1) To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated July 31, 1997 (the "Merger Agreement"), by and among Mercantile Bancorporation Inc. ("MBI"), Ameribanc, Inc., a wholly owned subsidiary of MBI ("Merger Sub"), and Horizon, pursuant to which Horizon will be merged (the "Merger") with and into Merger Sub, in a transaction that will result in the business and operations of Horizon being continued through Merger Sub, and whereby, upon consummation of the Merger, each outstanding share of Horizon common stock will be converted into the right to receive 4.0301 shares of MBI common stock, as set forth in detail in the attached Proxy Statement/Prospectus. (2) To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. The record date for determining the shareholders entitled to receive notice of, and to vote at, the Special Meeting or any adjournments or postponements thereof has been fixed as of the close of business on - -----------------, 1997. On the record date, Horizon had 632,743 shares of common stock issued, outstanding and entitled to vote. Such shares were held by approximately [131] holders. Each share will be entitled one vote on each matter submitted to a vote at the Special Meeting. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF HORIZON COMMON STOCK IS REQUIRED FOR APPROVAL OF THE MERGER AGREEMENT. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT THE SPECIAL MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. FAILURE TO RETURN THE ENCLOSED PROXY CARD OR TO VOTE AT THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. If the Merger Agreement is approved, you will be sent instructions regarding the mechanics of exchanging your existing Horizon Common Stock certificates for new certificates representing shares of MBI. BY ORDER OF THE BOARD OF DIRECTORS Arkadelphia, Arkansas - --------------, 1997 Secretary 4 MERCANTILE BANCORPORATION INC. PROSPECTUS ---------------- HORIZON BANCORP, INC. PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON --------------, 1998 This Prospectus of Mercantile Bancorporation Inc., a Missouri corporation ("MBI"), relates to up to 2,550,000 shares of common stock, $0.01 par value (the "Common Stock"), and attached Preferred Share Purchase Rights (the "Rights"), of MBI (the Common Stock and Rights are collectively referred to herein as "MBI Common Stock"), to be issued to the shareholders of Horizon Bancorp, Inc., an Arkansas corporation ("Horizon"), upon consummation of the proposed merger (the "Merger") of Horizon with and into Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of MBI ("Merger Sub"). Upon receipt of the requisite shareholder and regulatory approvals, and the satisfaction or waiver of certain conditions precedent, the Merger will be consummated pursuant to the terms of the Agreement and Plan of Merger, dated July 31, 1997 (the "Merger Agreement"), by and among MBI, Merger Sub and Horizon. This Prospectus also serves as the Proxy Statement of Horizon for use in connection with the Special Meeting of Shareholders of Horizon (the "Special Meeting"), which will be held on ----------------, 1998, at the time and place and for the purposes stated in the Notice of Special Meeting of Shareholders accompanying this Proxy Statement/Prospectus. Pursuant to the Merger Agreement, MBI will issue up to an aggregate of 2,550,000 shares of MBI Common Stock. Upon consummation of the Merger, the business and operations of Horizon will be continued through Merger Sub and each share (other than shares as to which a shareholder has perfected dissenters' rights) of common stock, $1.00 par value, of Horizon ("Horizon Common Stock") will be converted into the right to receive 4.0301 shares of MBI Common Stock. The fair market value of MBI Common Stock to be received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. See "TERMS OF THE PROPOSED MERGER - General Description of the Merger." No fractional shares of MBI Common Stock will be issued in the Merger, but cash will be paid in lieu of such fractional shares. See "TERMS OF THE PROPOSED MERGER - Fractional Shares." The Merger is intended to qualify as a reorganization under the Internal Revenue Code of 1986, as amended (the "Code"). The Merger generally is intended to achieve certain federal income tax tax-deferral benefits for Horizon shareholders with respect to shares of MBI Common Stock received in the Merger. See "SUMMARY INFORMATION - Federal Income Tax Consequences in General" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." MBI Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "MTL." On November 21, 1997 the closing sale price for MBI Common Stock as reported on the NYSE Composite Tape was $49.625. This Proxy Statement/Prospectus, the Notice of Special Meeting and the form of proxy were first mailed to the shareholders of Horizon on or about - -------------------, 1997. 5 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF MBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF MBI AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER FEDERAL OR STATE GOVERNMENTAL AGENCY. All information contained in this Proxy Statement/Prospectus with respect to MBI has been supplied by MBI and all information with respect to Horizon has been supplied by Horizon. The date of this Proxy Statement/Prospectus is -------------------, 1997. - 2 - 6 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 with the Commission reports, proxy statements and other information. Such reports, proxy statements and other information filed with the Commission by MBI can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Suite 1300, Seven World Trade Center, New York, New York 10048 and Room 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. The Commission maintains an Internet site on the World Wide Web containing reports, proxy and information statements and other information filed electronically by MBI with the Commission. The address of the World Wide Web site maintained by the Commission is http://www.sec.gov. MBI Common Stock is listed on the NYSE, and such reports, proxy statements and other information concerning MBI also are available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement on Form S-4 and exhibits thereto (the "Registration Statement") covering the securities offered hereby which has been filed by MBI with the Commission. As permitted by the rules and regulations of the Commission, this Proxy Statement/Prospectus omits certain information contained or incorporated by reference in the Registration Statement. Statements contained in this Proxy Statement/Prospectus provide a summary of the contents of certain contracts or other documents referenced herein but are not necessarily complete and in each instance reference is made to the copy of each such contract or other document filed as an exhibit to the Registration Statement. For such further information, reference is made to the Registration Statement. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ------------------------------------------------- THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO MBI, EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN, ARE AVAILABLE, WITHOUT CHARGE TO ANY PERSON, INCLUDING BENEFICIAL OWNERS OF HORIZON COMMON STOCK TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO JON W. BILSTROM, GENERAL COUNSEL AND SECRETARY, MERCANTILE BANCORPORATION INC., P.O. BOX 524, ST. LOUIS, MISSOURI 63166-0524, TELEPHONE (314) 425-2525. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY REQUEST SHOULD BE MADE BY ------------, 1997. 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, 1996, as amended by Form 10-K/A. (b) MBI's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997. - 3 - 7 (c) MBI's Current Reports on Form 8-K dated April 25, 1997 (as amended by Form 8-K/A dated May 22, 1997), May 13, 1997, July 1, 1997 and two dated September 25, 1997. (d) The description of MBI's Common Stock set forth in Item 1 of MBI's Registration Statement on Form 8-A, dated March 5, 1993, and any amendment or report filed for the purpose of updating such description. (e) The description of MBI's Preferred Share Purchase Rights set forth in Item 1 of MBI's Registration Statement on Form 8-A, dated March 5, 1993, and any amendment or report filed for the purpose of updating such description. Such incorporation by reference shall not be deemed to incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. All documents filed by MBI pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and until the date of the Special Meeting shall be deemed to be incorporated by reference herein and made a part hereof from the date any such document is filed. The information relating to MBI contained in this Proxy Statement/Prospectus does not purport to be complete and should be read together with the information in the documents incorporated by reference herein. Any statement contained herein or in a document incorporated herein by reference shall be deemed to be modified or superseded for purposes hereof to the extent that a subsequent statement contained herein or in any other subsequently filed document incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part hereof. Any statements contained in this Proxy Statement/Prospectus involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MBI OR HORIZON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF MBI COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT HERETO SHALL IMPLY OR CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MBI OR HORIZON OR ANY OF THEIR SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN SUBSEQUENT TO THE DATE HEREOF. - 4 - 8 TABLE OF CONTENTS -----------------
Page ---- AVAILABLE INFORMATION 3 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 3 SUMMARY INFORMATION 8 Business of MBI 8 Business of Merger Sub 9 Business of Horizon 9 The Proposed Merger 9 Voting Agreements 10 Interests of Certain Persons in the Merger 11 Special Meeting of Horizon Shareholders 11 Reasons for the Merger 12 Opinion of Financial Advisor to Horizon 12 Fractional Shares 12 Waiver and Amendment 13 Federal Income Tax Consequences in General 13 Regulatory Approval 13 Accounting Treatment 14 Dissenters' Rights 14 Markets and Market Prices 14 Comparative Unaudited Per Share Data 15 Summary Financial Data 16 INFORMATION REGARDING SPECIAL MEETING 20 General 20 Date, Time and Place 20 Record Date; Vote Required 20 Voting and Revocation of Proxies 20 Solicitation of Proxies 21 TERMS OF THE PROPOSED MERGER 22 General Description of the Merger 22 Other Agreements 23 Interests of Certain Persons in the Merger 23 Background of and Reasons for the Merger; Board Recommendations 25 Opinion of Financial Advisor to Horizon 27 Conditions of the Merger 30 Representations and Warranties 32 Termination, Waiver and Amendment of the Merger Agreement 33 Indemnification 34 Closing Date 34 Surrender of Horizon Stock Certificates and Receipt of MBI Common Stock 34 Fractional Shares 35 Regulatory Approval 35 Business Pending the Merger 36 Accounting Treatment 38 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 39 - 5 - 9 RIGHTS OF DISSENTING SHAREHOLDERS OF HORIZON 41 PRO FORMA FINANCIAL INFORMATION 42 Comparative Unaudited Per Share Data 42 Pro Forma Combined Consolidated Financial Statements (Unaudited) 43 INFORMATION REGARDING HORIZON 53 Business 53 Distribution of Average Assets, Liabilities and Shareholders' Equity and Interest Rates 53 Rate/Volume Analysis 56 Investment Portfolio 56 Loan Portfolio 58 Other Interest-bearing Assets 60 Summary of Loan Loss Experience 61 Return on Equity and Assets 63 Management's Discussion and Analysis for the Three Year Period Ended December 31, 1996 63 Management's Discussion and Analysis for the Nine Months Ended September 30, 1997 and 1996 70 Security Ownership of Certain Beneficial Owners and Management 72 INFORMATION REGARDING MBI STOCK 74 Description of MBI Common Stock and Attached Preferred Share Purchase Rights 74 Restrictions on Resale of MBI Stock by Affiliates 76 Comparison of the Rights of Shareholders of MBI and Horizon 76 SUPERVISION AND REGULATION 80 General 80 Certain Transactions with Affiliates 80 Payment of Dividends 80 Capital Adequacy 80 FDIC Insurance Assessments 81 Proposals to Overhaul the Savings Association Industry 82 Support of Subsidiary Banks 82 FIRREA and FDICIA 82 Depositor Preference Statute 83 The Interstate Banking and Community Development Legislation 84 RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS 84 LEGAL MATTERS 84 EXPERTS 84 OTHER MATTERS 85 SHAREHOLDER PROPOSALS 85 CONSOLIDATED FINANCIAL STATEMENTS 86 - 6 - 10 ANNEXES Annex A -- Opinion of Stephens Inc. A-1 Annex B -- Dissenters' Rights Provisions of the Arkansas Business Corporation Act of 1987, as amended B-1
- 7 - 11 SUMMARY INFORMATION ------------------- The following is a summary of the important terms of the proposed Merger and related information discussed elsewhere in this Proxy Statement/Prospectus but does not purport to be complete and is qualified in its entirety by reference to the more detailed information that appears elsewhere in this Proxy Statement/Prospectus and the documents incorporated by reference herein. Shareholders of Horizon are urged to read this Proxy Statement/Prospectus in its entirety. All MBI per share data reflect three-for-two stock splits distributed in the form of dividends on each of April 11, 1994 and October 1, 1997. BUSINESS OF MBI MBI, a Missouri corporation, was organized in 1970 and is a registered bank holding company under the federal Bank Holding Company Act of 1956, as amended (the "BHCA"). At September 30, 1997, MBI owned, directly or indirectly, all of the capital stock of Mercantile Bank National Association ("Mercantile Bank"), twenty-three other commercial banks and one federally chartered thrift, all of which operate from five hundred eighty-three banking offices and five hundred thirty-five Fingertip Banking automated teller machines, including fifty-five off-premises machines, located throughout Missouri, Illinois, eastern Kansas, northern and central Arkansas and Iowa. MBI's services concentrate in three major lines of business: consumer; corporate; and trust and investment advisory services. MBI also operates non-banking subsidiaries that provide related financial services, including investment management, brokerage services and asset-based lending. As of September 30, 1997, MBI had 130,289,361 shares of its Common Stock outstanding. As of September 30, 1997, MBI reported, on a consolidated basis, total assets of $30.0 billion, total deposits of $22.1 billion, total loans of $19.1 billion and shareholders' equity of $2.4 billion. On March 5, 1997, MBI completed the acquisition of Regional Bancshares, Inc., an Illinois corporation and a bank holding company ("Regional"). The acquisition was accounted for under the purchase method of accounting. As of March 5, 1997, Regional reported, on a consolidated basis, total assets of $172.0 million, total deposits of $136.0 million and shareholders' equity of $25.0 million. On April 25, 1997, MBI completed the acquisition of Mark Twain Bancshares, Inc., a Missouri corporation and bank holding company ("Mark Twain"). This acquisition was accounted for under the pooling-of-interests method of accounting. As of April 25, 1997, Mark Twain reported, on a consolidated basis, total assets of $3.2 billion, total deposits of $2.5 billion and shareholders' equity of $320.4 million. On July 1, 1997, MBI completed the acquisition of Roosevelt Financial Group, Inc., a Delaware corporation and savings and loan holding company ("Roosevelt"). The acquisition was accounted for under the purchase method of accounting. As of July 1, 1997, Roosevelt reported, on a consolidated basis, total assets of $7.3 billion, total deposits of $5.3 billion and stockholders' equity of $409.6 million. On October 29, 1997, MBI announced the execution of an agreement to acquire Homecorp, Inc., a Delaware corporation and savings and loan holding company ("Homecorp"), headquartered in Rockford, Illinois. As of September 30, 1997, Homecorp reported, on a consolidated basis, total assets of $326.9 million, total deposits of $299.1 million and stockholders' equity of $22.3 million. - 8 - 12 In connection with the acquisition of Mark Twain, MBI restated its consolidated financial statements as of and for the years ended December 31, 1996, 1995 and 1994 and as of and for the three months ended March 31, 1997 and 1996. MBI filed supplemental financial statements as of and for the years ended December 31, 1996, 1995 and 1994 and as of and for the three months ended March 31, 1997 and 1996 in a Current Report on Form 8-K dated May 13, 1997, which has been incorporated by reference into this Proxy Statement/Prospectus. MBI's principal executive offices are located at One Mercantile Center, St. Louis, Missouri 63101 and its telephone number is (314) 425-2525. Additional information concerning MBI is included in the documents incorporated by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." BUSINESS OF MERGER SUB Merger Sub, a Missouri corporation, is a wholly owned subsidiary of MBI that was organized in 1991. Merger Sub is a registered bank holding company under the BHCA. At September 30, 1997, Merger Sub owned all of the capital stock of twenty-four banks and one federally-chartered thrift, all of which together operate from five hundred eighty-three locations in Missouri, Illinois, eastern Kansas, northern and central Arkansas, and Iowa. Merger Sub, which will continue to be a subsidiary of MBI following the Merger, will be the surviving corporation upon consummation of the Merger. BUSINESS OF HORIZON Horizon, an Arkansas corporation, was formed in 1982 and is a registered bank holding company under the BHCA. Horizon currently owns all of the issued and outstanding shares of capital stock of Horizon Bank, an Arkansas state-chartered bank that currently operates from its main office in Malvern, Arkansas and sixteen additional branch offices. As of September 30, 1997, 632,743 shares of Horizon Common Stock were issued and outstanding. As of September 30, 1997, Horizon reported, on a consolidated basis, total assets of $550.7 million, total deposits of $470.4 million, total loans, net of unearned discount, of $328.7 million and shareholders' equity of $46.7 million. See "INFORMATION REGARDING HORIZON." Horizon's principal executive offices are located at 526 Main Street, Suite 204, Arkadelphia, Arkansas and its telephone number is (870) 246-8070. THE PROPOSED MERGER Subject to the satisfaction of the terms and conditions set forth in the Merger Agreement, Horizon will be merged with and into Merger Sub. Upon consummation of the Merger, Horizon's corporate existence will terminate and Merger Sub will continue as the surviving entity. Simultaneously with the effectiveness of the Merger, each share of Horizon Common Stock will be converted into the right to receive 4.0301 shares of MBI Common Stock. Such consideration is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI or Horizon prior to the consummation of the Merger. The fair market value of MBI Common Stock to be received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. - 9 - 13 Harris Trust and Savings Bank, the transfer agent for MBI Common Stock, has been selected as the Exchange Agent (the "Exchange Agent") for purposes of effecting the conversion of Horizon Common Stock into MBI Common Stock upon consummation of the Merger. As soon as practicable after consummation of the Merger, a letter of transmittal (including instructions setting forth the procedures for exchanging certificates representing shares of Horizon Common Stock for the MBI Common Stock payable to each holder thereof pursuant to the Merger Agreement) will be sent to each record holder as of the Effective Time (as hereinafter defined). Upon surrender to the Exchange Agent of his or her certificate(s) representing shares of Horizon Common Stock, together with a duly completed and executed letter of transmittal, each such holder will receive certificates representing that whole number of shares of MBI Common Stock to which such holder is entitled under the Merger Agreement. See "TERMS OF THE PROPOSED MERGER - Surrender of Horizon Stock Certificates and Receipt of MBI Common Stock." The Merger Agreement provides that the consummation of the Merger is subject to certain terms and conditions, including the approval of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of Horizon Common Stock, the receipt of the requisite regulatory approvals, an opinion of KPMG Peat Marwick LLP to the effect that the Merger will qualify for pooling-of-interests accounting treatment and an opinion of counsel for MBI regarding certain federal income tax aspects of the transaction. For a discussion of each of the conditions to the Merger, see "TERMS OF THE PROPOSED MERGER - Conditions of the Merger." The Merger will be consummated and become effective (the "Effective Time") upon the later of (i) the issuance of a certificate of merger by the Office of the Secretary of State of the State of Missouri and (ii) the filing of Articles of Merger with the Office of the Secretary of State of the State of Arkansas. Unless the parties otherwise agree, the date of the closing of the Merger (the "Closing Date") shall occur on such date as MBI shall notify Horizon in writing but (i) not earlier than the satisfaction of all conditions set forth in the Merger Agreement and (ii) not later than the first business day of the first full calendar month commencing at least five days after all conditions to closing as set forth in the Merger Agreement are satisfied. The Merger Agreement may be terminated at any time prior to the Closing Date by the mutual consent of the parties or, unilaterally, by either party upon the occurrence of certain events or if the Merger is not consummated by July 31, 1998. See "TERMS OF THE PROPOSED MERGER - Conditions of the Merger" and "- Termination of the Merger Agreement." VOTING AGREEMENTS Concurrent with the execution of the Merger Agreement, MBI and each of the directors of Horizon executed separate Voting Agreements (the "Voting Agreements") pursuant to which each such director agreed that he or she will vote all of the shares of Horizon Common Stock then owned, controlled or subsequently acquired in favor of the approval of the Merger Agreement at the Special Meeting. In addition, until the earliest to occur of the Closing Date or the termination of the Merger Agreement, each director further agreed he or she will not vote any such shares in favor of the approval of any other competing acquisition proposal involving Horizon and a third party. Each director also agreed that he or she will not transfer shares of Horizon Common Stock unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement and satisfactory to MBI. As of the Record Date (as defined below), the directors of Horizon who signed Voting Agreements owned beneficially, directly and indirectly, an aggregate of 337,791 shares of Horizon Common Stock, or approximately 53.4% of the issued and outstanding shares. - 10 - 14 INTERESTS OF CERTAIN PERSONS IN THE MERGER EMPLOYMENT AGREEMENTS. Each of Ross M. Whipple, Chairman and Chief Executive Officer of Horizon, and Steve L. DeMott, President of Horizon, has entered into an employment agreement with MBI pursuant to which they will continue to be employed by MBI or its affiliates following the consummation of the Merger. Pursuant to Mr. Whipple's employment agreement, in addition to certain other terms and conditions, Mr. Whipple will be engaged as the Chairman of MBI's Arkadelphia Community Banking unit and as a member of the Board of Directors of Mercantile Bank of Arkansas National Association for a period of three years commencing at the Effective Time. Pursuant to Mr. DeMott's employment agreement, in addition to certain other terms and conditions, commencing at the Effective Time, MBI will engage Mr. DeMott as an executive officer of Horizon or any successor thereto and as a member of the Board of Directors of the appropriate MBI community bank. See "TERMS OF THE PROPOSED MERGER - Interests of Certain Persons in the Merger - Employment Agreements." EMPLOYEE RETENTION BONUSES. In addition to the employment agreements with Mr. Whipple and Mr. DeMott, MBI has entered into an agreement with Horizon pursuant to which certain full-time employees of Horizon will be entitled to receive two bonus payments, each in an amount ranging from $10,000 to $25,000, in the event such employees remain full-time employees of Horizon, MBI, Merger Sub or any successor thereto as of each of the six-month anniversary and the one-year anniversary of the Effective Time. In addition, each such employee will be entitled to receive his or her total bonus amount (to the extent not previously paid) in a lump-sum payment if, on or prior to the one-year anniversary of the Effective Time, the employment of such employee is terminated for certain reasons or such employee dies or becomes permanently disabled. See "TERMS OF THE PROPOSED MERGER - Interests of Certain Persons in the Merger - Employee Retention Bonuses." INDEMNIFICATION. MBI also has agreed that the Merger will not diminish any indemnification obligations of Horizon or its subsidiaries in favor of the employees, agents, directors or officers or Horizon or its subsidiaries existing as of the Effective Time. In addition, to the extent that Horizon's existing directors' and officers' liability insurance policy provides coverage for the acts or omissions of the director and officers of Horizon and its subsidiaries, Horizon has agreed to give to such insurance carrier and to MBI notice of any potential claims thereunder. On and after the Effective Time, MBI's directors' and officers' liability insurance policy will provide coverage for the prior acts of the directors and officers of Horizon and its subsidiaries. See "TERMS OF THE PROPOSED MERGER - Interests of Certain Persons in the Merger - Indemnification." SPECIAL MEETING OF HORIZON SHAREHOLDERS The Special Meeting will be held on -------------, 1998, at ------- a.m. Central Time, at the offices of Horizon, 526 Main Street, Suite 204, Arkadelphia, Arkansas. Approval by the Horizon shareholders of the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Horizon Common Stock. Only holders of record of Horizon Common Stock at the close of business on --------------, 1997 (the "Record Date") will be entitled to notice of, and to vote at, the Special Meeting. At such date, there were 632,743 shares of Horizon Common Stock outstanding. Each share of Horizon Common Stock is entitled to one vote on each matter submitted to a vote at the Special Meeting. As of the Record Date, directors and executive officers of Horizon and their affiliates owned beneficially, or controlled the voting of, an aggregate of 339,137 shares of Horizon Common - 11 - 15 Stock, or approximately 53.6% of the shares entitled to vote at the Special Meeting. All of Horizon's directors and executive officers have indicated their intention to vote their shares for the approval of the Merger Agreement. Additionally, each of the directors of Horizon, pursuant to the terms of his or her respective Voting Agreement, has committed to vote his or her shares of Horizon Common Stock for the approval of the Merger Agreement. As of the Record Date, such persons who had executed Voting Agreements or otherwise indicated they would vote for approval of the Merger Agreement owned beneficially, directly and indirectly, an aggregate of 337,791 shares of Horizon Common Stock, or approximately 53.4% of the issued and outstanding shares. THE BOARD OF DIRECTORS OF HORIZON CAREFULLY CONSIDERED AND APPROVED THE TERMS OF THE MERGER AS BEING IN THE BEST INTEREST OF HORIZON AND ITS SHAREHOLDERS. THE HORIZON BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE --- MERGER AGREEMENT. REASONS FOR THE MERGER HORIZON. The Board of Directors of Horizon believes that the Merger is in the best interests of Horizon and its shareholders. In reaching the decision to recommend the approval of the Merger Agreement to the shareholders, the Board of Directors, without assigning any relative or specific weights, considered a number of factors. For a discussion of such factors, see "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations." MBI. MBI's Board of Directors believes that the Merger will enable MBI to (i) increase its presence in central Arkansas through the acquisition of an established banking organization and (ii) enhance MBI's ability to compete in the increasingly competitive banking and financial services industry. See "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations." OPINION OF FINANCIAL ADVISOR TO HORIZON On July 31, 1997, Stephens Inc. ("Stephens"), Horizon's financial advisor, rendered to the Board of Directors of Horizon a written opinion, to the effect that, as of the date of such opinion, the consideration to be received by the disinterested holders of Horizon Common Stock in the Merger was fair to them from a financial point of view. Attached to this Proxy Statement/Prospectus as Annex A is a copy of the opinion of Stephens, dated ------- July 31, 1997, setting forth the procedures followed, assumptions made, matters considered and qualifications and limitations of the review undertaken by Stephens in connection with rendering its opinion. Holders of Horizon Common Stock are urged to read Stephens' opinion in its entirety. See "TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger; Board Recommendations" and "- Opinion of Financial Advisor to Horizon." FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the shareholders of Horizon in connection with the Merger. Each holder of Horizon Common Stock who otherwise would have been entitled to receive a fraction of a share of MBI Common Stock shall receive in lieu thereof cash, without interest, in an amount equal to the holder's fractional share interest multiplied by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date. Cash received by Horizon shareholders in lieu of fractional shares may - 12 - 16 give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." WAIVER AND AMENDMENT Any provision of the Merger Agreement, including, without limitation, the conditions to the consummation of the Merger and the restrictions described under the caption "TERMS OF THE PROPOSED MERGER - Business Pending the Merger," may be (i) waived in writing at any time by the party that is, or whose shareholders are, entitled to the benefits thereof or (ii) amended at any time by written agreement of the parties approved by or on behalf of their respective Boards of Directors, whether before or after the approval of the Merger Agreement by the shareholders of Horizon; provided, however, that after approval of the Merger Agreement by the shareholders of Horizon at the Special Meeting no such modification may (i) alter or change the amount or kind of the consideration to be received by the Horizon shareholders pursuant to the Merger Agreement or (ii) adversely affect the tax treatment to the Horizon shareholders as a result of receiving shares of MBI Common Stock in the Merger. FEDERAL INCOME TAX CONSEQUENCES IN GENERAL Thompson Coburn, MBI's legal counsel, has delivered its opinion to the effect that, assuming the Merger occurs in accordance with the Merger Agreement and conditioned on the accuracy of certain representations made by MBI, Horizon and certain shareholders of Horizon, the Merger will constitute a "reorganization" for federal income tax purposes and that, accordingly, assuming the Horizon Common Stock is a capital asset in the hands of the holder at the Effective Time, no gain or loss will be recognized by Horizon shareholders who exchange their shares of Horizon Common Stock solely for shares of MBI Common Stock in the Merger. However, cash received in lieu of fractional shares may give rise to taxable income. EACH HORIZON SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER, INCLUDING THE APPLICABILITY OF VARIOUS STATE, LOCAL AND FOREIGN TAX LAWS. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." REGULATORY APPROVAL The Merger is subject to prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Arkansas State Bank Department (the "Arkansas Commissioner") and any other bank regulatory authority that may be necessary or appropriate (the Federal Reserve Board, the Arkansas Commissioner and any other bank regulatory authority that may be necessary or appropriate are collectively referred to herein as the "Regulatory Authorities" and, individually, as a "Regulatory Authority"). On December 1, 1997 and December 15, 1997, MBI will file the required applications regarding the Merger with the Federal Reserve Board and the Arkansas Commissioner, respectively. In reviewing the applications and the proposed Merger, the Federal Reserve Board will consider various factors, including possible anti-competitive effects of the Merger, and examine the financial and managerial resources and future prospects of the combined organization and the Arkansas Commissioner will review the record of MBI's subsidiary financial institutions in meeting the credit needs of the local communities they serve. There can be no assurance that the requisite regulatory approvals will be granted or as to the timing of such approvals. See "TERMS OF THE PROPOSED MERGER - Regulatory Approval" and "SUPERVISION AND REGULATION." - 13 - 17 ACCOUNTING TREATMENT It is intended that the Merger will be accounted for under the pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED MERGER - - Accounting Treatment." DISSENTERS' RIGHTS Under Arkansas law, a holder of Horizon Common Stock may dissent from the Merger and receive payment of the "fair value" of his or her shares by following certain procedures set forth in Sections 4-27-1302 through 4-27-1328 of the Arkansas Business Corporation Act of 1987, as amended (the "Arkansas Act"), the text of which is attached hereto as Annex B. Failure to ------- follow such procedures may result in a loss of dissenters' rights. Any Horizon shareholder returning a blank executed proxy card will be deemed to have approved the Merger Agreement, thereby waiving any such dissenters' rights. See "RIGHTS OF DISSENTING SHAREHOLDERS OF HORIZON." MARKETS AND MARKET PRICES MBI Common Stock is traded on the NYSE under the symbol "MTL." The closing per share sale price reported for MBI Common Stock on July 30, 1997, the last trading date preceding the public announcement of the Merger, was $47.1875. There is no established public trading market for Horizon Common Stock. The last sale price for Horizon Common Stock known to management of Horizon was $75.00 per share on July 11, 1997. Because of this lack of established trading market, Management of Horizon does not have knowledge of the prices paid in all transactions involving its shares and has not necessarily verified the prices indicated on this table with both parties to the relevant transaction. Thus, the sale prices listed below may not reflect the prices that would have been paid in an active market. As of the Record Date, Horizon had [131] shareholders of record. The following table sets forth for the periods indicated the high and low prices per share of MBI Common Stock as reported on the NYSE and of Horizon Common Stock as known to management of Horizon along with the quarterly cash dividends per share declared. The per share prices do not include adjustments for markups, markdowns or commissions. All stock prices and dividend amounts shown reflect a ten-for-one stock split effected by Horizon on May 22, 1996. - 14 - 18
MBI HORIZON ------------------------------------ ------------------------------------- SALES PRICE CASH SALES PRICE CASH ---------------------- DIVIDEND ---------------------- DIVIDEND HIGH LOW DECLARED HIGH LOW DECLARED ---- --- -------- ---- --- -------- 1995 First Quarter $24.813 $20.813 $.22 $52.10 $47.80 $ -- Second Quarter 29.938 24.000 .22 52.10 52.00 -- Third Quarter 31.313 27.750 .22 52.10 52.00 -- Fourth Quarter 31.000 27.688 .22 52.10 52.10 .45 1996 First Quarter $31.000 $27.688 $.273 $ $ .10 Second Quarter 31.938 29.000 .273 52.10 52.10 .10 Third Quarter 35.250 28.938 .273 .10 Fourth Quarter 36.000 32.688 .273 75.00 75.00 .71 1997 First Quarter $39.688 $33.313 $.287 $ 75.00 $ 75.00 $ .25 Second Quarter 41.688 35.000 .287 75.00 60.00 .25 Third Quarter 53.500 40.500 .287 75.00 75.00 .33 Fourth Quarter (through November 21, 1997) 53.500 45.500 .287 -- - ------------------------ For a recent sale price of MBI Common Stock, see the cover of this Proxy Statement/Prospectus. No trades are known to have occurred during this period for Horizon. The last transaction in Horizon Common Stock for which a price is known to the management of Horizon occurred July 11, 1997 and involved 50 shares of Horizon Common Stock.
COMPARATIVE UNAUDITED PER SHARE DATA The following table sets forth for the periods indicated selected historical per share data of MBI and Horizon and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Merger and the acquisition of Roosevelt. The data presented is based upon the supplemental consolidated financial statements and related notes of MBI and the consolidated financial statements and related notes of Horizon and Roosevelt included in this Proxy Statement/Prospectus or in documents incorporated herein by reference, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing elsewhere herein. This information should be read in conjunction with such historical and pro forma financial statements and related notes thereto. The assumptions used in the preparation of this table appear in the notes to the pro forma financial information appearing elsewhere in this Proxy Statement/Prospectus. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." This data is not necessarily indicative of the results of the future operations of the combined organization or the actual results that would have occurred if the Merger and the completed acquisition of Roosevelt had been consummated prior to the periods indicated. - 15 - 19
MBI/ MBI/ HORIZON/ HORIZON HORIZON ALL ENTITIES ALL ENTITIES MBI HORIZON PRO FORMA PRO FORMA PRO FORMA PRO FORMA REPORTED REPORTED COMBINED EQUIVALENT COMBINED EQUIVALENT -------- -------- ------------ -------------- ------------ -------------- Book Value per Share: September 30, 1997 $18.07 $76.09 $18.04 $ 72.70 $18.04 $ 72.70 December 31, 1996 16.74 65.45 16.34 65.85 16.92 68.19 Cash Dividends Declared per Share: Nine months ended September 30, 1997 $ .861 $ .83 $ .861 $ 3.47 $ .861 $ 3.47 Year ended December 31, 1996 1.090 1.01 1.090 4.39 1.090 4.39 Year ended December 31, 1995 .880 .45 .880 3.55 .880 3.55 Year ended December 31, 1994 .750 .03 .750 3.02 .750 3.02 Earnings per Share: Nine months ended September 30, 1997 $ .92 $ 8.28 $ .94 $ 3.79 $ .57 $ 2.30 Year ended December 31, 1996 2.11 9.04 2.11 8.50 1.47 5.92 Year ended December 31, 1995 2.41 5.89 2.39 9.63 2.39 9.63 Year ended December 31, 1994 2.06 7.73 2.06 8.30 2.06 8.30 Market Price per Share: At July 30, 1997 $47.1875 $75.00 $47.1875 $190.17 $47.1875 $190.17 At November 21, 1997 49.6250 $75.00 49.6250 195.46 49.6250 195.46 - ------------------------ Includes the effect of pro forma adjustments for Horizon and Roosevelt, as appropriate. See "PRO FORMA FINANCIAL INFORMATION - Notes to Pro Forma Combined Consolidated Financial Statements." Based on the pro forma combined per share amounts multiplied by 4.0301, the conversion ratio applicable to one share of Horizon Common Stock in the Merger. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to pro forma financial statements. See "PRO FORMA FINANCIAL INFORMATION - Notes to Pro Forma Combined Consolidated Financial Statements." Includes the effect of pro forma adjustments for Horizon and Roosevelt, as appropriate. Due to the immateriality of the financial condition and results of operations of Regional and Homecorp to that of MBI, does not include the effect of pro forma adjustments for Regional or Homecorp. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." The market value of MBI Common Stock disclosed as of July 30, 1997, the last trading day preceding the public announcement of the Merger, and as of November 21, 1997, the latest available date prior to the filing of the Registration Statement, is based on the last sale price as reported on the NYSE Composite Tape. There are no publicly available quotations of Horizon Common Stock. The last sale price for Horizon Common Stock known to management of Horizon was $75.00 per share on July 11, 1997.
SUMMARY FINANCIAL DATA The following table sets forth for the periods indicated certain summary historical consolidated financial information for MBI and Horizon. The balance sheet data and income statement data of MBI included in the summary financial data as of and for the five years ended December 31, 1996 are taken from MBI's audited supplemental consolidated financial statements. The balance sheet data and income statement data of Horizon included in the summary financial data as of and for the five years ended December 31, 1996 are taken from Horizon's audited consolidated financial statements. The balance sheet data and income statement data included in the summary financial data as of and for the nine months ended September 30, 1997 and 1996 are taken from the unaudited consolidated financial statements of MBI and the unaudited consolidated financial statements of Horizon as of and for the nine months ended September 30, 1997 and 1996. These data include all adjustments which are, in the opinion of the respective managements of MBI and Horizon, necessary to present a fair statement of these periods and are of a normal recurring nature. Results for the nine months ended September 30, 1997 are not necessarily indicative of results for the entire year. The following information should be - 16 - 20 read in conjunction with the supplemental consolidated financial statements of MBI and the consolidated financial statements of Horizon, and the related notes thereto, included herein or in documents incorporated herein by reference, and in conjunction with the unaudited pro forma combined consolidated financial information, including the notes thereto, appearing elsewhere in this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "PRO FORMA FINANCIAL INFORMATION." - 17 - 21 MERCANTILE BANCORPORATION INC. SUMMARY FINANCIAL DATA
ALL ENTITIES PRO FORMA COMBINED CONSOLIDATED AS OF OR FOR THE NINE AS OF OR FOR THE MONTHS ENDED NINE MONTHS ENDED AS OF OR FOR THE SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------ ----------------------- -------------------------------------------------------------- 1997 1997 1996 1996 1995 1994 1993 1992 ------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER COMMON SHARE DATA Net income $ .65 $ .92 $ 1.41 $ 2.11 $ 2.41 $ 2.06 $ 1.81 $ 1.55 Dividends declared .861 .861 .819 1.09 .88 .75 .66 .62 Book value at period end 18.04 18.07 16.05 16.74 16.29 14.48 13.41 12.11 Average shares outstanding (Thousands) 130,609 119,079 116,249 115,938 115,755 112,324 110,167 103,495 EARNINGS (THOUSANDS) Interest income $1,654,271 $1,352,187 $1,156,323 $1,552,863 $1,516,156 $1,311,928 $1,269,680 $1,316,560 Interest expense 882,728 672,529 541,610 724,910 715,466 521,542 508,469 628,837 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income 771,543 679,658 614,713 827,953 800,690 790,386 761,211 687,723 Provision for possible loan losses 77,901 73,616 57,915 73,015 41,533 48,791 70,584 88,238 Other income 269,765 279,263 242,065 337,480 311,649 272,368 290,380 264,534 Other expense 802,569 702,404 541,961 718,668 640,519 645,011 666,067 616,159 Income taxes 76,260 73,071 92,614 128,535 149,898 135,896 114,768 83,773 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income before extra- ordinary items $ 84,578 $ 109,830 $ 164,288 $ 245,215 $ 280,389 $ 233,056 $ 200,172 $ 164,087 ========== ========== ========== ========== ========== ========== ========== ========== ENDING BALANCE SHEET (MILLIONS) Total assets $ 30,524 $ 29,980 $ 21,264 $ 22,030 $ 20,883 $ 19,397 $ 18,878 $ 18,398 Earning assets 27,435 26,915 19,574 20,061 18,997 17,904 17,390 16,846 Investment securities 7,507 7,320 5,027 4,746 4,964 4,895 5,234 5,148 Loans and leases, net of unearned income 19,450 19,121 14,272 14,953 13,703 12,764 11,637 11,183 Deposits 22,583 22,112 16,976 17,336 16,172 15,137 15,435 15,295 Long-term debt 1,196 1,169 305 305 344 351 340 365 Shareholders' equity 2,394 2,355 1,824 1,946 1,915 1,643 1,510 1,322 Reserve for possible loan losses 262 257 234 230 232 245 233 224 SELECTED RATIOS Return on average assets .37% .59% 1.05% 1.16% 1.39% 1.22% 1.08% .93% Return on average equity 4.70 7.12 11.58 12.95 15.64 14.57 14.06 13.32 Net interest rate margin 3.79 4.08 4.33 4.34 4.38 4.61 4.58 4.36 Equity to assets 7.84 7.85 8.58 8.83 9.17 8.47 8.00 7.19 Reserve for possible loan losses Outstanding loans 1.35 1.35 1.64 1.54 1.69 1.92 2.00 2.00 Non-performing loans 219.48 221.85 356.05 318.99 241.79 552.34 289.13 155.54 Dividend payout ratio -- 93.59 58.09 51.74 36.46 36.13 36.53 39.91 - ------------------------ Based on weighted average common shares outstanding. Taxable-equivalent basis. Includes tax-equivalent adjustments of $11,612,000, $12,263,000, $16,353,000, $17,758,000, $17,962,000, $18,598,000 and $17,891,000 for September 30, 1997 and 1996 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The tax-equivalent adjustment used for the pro forma nine month period ending September 30, 1997 was $12,782,000. These adjustments are based upon a federal tax rate of 35% for all periods except 1992, when a federal tax rate of 34% was used.
- 18 - 22 HORIZON BANCORP, INC. SUMMARY FINANCIAL DATA
AS OF OR FOR THE NINE MONTHS ENDED AS OF OR FOR THE SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- PER SHARE DATA Net income $ 8.28 $ 7.16 $ 9.04 $ 5.89 $ 7.73 $ 6.56 $ 6.89 Cash dividends declared .83 .30 1.01 .45 .03 .03 .89 Book value at period end 76.09 64.42 65.45 59.39 48.88 47.33 45.14 Average common shares outstanding 614,370 599,887 600,575 600,930 591,680 606,300 545,268 EARNINGS (THOUSANDS) Interest income $ 30,186 $ 27,041 $ 36,588 $ 33,216 $ 28,197 $ 23,495 $ 23,044 Interest expense 15,313 13,907 18,762 17,343 12,175 9,499 10,363 -------- -------- -------- -------- -------- -------- -------- Net interest income 14,873 13,134 17,826 15,873 16,022 13,996 12,681 Provision for possible loan losses 811 900 1,241 875 695 885 1,690 Other income 3,076 3,005 4,052 3,292 3,337 2,275 2,612 Other expense 10,425 9,468 13,588 13,743 12,484 10,246 8,367 Income taxes 1,625 1,477 1,622 1,004 1,604 1,665 1,480 -------- -------- -------- -------- -------- -------- -------- Net income $ 5,088 $ 4,294 $ 5,427 $ 3,542 $ 4,576 $ 3,975 $ 3,756 ======== ======== ======== ======== ======== ======== ======== ENDING BALANCE SHEET (THOUSANDS) Total assets $550,679 $499,732 $509,356 $424,962 $425,962 $335,484 $309,495 Earning assets 519,205 463,084 476,619 437,860 402,791 315,290 291,258 Investments 187,301 163,235 166,431 169,731 152,164 119,633 122,069 Loans and leases, net of unearned income 328,798 293,948 299,807 264,285 240,602 195,202 168,164 Deposits 470,385 428,153 439,535 417,908 372,247 285,752 267,182 Long-term debt 10 4,332 2,386 5,394 6,221 2,147 2,008 Shareholders' equity 46,746 38,642 39,305 35,690 28,923 28,694 24,611 Allowance for possible loan losses 4,479 4,320 4,226 4,117 4,246 3,577 3,039 SELECTED RATIOS Return on average assets 1.26% 1.18% 1.10% .80% 1.11% 1.20% 1.29% Return on average equity 16.88 15.50 14.40 10.45 15.59 18.57 16.79 Net interest rate margin 4.20 4.21 4.21 4.17 4.56 4.37 4.59 Equity to assets 8.49 7.73 7.72 7.61 6.81 8.55 7.95 Reserve for possible loan losses to: Outstanding loans 1.36 1.47 1.41 1.56 1.76 1.83 1.81 Non-performing loans 131.08 173.98 186.25 307.93 581.64 473.77 716.75 Based on weighted average common shares outstanding. Based on interest income on a fully tax-equivalent basis.
- 19 - 23 INFORMATION REGARDING SPECIAL MEETING ------------------------------------- GENERAL This Proxy Statement/Prospectus is being furnished to holders of Horizon Common Stock in connection with the solicitation of proxies by the Board of Directors of Horizon for use at the Special Meeting and any adjournments or postponements thereof at which the shareholders of Horizon will consider and vote upon a proposal to approve the Merger Agreement and consider and vote upon any other business that may properly be brought before the Special Meeting or any adjournments or postponements thereof. Each copy of this Proxy Statement/Prospectus is accompanied by the Notice of Special Meeting of Shareholders of Horizon, a proxy card and related instructions and a return envelope to Horizon for the proxy card. This Proxy Statement/Prospectus also is furnished by MBI to each holder of Horizon Common Stock as a prospectus in connection with the issuance by MBI of shares of MBI Common Stock upon the consummation of the Merger. This Proxy Statement/Prospectus and the Notice of Special Meeting, proxy card and related materials are being first mailed to shareholders of Horizon on - -----------------, 1997. DATE, TIME AND PLACE The Special Meeting will be held at the offices of Horizon, 526 Main Street, Suite 204, Arkadelphia, Arkansas, on ---------------, 1998, at ------ a.m. Central Time. RECORD DATE; VOTE REQUIRED On the Record Date, there were 632,743 shares of Horizon Common Stock outstanding and entitled to vote at the Special Meeting. Each such share is entitled to one vote on each matter properly brought before the Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of Horizon Common Stock is required to approve the Merger Agreement. As of the Record Date, directors and executive officers of Horizon and their affiliates owned beneficially, or controlled the voting of, an aggregate of 339,137 shares of Horizon Common Stock, or approximately 53.6% of the outstanding shares of Horizon Common Stock entitled to vote at the Special Meeting. All directors and executive officers of Horizon have indicated their intention to vote their shares for the approval of the Merger Agreement at the Special Meeting. Additionally, each director of Horizon, pursuant to the terms of his or her respective Voting Agreement, has committed to vote his or her shares of Horizon Common Stock for approval of the Merger Agreement. As of the Record Date, such persons who had executed Voting Agreements or otherwise indicated they would vote for approval of the Merger Agreement owned beneficially, directly or indirectly, an aggregate of 337,791 shares of Horizon Common Stock, or approximately 53.4% of the issued and outstanding shares. See "TERMS OF THE PROPOSED MERGER - Other Agreements." VOTING AND REVOCATION OF PROXIES Shares of Horizon Common Stock that are represented by a properly executed proxy received prior to the vote at the Special Meeting will be voted at such Special Meeting in the manner directed on the proxy card, unless such proxy is revoked in the manner set forth herein in advance of - 20 - 24 such vote. ANY HORIZON SHAREHOLDER RETURNING AN EXECUTED PROXY CARD THAT DOES NOT PROVIDE INSTRUCTIONS TO VOTE AGAINST THE APPROVAL OF THE MERGER AGREEMENT WILL BE DEEMED TO HAVE APPROVED THE MERGER AGREEMENT. Failure to return a properly executed proxy card or to vote in person at the Special Meeting will have the practical effect of a vote against the approval of the Merger Agreement. Shares subject to abstentions will be treated as shares that are present and voting at the Special Meeting for purposes of determining the base number of shares voting on the proposal. Such votes will, therefore, have the effect of votes against the approval of the Merger Agreement. Broker "non-votes" (i.e., proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owners or other persons entitled to vote shares with respect to which the brokers or nominees do not have discretionary power to vote without such instructions) will be considered as present for the purposes of determining the presence of a quorum but will not be considered as voting at the Special Meeting. Broker non-votes will, therefore, have the effect of votes against the approval of the Merger Agreement. Any shareholder of Horizon giving a proxy may revoke it at any time prior to the vote at the Special Meeting. Shareholders of Horizon wishing to revoke a proxy prior to the vote may do so by delivering to the Secretary of Horizon at 526 Main Street, Suite 204, Arkadelphia, Arkansas 71923, a written notice of revocation bearing a later date than the proxy or a later dated proxy relating to the same shares, or by attending the Special Meeting and voting such shares in person. Attendance at the Special Meeting will not in itself constitute the revocation of a proxy. The Board of Directors of Horizon currently is not aware of any business to be brought before the Special Meeting other than that described herein. If, however, other matters are properly brought before such Special Meeting, or any adjournments or postponements thereof, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment as to the best interest of Horizon. SOLICITATION OF PROXIES Horizon will bear its own costs of soliciting proxies, except that MBI will pay printing and mailing expenses and registration fees incurred in connection with preparing this Proxy Statement/Prospectus. Proxies will initially be solicited by mail, but directors, officers and selected other employees of Horizon also may solicit proxies in person or by telephone. Directors, executive officers and any other employees of Horizon who solicit proxies will not be specially compensated for such services. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward proxy materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners. HOLDERS OF HORIZON COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. - 21 - 25 TERMS OF THE PROPOSED MERGER ---------------------------- The following is a summary of the material terms and conditions of the Merger Agreement, which document is incorporated by reference herein. This summary is qualified in its entirety by the full text of the Merger Agreement. MBI, upon written or oral request, will furnish a copy of the Merger Agreement, without charge, to any person who receives a copy of this Proxy Statement/Prospectus. Such requests should be directed to Jon W. Bilstrom, General Counsel and Secretary, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524, telephone (314) 425-2525. GENERAL DESCRIPTION OF THE MERGER Pursuant to the Merger Agreement, subject to satisfaction or waiver of certain conditions precedent, including receipt of all applicable regulatory approvals, Horizon will be merged on the Closing Date with and into Merger Sub. Upon consummation of the Merger, Horizon's corporate existence will terminate and Merger Sub will continue as the surviving entity. Simultaneously with the effectiveness of the Merger, each share of Horizon Common Stock will be converted into the right to receive 4.0301 shares of MBI Common Stock. Such consideration is subject to certain anti-dilution protections but is not adjustable based upon the operating results, financial condition or other factors affecting either MBI or Horizon prior to the consummation of the Merger. The fair market value of MBI Common Stock received pursuant to the Merger may fluctuate and at the consummation of the Merger may be more or less than the current fair market value of such shares. The amount and nature of the consideration was established through arm's-length negotiations between MBI and Horizon and their respective advisors, and reflects the balancing of a number of countervailing factors. The total amount of the consideration reflects a price both parties concluded was appropriate. See "-Background of and Reasons for the Merger; Board Recommendations." The fact that the consideration is payable in shares of MBI Common Stock reflects the potential for change in the value of the MBI Common Stock and the desire of the parties to the Merger to have the favorable tax attributes of a "reorganization" for federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." NO ASSURANCE CAN BE GIVEN THAT THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF MBI COMMON STOCK ON THE DATE SUCH STOCK IS RECEIVED BY A HORIZON SHAREHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI COMMON STOCK RECEIVED BY A HORIZON SHAREHOLDER MAY BE GREATER OR LESS THAN THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK DUE TO NUMEROUS MARKET FACTORS. Following the Closing Date, each shareholder of Horizon will be required to submit to the Exchange Agent a properly executed letter of transmittal and surrender to the Exchange Agent the stock certificate(s) formerly representing the shares of Horizon Common Stock in order to receive a new stock certificate(s) evidencing the shares of MBI Common Stock to which such shareholder is entitled. As soon as practicable following the Effective Time, the Exchange Agent will mail to each Horizon shareholder a notice of consummation of the Merger and a form of letter of transmittal, together with instructions and a return envelope to facilitate the exchange of such holder's certificate(s) formerly representing Horizon Common Stock for certificate(s) evidencing MBI Common Stock. No dividends or - 22 - 26 other distributions will be paid to a former Horizon shareholder with respect to shares of MBI Common Stock until such shareholder's letter of transmittal and stock certificate(s) formerly representing Horizon Common Stock, or documentation reasonably acceptable to the Exchange Agent in lieu of lost or destroyed certificates, is delivered to the Exchange Agent. See "TERMS OF THE PROPOSED MERGER - Surrender of Horizon Stock Certificates and Receipt of MBI Common Stock." No fractional shares of MBI Common Stock will be issued in the Merger, but cash will be paid in lieu of such fractional shares, such cash being calculated by multiplying the holder's fractional share interest by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date of the Merger. See "- Fractional Shares." The shares of MBI Common Stock to be issued pursuant to the Merger will be freely transferable except by certain shareholders of Horizon who are deemed to be "affiliates" of Horizon. The shares of MBI Common Stock issued to such affiliates will be restricted in their transferability in accordance with the rules and regulations promulgated by the Commission. See "INFORMATION REGARDING MBI STOCK - Restrictions on Resale of MBI Stock by Affiliates." OTHER AGREEMENTS Concurrent with the execution of the Merger Agreement, MBI and each of the directors of Horizon executed a separate Voting Agreement pursuant to which each such director agreed that he or she will vote all of the shares of Horizon Common Stock that he or she then owned, controlled or subsequently acquires in favor of the approval of the Merger Agreement at the Special Meeting. In addition, until the earliest to occur of the Effective Time, the termination of the Voting Agreements or the abandonment of the Merger, each such director further agreed that he or she will not vote any such shares in favor of the approval of any other competing acquisition proposal involving Horizon and a third party. Each such director also agreed that he or she will not transfer shares of Horizon Common Stock unless, prior to such transfer, the transferee executes an agreement in substantially the same form as the Voting Agreement. As of the Record Date, such directors owned beneficially, directly or indirectly, an aggregate of 337,791 shares of Horizon Common Stock, or approximately 53.4% of the issued and outstanding shares. INTERESTS OF CERTAIN PERSONS IN THE MERGER EMPLOYMENT AGREEMENTS. Each of Ross M. Whipple, Chairman and Chief Executive Officer of Horizon, and Steve L. DeMott, President of Horizon, has entered into an employment agreement with MBI pursuant to which they will continue to be employed by MBI or its affiliates following the consummation of the Merger. Pursuant to Mr. Whipple's employment agreement, Mr. Whipple will serve as a member of the Board of Directors of Mercantile Bank of Arkansas National Association (the "Arkansas Bank") and as Chairman of the Advisory Board of the Arkadelphia Community Bank division of the Arkansas Bank for a period of three years commencing at the Effective Time. In consideration of such services, Mr. Whipple will receive for the first year of such services an annual base salary of $100,000, inclusive of all customary directors' fees, and for the second and third years of such services, customary directors' fees. In addition, in the event that Mr. Whipple is employed by the Arkansas Bank upon the one-year anniversary of the Effective Time, MBI will pay to Mr. Whipple a one-time cash payment of $150,000. If, on or before the first anniversary of the Effective Time, (i) Mr. Whipple's engagement with the Arkansas Bank is terminated involuntarily by MBI other than for "cause" (as defined in the employment agreement), (ii) Mr. Whipple voluntarily terminates his engagement with the Arkansas Bank for "good - 23 - 27 reason" (as defined in the employment agreement) or (iii) Mr. Whipple dies or becomes permanently disabled, Mr. Whipple will be entitled to receive the remaining portion of his first year base salary and any unpaid portion of the $150,000 one-time cash payment that is to be received upon such one-year anniversary. Pursuant to his employment agreement, Mr. Whipple also has agreed not to compete with MBI or its affiliates while engaged by the Arkansas Bank and until the later of (i) the second anniversary of the Effective Time, if Mr. Whipple's employment is terminated prior to the first anniversary of the Effective Time, or (ii) in all other cases, one year following the date Mr. Whipple ceases his engagement with the Arkansas Bank. Pursuant to Mr. DeMott's employment agreement, commencing at the Effective Time, Mr. DeMott will serve as an executive officer of Horizon or any successor thereto (the "Continuing Bank") and a member of the advisory Board of Directors of the appropriate MBI community bank. In consideration of such services, Mr. DeMott will receive an annual base salary of $120,000, inclusive of all customary directors' fees, and will be eligible to participate in the Continuing Bank's incentive compensation plan. Mr. DeMott's base salary is guaranteed to remain at least $120,000 for 1998 and 1999, and Mr. DeMott's bonus payments under the incentive compensation plan are guaranteed to be not less than $30,000 for 1998 and $40,000 for 1999. Future base salary and bonus amounts will be subject to an annual performance review. In addition, in the event that Mr. DeMott is employed with the Continuing Bank thirty days following the Effective Time, Mr. DeMott will receive a one-time cash payment of $120,000. If Mr. DeMott is employed with the Continuing Bank upon the one-year anniversary of the Effective Time, MBI will pay to Mr. DeMott an additional one-time cash payment of $75,000. If, on or before July 31, 1999, (i) Mr. DeMott's engagement with the Continuing Bank is terminated involuntarily by the Continuing Bank or MBI other than for "cause" (as defined in the employment agreement), (ii) Mr. DeMott voluntarily terminates his engagement with the Bank for "good reason" (as defined in the employment agreement) or (iii) Mr. DeMott dies or becomes permanently disabled, then Mr. DeMott will be entitled to receive the remaining portion of his base salary and guaranteed bonus payments for 1998 and 1999 and any unpaid portion of the $120,000 and $75,000 one-time cash payments that are to be received thirty days and one year following the Effective Time, respectively. During Mr. Whipple's first year of employment with the Arkansas Bank and during Mr. DeMott's employment with the Continuing Bank each of Mr. Whipple and Mr. DeMott will be entitled to receive employee benefits and customary perquisites equivalent to those provided by MBI to similarly situated senior officers. EMPLOYEE RETENTION BONUSES. In addition to the employment agreements with Mr. Whipple and Mr. DeMott, MBI has entered into a bonus agreement (the "Bonus Agreement") with Horizon pursuant to which certain full-time employees of Horizon will be entitled to receive: (i) a bonus in an amount ranging from $10,000 to $25,000 if such employee is a full-time employee of Horizon, MBI, Merger Sub or any successor thereto (the "Employer") as of the six-month anniversary of the Effective Time; (ii) an additional bonus in an amount ranging from $10,000 to $25,000 if such employee is a full-time employee of the Employer also as of the one-year anniversary of the Effective Time; and/or (iii) in the event that on or prior to the one-year anniversary of the Effective Time (A) such employee's employment is terminated involuntarily by the Employer other than for "cause" (as defined in the Bonus Agreement), (B) such employee's employment is terminated voluntarily by such employee for "good reason" (as defined in the Bonus Agreement) or (C) such employee dies or becomes permanently disabled, a lump sum payment equal to the sum of the bonuses paid pursuant to (i) and (ii) for such employee, less any portions of such bonuses already paid. - 24 - 28 INDEMNIFICATION. MBI also has agreed that the Merger will not diminish any indemnification obligations of Horizon or its subsidiaries in favor of the employees, agents, directors or officers or Horizon or its subsidiaries existing as of the Effective Time by operation of law or by virtue of the Articles of Incorporation, by-laws, contracts, resolutions or other agreements or documents of Horizon or its subsidiaries in effect as of the Effective Time. In addition, to the extent that Horizon's existing directors' and officers' liability insurance policy provides coverage for the acts or omissions of the director and officers of Horizon and its subsidiaries, Horizon has agreed to give to such insurance carrier and to MBI notice of any potential claims thereunder. On and after the Effective Time, MBI's directors' and officers' liability insurance policy will provide coverage for the prior acts of the directors and officers of Horizon and its subsidiaries. BACKGROUND OF AND REASONS FOR THE MERGER; BOARD RECOMMENDATIONS BACKGROUND OF THE MERGER. In early April 1997, a representative of MBI contacted Horizon regarding the acquisition by MBI of all of the outstanding capital stock of Horizon in a transaction that would be a tax-deferred exchange to the shareholders of Horizon. On April 8, 1997, MBI sent Horizon a letter that discussed the advantages of shareholders of Horizon owning shares of MBI as a publicly traded company on the NYSE and the merits of a tax-deferred exchange of stock. On May 21, 1997, MBI met with management of Horizon to present an initial merger offer and to obtain additional information concerning Horizon's pricing and earnings. The parties held additional discussions during May and early June regarding Horizon's earnings. During May and June of 1997, management of Horizon had discussions with Stephens, as well as with its lawyers and accountants, for the purpose of considering the advantages of a sale or merger transaction. MBI toured Horizon's various markets on June 12, 1997. On July 11, 1997, MBI presented Horizon with a revised merger offer and on July 14, 1997, the parties discussed various social issues and agreed to proceed with merger negotiations. On July 16, 1997, Horizon executed an engagement letter with Stephens in which Stephens agreed to serve as financial advisor to Horizon in connection with any merger transaction. Stephens also agreed, if requested by Horizon, to give its written opinion as to whether any proposed transaction would be fair, from a financial point of view, to Horizon's disinterested shareholders. Both parties began the process of due diligence review on July 23, 1997 and continued further negotiations. Following discussions between the parties, the Board of Directors of Horizon met on July 30, 1997 and approved the Merger Agreement providing for each issued and outstanding share of Horizon Common Stock to be exchanged for 4.0301 shares of MBI Common Stock in a tax-deferred transaction. At this meeting, the Horizon Board received information from Stephens that the terms of the Merger Agreement were fair to the disinterested shareholders of Horizon from a financial point of view. On July 31, 1997, MBI and Horizon signed the Merger Agreement. - 25 - 29 HORIZON'S REASONS AND BOARD RECOMMENDATION. The Board of Directors of Horizon has determined that the Merger Agreement is in the best interests of Horizon and its shareholders. In evaluating the Merger Agreement, the Board of Directors of Horizon considered a variety of factors, including: (1) The fact that the price offered by MBI represents a substantial gain to Horizon shareholders (in the Merger, Horizon shareholders will receive 4.0301 shares of MBI Common Stock for each share of Horizon Stock held immediately prior to the Effective Time); (2) The value being offered to Horizon shareholders by MBI in relation to the market value, book value and earnings per share of Horizon Common Stock; (3) The fact that MBI Common Stock is traded on the NYSE, which would increase the liquidity of the securities held by Horizon shareholders; (4) The trend in the banking industry toward consolidation and increased regulation and the ability of MBI's expertise and training to assist Horizon in keeping abreast of such changes; (5) The fact that the interest in most regional bank holding companies has decreased, MBI is aggressive in merging and acquiring community banks and Horizon's desire to take advantage of the characteristics of such philosophy; (6) The advice of its financial advisor, Stephens, and the detailed financial analysis and other information from Stephens; (7) The financial terms and the income tax consequences of the Merger; (8) The likelihood of the Merger being approved by regulatory authorities without undue conditions or delay; and (9) The fairness of the terms of the Merger to the Horizon shareholders. In reaching its determination to approve the Merger Agreement and the transactions contemplated thereby, the Board of Directors of Horizon did not assign any relative or specific weights to the various factors considered by it, and individual directors may have given differing weights to different factors. The foregoing discussion of the information and factors considered by the Board of Directors of Horizon is not intended to be exhaustive but includes all material factors considered by the Board of Directors. The Board of Directors of Horizon believes that the Merger Agreement is in the best interests of Horizon and its shareholders and has recommended the matter to be voted upon by the Horizon shareholders. The Board of Directors of Horizon believes that the Merger would result in a company with expanded opportunities for profitable growth and that the combined resources and capital of Horizon and MBI would provide an enhanced ability to compete in the changing and competitive financial services industry. - 26 - 30 THE BOARD OF DIRECTORS OF HORIZON UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF HORIZON VOTE FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. --- MBI'S REASONS AND BOARD RECOMMENDATIONS. The Executive Committee of the Board of Directors of MBI considered a number of factors, including, among other things, the financial condition of Horizon and projected synergies that are anticipated to result from the Merger. The Executive Committee concluded that the Merger presents an unique opportunity for MBI to increase its presence in central Arkansas through the acquisition of an established banking organization having operations in the targeted area. MBI's decision to pursue discussions with Horizon was primarily a result of MBI's assessment of the value of Horizon's banking franchise, its substantial asset base within that area and the compatibility of the businesses of the two banking organizations. OPINION OF FINANCIAL ADVISOR TO HORIZON Stephens has acted as financial advisor to Horizon in connection with the Merger. As part of its engagement, Stephens agreed, if requested by Horizon, to render an opinion with respect to the fairness to the disinterested shareholders of Horizon from a financial point of view of the consideration proposed to be received by them in the Merger. For purposes of the opinion, the term "disinterested shareholders" was defined to exclude () directors, officers and employees, () any holder of five percent (5%) or more of the outstanding stock, and () Horizon and its affiliates. Stephens is a nationally recognized investment banking firm and, as part of its investment activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Horizon selected Stephens as its financial advisor on the basis of its experience and expertise in merger transactions, and its reputation in the banking and investment communities. In connection with its engagement, a written opinion dated July 31, 1997 was delivered by Stephens to Horizon to the effect that, based upon and subject to certain assumptions and matters considered, and limitations set out therein, the consideration to be received by the disinterested shareholders of Horizon in the Merger was fair to them from a financial point of view. THE FULL TEXT OF STEPHENS' WRITTEN OPINION TO HORIZON DATED JULY 31, 1997, WHICH SETS FORTH THE ASSUMPTIONS, MATTERS CONSIDERED AND LIMITATIONS OF THE OPINION IS ATTACHED HERETO AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ - ------- CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT/PROSPECTUS. THE FOLLOWING SUMMARY OF STEPHENS' OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. THE OPINION, WHICH IS ADDRESSED TO THE BOARD OF DIRECTORS OF HORIZON, IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW TO THE DISINTERESTED SHAREHOLDERS OF HORIZON OF THE CONSIDERATION TO BE RECEIVED BY THEM IN THE MERGER, DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED MERGER OR ANY RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. - 27 - 31 In connection with its review, Stephens did not assume any obligation independently to verify any of the information provided by either Horizon and MBI utilized in its analyses and relied on all such information being complete and accurate in all material respects. Stephens also assumed, with Horizon's consent, that there were no material changes in Horizon or MBI's assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements reviewed by Stephens and that any off-balance sheet activities of Horizon and MBI, including derivatives and other similar financial instruments, if any, would not materially and adversely affect the future financial condition or results of operations of Horizon or MBI. Stephens further assumed, with Horizon's consent, that in the course of obtaining the necessary regulatory and third party consents for the Merger, no restrictions would be imposed that would have a material adverse effect on the contemplated benefits of the Merger or the transactions contemplated thereby. Stephens further assumed, with Horizon's consent, that the Merger would be consummated in accordance with the terms and provisions of the Merger Agreement, without any amendments to, and without any waiver by Horizon of, any of the material conditions to its obligations thereunder. Stephens noted that it is not an expert in the evaluation of loan portfolios for purposes of assessing the adequacy of the allowances for losses with respect thereto and assumed, with Horizon's consent, that such allowances for each of Horizon and MBI, are in the aggregate, adequate to cover such possible losses. In addition, Stephens did not assume responsibility for reviewing any individual credit files or making an independent evaluation, appraisal or physical inspection of the assets or individual properties of Horizon or MBI, nor was Stephens furnished with any such evaluations or appraisals. Finally, Stephens' opinion was based on economic, monetary and market and other conditions as in effect on, and the information made available to Stephens as of the dates thereof. No other limitations were imposed by Horizon on Stephens with respect to the investigations made or procedures followed in rendering its opinion. Set forth below is a summary of the material analyses performed by Stephens in connection with its opinion delivered to Horizon on July 31, 1997. PRO FORMA CONTRIBUTION ANALYSIS. Stephens computed the contribution of Horizon to the combined entity's pro forma balance sheet and income statement at and for the six months ended June 30, 1997. The computation showed, among other things, that based on the merger consideration, Horizon contributed to the combined entity approximately: 2.4% of total assets; 2.0% of total loans and net loans; 2.7% of total deposits; 1.6% of non-interest-bearing deposits; 2.2% of net interest income (before provision for loan losses); 1.1% of non-interest income; 2.2% of net income; and 2.2% of pro forma ownership of the combined company. PRO FORMA DILUTION ANALYSIS. Stephens reviewed the pro forma impact of the Merger on Horizon's earnings per share and book value per share from 1994 through June 30, 1997 on a historical basis, and at and for the years ended December 31, 1997 and 1998 on an estimated basis. Earnings estimates for MBI were based on the median of analysts' estimates as published by the Institutional Brokers Estimate System ("I/B/E/S"). I/B/E/S is a data service that monitors and publishes a compilation of earnings estimates produced and provided by selected research analysts. Stephens did not assume any cost savings (or revenue enhancements) by MBI resulting from the Merger. This analysis showed that the Merger was accretive (dilutive) to Horizon's historical earnings per share for 1994, 1995, 1996 and the six months ended June 30, 1997, by 14.2%, 64.8%, 24.8% and (0.8)%, respectively and 3.1% and 5.0% accretive to estimated earnings per share for 1997 and 1998, respectively. The analysis also showed that the Merger was accretive (dilutive) to Horizon's book value per share at December 31, 1994, 1995 and 1996 and June 30, 1997, by 30.9%, 19.7%, 9.8% and (9.4)%, respectively. - 28 - 32 ANALYSIS OF SELECTED COMPARABLE BANK MERGER TRANSACTIONS. Stephens reviewed the consideration paid in eighteen transactions announced since January 1, 1996 with transaction values between $50 million and $250 million and involving acquired banks located in Arkansas or its contiguous states (the "Comparable Transactions"). For each company merged or to be merged in such transactions, Stephens compiled data comparing, among other things, the transaction price to the latest twelve months' earnings per share, the transaction price to book value and the transaction price to tangible book value. The characteristics of the Comparable Transactions announced since 1996 are as follows: (i) a mean and median ratio of transaction price to latest twelve months' earnings per share of 18.5x and 18.0x, respectively; (ii) a mean and median ratio of transaction price to book value of 2.3x and 2.4x, respectively; and (iii) a mean and median ratio of transaction price to tangible book value of 2.4x and 2.4x, respectively. In comparison, based upon a price per share of $47.2083 for MBI ($70.8125 on a pre-split basis and using the last reported price on July 30, 1997) and an implied offer value of $120.7 million, the consideration to be paid to the holders of Horizon Common Stock represented a ratio of transaction price to latest twelve months' earnings per share (through June 30, 1997) of 20.5x, a ratio of transaction price to book value of 2.7x and ratio of transaction price to tangible book value of 2.8x. No other company or transaction used in the above analysis as a comparison is identical to MBI, Horizon or the proposed Merger. Accordingly, an analysis of the results of the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the acquisition or public trading multiples of the companies to which MBI, Horizon and the proposed Merger are being compared. POTENTIAL MERGER VALUATION RANGE. Stephens prepared an analysis that provided an estimate of the potential value that selected potential merger partners including MBI might offer to acquire Horizon. The analysis showed that, based on closing stock market prices on July 30, 1997 and management's assumption of potential cost savings of 0% to 10% of Horizon's non-interest expense, the selected potential merger partners might offer between $95.6 million and $138.6 million in a merger transaction. The potential merger partners selected for the analysis included six publicly-traded bank holding companies that in recent years have acquired community banks in Arkansas, north Louisiana or east Texas. The analysis was predicated on the assumption that each potential merger partner would be willing to issue that number of shares that would cause no dilution to analysts' consensus estimates of their expected 1997 earnings per share and was based on management's estimate of Horizon's then-expected 1997 earnings. In rendering its opinion, Stephens considered certain other factors and performed other comparative analyses, including, among other things, analyses of: (i) the historical financial results of MBI and Horizon; (ii) the historical trading prices and volume of the stock of MBI and Horizon; (iii) the market share of MBI; and (iv) the stock prices and market multiples of MBI relative to those of selected publicly traded banking companies. The foregoing is a summary of the material analyses performed by Stephens in connection with its opinion delivered to Horizon on July 31, 1997. The summary set forth above does not purport to be a complete description of the analyses performed by Stephens. The preparation of a fairness opinion is not necessarily susceptible to partial analysis or summary description. Stephens - 29 - 33 believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, would create an incomplete view of the process underlying the analyses. In addition, Stephens may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable that other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Stephens' view of the actual values of Horizon, MBI or the combined company. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis. In performing its analyses, Stephens made numerous assumptions with respect to industry performance, regulatory, general business and economic conditions and other matters many of which are beyond the control of Horizon and MBI. The analyses performed by Stephens are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those suggested by such analyses. Such analyses were prepared solely as part of Stephens' analysis of the fairness of the consideration to be received from a financial point of view in connection with the delivery of Stephens' opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. Pursuant to the terms of Stephens' engagement as financial advisor (including rendering its opinion as to the fairness of the proposed transaction), Horizon has agreed to pay Stephens a fee of $450,000, of which $50,000 was paid upon signing of the Merger Agreement, and the balance of which is contingent and payable on completion of the Merger. Horizon has also agreed to indemnify Stephens, its affiliates and their respective partners, directors, officers, agents, consultants, employees and controlling persons against certain liabilities, including liabilities under federal securities law. CONDITIONS OF THE MERGER The respective obligations of MBI, Merger Sub and Horizon to consummate the Merger are subject to the satisfaction of certain mutual conditions, including the following: (1) The Merger Agreement shall be approved by the requisite vote of holders of Horizon Common Stock at the Special Meeting. (2) The Merger Agreement and the transactions contemplated therein shall have been approved by the Federal Reserve Board and any other federal and/or state regulatory agency whose approval is required for the consummation of the transactions contemplated therein, and all waiting periods after such approvals required by law or regulation shall have expired. (3) The Registration Statement of which this Proxy Statement/Prospectus is a part, registering shares of MBI Common Stock to be issued in the Merger, shall have been declared effective and not be subject to a stop order or any threatened stop order. - 30 - 34 (4) Neither Horizon, MBI nor Merger Sub shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the Merger. (5) Horizon, MBI and Merger Sub each shall have received from Thompson Coburn an opinion (which opinion shall not have been withdrawn at or prior to the Effective Time) reasonably satisfactory in form and substance to it to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code and to the effect that, as a result of the Merger, except with respect to cash received in lieu of fractional share interests, holders of Horizon Common Stock who receive MBI Common Stock in the Merger will not recognize gain or loss for federal income tax purposes, the basis of such MBI Common Stock will equal the basis of the Horizon Common Stock for which it is exchanged and the holding period of such MBI Common Stock will include the holding period of the Horizon Common Stock for which it is exchanged, assuming that such Horizon Common Stock is a capital asset in the hands of the holder thereof as of the Effective Time. The obligation of MBI and Merger Sub to consummate the Merger is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of Horizon made in the Merger Agreement shall be true and correct in all material respects as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts caused the failure of any representations or warranty to be so true and correct have not resulted, and are not likely to result, in a Material Adverse Effect (as defined in the Merger Agreement) on Horizon and its subsidiaries, taken as a whole, and (iii) for the effect of transactions contemplated by the Merger Agreement, and all obligations required to be performed by Horizon prior to the Effective Time shall have been performed in all material respects, and MBI shall have received a certificate of the Chairman and President of Horizon to that effect. (2) Horizon shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of Horizon for the lawful consummation of the Merger. (3) MBI and Merger Sub shall have received an opinion of KPMG Peat Marwick LLP, satisfactory to MBI and Merger Sub, that the Merger will qualify for pooling-of-interests accounting treatment, which opinion shall not have been withdrawn at or prior to the Effective Time. (4) Horne, Hollingsworth & Parker, counsel to Horizon, shall have delivered to MBI an opinion dated as of the Closing Date regarding certain legal matters. (5) Since July 31, 1997, there shall have been no Material Adverse Effect on Horizon and its subsidiaries, taken as a whole. (6) Unless otherwise waived by MBI in its sole discretion, holders of less than five percent (5%) of the total value of shares of Horizon Common Stock - 31 - 35 outstanding shall have taken such steps as are then possible to dissent from the Merger pursuant to the Arkansas Act. Horizon's obligation to consummate the Merger is subject to the satisfaction, unless waived, of certain other conditions, including the following: (1) The representations and warranties of MBI and Merger Sub made in the Merger Agreement shall be true and correct, in all material respects, as of the Effective Time except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a Material Adverse Effect on MBI and its subsidiaries, taken as a whole, and (iii) for the effect of transactions contemplated by the Merger Agreement, and all obligations required to be performed by MBI and Merger Sub prior to the Effective Time shall have been performed in all material respects, and Horizon shall have received a certificate from any Executive Vice President of MBI to that effect. (2) MBI and Merger Sub shall have obtained any and all material permits, authorizations, consents, waivers and approvals required of MBI or Merger Sub for the lawful consummation of the Merger. (3) Since July 31, 1997, there shall have been no Material Adverse Effect on MBI and its subsidiaries, taken as a whole. (4) Thompson Coburn, counsel to MBI, shall have delivered to Horizon an opinion dated as of the Closing Date regarding certain legal matters. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains extensive representations and warranties by Horizon, MBI and Merger Sub. These include, among other things, representations and warranties of Horizon as to (i) the organization and good standing of it and its subsidiaries, (ii) its capital structure, (iii) its authority relative to the execution and delivery of, and performance of its obligations under, the Merger Agreement, (iv) the documents, including financial statements and other reports, filed by Horizon with the applicable regulatory authorities, (v) title to and condition of assets, (vi) real property, (vii) taxes, (viii) the absence of material adverse changes since March 31, 1997, (ix) loans, commitments and contracts, (x) the absence of material conflicts between its obligations under the Merger Agreement and its charter documents and material contracts to which it is a party or by which it is bound, (xi) litigation, (xii) directors' and officers' insurance, (xiii) compliance with laws, (xiv) labor, (xv) the existence of certain material interests of certain persons, (xvi) allowance for loan and lease losses and non-performing assets, (xvii) employee benefit plans and related matters, (xviii) the absence of undisclosed liabilities, (xix) the accuracy of the information supplied by Horizon for inclusion in this Proxy Statement/Prospectus and related documents, (xx) the absence of registration obligations with respect to Horizon Common Stock, (xxi) the absence of actions that would jeopardize the qualification of the Merger as a reorganization or the receipt of certain regulatory approvals, (xxii) obligations to brokers and finders, (xxiii) the absence of interest rate management instruments, (xxiv) the accuracy of the statements contained in the Merger Agreement and related documents and (xxv) Year 2000 compliance for all computer software and hardware. - 32 - 36 MBI's and Merger Sub's representations and warranties include, among other things, those as to (i) their respective organization and good standing, (ii) their respective capital structures, (iii) their authority relative to the execution and delivery of, and performance of their respective obligations under, the Merger Agreement, (iv) the documents, including financial statements and other reports, filed by MBI with applicable regulatory authorities, (v) the absence of material adverse changes since March 31, 1997, (vi) the accuracy of the information supplied by MBI or Merger Sub for inclusion in this Proxy Statement/Prospectus and related documents and (vii) the absence of obligations to brokers and finders. TERMINATION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT The Merger Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the shareholders of Horizon, (i) by mutual consent of the Executive Committee of the Board of Directors of MBI and the respective Boards of Directors of Horizon and Merger Sub, or (ii) unilaterally by the Executive Committee of the Board of Directors of MBI or the Boards of Directors of Horizon or Merger Sub: (A) at any time after July 31, 1998, if the Merger has not been consummated by such date (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in the Merger Agreement); (B) if the Federal Reserve Board or any other Regulatory Authority whose approval is required for consummation of the Merger shall have issued a final non-appealable denial of such approval; (C) if the shareholders of Horizon shall not have approved the Merger Agreement at the Special Meeting; or (D) in the event of a breach by the other party of any representation, warranty or agreement contained in the Merger Agreement, which breach is not cured within 30 days after written notice thereof is given to the party committing such breach or is not waived by such other party. The Executive Committee of the Board of Directors of Mercantile may terminate the Agreement in certain circumstances if Horizon acquires property after July 31, 1997 and if environmental investigations of such acquired property, together with all previously acquired property after such date, indicate that the estimated cost of corrective or remedial action with regard to such properties would exceed $500,000 in the aggregate. No assurance can be given that the Merger will be consummated on or before July 31, 1998 or that MBI, Merger Sub or Horizon will not elect to terminate the Merger Agreement if the Merger has not been consummated on or before such date. In the event of the termination of the Merger Agreement, it shall become void and there shall be no liability on the part of any party except, that (i) confidentiality and indemnification obligations shall survive termination, (ii) MBI shall pay all printing, mailing and filing expenses with respect to the Registration Statement and this Proxy Statement/Prospectus and (iii) in the case of termination due to continued material breach after notice and opportunity to cure, the breaching party shall not be relieved of liability to the non-breaching party arising from the willful nonperformance of any covenant in the Merger Agreement. Any provision of the Merger Agreement, including, without limitation, the conditions to the consummation of the Merger and the restrictions described under "- Business Pending the Merger," may be (i) waived in writing at any time by the party that is, or whose shareholders are, entitled to the benefits thereof, or (ii) amended at any time by written agreement of the parties approved by or on behalf of their respective Boards of Directors or Executive Committees, whether before or after the Special Meeting; provided, however, that after approval of the Merger Agreement by the shareholders of Horizon at the Special Meeting no such modification may (i) alter or change the amount or kind of consideration - 33 - 37 to be received by the Horizon shareholders pursuant to the Merger, or (ii) adversely affect the tax treatment to Horizon shareholders as a result of receiving the shares of MBI Common Stock in the Merger. INDEMNIFICATION Horizon, MBI and Merger Sub have agreed to indemnify each other and the officers, directors and controlling persons of each other against any losses, claims, damages or liabilities to which any such party may become subject under federal or state laws or regulations, to the extent that such loss, claim, damage or liability is based primarily upon information furnished to the party subject to such liability by the other party, or out of an omission by such other party to state a necessary or material fact in the Registration Statement of which this Proxy Statement/Prospectus is a part. CLOSING DATE The Merger will be consummated and become effective upon the later of (i) the issuance of a certificate of merger by the Office of the Secretary of State of the State of Missouri or (ii) the filing of Articles of Merger with the Office of the Secretary of State of the State of Arkansas. Under the Merger Agreement, unless otherwise agreed to by the parties, the Closing Date shall occur on such date as MBI shall notify Horizon in writing but (i) not earlier than the satisfaction of the following conditions (a) the receipt of the requisite approval of the Merger Agreement by the shareholders of Horizon and (b) the approval of the Merger by the Federal Reserve Board and any other Regulatory Agency whose approval is required, and all waiting periods for such approvals have been satisfied (the "Approval Date"), and (ii) not later than the first business day of the first full calendar month beginning at least five business days after the Approval Date. SURRENDER OF HORIZON STOCK CERTIFICATES AND RECEIPT OF MBI COMMON STOCK At the Effective Time, each outstanding share of Horizon Common Stock will be converted into the right to receive 4.0301 shares of MBI Common Stock. See "- General Description of the Merger." Each holder of Horizon Common Stock, upon submission to the Exchange Agent of a properly executed letter of transmittal and surrender to the Exchange Agent of the stock certificate(s) formerly representing shares of Horizon Common Stock, will be entitled to receive a stock certificate(s) evidencing the shares of MBI Common Stock to which such shareholder is entitled. As soon as practicable following the Effective Time, the Exchange Agent will mail to each Horizon shareholder of record as of the Effective Time notification of the consummation of the Merger. The Exchange Agent also will provide a letter of transmittal and instructions as to the procedure for the surrender of the stock certificates evidencing the Horizon Common Stock and the receipt of shares of MBI Common Stock. It will be the responsibility of each holder of Horizon shares to submit all certificates formerly evidencing such holder's shares of Horizon Common Stock to the Exchange Agent. No dividends or other distribution will be paid to a former Horizon shareholder with respect to shares of MBI Common Stock until such shareholder's properly completed letter of transmittal and stock certificates formerly representing Horizon Common Stock, or, in lieu thereof, such evidence of a lost, stolen or destroyed certificate and/or such insurance bond as the Exchange Agent may reasonably require in accordance with customary exchange practices, are delivered to the Exchange Agent. All dividends or other distributions on the MBI Common Stock declared between the Closing Date and the date of the surrender of a Horizon stock certificate will be held for the benefit of the shareholder and will be paid to - 34 - 38 the shareholder, without interest thereon, upon the surrender of such stock certificate(s) or documentation and/or insurance bond in lieu thereof. FRACTIONAL SHARES No fractional shares of MBI Common Stock will be issued to the former shareholders of Horizon in connection with the Merger. Each holder of Horizon Common Stock who otherwise would have been entitled to receive a fraction of a share of MBI Common Stock shall receive in lieu thereof cash, without interest, in an amount equal to the holder's fractional share interest multiplied by the closing stock price of MBI Common Stock on the NYSE Composite Tape as reported in The Wall Street Journal on the Closing Date. Cash received by Horizon shareholders in lieu of fractional shares may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER." REGULATORY APPROVAL In addition to the approval of the Merger Agreement by the Horizon shareholders, the obligations of the parties to effect the Merger are subject to prior approval of the Federal Reserve Board and the Arkansas Commissioner. As a bank holding company, MBI is subject to regulation under the BHCA. MBI will file all required applications seeking approval of the Merger with the Regulatory Authorities. Under the BHCA, the Federal Reserve Board can withhold approval of the Merger if, among other things, it determines that the effect of the Merger would be to substantially lessen competition in the relevant market. In addition, the Federal Reserve Board is required to consider whether the combined organization meets the requirements of the Community Reinvestment Act of 1977, as amended, by assessing the involved entities' respective records of meeting the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions. In its review, the Federal Reserve Board also is required to examine the financial and managerial resources and future prospects of the combined organization and analyze the capital structure and soundness of the resulting entity. The Federal Reserve Board has the authority to deny an application if it concludes that the combined organization would have inadequate capital. MBI will also file an application with the Arkansas Commissioner, which will review the record of MBI's subsidiary financial institutions in meeting the credit needs of the local communities they serve. The Merger cannot be consummated prior to receipt of all required approvals. There can be no assurance that the required regulatory approvals for the Merger will be obtained, and, if the Merger is approved, as to the date of such approvals or whether the approvals will contain any unacceptable conditions. There can likewise be no assurance that the United States Department of Justice will not challenge the Merger during the waiting period set aside for such challenges after receipt of approval from the Federal Reserve Board. See "SUPERVISION AND REGULATION." MBI and Horizon are not aware of any governmental approvals or actions that may be required for consummation of the Merger other than as described above. Should any other approval or action be required, it is presently contemplated that such approval or action would be sought. There can be no assurance that any necessary regulatory approvals or actions will be timely received or taken, that no action will be brought challenging such approval or action or, if such a challenge is brought, as to the - 35 - 39 result thereof, or that any such approval or action will not be conditioned in a manner that would cause the parties to abandon the Merger. See "SUPERVISION AND REGULATION." BUSINESS PENDING THE MERGER The Merger Agreement provides that, during the period from July 31, 1997 to the Effective Time, Horizon will conduct its business according to the ordinary and usual course consistent with past practices and use its best efforts to maintain and preserve its business organization, employees and advantageous business relationships and retain the services of its officers and key employees. Furthermore, from July 31, 1997 to the Effective Time, except as provided in the Merger Agreement, Horizon will not, and will not permit any of its subsidiaries to, without the prior written consent of MBI: (1) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock (other than dividends from any of the Horizon subsidiaries to Horizon), except that Horizon may pay regular quarterly cash dividends of not more than $0.32 per share; provided, however, that if the Effective Time shall not have occurred on or before March 1, 1998, Horizon may declare, set aside or pay a dividend for each share of Horizon Common Stock for each quarter thereafter in which the MBI Board of Directors shall declare a dividend on shares of MBI Common Stock that equals the product or (i) 4.0301 and (ii) the amount of the dividend per share declared by the Board of Directors of MBI; provided, further, however, that Horizon shall not declare or pay a quarterly dividend for any quarter in which Horizon shareholders will be entitled to receive a regular quarterly dividend on the shares of MBI Common Stock to be issued in the Merger; (2) enter into or amend any employment, severance or similar agreement or arrangement with any director, officer or employee, or materially modify any of the Horizon employee plans or grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except normal individual increases in compensation to employees consistent with past practice, or as required by law or contract, and except for such increases of which Horizon notifies MBI in writing and which MBI does not disapprove within ten days of the receipt of such notice; (3) authorize, recommend, propose or announce an intention to authorize, recommend or propose, or enter into an agreement in principle with respect to, any merger, consolidation or business combination (other than the Merger), any acquisition of a material amount of assets or securities, any disposition of a material amount of assets or securities or any release or relinquishment of any material contract rights; (4) propose or adopt any amendments to the Articles of Incorporation or Charter of Horizon or any subsidiary of Horizon, as the case may be, or its respective by-laws or charter; (5) issue, sell, grant, confer or award any capital stock options, warrants, conversion rights or other rights or effect any stock split or adjust, combine, reclassify or otherwise change its capitalization as it existed on July 31, 1997; - 36 - 40 (6) purchase, redeem, retire, repurchase or exchange, or otherwise acquire or dispose of, directly or indirectly, any capital stock, options, warrants, conversion rights or other rights, whether pursuant to the terms of such capital stock, options, warrants, conversion rights or other rights or otherwise; (7) (i) without first consulting with and obtaining the written consent of MBI, 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 $500,000 or in any amount which, when aggregated with any and all loans or credit commitments of Horizon and its subsidiaries to such person or entity, would be equal to or in excess of $500,000; provided, however, that Horizon or any of its subsidiaries may make any such loan or credit commitment in the event (A) Horizon or any of its subsidiaries has delivered to MBI or its designated representative a notice of its intention to make such loan and such information as MBI or its designated representative may reasonably require in respect thereof and (B) MBI or its designated representative shall not have reasonably objected to such loan by giving written or facsimile notice of such objection within two (2) business days following the delivery to MBI or its designated representative of the notice of intention and information as aforesaid; provided further, however, that nothing shall prohibit Horizon or any of its subsidiaries from honoring any contractual obligation in existence on the date of the Merger Agreement. Notwithstanding the above, Horizon shall be authorized, without first consulting with MBI or obtaining MBI's prior written consent, to increase the aggregate amount of any credit facilities theretofore established in favor of any person or entity (each a "Pre-Existing Facility"), provided that the aggregate amount of any and all such increases shall not be in excess of the lesser of ten percent (10%) of such Pre-Existing Facilities or $25,000; (8) directly or indirectly, including through its officers, directors, employees or other representatives: (i) initiate, solicit or encourage any discussions, inquiries or proposals with any third party (other than MBI or Merger Sub) relating to the disposition of any significant portion of the business or assets of Horizon or any of its subsidiaries or the acquisition of the capital stock (or rights or options exercisable for, or securities convertible or exchangeable into, capital stock) of Horizon or any of its subsidiaries or the merger of Horizon or any of its subsidiaries with any person (other than MBI or Merger Sub) or any similar transaction (each such transaction being referred to herein as an "Acquisition Transaction"), or (ii) provide any third party with information or assistance or negotiate with any third party with respect to an Acquisition Transaction, and Horizon shall promptly notify MBI orally of all the relevant details relating to all inquiries, indications of interest and proposals which it or any of its subsidiaries may receive with respect to any Acquisition Transaction; - 37 - 41 (9) knowingly take any action or omit to take any action that would (i) materially impede or delay the consummation of the transactions contemplated by the Merger Agreement or the ability of MBI or Horizon to obtain any approval of any Regulatory Authority required for the transactions contemplated by the Merger Agreement or to perform its covenants and agreements under the Merger Agreement, (ii) prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code or (iii) prevent the merger from qualifying for pooling-of-interests accounting treatment; (10) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity; (11) materially restructure or change its investment securities portfolio, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported, or execute individual investment transactions of greater than $2,000,000 for U.S. Treasury or Federal Agency Securities and $250,000 for all other investment instruments; (12) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or knowingly take or omit to take any other action which would make any of Horizon's representations and warranties in the Merger Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other act; or (13) enter into, increase or renew any loan or credit commitment (including standby letters of credit) to any executive officer or director of Horizon or any subsidiary of Horizon, any holder of 10% or more of the outstanding shares of Horizon Common Stock, or any entity controlled, directly or indirectly, by any of the foregoing or engage in any transaction with any of the foregoing which is of the type or nature sought to be regulated in 12 U.S.C. Section 371c and 12 U.S.C. Section 371c-1, without first obtaining the prior written consent of MBI, which consent shall not be unreasonably withheld. The Merger Agreement also provides that during the period from July 31, 1997 to the Effective Time, MBI and Merger Sub shall not, and shall not permit any of their subsidiaries to, without the prior written consent of Horizon, agree in writing or otherwise take any action that is prohibited of Horizon by subsections (9) and (12) above. ACCOUNTING TREATMENT The Merger is intended to be accounted for under the pooling-of-interests method of accounting. It is a condition to MBI's and Merger Sub's consummation of the Merger, unless otherwise waived, that KPMG Peat Marwick LLP, MBI's independent accountants, deliver to MBI and Merger Sub an opinion that the Merger will qualify for pooling-of-interests accounting treatment. - 38 - 42 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ----------------------------------------------------- The following discussion is based upon an opinion of Thompson Coburn, counsel to MBI ("Counsel"), and except as otherwise indicated, reflects Counsel's opinion. The discussion is a general summary of the material United States federal income tax ("federal income tax") consequences of the Merger to certain Horizon shareholders and does not purport to be a complete analysis or listing of all potential tax considerations or consequences relevant to a decision whether to vote for the approval of the Merger. The discussion does not address all aspects of federal income taxation that may be applicable to Horizon shareholders in light of their status or personal investment circumstances, nor does it address the federal income tax consequences of the Merger that are applicable to Horizon shareholders subject to special federal income tax treatment including (without limitation) foreign persons, insurance companies, tax-exempt entities, retirement plans, dealers in securities, persons who acquired their Horizon Common Stock pursuant to the exercise of employee stock options or otherwise as compensation, and persons who hold their Horizon Common Stock as part of a "straddle," "hedge" or "conversion transaction." Each shareholder's individual circumstances may affect the tax consequences of the Merger to such shareholder. In addition, the discussion does not address the effect of any applicable state, local or foreign tax laws, or the effect of any federal tax laws other than those pertaining to the federal income tax. AS A RESULT, EACH HORIZON SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. The discussion assumes that shares of Horizon Common Stock are held as capital assets (within the meaning of Section 1221 of the Code) at the Effective Time. Horizon has received an opinion from Counsel to the effect that, assuming the Merger occurs in accordance with the Merger Agreement, the Merger will constitute a "reorganization" for federal income tax purposes with the following federal income tax consequences: (1) Horizon shareholders will recognize no gain or loss as a result of the exchange of their Horizon Common Stock solely for shares of MBI Common Stock pursuant to the Merger, except with respect to cash received in lieu of fractional shares, if any, as discussed below. (2) The aggregate adjusted tax basis of the shares of MBI Common Stock received by each Horizon shareholder in the Merger (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 4 below) will be equal to the aggregate adjusted tax basis of the shares of Horizon Common Stock surrendered. (3) The holding period of the shares of MBI Common Stock received by each Horizon shareholder in the Merger (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 4 below) will include the holding period of the shares of Horizon Common Stock exchanged therefor. (4) A Horizon shareholder who receives cash in the Merger in lieu of a fractional share of MBI Common Stock will be treated as if the fractional share had been received by such shareholder in the Merger and then redeemed by MBI in return for the cash. The receipt of such cash will cause the recipient to recognize capital gain or loss equal to the difference between the amount of cash received and the portion of such holder's adjusted tax basis in the shares of MBI Common Stock allocable to the fractional share. - 39 - 43 Counsel's opinion is subject to the conditions and assumptions stated therein and relies upon various representations made by MBI, Horizon and certain shareholders of Horizon. If any of these representations or assumptions is inaccurate, the tax consequences of the Merger could differ from those described herein. Counsel's opinion also is based upon the Code, regulations proposed or promulgated thereunder, judicial precedent relating thereto, and current administrative rulings and practice, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences discussed herein. The opinion is available without charge upon written request to Jon W. Bilstrom, General Counsel and Secretary, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524. The receipt of Counsel's opinion again as of the Closing Date is a condition to the consummation of the Merger. An opinion of counsel, unlike a private letter ruling from the Internal Revenue Service (the "Service"), has no binding effect on the Service. The Service could take a position contrary to Counsel's opinion and, if the matter were litigated, a court may reach a decision contrary to the opinion. Neither MBI nor Horizon has requested an advance ruling as to the federal income tax consequences of the Merger, and the Service is not expected to issue such a ruling. THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO CERTAIN HORIZON SHAREHOLDERS AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH HORIZON SHAREHOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EACH HORIZON SHAREHOLDER. ACCORDINGLY, EACH HORIZON SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS. - 40 - 44 RIGHTS OF DISSENTING SHAREHOLDERS OF HORIZON -------------------------------------------- Each holder of Horizon Common Stock has the right to dissent from the Merger and receive the fair value of such holder's shares of Horizon Common Stock if the shareholder follows the procedures set forth in the Arkansas Act, included as Annex B hereto and the material provisions of which are ------- summarized below. Pursuant to the Arkansas Act, a holder of Horizon Common Stock may dissent and Horizon will pay to such shareholder the fair value of such shareholder's shares of Horizon Common Stock if such shareholder (1) files with Horizon prior to the vote being taken a written demand for payment for his or her shares if the Merger is consummated and (2) does not vote in favor thereof. Within 10 days after the consummation of the Merger, Horizon shall send a letter to all dissenting shareholders notifying them of the procedures for demanding payment. A dissenting shareholder must demand payment pursuant to the procedures set forth in the dissenters' notice. After the shareholder delivers to Horizon the written demand for payment, Horizon shall send each shareholder who has delivered a written demand for payment the amount Horizon estimates to be the fair value of the shares, plus accrued interest, accompanied by a written explanation of how the interest was calculated, a statement setting forth the opinion of Horizon as to the estimated fair value of the shares, Horizon's latest balance sheet as of the end of a fiscal year ended not earlier than 16 months before the delivery of the statement, together with the statement of income for that year and the latest available interim financial statements, a statement of the shareholder's right to demand payment under the Arkansas Act and a copy of the pertinent provisions of the Arkansas Act. A VOTE AGAINST THE MERGER, WHETHER BY PROXY OR IN PERSON, WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN DEMAND FOR PAYMENT FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS. Upon payment of the agreed value, the dissenting shareholder shall cease to have any interest in such shares or in Horizon or MBI. If the dissenting shareholder does not agree with the opinion of Horizon as to the estimated fair value of the shares or the amount of interest due, the dissenting shareholder must, within 30 days from the delivery of Horizon's statement of value, notify Horizon in writing of the shareholder's estimated fair value and interest due and demand payment for the difference between the shareholder's estimate of fair value and interest due and the amount of the payment by Horizon. If Horizon and the dissenting shareholder do not agreed upon the fair value of the shares and interest due, Horizon shall file a petition in the circuit court of the county in which either the registered office or the principal office of Horizon is located, requesting the court to determine the fair value of the shares and interest due. The "fair value" determined by the court may be more or less than the amount offered to Horizon shareholders under the Merger Agreements. Upon the payment of the judgment, the dissenting shareholder shall cease to have any interest in such shares or in Horizon or MBI. THE FOREGOING SUMMARY OF THE PROVISIONS REGARDING DISSENTERS' RIGHTS UNDER THE ARKANSAS ACT IS QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF THE ARKANSAS ACT WHICH IS ATTACHED HERETO AS ANNEX B. - ------- Horizon shareholders who are interested in perfecting dissenters' rights pursuant to the Arkansas Act in connection with the Merger should consult with their counsel for advice as to the procedures required to be followed. - 41 - 45 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 Horizon and the corresponding pro forma and pro forma equivalent per share amounts giving effect to the proposed Merger and the acquisition of Roosevelt. The data presented is based upon the supplemental consolidated financial statements and related notes of MBI and the consolidated financial statements and related notes of Horizon and Roosevelt included in this Proxy Statement/Prospectus or in documents incorporated herein by reference, and the pro forma combined consolidated balance sheet and income statements, including the notes thereto, appearing elsewhere herein. This information should be read in conjunction with such historical and pro forma financial statements and related notes thereto. The assumptions used in the preparation of this table appear in the notes to the pro forma financial information appearing elsewhere in this Proxy Statement/Prospectus. This data is not necessarily indicative of the results of the future operations of the combined organization or the actual results that would have occurred if the Merger or the completed acquisition of Roosevelt had been consummated prior to the periods indicated.
MBI/ HORIZON/ HORIZON HORIZON MBI/ALL ENTITIES ALL ENTITIES MBI HORIZON PRO FORMA PRO FORMA PRO FORMA PRO FORMA REPORTED REPORTED COMBINED EQUIVALENT COMBINED EQUIVALENT -------- -------- ------------ -------------- ------------ -------------- Book Value per Share: September 30, 1997 $ 18.07 $76.09 $ 18.04 $ 72.70 $ 18.04 $ 72.70 December 31, 1996 16.74 65.45 16.34 65.85 16.92 68.19 Cash Dividends Declared per Share: Nine months ended September 30, 1997 $ .861 $ .83 $ .861 $ 3.47 $ .861 $ 3.47 Year ended December 31, 1996 1.090 1.01 1.090 4.39 1.090 4.39 Year ended December 31, 1995 .880 .45 .880 3.55 .880 3.55 Year ended December 31, 1994 .750 .03 .750 3.02 .750 3.02 Earnings per Share: Nine months ended September 30, 1997 $ .92 $ 8.28 $ .94 $ 3.79 $ .57 $ 2.30 Year ended December 31, 1996 2.11 9.04 2.11 8.50 1.47 5.92 Year ended December 31, 1995 2.41 5.89 2.39 9.63 2.39 9.63 Year ended December 31, 1994 2.06 7.73 2.06 8.30 2.06 8.30 Market Price per Share: At July 30, 1997 $47.1875 $75.00 $47.1875 $190.17 $47.1875 $190.17 At November 21, 1997 49.6250 $75.00 49.6250 195.46 49.6250 195.46 - --------------------- Includes the effect of pro forma adjustments for Horizon and Roosevelt, as appropriate. See "PRO FORMA FINANCIAL INFORMATION - Notes to Pro Forma Combined Consolidated Financial Statements." Based on the pro forma combined per share amounts multiplied by 4.0301, the conversion ratio applicable to one share of Horizon Common Stock in the Merger. Further explanation of the assumptions used in the preparation of the pro forma combined consolidated financial statements is included in the notes to pro forma financial statements. See "PRO FORMA FINANCIAL INFORMATION - Notes to Pro Forma Combined Consolidated Financial Statements." Includes the effect of pro forma adjustments for Horizon and Roosevelt, as appropriate. Due to the immateriality of the financial condition and results of operations of Regional and Homecorp to that of MBI, does not include the effect of pro forma adjustments for Regional or Homecorp. See "PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial Statements." The market value of MBI Common Stock disclosed as of July 30, 1997, the last trading day preceding the public announcement of the Merger, and as of November 21, 1997, the latest available date prior to the filing of the Registration Statement, is based on the last sale price as reported on the NYSE Composite Tape. There are no publicly available quotations of Horizon Common Stock. The last sale price for Horizon Common Stock known to management of Horizon was $75.00 per share on July 11, 1997.
-42- 46 PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) RECENT ACQUISITIONS. MBI has completed or announced a number of acquisitions during the years covered by the pro forma financial statements that follow. Set forth below is a table that summarizes the completed and pending acquisitions, including the name of the acquired entity, the date of consummation of the acquisition, the assets and deposits of the acquired entities at the date of consummation for the completed acquisitions or at September 30, 1997 for the pending acquisition the consideration paid in cash and/or shares of MBI stock and the accounting method utilized. ACQUISITIONS COMPLETED BY MBI (1994-PRESENT)
CONSIDERATION -------------------- GROSS ACCOUNTING NAME DATE ASSETS DEPOSITS CASH SHARES METHOD - ---- ---- ------ -------- ---- ------ ------ (dollars in thousands) Roosevelt Financial Group, Inc. July 1, 1997 $7,251,985 $5,317,514 $374,477 18,948,884 Purchase Mark Twain Bancshares, Inc. Apr. 25, 1997 3,227,972 2,519,474 73 24,088,713 Pooling Regional Bancshares, Inc. Mar. 5, 1997 171,979 135,954 12,300 900,625 Purchase TODAY'S Bancorp, Inc. Nov. 7, 1996 501,418 432,104 34,912 1,690,587 Purchase First Financial Corporation of America Nov. 1, 1996 87,649 76,791 3,253 388,113 Purchase Peoples State Bank Aug. 22, 1996 95,657 75,149 -- 488,756 Purchase Metro Savings Bank, F.S.B. Mar. 7, 1996 80,857 73,843 5 296,853 Purchase Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 89,697 1 482,946 Purchase Hawkeye Bancorporation Jan. 2, 1996 1,978,540 1,739,811 80 11,838,294 Pooling First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 147,588 1 782,126 Pooling Southwest Bancshares, Inc. Aug. 1, 1995 187,701 155,628 1 1,012,463 Pooling AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 130,179 1 992,034 Pooling Plains Spirit Financial Corporation July 7, 1995 400,754 276,887 6,697 1,951,770 Purchase TCBankshares, Inc. May 1, 1995 1,422,798 1,217,740 -- 7,124,99 Pooling Central Mortgage Bancshares, Inc. May 1, 1995 654,584 571,105 8 3,806,585 Pooling UNSL Financial Corp. Jan. 3, 1995 508,346 380,716 11 2,367,161 Pooling Wedge Bank Jan. 3, 1995 195,716 152,865 1 1,454,931 Pooling United Postal Bancorp, Inc. Feb. 1, 1994 1,260,765 1,025,252 39 8,447,930 Pooling Metro Bancorporation Jan. 3, 1994 370,175 333,183 6 2,457,417 Pooling PENDING ACQUISITION BY MBI Homecorp, Inc. 1st Qtr. 1998 $ 326,877 $ 299,148 -- 951,380 Pooling Horizon Bancorp, Inc. 1st Qtr. 1998 $ 550,678 $ 470,385 -- 2,550,000 Pooling - --------------------------- The historical financial statements of MBI were not restated for the acquisition due to the immateriality of the acquiree's financial condition and results of operations to those of MBI. In addition to MBI Common Stock issued, MBI assumed, through an exchange, the outstanding, non-convertible preferred stock of TCBankshares, Inc. Such preferred stock was redeemed in the first quarter of 1996. Estimated number of shares to be issued in acquisition.
PRO FORMA FINANCIAL STATEMENTS. The following unaudited pro forma combined consolidated balance sheet gives effect to the Merger as if it was consummated on September 30, 1997. MBI acquired Roosevelt on July 1, 1997, which acquisition was accounted for under the purchase method of accounting. Accordingly, the historical results of operations of MBI include the results of operations of Roosevelt from July 1, 1997 forward. The following pro forma combined consolidated income statements include the results of operations of Roosevelt from January 1, 1996 through the date of acquisition. -43- 47 The following pro forma combined consolidated income statements for the nine months ended September 30, 1997 and for the years ended December 31, 1996, 1995 and 1994 set forth the results of operations of MBI combined with the results of operations of Horizon as if the Merger had occurred as of the first day of the period presented. As stated above, the pro forma combined consolidated income statements for the year ended December 31, 1996 and for the nine months ended September 30, 1997 include the results of operations of Roosevelt from January 1, 1996 through the date of acquisition. The unaudited pro forma combined consolidated financial statements should be read in conjunction with the accompanying Notes to the Pro Forma Combined Consolidated Financial Statements and with the historical financial statements of MBI, Horizon and Roosevelt. The historical interim financial information for the nine months ended September 30, 1997, used as a basis for the pro forma combined consolidated financial statements, includes all necessary adjustments, which, in management's opinion, are necessary to present the data fairly. These pro forma combined consolidated financial statements may not be indicative of the results of operations that actually would have occurred if the completed and proposed acquisitions had been consummated on the dates assumed above or of the results of operations that may be achieved in the future. Due to the immateriality of the results of operations of Regional and Homecorp to that of MBI, individually and in the aggregate, the unaudited pro forma combined consolidated financial statements contained herein do not reflect the completed acquisition of Regional period prior to the acquisition date of such entity or the pending acquisition of Homecorp. -44- 48 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 (THOUSANDS) (UNAUDITED)
PRO FORMA HORIZON COMBINED MBI HORIZON ADJUSTMENTS CONSOLIDATED ------- ------- ----------- ------------ ASSETS Cash and due from banks $ 1,043,236 $ 11,036 $ (7,220) $ 1,047,052 Due from banks - interest-bearing 303,276 -- 303,276 Federal funds sold and repurchase agreements 171,703 3,106 174,809 Investments in debt and equity securities Trading 137,761 -- 137,761 Available-for-sale 6,904,529 172,811 7,077,340 Held-to-maturity 277,311 14,490 291,801 ----------- -------- -------- ----------- Total 7,319,601 187,301 -- 7,506,902 Loans and leases 19,120,797 328,798 19,449,595 Reserve for possible loan losses (257,261) (4,479) (261,740) ----------- -------- -------- ----------- Net loans and leases 18,863,536 324,319 -- 19,187,855 Intangible assets 821,726 2,009 823,735 Receivable for credit card loans sold 372,835 372,835 Other assets 1,084,450 22,908 46,746 1,107,358 (46,746) ----------- -------- -------- ----------- Total Assets $29,980,363 $550,679 $ (7,220) $30,523,822 =========== ======== ======== =========== LIABILITIES Deposits Non-interest-bearing $ 3,134,713 $ 51,623 $ $ 3,186,336 Interest-bearing 18,308,044 418,762 18,726,806 Foreign 669,483 -- 669,483 ----------- -------- -------- ----------- Total Deposits 22,112,240 470,385 -- 22,582,625 Short-term borrowings 3,771,713 3,136 3,774,849 Bank notes 175,000 -- 175,000 Long-term debt 1,019,092 27,352 1,046,444 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 -- 150,000 Other liabilities 397,639 3,060 400,699 ----------- -------- -------- ----------- Total Liabilities 27,625,684 503,933 -- 28,129,617 SHAREHOLDERS' EQUITY Common stock 1,304 666 24 1,328 (666) Capital surplus 939,387 12,372 3,896 943,283 (12,372) Retained earnings 1,419,402 35,606 35,606 1,455,008 (35,606) Treasury stock (5,414) (1,898) (7,220) (5,414) 7,220 1,898 ----------- -------- -------- ----------- Total Shareholders' Equity 2,354,679 46,746 (7,220) 2,394,205 ----------- -------- -------- ----------- Total Liabilities and Shareholders' Equity $29,980,363 $550,679 $ (7,220) $30,523,822 =========== ======== ======== =========== See Notes to Pro Forma Combined Consolidated Financial Statements.
-45- 49 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, FOR THE SIX HORIZON MONTHS ENDED ALL ENTITIES PRO FORMA JUNE 30, 1997 PRO FORMA HORIZON COMBINED ------------- ROOSEVELT COMBINED MBI HORIZON ADJUSTMENTS CONSOLIDATED ROOSEVELT ADJUSTMENTS CONSOLIDATED ------- ------- ----------- ------------ --------- --------------- ------------ Interest Income $ 1,352,187 $30,186 $(271) $ 1,381,922 $272,169 $ $ 1,654,271 Interest Expense 672,529 15,313 687,842 178,306 858 882,728 15,722 ------------ ------- ----- ------------ -------- -------- ------------ Net Interest Income 679,658 14,873 (271) 694,080 93,863 (16,580) 771,543 Provision for Possible Loan Losses 73,616 811 74,427 3,474 -- 77,901 ------------ ------- ----- ------------ -------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 606,042 14,062 (271) 619,653 90,389 (16,580) 693,642 Other Income Trust 71,688 119 71,807 -- 71,807 Service charges 72,625 1,564 74,189 13,018 87,207 Credit card fees 16,421 -- 16,421 -- 16,421 Net loss from financial instruments -- -- -- (35,630) (35,630) Securities gains 4,901 42 4,943 -- 4,943 Other 113,628 1,351 114,979 10,038 125,017 ------------ ------- ----- ------------ -------- -------- ------------ Total Other Income 279,263 3,076 -- 282,339 (12,574) -- 269,765 Other Expense Salaries and employee benefits 307,350 5,650 313,000 23,717 336,717 Net occupancy and equipment 86,031 1,712 87,743 9,291 97,034 Loss on the sale of credit card loans 50,000 -- 50,000 50,000 Other 259,023 3,063 262,086 36,555 20,177 318,818 ------------ ------- ----- ------------ -------- -------- ------------ Total Other Expense 702,404 10,425 -- 712,829 69,563 20,177 802,569 ------------ ------- ----- ------------ -------- -------- ------------ Income Before Income Taxes 182,901 6,713 (271) 189,343 8,252 (36,757) 160,838 Income Taxes 73,071 1,625 (97) 74,599 7,630 (5,969) 76,260 ------------ ------- ----- ------------ -------- -------- ------------ Net Income $ 109,830 $ 5,088 $(174) $ 114,744 $ 622 $(30,788) $ 84,578 ============ ======= ===== ============ ======== ======== ============ Per Share Data Average Common Shares Outstanding 119,079,189 121,476,189 130,608,778 Net Income $ .92 $ .94 $ .65 See Notes to Pro Forma Combined Consolidated Financial Statements.
-46- 50 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
MBI, HORIZON ALL ENTITIES PRO FORMA PRO FORMA HORIZON COMBINED ROOSEVELT COMBINED MBI HORIZON ADJUSTMENTS CONSOLIDATED ROOSEVELT ADJUSTMENTS CONSOLIDATED ------- ------- ----------- ------------ --------- --------------- ------------ Interest Income $ 1,552,863 $36,588 $(361) $ 1,589,090 $640,311 $ $ 2,229,401 Interest Expense 724,910 18,762 743,672 462,724 10,290 1,252,061 35,375 ------------ ------- ----- ------------ -------- -------- ------------ Net Interest Income 827,953 17,826 (361) 845,418 177,587 (45,665) 977,340 Provision for Possible Loan Losses 73,015 1,241 74,256 1,262 75,518 ------------ ------- ----- ------------ -------- -------- ------------ Net Interest Income after Provision for Possible Loan Losses 754,938 16,585 (361) 771,162 176,325 (45,665) 901,822 Other Income Trust 86,616 68 86,684 -- 86,684 Service charges 88,916 2,035 90,951 17,157 108,108 Credit card fees 27,962 -- 27,962 -- 27,962 Net loss from financial instruments -- -- -- (76,634) (76,634) Securities losses (83) (1) (84) -- (84) Other 134,069 1,950 136,019 23,510 159,529 ------------ ------- ----- ------------ -------- -------- ------------ Total Other Income 337,480 4,052 -- 341,532 (35,967) -- 305,565 Other Expense Salaries and employee benefits 365,729 7,275 373,004 42,304 415,308 Net occupancy and equipment 103,715 2,169 105,884 18,081 123,965 Other 249,224 4,144 253,368 63,024 40,355 356,747 ------------ ------- ----- ------------ -------- -------- ------------ Total Other Expense 718,668 13,588 -- 732,256 123,409 40,355 896,020 ------------ ------- ----- ------------ -------- -------- ------------ Income Before Income Taxes 373,750 7,049 (361) 380,438 16,949 (86,020) 311,367 Income Taxes 128,535 1,622 (130) 130,027 5,835 (16,439) 119,423 ------------ ------- ----- ------------ -------- -------- ------------ Income Before Extraordinary Items $ 245,215 $ 5,427 $(231) $ 250,411 $ 11,114 $(69,581) $ 191,944 ============ ======= ===== ============ ======== ======== ============ Per Share Data Average Common Shares Outstanding 115,938,311 118,335,311 130,615,744 Net Income Before Extraordinary Items $ 2.11 $ 2.11 $ 1.47
-47- 51 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
PRO FORMA HORIZON COMBINED MBI HORIZON ADJUSTMENTS CONSOLIDATED ------- ------- ----------- ------------ Interest Income $ 1,516,156 $33,216 $(361) $ 1,549,011 Interest Expense 715,466 17,343 732,809 ------------ ------- ----- ------------ Net Interest Income 800,690 15,873 (361) 816,202 Provision for Possible Loan Losses 41,533 875 42,408 ------------ ------- ----- ------------ Net Interest Income after Provision for Possible Loan Losses 759,157 14,998 (361) 773,794 Other Income Trust 77,115 29 77,144 Service charges 82,459 1,574 84,033 Credit card fees 20,366 -- 20,366 Securities gains 4,338 48 4,386 Other 127,371 1,641 29,012 ------------ ------- ----- ------------ Total Other Income 311,649 3,292 -- 314,941 Other Expense Salaries and employee benefits 346,156 7,280 353,436 Net occupancy and equipment 95,896 1,981 97,877 Other 198,467 4,482 202,949 ------------ ------- ----- ------------ Total Other Expense 640,519 13,743 -- 654,262 ------------ ------- ----- ------------ Income Before Income Taxes 430,287 4,547 (361) 434,473 Income Taxes 149,898 1,005 (130) 150,773 ------------ ------- ----- ------------ Net Income $ 280,389 $ 3,542 $(231) $ 283,700 ============ ======= ===== ============ Per Share Data Average Common Shares Outstanding 115,754,877 118,151,877 Net Income $ 2.41 $ 2.39 See Notes to Pro Forma Combined Consolidated Financial Statements.
-48- 52 MERCANTILE BANCORPORATION INC. PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1994 (THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
PRO FORMA HORIZON COMBINED MBI HORIZON ADJUSTMENTS CONSOLIDATED ------- ------- ----------- ------------ Interest Income $ 1,311,928 $28,197 $(361) $ 1,339,764 Interest Expense 521,542 12,175 533,717 ------------ ------- ----- ------------ Net Interest Income 790,386 16,022 (361) 806,047 Provision for Possible Loan Losses 48,791 695 49,486 ------------ ------- ----- ------------ Net Interest Income after Provision for Possible Loan Losses 741,595 15,327 (361) 756,561 Other Income Trust 71,972 -- 71,972 Service charges 80,057 1,289 81,346 Credit card fees 27,352 -- 27,352 Securities gains 2,888 -- 2,888 Other 90,099 2,048 92,147 ------------ ------- ----- ------------ Total Other Income 272,368 3,337 -- 275,705 Other Expense Salaries and employee benefits 336,426 6,531 342,957 Net occupancy and equipment 91,755 1,444 93,199 Other 216,830 4,509 221,339 ------------ ------- ----- ------------ Total Other Expense 645,011 12,484 -- 657,495 ------------ ------- ----- ------------ Income Before Income Taxes 368,952 6,180 (361) 374,771 Income Taxes 135,896 1,604 (130) 137,370 ------------ ------- ----- ------------ Net Income $ 233,056 $ 4,576 $(231) $ 237,401 ============ ======= ===== ============ Per Share Data Average Common Shares Outstanding 112,323,722 114,720,722 Net Income $ 2.06 $ 2.06 See Notes to Pro Forma Combined Consolidated Financial Statements.
-49 53 MERCANTILE BANCORPORATION INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Represents MBI's restated historical consolidated financial statements reflecting the acquisition of Hawkeye Bancorporation, effective January 2, 1996, and Mark Twain, effective April 25, 1997. Such acquisitions were accounted for as poolings-of-interests. The acquisition of First Sterling Bancorp, Inc. ("Sterling") by MBI and the acquisition of Northland Bancshares, Inc. by Mark Twain were also accounted for as poolings-of-interests; however, due to the immateriality of the financial condition and results of operations of Sterling and Northland Bancshares, Inc. to that of MBI and Mark Twain, the historical financial statements were not restated. Therefore, Sterling and Northland Bancshares, Inc. are included in these pro forma financial statements only from their respective acquisition dates forward. Each of Security Bank of Conway, F.S.B., Metro Savings Bank, F.S.B., Peoples State Bank, First Financial Corporation of America, TODAY'S Bancorp, Inc., Regional Bancshares, Inc. and First City Bancshares, Incorporated, each of which was accounted for as a purchase, is included in these pro forma financial statements only from its respective acquisition date forward. The full impact of these acquisitions is immaterial to the Pro Forma Combined Consolidated Financial Statements. MBI completed its acquisition of Roosevelt on July 1, 1997. The acquisition of Roosevelt was accounted for as a purchase; as such, historical financial statements will not be restated. The full impact of the Roosevelt acquisition is included in the pro forma combined consolidated income statement for the nine months ended September 30, 1997 and for the year ended December 31, 1996. The proposed acquisition of Homecorp, which will be accounted for as a pooling-of-interest, is not material to the financial condition and results of operations of MBI. As such, Homecorp is not included in these Pro Forma Combined Financial Statements. All per share data reflects the 3-for-2 stock split declared by MBI on July 16, 1997, which was distributed on October 1, 1997. In conjunction with the proposed acquisition of Horizon, MBI plans to repurchase up to 153,000 shares of MBI Common Stock in the open market. The assumed repurchase price per share is $47.1875, the closing price of MBI Common Stock on July 30, 1997, the last business date before the announcement of the Merger Agreement between MBI and Horizon. Acquisition of Horizon with 2,550,000 shares of issued MBI Common Stock, including up to 153,000 reissued treasury shares, based on the exchange ratio of 4.0301 shares of MBI Common Stock per share of Horizon Common Stock. The number of shares of MBI Common Stock, which represents the aggregate number of shares to be issued in the Merger, was calculated as follows: - 50 - 54 Shares of Horizon Common Stock outstanding at September 30, 1997 632,743 Exchange Ratio x 4.0301 ------------ Aggregate number of shares of MBI Common Stock to be issued in the Merger 2,550,000 ============
Elimination of MBI's investment in Horizon. Interest income foregone as the result of MBI repurchasing 153,000 treasury shares in conjunction with the acquisition of Horizon by MBI. The assumed interest rate is 5%. Income tax benefit associated with interest income foregone as the result of repurchasing shares in conjunction with the acquisition of Horizon by MBI. The assumed effective tax rate is 36%. The acquisition of Roosevelt was accounted for as a purchase transaction. Included herein is the amortization of goodwill over a 15-year period (see footnote 8 below) and interest expense related to the issuance of subordinated debt securities and notes as described in footnotes 9 and 10 below. MBI issued these subordinated debt securities and notes primarily to finance the Roosevelt acquisition. The impact of interest income lost on the cash consideration and stock buybacks is immaterial to the Pro Forma Combined Consolidated Financial Statements through September 30, 1997. Goodwill is considered nondeductible. The income tax benefit associated with taxable income statement adjustments is computed at an effective tax rate of 36%. The pro forma excess of cost over fair value of net assets acquired was $605,320,000 for Roosevelt as of June 30, 1997. The annual amount of goodwill amortization, given a 15-year amortization period, is $40,355,000. On January 29, 1997, MBI issued $150,000,000 of subordinated debt securities, which were issued at a floating rate equal to the three-month LIBOR plus 85 basis points. The rate assumed in calculating the expense for the Unaudited Pro Forma Combined Consolidated Financial Statements is 6.86%. On June 11, 1997, MBI issued $200,000,000 of subordinated notes due 2007 at 7.3%, $150,000,000 of senior notes due 2001 at 6.8% and $150,000,000 of senior notes due 2004 at 7.05%. Income tax benefit associated with interest expense on debt issues (see footnotes 9 and 10 above). The assumed effective tax rate is 36%. - 51 - 55 The computation of year-to-date average shares as restated for the poolings-of-interests with Mark Twain and Hawkeye Bancorporation, as well as for the 3-for-2 stock split distributed on October 1, 1997, is as follows:
FOR THE NINE FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED ------------------------------------ SEPT. 30, 1997 1996 1995 1994 -------------- ---- ---- ---- Shares of MBI Common Stock issued and outstanding 119,079,189 115,938,311 115,754,877 112,323,722 Shares of MBI Common Stock to be issued in the Horizon acquisition, net of treasury shares 2,397,000 2,397,000 2,397,000 2,397,000 Shares of MBI Common Stock issued in the Roosevelt acquisition 18,948,884 18,948,884 Less effect of MBI shares issued in the Roosevelt acquisition being outstanding since July 1, 1997 (6,316,295) Less effect of treasury share purchases (3,500,000) (6,668,451) ----------- ----------- ----------- ----------- Pro Forma Combined 130,608,778 130,615,744 118,151,877 114,720,722 =========== =========== =========== ===========
- 52 - 56 INFORMATION REGARDING HORIZON ----------------------------- BUSINESS Horizon, an Arkansas corporation, was formed in 1982 and is registered as a bank holding company under the BHCA. As of September 30, 1997, Horizon reported, on a consolidated basis, total assets of $550.7 million, total deposits of $470.4 million, loans, net of unearned discount, of $328.8 million and shareholders' equity of $46.7 million. Horizon owns all of the issued and outstanding shares of capital stock of Horizon Bank, an Arkansas state-chartered bank, and Horizon Financial Services, Inc., an Arkansas corporation. Horizon Bank owns all the issued and outstanding shares of capital stock of Landau, Inc. and Horizon Mortgage Company, each of which is an Arkansas corporation. Horizon operates sixteen banking offices in the following Arkansas markets: Arkadelphia, Bismarck, Gurdon, Hot Springs, Hot Springs Village, Malvern and Sheridan. A new facility is under construction in Bryant, Arkansas (Saline County) which will be open for operations in mid-November 1997. Horizon is a leading commercial banking organization in its markets with the primary focus on long-term customer relationships and quality service and conducts full service community banking and trust services throughout its market area. In the following pages, statistical information about Horizon is presented. Such information should be read in conjunction with "Management's Discussion and Analysis for the Three Year Period Ended December 31, 1996" and "Management's Discussion and Analysis for the Nine Months Ended September 30, 1997 and 1996" and the consolidated financial statements included elsewhere herein. DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES The following table sets forth the condensed average balance sheets for the periods presented and the percentage of each principal category of assets and liabilities to total assets. Also shown is the average yield on each category of interest-earning assets and the average rate paid on interest-bearing liabilities for each of the periods presented. Such yields and rates are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. - 53 - 57
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------ 1997 ------------------------------------------------------ PERCENT INTEREST AVERAGE AVERAGE OF TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE ------- ------ ------- -------- ASSETS: (dollars in thousands) Interest-earning assets Loans $310,929 57.82% $20,993 9.00% Taxable investment securities 54,612 10.15 2,688 6.56 Non-taxable investment securities-fed 5,322 .99 382 9.57 Non-taxable investment securities-state 95,671 17.79 4,892 6.82 Non-taxable investment securities-fed and state 30,877 5.74 1,925 8.31 Other investment securities 3,422 .64 150 5.84 Interest-bearing deposits 3,985 .74 158 5.29 Federal funds sold 4,018 .75 168 5.57 -------- ------ ------- ---- Total interest-earning assets 508,836 94.62 31,356 8.22 Non-interest-earning assets: Cash and due from banks 12,099 2.25 Premises and equipment 10,853 2.02 Other assets 10,313 1.91 Allowance for possible loan losses (4,310) (.80) -------- ------ Total assets $537,791 100.00% ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Interest-bearing demand deposits $ 93,089 17.31% $ 1,935 2.77% Savings deposits 75,549 14.05 2,385 4.21 Time deposits 240,434 44.71 9,569 5.31 Other borrowings 33,518 6.23 1,424 5.66 -------- ------ ------- ---- Total interest-bearing liabilities 442,590 82.30 15,313 4.61 Non-interest-bearing liabilities Demand deposits 49,555 9.21 Other liabilities 5,445 1.01 -------- ------ Total liabilities 497,590 92.52 Shareholders equity 40,201 7.48 -------- ------ Total liabilities and shareholders' equity $537,791 100.00% ======== ====== Net interest income $16,043 ======= Interest rate spread 3.61% ==== Net interest rate margin 4.20% ==== Interest-bearing liabilities to earning assets ratio 86.98% ======== - ------------------------------ Average Yield/Rate for the nine months ended September 30, 1997 and 1996 are annualized. Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Non-taxable investment income presented on a fully tax-equivalent basis assuming a tax rate of 6.5% (state), 34% (federal) and 37.5% (state and federal). NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------ 1996 ------------------------------------------------------ PERCENT INTEREST AVERAGE AVERAGE OF TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE ------- ------ ------- -------- ASSETS: (dollars in thousands) Interest-earning assets Loans $278,696 57.40% $19,085 9.13% Taxable investment securities 45,596 9.39 2,165 6.33 Non-taxable investment securities-fed 5,860 1.21 423 9.62 Non-taxable investment securities-state 78,982 16.27 3,903 6.59 Non-taxable investment securities-fed and state 37,287 7.68 2,328 8.32 Other investment securities 2,649 .55 110 5.54 Interest-bearing deposits 2,199 .45 89 5.40 Federal funds sold 5,117 1.05 208 5.42 -------- ------ ------- ---- Total interest-earning assets 456,386 94.00 28,311 8.27 Non-interest-earning assets: Cash and due from banks 12,479 2.57 Premises and equipment 10,977 2.26 Other assets 9,986 2.06 Allowance for possible loan losses (4,308) (.89) -------- ------ Total assets $485,520 100.00% ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Interest-bearing demand deposits $ 96,308 19.84% $ 1,991 2.76% Savings deposits 29,830 6.14 521 2.33 Time deposits 246,731 50.82 10,235 5.53 Other borrowings 27,672 5.70 1,160 5.59 -------- ------ ------- ---- Total interest-bearing liabilities 400,541 82.50 13,907 4.63 Non-interest-bearing liabilities Demand deposits 44,854 9.23 Other liabilities 3,192 .66 -------- ------ Total liabilities 448,587 92.39 Shareholders equity 36,933 7.61 -------- ------ Total liabilities and shareholders' equity $485,520 100.00% ======== ====== Net interest income $14,404 ======= Interest rate spread 3.64% ==== Net interest rate margin 4.21% ==== Interest-bearing liabilities to earning assets ratio 87.76% ======== - ------------------------------ Average Yield/Rate for the nine months ended September 30, 1997 and 1996 are annualized. Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Non-taxable investment income presented on a fully tax-equivalent basis assuming a tax rate of 6.5% (state), 34% (federal) and 37.5% (state and federal).
- 54 - 58
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 ------------------------------------------------------ PERCENT INTEREST AVERAGE AVERAGE OF TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE ------- ------ ------- ---- ASSETS: (dollars in thousands) Interest-earning assets Loans $283,390 57.67% $25,898 9.14% Taxable investment securities 45,549 9.27 2,890 6.34 Non-tax investment securities-fed 5,569 1.13 533 9.57 Non-tax investment securities-state 78,739 16.02 5,185 6.59 Non-tax investment securities-fed & state 36,734 7.48 3,053 8.31 Other investment securities 2,672 .54 157 5.88 Interest-bearing deposits 3,753 .76 202 5.38 Federal funds sold 6,157 1.25 333 5.41 -------- ------ ------- ---- Total interest-earning assets 462,563 94.12 38,251 8.27 Non-interest-earning assets: Cash and due from banks 12,842 2.62 Premises and equipment 11,028 2.25 Other assets 9,283 1.89 Allowance for possible loan losses (4,315) (.88) -------- ------ Total assets $491,401 100.00% ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Interest-bearing demand deposits $ 98,795 20.10% $ 2,764 2.80% Savings deposits 30,239 6.15 742 2.45 Time deposits 247,828 50.43 13,654 5.51 Other borrowings 28,823 5.87 1,602 5.56 -------- ------ ------- ---- Total interest-bearing liabilities 405,685 82.55 18,762 4.62 Non-interest-bearing liabilities Demand deposits 44,946 9.15 Other liabilities 3,089 .63 -------- ------ Total liabilities 453,720 92.33 Shareholders' equity 37,681 7.67 -------- ------ Total liabilities and shareholders' equity $491,401 100.00% ======== ====== Net interest income $19,489 ======= Interest rate spread 3.65% ==== Net interest rate margin 4.21% ==== Interest-bearing liabilities to earning assets ratio 87.70% ======== YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1995 ------------------------------------------------------ PERCENT INTEREST AVERAGE AVERAGE OF TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE ------- ------ ------- ---- ASSETS: (dollars in thousands) Interest-earning assets Loans $248,672 56.22% $22,579 9.08% Taxable investment securities 50,381 11.39 3,606 7.16 Non-tax investment securities-fed 1,483 .34 183 12.34 Non-tax investment securities-state 70,082 15.84 4,580 6.54 Non-tax investment securities-fed & state 34,353 7.77 3,061 8.91 Other investment securities 2,597 .59 142 5.47 Interest-bearing deposits 5,068 1.15 307 6.06 Federal funds sold 4,541 1.03 266 5.86 -------- ------ ------- ----- Total interest-earning assets 417,177 94.31 34,724 8.32 Non-interest-earning assets: Cash and due from banks 10,548 2.38 Premises and equipment 10,012 2.26 Other assets 8,758 1.98 Allowance for possible loan losses (4,147) (.94) -------- ------ Total assets $442,348 100.00% ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Interest-bearing demand deposits $ 73,524 16.62% $ 1,721 2.34% Savings deposits 30,393 6.87 819 2.69 Time deposits 237,998 53.80 13,433 5.64 Other borrowings 21,436 4.85 1,370 6.39 -------- ------ ------- ----- Total interest-bearing liabilities 363,351 82.14 17,343 4.77 Non-interest-bearing liabilities Demand deposits 42,081 9.52 Other liabilities 3,014 .68 -------- ------ Total liabilities 408,446 92.34 Shareholders' equity 33,902 7.66 -------- ------ Total liabilities and shareholders' equity $442,348 100.00% ======== ====== Net interest income $17,381 ======= Interest rate spread 3.55% ===== Net interest rate margin 4.17% ===== Interest-bearing liabilities to earning assets ratio 87.10% ======== YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1994 ------------------------------------------------------ PERCENT INTEREST AVERAGE AVERAGE OF TOTAL INCOME/ YIELD/ BALANCE ASSETS EXPENSE RATE ------- ------ ------- ---- ASSETS: (dollars in thousands) Interest-earning assets Loans $227,022 54.92% $18,798 8.28% Taxable investment securities 38,669 9.35 1,554 4.02 Non-tax investment securities-fed 1,130 .27 83 7.35 Non-tax investment securities-state 75,205 18.19 5,811 7.73 Non-tax investment securities-fed & state 34,159 8.26 3,150 9.22 Other investment securities 2,881 .70 113 3.92 Interest-bearing deposits 3,482 .84 98 2.81 Federal funds sold 3,542 .86 177 5.00 -------- ------ ------- ---- Total interest-earning assets 386,090 93.39 29,784 7.71 Non-interest-earning assets: Cash and due from banks 11,648 2.82 Premises and equipment 10,027 2.43 Other assets 9,707 2.35 Allowance for possible loan losses (4,081) (.99) -------- ------ Total assets $413,391 100.00% ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Interest-bearing demand deposits $ 79,689 19.28% $ 1,730 2.17% Savings deposits 32,950 7.97 891 2.70 Time deposits 203,942 49.33 8,182 4.01 Other borrowings 20,795 5.03 1,372 6.60 -------- ------ ------- ---- Total interest-bearing liabilities 337,376 81.61 12,175 3.61 Non-interest-bearing liabilities Demand deposits 42,494 10.28 Other liabilities 4,172 1.01 -------- ------ Total liabilities 384,042 92.90 Shareholders' equity 29,349 7.10 -------- ------ Total liabilities and shareholders' equity $413,391 100.00% ======== ====== Net interest income $17,609 ======= Interest rate spread 4.10% ==== Net interest rate margin 4.56% ==== Interest-bearing liabilities to earning assets ratio 87.38% ======== - ------------------------------ Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Non-taxable investment income presented on a fully tax-equivalent basis is assuming a tax rate of 6.5% (state), 34% (federal) and 37.5% (state and federal).
- 55 - 59 RATE/VOLUME ANALYSIS The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, respectively. The table distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). Investments are shown at book value. The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
AMOUNT OF INCREASE (DECREASE) ------------------------------------------------------------------ 1996 COMPARED TO 1995 1995 COMPARED TO 1994 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ------------------------------- --------------------------- VOLUME RATE NET VOLUME RATE NET ---------- -------- --- ---------- -------- --- (dollars in thousands) Interest-earning assets: Loans $3,172 $147 $3,319 $1,879 $1,902 $3,781 Taxable investment securities (328) (388) (716) 573 1,479 2,052 Non-taxable investment securities-fed 400 (50) 350 31 69 100 Non-taxable investment securities-state 570 35 605 (377) (854) (1,231) Non-tax investment securities-fed and state 205 (213) (8) 18 (107) (89) Other investments 4 11 15 (12) 41 29 Interest-bearing deposit (73) (32) (105) 59 150 209 Federal funds sold 89 (22) 67 55 34 89 ------ ----- ------ ------ ------- ------ Total interest-earning assets 4,039 (512) 3,527 2,226 2,714 4,940 Interest-bearing liabilities: Interest-bearing demand deposits 665 378 1,043 (139) 130 (9) Savings deposits (4) (73) (77) (69) (3) (72) Time deposits 546 (325) 221 1,528 3,723 5,251 Other borrowings 427 (195) 232 42 (44) (2) ------ ----- ------ ------ ------- ------ Total interest-bearing liabilities 1,634 (215) 1,419 1,362 3,806 5,168 ------ ----- ------ ------ ------- ------ Net interest income $2,405 $(297) $2,108 $ 864 $(1,092) $ (228) ====== ===== ====== ====== ======= ====== - ------------------- Change in volume multiplied by yield/rate of prior period. Change in yield/rate multiplied by volume of prior period. Note 1: Investments are shown at book value. Note 2: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each. Note 3: Non-taxable investment income presented on a fully tax-equivalent basis assuming a tax rate of 6.5% (state), 34% (federal) and 37.5% (state and federal).
INVESTMENT PORTFOLIO The following table presents the composition of Horizon's investment securities portfolio by major category at December 31, 1996 and 1995.
DECEMBER 31, ---------------------------------------------------------------------------------------------- 1996 1995 --------------------------------------------- ---------------------------------------------- AVAILABLE- PERCENT HELD-TO- PERCENT OF AVAILABLE- PERCENT OF HELD-TO- PERCENT OF FOR-SALE OF TOTAL MATURITY TOTAL FOR-SALE TOTAL MATURITY TOTAL ---------- -------- -------- ---------- ---------- ---------- -------- ---------- U.S. Treasury securities and U.S. government agencies and corporations $112,634 76.3% $13,766 73.3% $105,753 73.5% $19,440 75.5% State and municipal 35,029 23.7 4,703 25.1 38,235 26.5 6,133 23.8 Other -- -- 300 1.6 -- -- 170 0.7 -------- ----- ------- ----- -------- ----- ------- ----- Total $147,663 100.0% $18,769 100.0% $143,988 100.0% $25,743 100.0% ======== ===== ======= ===== ======== ===== ======= =====
- 56 - 60 On January 1, 1994, Horizon adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), which requires classification of debt securities into the following three categories: held-to-maturity ("HTM"), available-for-sale ("AFS") or trading. Securities classified as HTM are carried at amortized cost and securities classified as AFS or trading are carried at fair market value. Accordingly, certain securities were reclassified as AFS on January 1, 1994. Prior to January 1, 1994, all securities were considered HTM and carried at amortized cost. Horizon has never maintained a trading account. The objectives of the securities portfolio are to provide Horizon with a source of liquidity and a maximum return within predetermined risk limitations. The securities portfolio is an integral part of the overall interest rate risk management process. As of December 31, 1996, investment securities classified as AFS and HTM constituted 88.72% and 11.28%, respectively, of Horizon's securities portfolio. As of December 31, 1996, Horizon held no securities of any single issuer, other than the U.S. Treasury and U.S. government agencies and corporations (including Freddie Mac, Fannie Mae and Ginnie Mae), that exceeded 10% of shareholders' equity. The following table sets forth the maturities and weighted average yields of Horizon's investment securities at December 31, 1996.
DECEMBER 31, 1996 MATURING ---------------------------------------------------------------------------------- AFTER ONE AFTER FIVE IN ONE THROUGH THROUGH OVER YEAR OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL ------------------ ------------------ ----------------- ----------------- ------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT ------ --------- ------ --------- ------ --------- ------ --------- ------ (dollars in thousands) Available-for-Sale U.S. Treasury securities and other U.S. government agencies and corporations $ 8,311 6.08% $57,016 6.07% $14,353 6.46% $32,954 6.70% $112,634 State and municipal 2,754 7.95 11,369 7.20 11,970 8.42 8,935 9.04 35,029 ------- ----- ------- ----- ------- ----- ------- ----- -------- Total $11,065 6.55% $68,385 6.26% $26,323 7.35% $41,890 7.20% $147,663 ======= ===== ======= ===== ======= ===== ======= ===== ======== Held-to-Maturity U.S. Treasury securities and other U.S. government agencies and corporations $ 3,755 5.62% $ 7,354 6.00% $ 751 7.43% $ 1,907 6.63% $ 13,767 State and municipal 264 6.63 1,689 7.55 1,840 7.85 1,109 9.38 4,902 Other -- -- 100 8.74 -- -- -- -- 100 ------- ----- ------- ----- ------- ----- ------- ----- -------- Total $ 4,019 5.69% $ 9,143 6.32% $ 2,591 7.73% $ 3,016 7.64% $ 18,769 ======= ===== ======= ===== ======= ===== ======= ===== ======== - -------------------- Presented at book value.
- 57 - 61 LOAN PORTFOLIO TYPES OF LOANS. The following table sets forth information concerning the composition of Horizon's loan portfolio, as of the date indicated.
DECEMBER 31, -------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ---------------- ---------------- ---------------- ---------------- (dollars in thousands) PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Commercial, financial and agricultural $ 82,841 27.6% $ 58,900 22.1% $ 65,820 26.7% $ 46,644 23.1% $ 35,910 20.7% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Real estate: Commercial 39,485 13.1 41,186 15.4 17,840 7.2 20,932 10.4 22,561 13.0 Residential 98,441 32.8 85,787 32.2 74,525 30.2 59,807 29.7 57,770 33.4 Construction 11,951 4.0 5,627 2.1 7,124 2.9 3,463 1.8 1,745 1.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total 149,877 132,600 99,489 84,202 82,076 Consumer and other 67,841 22.5 75,309 28.2 81,637 33.0 70,651 35.0 55,323 31.9 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans $300,559 100.0% $266,809 100.0% $246,946 100.0% $201,497 100.0% $173,309 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Less: Unearned discount 753 2,525 6,344 6,295 5,146 Allowance for loan loss 4,226 4,117 4,246 3,577 3,039 -------- -------- -------- -------- -------- Total loans, net $295,580 $260,167 $236,356 $191,625 $165,124 ======== ======== ======== ======== ========
Commercial and real estate loans have experienced 90.2%, or $106,713,000, growth since December 1992. This growth rate was influenced by three major factors: (i) Horizon's acquisition of Grant County Bank, January 3, 1994, which included $12,586,000 in commercial and real estate loans; (ii) growth within the Hot Springs market due to the increase in tourism; and (iii) Horizon's increased emphasis on commercial and real estate loans. In early 1995, Horizon sought to restructure its projected loan growth in each of the major categories (commercial, real estate and installment) due to market factors and internal economic forecasts. The forecasted growth in installment loans was revised to little or no growth (as discussed further below) while commercial and real estate loans became the primary focus for future growth. This restructuring was in response to two overriding factors: (a) the need to continue diversifying the mix of the loan portfolio; and (b) the quality of the commercial and real estate loan portfolios which is supported by experienced lenders and stringent underwriting standards. Installment loans experienced strong growth during 1993 and 1994, due in part to Horizon's acquisition of Grant County Bank, which included $3,473,000 in installment loans. In addition, Horizon aggressively pursued indirect automobile paper during 1993 and 1994. From January 1, 1995 forward, installment loans have experienced little or no growth due to three factors: (i) aggressive pricing by competitors; (ii) more conservative bank underwriting practices; and (iii) the alarming rise (and forecasted rise) in personal bankruptcies and personal credit card debt. - 58 - 62 LOAN MATURITY SCHEDULE. The following table sets forth the contractual maturity of Horizon's loan portfolio at December 31, 1996.
LOANS AT DECEMBER 31, 1996 MATURING -------------------------------------------------------------- AFTER ONE IN ONE THROUGH AFTER YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL ------------ ---------- ---------- ----- (dollars in thousands) Commercial and agricultural $36,136 $37,179 $9,526 $82,841 Real estate-construction 8,833 2,847 271 11,951 ------- ------- ------ ------- Total $44,969 $40,026 $9,797 $94,792 ======= ======= ====== =======
At December 31, 1996, the total amount of commercial and agricultural and real estate construction loans due after one year that have predetermined interest rates was $46,335 and the total amount of commercial and agricultural and real estate construction loans due after one year that have floating or adjustable interest rates was $3,488. RISK ELEMENTS INVOLVED IN LENDING ACTIVITIES. The following table sets forth the amounts of non-performing loans and other real estate for the periods presented.
DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- (dollars in thousands) Non-accrual loans $ 3,294 $ 1,986 $ 974 $ 479 $ 326 $ 351 Loans past due 90 days or more 123 283 363 251 429 73 Restructured loans -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total non-performing loans 3,417 2,269 1,337 730 755 424 Foreclosed property 1,642 1,503 923 1,035 1,069 1,087 -------- -------- -------- -------- -------- -------- Total non-performing assets $ 5,059 $ 3,772 $ 2,260 $ 1,765 $ 1,824 $1,511 ======== ======== ======== ======== ======== ======== Non-performing loans to loans 1.04% .76% .51% .30% .39% .25% Non-performing assets to loans plus foreclosed property 1.53 1.25 .85 .73 .93 .89 Non-performing assets to total assets .92 .74 .48 .42 .54 .49 Total assets $550,679 $509,356 $469,153 $424,962 $335,484 $309,495 Total loans, net of unearned discount 328,798 299,807 264,285 240,602 195,202 168,164 Total loans plus foreclosed property 330,440 301,310 265,208 241,637 196,271 169,251
- 59 - 63 The table above summarizes Horizon's non-performing loan trends. The increase in non-performing assets is a result of management's aggressive approach to the identification of problem credits. Management is not presently aware of any loan or portion of the loan portfolio not included in the table above with respect to which there are serious doubts as to the ability of the borrower(s) to comply with the present loan payment terms. When it becomes questionable that the collection of all principal or interest will take place, the accrual of interest is discontinued. Usually, loans ninety days or more past due are placed on non-accrual status, unless the loan is well secured and in the process of collection. However, all loans over 105 days past due are placed on non-accrual status. The interest on non-accrual loans which would have been accrued, as well as the interest collected on such loans, was not material for periods presented in the table above. POTENTIAL PROBLEM LOANS. Management uses risk ratings to track the quality of the loan portfolio. The ratings are used in the calculation of the allowance for loan losses by assigning a weighted value to each rating. The ratings are also used in the production of "watch lists" that show potential problem credits. The internal loan review department is responsible for the evaluation of the overall credit quality of the bank and has the responsibility, along with the servicing officer, to identify loan ratings that need to be adjusted. The review process is intended to identify borrowers who might be experiencing financial difficulties. The allowance for loan losses is maintained at a level considered adequate to cover potential losses that are anticipated based on past loss experience, past due trends, economic conditions, portfolio trends, areas with a concentration of credit, information about a specific borrower including their financial position and collateral values, and other factors that are subject to change over time. Specific allowance allocations can be made as warranted on any loan with respect to which management determines the need exists. Horizon has four divisional loan committees, one for each geographical area. Each committee works closely with the servicing officers in the credit approval and review process. All large lines of credit, as well as any other lines of credit that the officer believes necessary, are submitted to Horizon Bank's loan committee, which is made up of Horizon Bank's senior officers. The approval process is designed to help assure that underwriting standards are maintained as loans are originated. FOREIGN OUTSTANDINGS. Horizon had no loans to any foreign countries on any of the dates specified in the tables. LOAN CONCENTRATIONS. Horizon does not have a particular concentration of credit in any one economic or geographic sector. OTHER INTEREST-BEARING ASSETS Other interest-bearing assets consists of interest-bearing deposits and federal funds sold at September 30, 1997 and December 31, 1996 and 1995. Interest-bearing deposits and federal funds sold are highly rate sensitive. - 60 - 64 SUMMARY OF LOAN LOSS EXPERIENCE The following table sets forth an analysis of the allowance for loan losses activity for the periods presented, including the ratio of net charge-offs to average loans.
DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- (dollars in thousands) Reserve balance at beginning of period $ 4,226 $ 4,117 $ 4,246 $ 3,577 $ 3,039 $ 1,848 Loans charged off: Commercial, financial and agricultural 114 264 269 128 138 257 Real estate mortgage 53 288 327 80 164 143 Installment and consumer 578 852 742 585 303 248 -------- -------- -------- -------- -------- -------- Total charge-offs 745 1,404 1,338 793 605 648 Recoveries of loans previously charged off: Commercial, financial and agricultural 45 18 56 134 74 49 Real estate mortgage 10 20 63 216 36 13 Installment and consumer 132 234 215 178 148 87 -------- -------- -------- -------- -------- -------- Total recoveries 187 272 334 528 258 149 -------- -------- -------- -------- -------- -------- Net charge-offs 558 1,132 1,004 265 347 499 Additions to reserve charged to expense 811 1,241 875 695 885 1,690 Allowance acquired in business combinations -- -- -- 239 -- -- -------- -------- -------- -------- -------- -------- Reserve balance at end of period $ 4,479 $ 4,226 $ 4,117 $ 4,246 $ 3,577 $ 3,039 ======== ======== ======== ======== ======== ======== Net charge-offs to average loans .18% .40% .40% .12% .18% .34% Allowance for possible loan losses to loans 1.36 1.41 1.56 1.76 1.83 1.81 Allowance for possible loan losses to non-performing loans 131.08 186.25 307.93 581.64 473.77 716.75 Average loans $310,929 $283,390 $248,672 $227,022 $195,068 $148,425 Total loans (net of unearned income) 328,798 299,807 264,285 240,602 195,202 168,164 Non-performing loans 3,417 2,269 1,337 730 755 424
The increase in charge-offs in 1995 and 1996 was primarily due to management's emphasis on improving the quality of the loan portfolio. Horizon Bank utilizes a ratings system whereby loans are grouped according to the identified risk in each credit. The rating is assigned initially by the account officer. A rating can be downgraded, as conditions warrant. A rating can be upgraded only by approval from the loan review department and the senior loan officer. Commercial and real estate loans utilize the a rating system numbering from 1 to 7. These loans are rated, grouped and the corresponding reserve amount is calculated. Unfunded loans and lines-of-credit also utilize the same numbering system. Installment loans utilize the rating system whereby loans are grouped based on past due status and the corresponding reserve amount is calculated. - 61 - 65 The sum total of all the required reserves for commercial loans, real estate loans, unfunded loans, lines-of-credit and installment loans are then compared against the book balance of loan loss reserve and any excess/shortage is identified. Horizon performs this analysis on a monthly basis utilizing internal guidelines, as well as taking into account the requirements set forth in Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure ("SFAS 118").
PROJECTED 1998 CHARGE-OFFS ALLOCATION OF PROJECTED CHARGE-OFFS -------------------------- ----------------------------------- Average loans projected for 1998 $365,000,000 Commercial $228,250 Charge-off rate 0.25% of average loans Real Estate 182,600 Total projected charge-offs $913,000 Installment 502,150
DEPOSITS The following table shows, for each type of deposit, the average amount and the average rate paid on each type of deposit for the years ended December 31, 1996 and 1995.
DECEMBER 31, ---------------------------------------------------------------------------- 1996 1995 ---------------------------------- -------------------------------- (dollars in thousands) AVERAGE INTEREST AVERAGE INTEREST BALANCE EXPENSE RATE BALANCE EXPENSE RATE -------- ------- ---- ------- ------- ---- Non-interest-bearing demand deposits $ 44,946 $ -- --% $ 42,081 $ -- --% Interest-bearing demand deposits 98,795 2,764 2.80 73,524 1,721 2.34 Savings deposits 30,239 742 2.45 30,393 819 2.69 Time deposits 247,828 13,654 5.51 237,998 13,433 5.64 -------- ------- -------- ------- $421,808 $17,160 4.07% $383,996 $15,973 4.16% ======== ======= ======== =======
The following table sets forth the amount of Horizon's time deposits of $100,000 or more by time remaining until maturity at December 31, 1996:
DECEMBER 31, 1996 ----------------- (dollars in thousands) Three months or less $21,140 Over three through six months 20,465 Over six through twelve months 10,797 Over twelve months 10,108 ------- $62,510 =======
- 62 - 66 As presented in the table above, average deposits increased $62,733,000, or 17.47%, from December 31, 1994 to December 31, 1996. The primary growth areas were interest-bearing demand deposits and time deposits. Interest-bearing demand deposits grew mainly due to Horizon's offering of two different account packages that had higher interest rates and more restrictions on withdrawals. Time deposits grew because Horizon offered several new certificate of deposit products at rates higher than in previous years. Overall, the effect of the 300-basis-point rise and fall in rates experienced during the last interest rate cycle can be seen in the increased cost of deposits from December 31, 1994 to December 31, 1996. Despite this rise in the cost of funds, Horizon maintained its net yield on interest-earning assets at 4.17% or above. This was accomplished through more effective asset/liability management and Horizon's focus on higher yield commercial loan products. The maturity of time deposits over $100,000 presented above is indicative of Horizon's liability-sensitive balance sheet position, with 83.83% of the large time deposits maturing or repricing within twelve months. Horizon manages its liability sensitive position through short term borrowing and access to available for sale investment securities. RETURN ON EQUITY AND ASSETS The following are certain selected ratios of Horizon as of December 31, 1996, 1995 and 1994 used in analyzing performance of banks and bank holding companies.
1996 1995 1994 -------- -------- -------- Return on average assets: Net Income $ 5,427 $ 3,542 $ 4,576 Average Assets 491,401 442,348 413,391 -------- -------- -------- 1.10% .80% 1.11% ======== ======== ======== Return on average equity: Net Income 5,427 3,542 4,576 Average Equity 37,681 33,902 29,349 -------- -------- -------- 14.40% 10.45% 15.59% ======== ======== ======== Dividend payout ratio: Dividend per share 1.01 .45 .03 Average Equity 9.04 5.89 7.73 -------- -------- -------- 11.17% 7.64% .39% ======== ======== ======== Equity to assets ratio: Average Equity 37,681 33,902 29,349 Average Assets 491,401 442,348 413,391 -------- -------- -------- 7.67% 7.66% 7.10% ======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996 The following discussion and analysis is intended to review the significant factors affecting the financial condition and results of operations of Horizon for the three years ended December 31, 1996. It provides a more comprehensive review that is not otherwise apparent from the financial statements alone. Reference should be made to those statements and the selected financial data presented elsewhere herein for an understanding of the following review. NET INCOME ANALYSIS. Horizon's net income for 1996 was $5,427,000, as compared to - 63 - 67 net income of $3,542,000 for 1995, and $4,576,000 for 1994. Net interest income grew $1,953,000 in 1996 which was offset by a $366,000 increase in provision for possible loan losses. Non-interest income also increased from 1995 to 1996 by $759,000, and non-interest expense declined $157,000 over the same period. The decrease in net income between 1994 and 1995 can partly be attributed to a decrease of $149,000 in net interest income, and the $45,000 decrease in non-interest income, however, the primary cause for the decline is the increase in non-interest expenses of $1,259,000. The increase in non-interest expenses relates to merger expenses (both one-time expenses and capitalized costs) incurred for the reorganization undertaken during 1995. NET INTEREST INCOME. Net interest income represents the difference between interest earned on loans, securities and other earning assets, and the interest expense on deposits and other borrowings used to fund them. Net interest income is the principal source of earnings for Horizon. The Bank's net interest income increased 12.30% to $17,826,000 during 1996 after a decrease of 0.93% in 1995 and an increase of 14.47% in 1994. These fluctuations are attributable to Horizon's liability sensitive balance sheet. Changes in interest rates and the mix of interest-earning assets and interest-bearing liabilities are prominent factors affecting net interest income. Another important factor is the ratio of interest-bearing liabilities to interest-earning assets, which was 87.70%, 87.10% and 87.38% in 1996, 1995 and 1994, respectively. Horizon's net interest rate spread equals the excess of the yield on interest-earning assets over the interest-bearing liabilities. The Bank's net interest rate spread was 3.65% in 1996 as compared to 3.55% and 4.10% in 1995 and 1994, respectively. The net yield on average earning assets equals the net interest income divided by average earning assets. The net yield on interest-earning assets was 4.21% in 1996 as compared to 4.17% and 4.56% in 1995 and 1994, respectively. A summary of Horizon's net interest rate spread, net yield on interest-earning assets and net interest income follows, presented on a fully tax-equivalent basis.
1996 1995 1994 ---- ---- ---- (dollars in thousands) Net interest rate spread 3.65% 3.55% 4.10% Net yield on interest-earning assets 4.21 4.17 4.56 Net interest income $19,489 $17,381 $17,609
Horizon has experienced a liability-sensitive balance sheet for the past several years. This accounts for the decrease in net interest spread from 1994 to 1995 when the markets experienced a 300 basis point rise and fall in interest rates before stabilizing in early 1996. In an effort to actively mitigate the effects of interest rate cycles, Horizon began to restructure the balance sheet by targeting growth in savings accounts and demand deposits (interest-bearing and non-interest-bearing), which are historically lower costing liabilities. As part of this asset reallocation, Horizon also increased its position in adjustable rate securities and adjustable rate loans. The effects of this restructuring can be seen in the increase in net interest rate spread from 1995 to 1996. - 64 - 68 PROVISION FOR LOAN LOSSES. The provision for possible loan losses charged to expense was $1,241,000 in 1996 compared to $875,000 in 1995 and $695,000 in 1994. The provision for loan losses is maintained at a level considered adequate to cover potential losses that are anticipated based on past loss experience, past due trends, economic conditions, portfolio trends, areas with a concentration of credit, information about a specific borrower including their financial position and collateral values, and other factors that are subject to change over time. Specific allocations can be made to the allowance as warranted on any loan, as determined by management. The following table includes ratios that describe trends in the allowance for possible loan losses during the three years ending:
DECEMBER 31, ------------ 1996 1995 1994 ---- ---- ---- Non-Performing Loans/Loans 0.76% 0.51% 0.30% Allowance For Possible Loans Losses/Loans 1.41 1.56 1.76 Allowance For Possible Loan Losses/Non- Performing Loans 186.25 307.93 581.64 Net Charge-offs/Average Loans 0.40 0.40 0.12
The table above summarizes Horizon's non-performing loan trends. The increase in non-performing loans is a result of management's aggressive approach to the identification of problem credits netted with the moderate increase in the allowance. Net charge-offs as a percentage of average loans remained steady at 0.40% in 1996 and 1995 due to increased charge-offs offset by increased average loans. Horizon has an internal loan review committee whose function whose duties include review of existing and new loans and analysis of the portfolio to determine adequacy of loan loss reserve. Horizon takes into account the effects of SFAS 114 and SFAS 118, which require that loans considered to be impaired be reduced to the present value of expected future cash flows or to the fair value of collateral. The driving forces behind the annual provision are: (i) Horizon's desired reserve ratio (loan loss reserve to net loans); and (ii) the actual and projected charge-offs Horizon has experienced. Based upon its analysis, management believes the allowance for loan losses was adequate at September 30, 1997 to cover future possible loan losses. NON-INTEREST INCOME. Non-interest income includes service charges on deposit accounts, security gains/(losses), trust fees, income from subsidiaries and other commissions and fees. Horizon's 1996 non-interest income was $4,052,000, an increase of $759,000 over 1995 results, which was a decrease of $45,000 from 1994 results. The ratio of non-interest income to average total assets was .82%, .74% and .81% for the years ended December 31, 1996, 1995 and 1994, respectively. The primary factor behind the decrease from 1994 to 1995 relates to the merger during July 1995 in which Horizon consolidated four banks into one financial institution. In an effort to enhance customer satisfaction, Horizon reduced or waived most service charges (from July 1 through October 1, 1995) to mitigate the merger effects on the customer. - 65 - 69 NON-INTEREST EXPENSE. Non-interest expense includes salaries and employee benefits, occupancy and equipment expense and other operating expenses. Horizon Bank's non-interest expense decreased 1.14% in 1996 to $13,587,000 as compared to increases of 10.09% in 1995 and 21.84% in 1994. For the years ended December 31, 1996, 1995 and 1994, Horizon Bank's ratio of non-interest expense to average total assets was 2.77%, 3.11% and 3.02%, respectively. Salaries and benefits, which account for almost half of total non-interest expenses, decreased $5,052 in 1996, increased $748,201 in 1995 and increased $1,310,575 in 1994. The decline in 1996 is a result of the merger, which consolidated operations and thus reduced staffing. The increases in 1994 and 1995 are due to increased staffing needs and the acquisition of Grant County Bank on January 3, 1994. INCOME TAXES. Horizon recorded income tax expense of $1,622,000 for 1996, $1,005,000 for 1995 and $1,604,000 for 1994. The ratio of income tax expense to pre-tax income was 23.01%, 22.09% and 25.95% for the years ended December 31, 1996, 1995 and 1994 respectively. The fluctuations were primarily due to changes in pretax income. Horizon reduces federal and state income tax expense through investments in tax exempt securities. Historically, Horizon has earned a higher fully tax-equivalent yield on tax exempt investments than on taxable securities. The presence of the alternative minimum tax effectively limits Horizon's tax exempt investments to certain desired levels. Horizon adopted Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes ("SFAS 109") on January 1, 1993. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS. Horizon adopted SFAS 115 on January 1, 1994 and SFAS 114 and SFAS 118 on January 1, 1995. LIQUIDITY AND INTEREST RATE SENSITIVITY. The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest-earning assets and interest-bearing liabilities. The matching of assets and liabilities may be examined by analyzing a financial institution's interest rate sensitivity "gap." An asset or liability is considered interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within the same time period. A positive gap reflects an asset-sensitive balance sheet position, while a negative gap reflects a liability-sensitive balance sheet position. During a period of rising interest rates, a negative gap position would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income, while a positive gap position would tend to adversely affect net interest income. Liquidity management involves the ability to meet the cash flow requirements of deposits made or withdrawn and loans originated or paid off. Horizon's gap position is illustrated in tables below. - 66 - 70
SEPTEMBER 30, 1997 --------------------------------------------------------------------- OVER OVER 3 MONTHS 1 YEAR 3 MONTHS THROUGH 12 THROUGH AFTER OR LESS MONTHS 5 YEARS 5 YEARS TOTAL --------- --------- -------- ------- -------- (dollars in thousands) Assets: Investment securities $ 59,879 $ 9,512 $ 71,134 $46,776 $187,301 Interest-earning deposits 3,106 3,106 Loans, net of unearned discount 50,990 49,526 177,998 50,284 328,798 --------- --------- -------- ------- -------- Total interest-sensitive assets 113,975 59,038 249,132 97,060 519,205 --------- --------- -------- ------- -------- Liabilities: Fed funds purchased 6,285 6,285 Regular money market deposits 34,001 34,001 Savings 92,827 92,827 NOW accounts 62,591 62,591 Time deposits 55,533 128,019 39,210 296 223,058 Short-term borrowings 2,520 615 27,342 10 30,487 --------- --------- -------- ------- -------- Total interest-sensitive liabilities 253,757 128,634 66,552 306 449,249 --------- --------- -------- ------- -------- Interest-sensitivity gap at September 30, 1997: Incremental $(139,782) $ (69,596) $182,580 $96,754 $ 69,956 ========= ========= ======== ======= ======== Cumulative $(139,782) $(209,378) $(26,798) $69,956 ========= ========= ======== =======
- 67 - 71
DECEMBER 31, 1996 --------------------------------------------------------------------- OVER OVER 3 MONTHS 1 YEAR 3 MONTHS THROUGH 12 THROUGH AFTER OR LESS MONTHS 5 YEARS 5 YEARS TOTAL --------- --------- -------- ------- -------- (dollars in thousands) Assets: Investment securities $ 38,474 $ 13,321 $ 70,226 $44,410 $166,431 Loans, net of unearned discount 47,659 56,589 153,954 41,605 299,807 Federal funds sold 10,381 10,381 --------- --------- -------- ------- -------- Total interest-sensitive assets 96,514 69,910 224,180 86,015 476,619 --------- --------- -------- ------- -------- Liabilities: Regular money market deposits 42,004 42,004 Savings 42,806 42,806 NOW accounts 63,259 63,259 Time deposits 73,969 116,732 296 246,464 Short-term borrowings 12,048 24,756 Note payable 2,386 2,386 --------- --------- -------- ------- -------- Total interest-sensitive liabilities 234,086 116,732 68,175 2,682 421,675 --------- --------- -------- ------- -------- Interest-sensitivity gap at December 31, 1996: Incremental $(137,572) $ (46,822) $156,005 $83,333 $ 54,944 ========= ========= ======== ======= ======== Cumulative $(137,572) $(184,394) $(28,389) $54,944 ========= ========= ======== =======
CAPITAL ADEQUACY. Risk-based capital guidelines for financial institutions were adopted by regulatory authorities effective January 1, 1991. These guidelines were designed to relate regulatory capital requirements to the risk profile of the specific institutions and to provide for uniform requirements among the various regulators. Currently the risk-based capital guidelines require Horizon to meet a minimum total capital ratio of 8% of which at least 4% must consist of Tier 1 capital. Tier 1 capital generally consists of: (a) common shareholders' and equity; (b) qualifying perpetual preferred stock and related surplus subject to certain limitations specified by the FDIC; and (c) minority interests in the equity accounts of consolidated securities less goodwill and any other intangible assets and investments in subsidiaries that the FDIC determines should be deducted from Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3%, defined as the ratio of Tier 1 capital less purchased mortgage servicing rights to total assets, for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations. The following table summarizes Horizon's risk-based capital and leverage ratios:
RISK-BASED TOTAL RISK-BASED TIER 1 CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO ------------- ------------- -------------- December 31, Actual Required Actual Required Actual Required ----------- ------ -------- ------ -------- ------ -------- 1996 12.23% 8.00% 7.45% 4.00% 11.01% 3.00% 1995 13.59 8.00 7.76 4.00 12.34 3.00 1994 11.75 8.00 6.60 4.00 10.49 3.00
RISK MANAGEMENT. Horizon's management objective in structuring the balance sheet is to maximize the return on shareholders' equity while minimizing the associated risks. The major risks involved in the banking industry are market, credit and liquidity risks. The following is a discussion of Horizon's management of these risks. Market Risk Management. Horizon's management believes its loan and ----------------------- investment portfolios are sufficiently diversified to minimize the effect of a downturn in any - 68 - 72 particular industry or market. Horizon does not have any particular concentration of credit in any one economic sector. The bank did have $169,417,000 or 56.5% of its loan portfolio, net of unearned discount, concentrated and secured by real estate as of December 31, 1996. Of the loans secured by real estate $98,441,0000 or 32.8% of total loans were secured by one to four family residential mortgages. The commercial loan portfolio which includes loans made primarily to businesses located and served by Horizon Bank, is generally secured by business assets such as real estate, inventory, accounts receivable, and equipment, comprised $55,618,000 or 18.6% of the total loan portfolio, net of unearned discount, as of the end of 1996. Consumer loans as of December 31, 1996 totaled $74,772,000 or 24.9% of the loan portfolio, net of unearned discount. At December 31, 1996 the total investment portfolio was $166,431,000, a decrease of 1.9% from the same period in 1995. At December 31, 1996 and 1995, approximately 75.0% of the portfolio was comprised of U.S. Treasury securities, U.S. government agencies or corporate (including Freddie Mac, Fannie Mae and Ginnie Mae) issues. Credit Risk Management. Management of the risks Horizon assumes ----------------------- in providing credit products to customers is fundamental to its business operation. Credit risk management includes defining an acceptable level of risk and return, establishing policies and procedures to govern the credit process and maintaining a thorough portfolio review function. Of equal importance in this risk management process are the ongoing, monitoring procedures performed by management. Non-performing loans increased to 0.76% at December 31, 1996 from 0.51% and 0.30% at December 31, 1995 and 1994, respectively. This increase in non-performing loans is a result of management's increased emphasis on improving the banks overall credit quality in both 1995 and 1996, in part by the aggressive identification of problem credits. Other real estate owned by Horizon as a result of foreclosure transactions was $1,503,000 at December 31, 1996 compared to $923,000 and $1,035,000 at December 31, 1995 and 1994, respectively. Fluctuations in other real estate owned is due to more aggressive identification and time of disposition of foreclosed properties. Liquidity Risk Management. Liquidity is a measurement of -------------------------- Horizon's ability to meet the borrowing needs and the deposit withdrawal requirements of its customers. Horizon actively manages the composition of its assets and liabilities to maintain the appropriate level of liquidity in the balance sheet. Management is guided by regularly reviewed policies when determining the appropriate portion of total assets that should be comprised of readily marketable assets available to meet future liquidity needs. EFFECT OF INFLATION. Persistent high rates of inflation can have a significant effect on the reported financial condition and results of operations of all industries. However, the asset and liability structure of commercial banks is substantially different from that of an industrial company in that virtually all assets and liabilities of commercial banks are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a commercial bank's performance. Interest rates do no necessarily move in the same direction or in the same magnitude as the prices of goods and services. Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity - 69 - 73 to assets ratio. One of the most important effects that inflation has had on the commercial banking industry is to reduce the proportion of earnings paid out in the form of dividends. Interest rates in particular are significantly affected by inflation but neither the timing nor the magnitude of the changes coincide with changes in standard measurements of inflation such as the consumer price index. Additionally, the effect of changes in interest rates on some kinds of consumer deposits may be delayed. These factors in turn affect the composition of sources of funds by reducing the growth of deposits that are less interest sensitive and increasing the need for funds that are more interest sensitive. CASH FLOWS. As shown in the consolidated statements of cash flows for the three years ended December 31, 1996 and the nine months ended September 30, 1996 and 1997, Horizon's net cash flows exceeded net income for all time periods shown except 1994. Management expects this trend to continue for the foreseeable future. The December 31, 1994 statement of cash flows shows a sizable increase in deposits; however, this increase is due to the Grant County Bank acquisition on January 3, 1994, which included $44,449,000 in deposits. The December 31, 1994 statement of cash flows was also influenced by the $16,059,000 in loans and $26,872,000 in securities from the Grant County Bank acquisition. Net of these acquisition effects, the statement of cash flow for the year ended December 31, 1994 appears consistent with the later time periods presented. The change in other operating assets was influenced by the increase in prepaids due to branch expansions that are currently under construction and not yet capitalized. The increase in loans and securities has been funded primarily through growth in deposits and wholesale funding. Horizon continues to focus growth efforts on demand deposits and other low-cost liabilities while making use of wholesale funding to create arbitrages that leverage the bank with little or no increase in risk. Loan growth that exceeds deposit growth is funded by a decrease in securities. Cash and cash equivalents continues to rise each year as Horizon proactively manages its balance sheet. Horizon is vigilant in its effort to meet its customers' loan funding and deposit withdrawal requirements. Also, Horizon continues to monitor its interest rate risk position, which is influenced by total cash and cash equivalents. Horizon has no planned significant capital outlays that would place a burden on its cash flows. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 The following discussion focuses on the consolidated financial condition of Horizon Bancorp at September 30, 1997 and the consolidated results of operations for the nine months ended September 30, 1997 compared to the same period in 1996. This discussion should be read in conjunction with the interim condensed consolidated financial statements and notes thereto. NET INCOME ANALYSIS. Net income for the nine-month period ended September 30, 1997 was $5,088,000 as compared to $4,294,000 for the same period in 1996. Net interest income increased - 70 - 74 $1,739,000, or 13.24%, for the nine months ended September 30, 1997, compared to the same period in 1996. The net yield on average earning assets at September 30, 1997 was 4.20%, compared to a net yield of 4.21% for the same period in 1996. PROVISION FOR LOAN LOSSES. The provision for possible loan losses charged to expense was $811,002 for the first nine months of 1997 compared to $900,435 through September 30, 1996. Non-performing loans over the same time periods were 1.04% and 0.84%, respectively. Net charge-offs as a percentage of average loans improved slightly to 0.18% at September 30, 1997 from 0.24% at September 30, 1996. NON-INTEREST INCOME. Non-interest income experienced 2.37% growth for the nine months ended September 30, 1997 over September 30, 1996 results increasing from $3,005,000 at September 30, 1996 to $3,076,000 at September 30, 1997. Non-interest expense experienced a 10.11% growth from September 30, 1996 to the September 30, 1997 level of $10,425,000. This increase primarily was due to higher salaries and employee benefits and other operating expenses. INCOME TAXES. Income tax expense through September 30, 1997 was $1,625,000 as compared to $1,477,000 for the same period in 1996. The fluctuation primarily was due to a change in pretax income. BALANCE SHEET ANALYSIS. Horizon's total assets increased $41,323,000, or 8.11%, from December 31, 1996 to September 30, 1997. The total assets increased $50,947,000, or 10.19%, from September 30, 1996 to September 30, 1997. Total assets at September 30, 1997 were $550,679,000 which is at or near a record level high for Horizon. Average assets for the nine-month periods ended September 30, 1997 and 1996 were $537,791,000 and $485,520,000, respectively. The growth in assets in 1997, as compared to December 31, 1996, was funded by: (i) a 14.71% increase in non-interest-bearing demand deposits; (ii) a 6.14% increase in interest-bearing liabilities; and (iii) a 12.32% increase in borrowed funds. The non-interest demand deposit account growth and interest-bearing liabilities growth represents the continuing concerted effort by Horizon Bank to re-align the balance sheet. The increase in borrowed funds is centered around arbitrage opportunities taken by Horizon Bank in 1997. Shareholders' equity increased due to net income through September 30, 1997 of $5,088,000 as well as the elimination of debt at the holding company level. The total book value of securities was $187,301,000 at September 30, 1997, which represents an increase of $20,869,000 from the book value at December 31, 1996. This growth was due to an increase in deposits/borrowed funds and modest loan growth. The fair value of securities improved relative to amortized cost during 1997. The remaining growth in assets occurred in the loan portfolio. As of September 30, 1997, loans, net of unearned discount, increased approximately $28,991,000, or 9.67%, since December 31, 1996. Management continues to seek loan growth provided underwriting standards are not compromised. Business development and marketing efforts have fueled the growth in residential/commercial real estate loans and commercial loans in general. As of September 30, 1997, real estate mortgage loans increased $22,389,000, or 13.29%, from December 31, 1996. Commercial loans also increased by $10,464,000, or 16.93%, during the nine months ended September 30, 1997. As of September 30, 1997 installment loans were down $4,114,000, or 7.56%, from December 31, 1996. This is reflective of more conservative underwriting standards in relation to indirect automobile lending. - 71 - 75 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of the Record Date the number of shares of Horizon Common Stock beneficially owned and the percentage of ownership of outstanding shares of Horizon Common Stock by (a) each director and executive officer of Horizon, (b) each person who is known by Horizon to own beneficially 5% or more of such stock and (c) all directors and executive officers of Horizon as a group:
BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER OWNED CLASS ---------------------------- ----- ----- Ross M. Whipple 307,809 48.65% Chairman, Chief Executive Officer and Director Horizon Bancorp, Inc. 84,755 13.39 Employee Stock Ownership and Savings Plan Joe C. Keith 14,140 2.24 Director Paul L. Offutt 8,870 1.40 Director Steve L. DeMott 5,168 President and Director Michael F. Lax 1,804 Director John A. Bryant 1,000 Kathie L. Bledsoe 346 Directors and Executive 339,137 53.60 Officers as a group (7 persons) - --------------------------- Less than 1% The business address for each of the beneficial owners listed is 526 Main Street, Suite 204, Arkadelphia, Arkansas 71923. Includes 304,102 shares owned by Whipple Family Ltd., a limited partnership of which Ross M. Whipple is managing general partner, 3,577 shares held by Merrill Lynch Pierce Fenner & Smith in an IRA for Mr. Whipple and 130 shares held by Stephens in an IRA for Mary M. Whipple. Includes 6,670 shares owned of record by Joe C. Keith, 4,430 shares owned by the Keith Family Trust, of which Mr. Keith is Trustee, 925 shares owned of record by Dorothy M. Keith, Mr. Keith's spouse, 2,015 shares owned by the Joe and Dorothy Keith Trust, of which Mr. Keith is a beneficiary. Includes 8,100 shares owned of record by Paul L. Offutt and 770 shares held in a heir-account for the benefit of Mr. Offutt. Includes 5,040 shares owned of record by Steve L. DeMott and 128 shares held by Stephens in an IRA for Mr. DeMott. Includes 707 shares held by Stephens in an IRA for Michael F. Lax and 616 shares held by Stephens in an IRA for Billie M. Lax, Mr. Lax's spouse. Such shares are owned jointly by John A. and Leonette T. Bryant. Includes 110 shares owned of record by Kathie L. Bledsoe and 236 shares held by Stephens in an IRA for Ms. Bledsoe.
For purposes of the above table, a person is deemed to be a beneficial owner of shares of Horizon Common Stock if the person has or shares the power to vote or to dispose of such shares. - 72 - 76 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. - 73 - 77 INFORMATION REGARDING MBI STOCK ------------------------------- DESCRIPTION OF MBI COMMON STOCK AND ATTACHED PREFERRED SHARE PURCHASE RIGHTS GENERAL. MBI has authorized 5,000,000 shares of MBI Preferred Stock, no par value, and 200,000,000 shares of MBI Common Stock, $0.01 par value. At September 30, 1997, MBI had no shares of MBI Preferred Stock issued and outstanding and 130,289,361 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 also is authorized to fix the number of shares and determine the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any series of MBI Preferred Stock. Except for the designation and reservation of Series A Junior Participating Preferred Stock pursuant to MBI's Preferred Share Purchase Rights Plan described below, MBI's Board of Directors has not acted to designate or issue any shares of MBI Preferred Stock. The existence of a substantial number of unissued and unreserved shares of MBI Common Stock and undesignated shares of MBI Preferred Stock may enable the Board of Directors to issue shares to such persons and in such manner as may be deemed to have an anti-takeover effect. The following summary of the terms of MBI's capital stock does not purport to be complete and is qualified in its entirety by reference to the applicable provisions of MBI's Restated Articles of Incorporation, as amended, and by-laws and Missouri law. DIVIDENDS. The holders of MBI Common Stock are entitled to share ratably in dividends when, as and if declared by the Board of Directors from funds legally available therefor, after full cumulative dividends have been paid or declared, and funds sufficient for the payment thereof set apart, on all series of MBI Preferred Stock ranking superior as to dividends to MBI Common Stock. The Board of Directors of MBI intends to maintain its present policy of paying quarterly cash dividends on MBI Common Stock, when justified by the financial condition of MBI and its subsidiaries. The declaration and amount of future dividends will depend on circumstances existing at the time, including MBI's earnings, financial condition and capital requirements as well as regulatory limitations, note and indenture provisions and such other factors as the Board of Directors may deem relevant. The payment of dividends to MBI by subsidiary banks is subject to extensive regulation by various state and federal regulatory agencies. See "SUPERVISION AND REGULATION." VOTING RIGHTS. Each holder of MBI Common Stock has one vote for each share held on matters presented for consideration by the shareholders, except that, in the election of directors, each shareholder has cumulative voting rights that entitle each such shareholder to the number of votes that equals the number of shares held by the shareholder multiplied by the number of directors to be elected. All such votes may be cast for one candidate for election as a director or may be distributed among two or more candidates. PREEMPTIVE RIGHTS. The holders of MBI Common Stock have no preemptive right to acquire any additional unissued shares or treasury shares of MBI. - 74 - 78 LIQUIDATION RIGHTS. In the event of liquidation, dissolution or winding up of MBI, whether voluntary or involuntary, the holders of MBI Common Stock will be entitled to share ratably in any of its assets or funds that are available for distribution to its shareholders after the satisfaction of its liabilities (or after adequate provision is made therefor) and after preferences on any outstanding MBI Preferred Stock. ASSESSMENT AND REDEMPTION. Shares of MBI Common Stock are and will be, when issued, fully paid and non-assessable. Such shares do not have any redemption provisions. PREFERRED SHARE PURCHASE RIGHTS PLAN. One preferred share purchase right is attached to each share of MBI Common Stock. The MBI Rights trade automatically with shares of MBI Common Stock, and become exercisable and will trade separately from the MBI Common Stock on the tenth day after public announcement that a person or group has acquired, or has the right to acquire, beneficial ownership of 20% or more of the outstanding shares of MBI Common Stock, or upon commencement or announcement of intent to make a tender offer for 20% or more of the outstanding shares of MBI Common Stock, in either case without prior written consent of the Board. When exercisable, each MBI Right will entitle the holder to buy 1/100 of a share of MBI Series A Junior Participating Preferred Stock at an exercise price of $100 per MBI Right. In the event a person or group acquires beneficial ownership of 20% or more of MBI Common Stock, holders of MBI Rights (other than the acquiring person or group) may purchase MBI Common Stock having a market value of twice the then current exercise price of each MBI Right. If MBI is acquired by any person or group after the Rights become exercisable, each MBI Right will entitle its holder to purchase stock of the acquiring company having a market value of twice the current exercise price of each MBI Right. The MBI Rights are designed to protect the interests of MBI and its shareholders against coercive takeover tactics. The purpose of the MBI Rights is to encourage potential acquirors to negotiate with MBI's Board of Directors prior to attempting a takeover and to give the Board leverage in negotiating on behalf of all shareholders the terms of any proposed takeover. The MBI Rights may deter certain takeover proposals. The MBI Rights, which can be redeemed by MBI's Board of Directors in certain circumstances, expire by their terms on June 3, 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 also may have the effect of decreasing the number of directors that could otherwise be elected at each annual meeting of shareholders by a person who obtains a controlling interest in the MBI Common Stock and thereby could impede a change in control of MBI. Because fewer directors will be elected at each annual meeting, such classification also will reduce the effectiveness of cumulative voting as a means of establishing or increasing minority representation on the Board of Directors. OTHER MATTERS. MBI's Restated Articles of Incorporation, as amended, and by-laws also contain provisions that: (i) require the affirmative vote of holders of at least 75% of the voting power of all of the shares of outstanding capital stock of MBI entitled to vote in the election of directors to remove a director or directors without cause; (ii) require the affirmative vote of the holders of at least 75% of the voting power of all shares of the outstanding capital stock of MBI to approve certain "business combinations" with "interested parties" unless at least two-thirds of the Board of Directors first approves such business combinations; and (iii) require an affirmative vote of at least 75% of the voting power of all shares of the outstanding capital stock of MBI for the amendment, alteration, change or repeal of any of the above provisions unless at least two-thirds of the Board of Directors first approves such an - 75 - 79 amendment, alteration, change or repeal. Such provisions may be deemed to have an anti-takeover effect. RESTRICTIONS ON RESALE OF MBI STOCK BY AFFILIATES Under Rule 145 of the Securities Act of 1933, as amended (the "Securities Act"), certain persons who receive MBI Common Stock pursuant to the Merger and who are deemed to be "affiliates" of Horizon 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 Horizon at the time the Merger is submitted to a vote of the shareholders of Horizon. Each affiliate of Horizon (generally any director or executive officer or shareholder of Horizon who beneficially owns a substantial number of outstanding shares of Horizon Common Stock) who desires to resell the MBI Common Stock received in the Merger must sell such stock either pursuant to an effective registration statement or in accordance with an applicable exemption, such as the applicable provisions of Rule 145(d) under the Securities Act. Rule 145(d) provides that persons deemed to be affiliates may resell their stock received in the Merger pursuant to certain of the requirements of Rule 144 under the Securities Act if such stock is sold within the first year after the receipt thereof. After one year if such person is not an affiliate of MBI and if MBI is current with respect to its required public filings, a former affiliate of Horizon may resell the stock received in the Merger without limitation. After two years from the issuance of the stock, if such person is not an affiliate of MBI at the time of sale and for at least three months prior to such sale, such person may resell such stock, without limitation, regardless of the status of MBI's required public filings. The shares of MBI Common Stock to be received by affiliates of Horizon in the Merger will be legended as to the restrictions imposed upon resale of such stock. Horizon has agreed to provide MBI with a list of those persons who may be deemed to be affiliates at the time of the Special Meeting. Horizon has agreed to use all reasonable efforts to cause each such person to deliver to MBI prior to the Effective Time a written agreement to the effect that no sale will be made of any shares of MBI Common Stock received in the Merger by an affiliate of MBI except in accordance with the Securities Act and until such time as MBI shall first publish the financial results of at least 30 days of post-merger combined operations of Horizon and MBI. The certificates of MBI Common Stock issued to affiliates of Horizon in the Merger may contain an appropriate restrictive legend, and appropriate stop transfer orders may be given to the transfer agent for such certificates. COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF MBI AND HORIZON MBI is incorporated under the laws of the State of Missouri, while Horizon is incorporated under the laws of the State of Arkansas. The rights of the shareholders of MBI are governed by MBI's Restated Articles of Incorporation, as amended, and by-laws and Chapter 351 of the Missouri Revised Statutes (the "Missouri Act"). The rights of Horizon shareholders are governed by Horizon's Articles of Incorporation and by-laws and by the Arkansas Act. The rights of Horizon shareholders who receive shares of MBI Common Stock in the Merger will thereafter be governed by MBI's Restated Articles of Incorporation, as amended, and by-laws and by the Missouri Act. The material rights of such shareholders, and, where applicable, the differences between the rights of MBI shareholders and Horizon shareholders, are summarized below. - 76 - 80 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. Horizon does not have a rights plan. SUPERMAJORITY PROVISIONS. MBI's Restated Articles of Incorporation, as amended, and MBI's by-laws contain provisions requiring a supermajority vote of the shareholders of MBI to approve certain proposals. Under both MBI's Restated Articles of Incorporation, as amended, and by-laws, removal by the shareholders of the entire Board of Directors or any individual director from office without cause requires the affirmative vote of not less than 75% of the total votes entitled to be voted at a meeting of shareholders called for the election of directors. Amendment by the shareholders of MBI's Restated Articles of Incorporation, as amended, or by-laws relating to (i) the number or qualification of directors; (ii) the classification of the Board of Directors; (iii) the filling of vacancies on the Board of Directors; or (iv) the removal of directors, requires the affirmative vote of not less than 75% of the total votes of MBI's then outstanding shares of capital stock entitled to vote, voting together as a single class, unless such amendment has previously been expressly approved by at least two-thirds of the Board of Directors. The Restated Articles of Incorporation, as amended, of MBI additionally provide that, in addition to any shareholder vote required under the Missouri Act, the affirmative vote of the holders of not less than 75% of the total votes to which all of the then outstanding shares of capital stock of MBI are entitled, voting together as a single class (the "Voting Stock"), shall be required for the approval of any Business Combination. A "Business Combination" is defined generally to include sales, exchanges, leases, transfers or other dispositions of assets, mergers or consolidations, issuances of securities, liquidations or dissolutions of MBI, reclassifications of securities or recapitalizations of MBI, involving MBI on the one hand, and an Interested Shareholder or an affiliate of an Interested Shareholder on the other hand. An "Interested Shareholder" is defined generally to include any person, firm, corporation or other entity which is the beneficial owner of 5% or more of the voting power of the outstanding Voting Stock. If, however, at least two-thirds of the Board of Directors of MBI approve the Business Combination, such Business Combination shall require only the vote of shareholders as provided by Missouri law or otherwise. The amendment of the provisions of MBI's Restated Articles relating to the approval of Business Combinations requires the affirmative vote of the holders of at least 75% of the Voting Stock unless such amendment has previously been approved by at least two-thirds of the Board of Directors. To the extent that a potential acquiror's strategy depends on the passage of proposals that require a supermajority vote of MBI's shareholders, such provisions requiring a supermajority vote may have the effect of discouraging takeover attempts that do not have Board approval by making passage of such proposals more difficult. Neither Horizon's Articles of Incorporation nor Horizon's by-laws require a supermajority vote of shareholders with respect to any item. VOTING FOR DIRECTORS. MBI's by-laws provide for cumulative voting in the election of directors. Cumulative voting entitles each shareholder to cast an aggregate number of votes equal to the number of voting shares held, multiplied by the number of directors to be elected. Each shareholder may cast all such votes for one nominee or distribute them among two or more nominees, thus permitting holders of less than a majority of the outstanding shares of voting stock to achieve board representation. Neither Horizon's Articles of Incorporation or by-laws provide for cumulative voting. CLASSIFIED BOARD. As described under "- Classification of Board of Directors," the Board of Directors of MBI is divided into three classes of directors, with each class being elected to a staggered three-year term. By reducing the number of directors to be elected in any given year, the - 77 - 81 existence of a classified Board diminishes the benefits of the cumulative voting rights to minority shareholders. Horizon does not have a classified Board of Directors. ANTI-TAKEOVER STATUTES. The Missouri Act contains certain provisions applicable to Missouri corporations such as MBI which may be deemed to have an anti-takeover effect. Such provisions include Missouri's business combination statute and the control share acquisition statute. The Missouri business combination statute protects domestic corporations after hostile takeovers by prohibiting certain transactions once an acquiror has gained control. The statute restricts certain "Business Combinations" between a corporation and an "Interested Shareholder" or affiliates of the Interested Shareholder for a period of five years unless certain conditions are met. A "Business Combination" includes a merger or consolidation, certain sales, leases, exchanges, pledges and similar dispositions of corporate assets or stock and certain reclassifications and recapitalizations. An "Interested Shareholder" includes any person or entity which beneficially owns or controls 20% or more of the outstanding voting shares of the corporation. During the initial five-year restricted period, no Business Combination may occur unless such Business Combination or the transaction in which an Interested Shareholder becomes "interested" (the "Acquisition Transaction") was approved by the board of directors of the corporation on or before the date of the Acquisition Transaction. Business Combinations may occur after the five-year period following the Acquisition Transaction only if: (i) prior to the stock acquisition by the Interested Shareholder, the board of directors approves the transaction in which the Interested Shareholder became an Interested Shareholder or approves the Business Combination in question; (ii) the holders of a majority of the outstanding voting stock, other than stock owned by the Interested Shareholder, approve the Business Combination; or (iii) the Business Combination satisfies certain detailed fairness and procedural requirements. The Missouri Act exempts from its provisions: (i) corporations not having a class of voting stock registered under Section 12 of the Exchange Act; (ii) corporations which adopt provisions in their articles of incorporation or by-laws expressly electing not to be covered by the statute; and (iii) certain circumstances in which a shareholder inadvertently becomes an Interested Shareholder. MBI's Restated Articles of Incorporation and by-laws do not contain an election to "opt out" of the Missouri business combination statute. The Missouri Act also contains a "Control Share Acquisition Statute" which provides that an "Acquiring Person" who after any acquisition of shares of a publicly traded corporation has the voting power, when added to all shares of the same corporation previously owned or controlled by the Acquiring Person, to exercise or direct the exercise of: (i) 20% but less than 33 1/3%, (ii) 33 1/3% or more but less than a majority or (iii) a majority, of the voting power of outstanding stock of such corporation, must obtain shareholder approval for the purchase of the "Control Shares." If approval is not given, the Acquiring Person's shares lose the right to vote. The statute prohibits an Acquiring Person from voting its shares unless certain disclosure requirements are met and the retention or restoration of voting rights is approved by both: (i) a majority of the outstanding voting stock, and (ii) a majority of the outstanding voting stock after exclusion of "Interested Shares." Interested Shares are defined as shares owned by the Acquiring Person, by directors who are also employees, and by officers of the corporation. Shareholders are given dissenters' rights with respect to the vote on Control Share Acquisitions and may demand payment of the fair value of their shares. - 78 - 82 A number of acquisitions of shares are deemed not to constitute Control Share Acquisitions, including good faith gifts, transfers pursuant to wills, purchases pursuant to an issuance by the corporation, mergers involving the corporation which satisfy the other requirements of the Missouri Act, transactions with a person who owned a majority of the voting power of the corporation within the prior year, or purchases from a person who has previously satisfied the provisions of the Control Share Acquisition Statute so long as the transaction does not result in the purchasing party having voting power after the purchase in a percentage range (such ranges are as set forth in the immediately preceding paragraph) beyond the range for which the selling party previously satisfied the provisions of the statute. Additionally, a corporation may exempt itself from application of the statute by inserting a provision in its articles of incorporation or by-laws expressly electing not to be covered by the statute. MBI's Restated Articles of Incorporation and by-laws do not contain an election to "opt out" of the Control Share Acquisition Statute. The Arkansas Act does include an anti-takeover statute; however, the provisions of such antitake-over statute are not applicable to the Merger. DISSENTERS' RIGHTS. Under both Section 351.455 of the Missouri Act and Section 4-27-1302 of the Arkansas 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. The provisions of the Arkansas Act are applicable to the shareholders of Horizon, the complete text of which is attached hereto as Annex B. ------- SHAREHOLDERS' RIGHT TO INSPECT. Under Section 351.215 of the Missouri Act, any shareholder of MBI may inspect the corporation's books and records for any reasonable and proper purpose. Such inspection may be made at any reasonable time or times. Shareholders of Horizon have similar rights under Section 4-27-1602 of the Arkansas Act. SIZE OF BOARD OF DIRECTORS. As permitted under the Missouri Act, the number of directors on the Board of Directors of MBI is set forth in MBI's by-laws, which provide that the number of directors may be fixed from time to time at not less than 12 nor more than 24 by an amendment of the by-laws or by a resolution of the Board of Directors, in either case, adopted by the vote or consent of at least two-thirds of the number of directors then authorized under the by-laws. MBI's Board of Directors currently has twelve (12) members. Horizon's Board of Directors currently has five 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. - 79 - 83 SUPERVISION AND REGULATION -------------------------- GENERAL As a bank holding company, MBI is subject to regulation under the BHCA and its examination and reporting requirements. Under the BHCA, a bank holding company may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank or savings and loan association, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. MBI and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of MBI's subsidiaries, and therefore the earnings of MBI, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board, the Office of Thrift Supervision, 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 - 80 - 84 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. 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 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. As of January 1, 1996, the SAIF had not reached the designated reserve ratio. 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. The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted on September 30, 1996, required the FDIC to take immediate steps to recapitalize the SAIF and to change the basis on which funds are raised to make the scheduled payments on the FICO bonds issued in 1987 to replenish the Federal Savings and Loan Insurance Corporation. The new legislation, combined with regulations issued by the FDIC immediately after enactment of the Funds Act, provides for the following: (i) A special assessment in the amount of 65.7 basis points on SAIF-insured deposits held by depository institutions on March 31, 1995 (the special assessment was required by the Funds Act to recapitalize the SAIF to the designated reserve ratio of 1.25 percent of the deposits insured by SAIF). Payments of this assessment were made in November 1996, but were accrued by financial institutions in the third calendar quarter of 1996. Institutions such as MBI that have deposits insured by both the BIF and the SAIF ("Oakar Banks") were required to pay the special assessment on 80% of their - 81 - 85 "adjusted attributable deposit amounts" ("AADA"). In addition, for purposes of future regular deposit insurance assessments, the AADA on which Oakar Banks pay assessments to SAIF was also reduced by 20%. (ii) Commencing January 1, 1997, BIF insured institutions will be responsible for a portion of the annual carrying costs of the FICO bonds. Such institutions will be assessed at 80% of the rate applicable to SAIF-insured institutions until December 31, 1999. Additionally, pursuant to the Funds Act, if the reserves in BIF at the end of any semiannual assessment period exceed 1.25% of insured deposits, the FDIC is required to refund the excess to the BIF-insured institutions. (iii) The merger of the BIF and the SAIF on January 1, 1999 to create the Deposit Insurance Fund, but only if no more savings associations are in existence at that time. The Deposit Act also directs the Secretary of the Treasury to conduct a study and submit recommendations to Congress regarding the establishment of a common charter for depository institutions. PROPOSALS TO OVERHAUL THE SAVINGS ASSOCIATION INDUSTRY Proposals have been introduced in the U.S. Congress that, if adopted, would overhaul the savings association industry. The most significant of these proposals would merge the Comptroller and the OTS, abolish the federal savings association charter and require federal thrifts to convert to commercial banks. MBI cannot predict whether these or any other legislative proposals will be enacted, or, if enacted, the final form of the law. SUPPORT OF SUBSIDIARY BANKS Under Federal Reserve Board policy, MBI is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each of the subsidiaries in circumstances where it might not choose to do so absent such a policy. This support may be required at times when MBI may not find itself able to provide it. In addition, any capital loans by MBI to any of its subsidiaries would also be subordinate in right of payment to deposits and certain other indebtedness of such subsidiary. Consistent with this policy regarding bank holding companies serving as a source of financial strength for their subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the bank holding company's capital needs, asset quality and overall financial condition. FIRREA AND FDICIA 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 - 82 - 86 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 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. - 83 - 87 THE INTERSTATE BANKING AND COMMUNITY DEVELOPMENT LEGISLATION In September 1994, legislation was enacted that is expected to have a continued 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 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 is to permit MBI to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Missouri. Overall, 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, 1996 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements, review and consultation regarding filings with the Commission and other regulatory authorities and consultation on financial accounting and reporting matters. Moore Stephens Frost served as Horizon's independent accountants for the year ended December 31, 1996 and continues to serve in such capacity. Services provided in connection with the audit function included examination of the annual consolidated financial statements and consultation on financial accounting and reporting matters. Deloitte & Touche LLP served as Horizon's independent accountants for the years ended December 31, 1995 and 1994. Services provided in connection with the audit function included examination of the annual consolidated financial statements and consultation on financial accounting and reporting matters. LEGAL MATTERS ------------- Certain legal matters will be passed upon for MBI by Thompson Coburn, St. Louis, Missouri and for Horizon by Horne, Hollingsworth & Parker, Little Rock, Arkansas. EXPERTS ------- The consolidated financial statements of MBI as of December 31, 1996, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1996, incorporated by reference in MBI's Annual Report on Form 10-K, and the supplemental consolidated financial statements of - 84 - 88 Mercantile Bancorporation Inc. as of December 31, 1996, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1996, contained in MBI's Current Report on Form 8-K dated May 13, 1997 (as amended by Form 8-K/A dated May 22, 1997), have been incorporated by reference herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Horizon as of December 31, 1996 and for the year then ended have been included herein in reliance upon the report of Moore Stephens Frost, independent certified public accountants, whose report is included herein, and upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Horizon as of December 31, 1995 and 1994, and for the years then ended included in this Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Roosevelt as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996, incorporated by reference in MBI's Current Report on Form 8-K, dated July 1, 1997, have been incorporated herein in reliance upon the reports of KPMG Peat Marwick LLP, independent accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. OTHER MATTERS ------------- The Board of Directors of Horizon, at the date hereof, is not aware of any business to be presented at the Special Meeting other than that referred to in the Notice of Special Meeting and discussed herein. If any other matter should properly come before the Special Meeting, the persons named as proxies will have discretionary authority to vote the shares represented by proxies in accordance with their discretion and judgment as to the best interests of Horizon. SHAREHOLDER PROPOSALS --------------------- If the Merger is approved, the other conditions to the Merger are satisfied and the Merger is consummated, shareholders of Horizon will become shareholders of MBI at the Effective Time. MBI shareholders may submit to MBI proposals for formal consideration at the annual meeting of MBI's shareholders and inclusion in MBI's proxy statement for such meeting. All proposals for the 1998 annual meeting of MBI's shareholders must have been received in writing by the Corporate Secretary at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by November 22, 1997. All proposals for the 1999 annual meeting of MBI's shareholders must be received in writing by the Corporate Secretary at Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524 by ___________, 1998. - 85 - 89 CONSOLIDATED FINANCIAL STATEMENTS INDEX -----
Page ---- REPORT OF INDEPENDENT AUDITORS - MOORE STEPHENS FROST F-1 REPORT OF INDEPENDENT AUDITORS - DELOITTE & TOUCHE, LLP F-2 CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995 F-3 CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 F-4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-21
- 86 - 90 [Letterhead of Moore Stephens Frost] INDEPENDENT AUDITOR'S REPORT ---------------------------- Board of Directors Horizon Bancorp, Inc. Arkadelphia, Arkansas We have audited the accompanying consolidated balance sheet of HORIZON BANCORP, INC. AND SUBSIDIARIES as of December 31, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's 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 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 consolidated 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 HORIZON BANCORP, INC. AND SUBSIDIARIES as of December 31, 1996, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Moore Stephens Frost Certified Public Accountants Little Rock, Arkansas February 28, 1997 F-1 91 [Letterhead of Deloitte & Touche LLP, Little Rock, Arkansas] INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors of Horizon Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Horizon Bancorp, Inc. (former Central Arkansas Bancshares, Inc.) and its subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Horizon Bancorp, Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP March 6, 1996 F-2 92 HORIZON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995
DECEMBER 31, SEPT. 30, -------------------------------- 1997 1996 1995 ----------- ---- ---- (Unaudited) ASSETS - ------ Cash and due from banks $ 11,036,152 $ 14,231,320 $ 15,610,173 Federal funds sold 3,106,417 10,381,438 2,705,000 Investment securities Available for sale, at fair value (cost of $172,231,920, $147,918,021 and $142,982,622, respectively) 172,811,273 147,662,833 143,988,279 Held-to-maturity, at cost (fair value of $14,573,487, $18,675,008 and $25,809,149, respectively) 14,489,760 18,768,604 25,742,786 ------------ ------------ ------------ Total Investment Securities 187,301,033 166,431,437 169,731,065 Net loans 324,318,968 295,580,345 260,167,463 Bank premises and equipment 10,542,148 11,232,112 11,089,990 Other assets Accrued interest receivable 5,066,194 4,305,249 4,263,584 Other investments 3,050,000 2,951,200 2,248,100 Other real estate 934,706 807,342 216,022 Other 5,322,937 3,435,062 3,121,318 Total Other Assets 14,373,837 11,498,853 9,849,024 ------------ ------------ ------------ Total Assets $550,678,555 $509,355,505 $469,152,715 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Deposits $470,385,496 $439,535,350 $417,908,190 Borrowed funds 30,486,668 27,142,346 12,413,072 Accrued expenses and other liabilities 3,060,244 3,373,180 3,141,333 ------------ ------------ ------------ Total Liabilities 503,932,406 470,050,876 433,462,595 ------------ ------------ ------------ Shareholders' equity: Common stock, $1 par value: 666,240 shares authorized and issued at September 30, 1997 and December 31, 1996, 66,624 shares authorized and issued in 1995 666,240 666,240 66,624 Surplus 12,372,017 11,566,234 12,159,109 Reduction for ESOP loan guaranty -- (374,940) (594,940) Retained earnings 35,224,106 30,648,726 25,830,769 Unrealized gain (loss) on investment securities, net of deferred income taxes (benefit) of $196,980 in 1997, $(97,734) in 1996 and $341,923 in 1995 382,373 (157,445) 663,734 Treasury stock, at cost, 33,497 shares at September 30, 1997, 59,238 shares in 1996 and 5,124 shares in 1995 (1,898,589) (3,044,186) (2,435,176) ------------ ------------ ------------ Total Shareholders' Equity 46,746,147 39,304,629 35,690,120 ------------ ------------ ------------ Total Liabilities and Shareholders' Equity $550,678,555 $509,355,505 $469,152,715 ============ ============ ============ The accompanying notes are an integral part of these financial statements.
F-3 93 HORIZON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------------------- ------------------------------------------ 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Interest Income: Loans, including fees $20,993,386 $19,085,154 $25,897,745 $22,579,413 $18,798,371 Investments securities 8,734,950 7,554,768 10,009,473 10,063,458 9,133,893 Other 457,900 400,636 680,440 573,071 264,626 ----------- ----------- ----------- ----------- ----------- Total Interest Income 30,186,236 27,040,558 36,587,658 33,215,942 28,196,890 ----------- ----------- ----------- ----------- ----------- Interest Expense: Deposits 13,889,198 12,746,751 17,160,136 15,972,001 10,803,461 Other borrowed funds 1,423,889 1,159,919 1,601,818 1,370,857 1,371,598 ----------- ----------- ----------- ----------- ----------- Total Interest Expense 15,313,087 13,906,670 18,761,954 17,342,858 12,175,059 ----------- ----------- ----------- ----------- ----------- Net Interest Income 14,873,149 13,133,888 17,825,704 15,873,084 16,021,831 Provision for Loan Losses (811,002) (900,435) (1,241,435) (875,000) (695,000) ----------- ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 14,062,147 12,233,453 16,584,269 14,998,084 15,326,831 Other Income: Service charges on deposit accounts 1,563,970 1,434,514 2,035,492 1,574,104 1,289,379 Other service charges 436,963 464,139 594,392 389,948 466,568 Insurance commissions -- -- -- 116,132 201,428 Other 1,075,458 1,106,520 1,421,776 1,212,062 1,379,853 ----------- ----------- ----------- ----------- ----------- Total Other Income 3,076,391 3,005,173 4,051,660 3,292,246 3,337,228 Other Expense: Salaries 5,115,380 4,531,716 6,150,362 6,531,920 5,516,006 Employee benefits 534,844 464,192 1,124,110 747,604 1,015,317 Occupancy 395,784 302,763 450,921 1,055,420 931,417 Equipment 1,316,113 1,296,225 1,718,066 926,146 513,025 Other 3,063,194 2,873,251 4,143,195 4,482,636 4,508,483 ----------- ----------- ----------- ----------- ----------- Total Other Expense 10,425,315 9,468,147 13,586,654 13,743,726 12,484,248 ----------- ----------- ----------- ----------- ----------- Income Before Income Taxes 6,713,223 5,770,479 7,049,275 4,546,604 6,179,811 Income Taxes 1,624,909 1,476,855 1,621,920 1,004,536 1,603,526 ----------- ----------- ----------- ----------- ----------- Net Income $ 5,088,314 $ 4,293,624 $ 5,427,355 $ 3,542,068 $ 4,576,285 =========== =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
F-4 94 HORIZON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
UNREALIZED ESOP GAIN (LOSS) COMMON LOAN RETAINED ON INVESTMENT TREASURY STOCK SURPLUS GUARANTY EARNINGS SECURITIES STOCK TOTAL -------- ----------- ---------- ----------- ----------- ----------- ----------- Balance, December 31, 1993 $ 66,624 $11,929,813 $(1,048,160) $18,929,566 $ -- $(1,184,154) $28,693,689 Effect of adoption of SFAS 115 -- -- -- -- 2,668,288 -- 2,668,288 Purchase of treasury stock -- -- -- -- -- (1,306,837) (1,306,837) Principal reduction on ESOP loan -- -- 226,670 -- -- -- 226,670 Issuance of stock dividend from treasury shares and cash paid for fractional shares -- 205,414 -- (608,620) -- 383,004 (20,202) Sales of treasury stock -- 22,570 -- -- -- 103,622 126,192 Change in unrealized gain on AFS securities -- -- -- -- $(6,041,008) -- (6,041,008) Net income -- -- -- 4,576,285 -- -- 4,576,285 -------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1994 $ 66,624 $12,157,797 $ (821,490) $22,897,231 $(3,372,720) $(2,004,365) $28,923,077 Purchase of treasury stock -- -- -- -- -- (880,685) (880,685) Principal reduction on ESOP loan -- -- 226,550 -- -- -- 226,550 Issuance of stock dividend from treasury shares and cash paid for fractional shares -- -- -- (608,530) -- 337,087 (271,443) Sale of treasury stock -- 1,312 -- -- -- 112,787 114,099 Change in unrealized gain on AFS securities -- -- -- -- 4,036,454 -- 4,036,454 Net income -- -- -- 3,542,068 -- -- 3,542,068 -------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1995 $ 66,624 $12,159,109 $ (594,940) $25,830,769 $ 663,734 $(2,435,176) $35,690,120 10-for-1 stock split 599,616 (599,616) -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- (690,929) (690,929) Principal reduction on ESOP loan -- -- 220,000 -- -- -- 220,000 Dividend paid -- -- -- (609,398) -- -- (609,398) Sale of treasury stock -- 6,741 -- -- -- 81,919 88,660 Change in unrealized gain on AFS securities -- -- -- -- (821,179) -- (821,179) Net income -- -- -- 5,427,355 -- -- 5,427,355 -------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1996 $666,240 $11,566,234 $ (374,940) $30,648,726 $ (157,445) $(3,044,186) $39,304,629 Purchase of treasury stock -- -- -- -- -- (86,070) (86,070) Principal reduction on ESOP loan -- -- 374,940 -- -- -- 374,940 Dividend paid and declared -- -- -- (512,934) -- -- (512,934) Sale of treasury stock -- 805,783 -- -- -- 1,231,667 2,037,450 Change in unrealized gain on AFS securities -- -- -- -- 539,818 -- 539,818 Net income -- -- -- 5,088,314 -- -- 5,088,314 -------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, September 30, 1997 (unaudited) $666,240 $12,372,017 $ -- $35,224,106 $ 382,373 $(1,898,589) $46,746,147 ======== =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
F-5 95 HORIZON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------------------- ------------------------------------------ 1997 1996 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Cash Flows From Operating Activities: Net income $ 5,088,314 $ 4,293,624 $ 5,427,355 $ 3,542,068 $ 4,576,285 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 851,093 1,071,018 1,145,645 760,552 819,701 Amortization 152,610 146,183 302,746 145,704 207,229 Provision for other real estate losses 31,699 8,175 38,042 13,908 -- Provision for loan losses 811,002 900,435 1,241,435 875,000 695,000 Gain on sale of bank premises and equipment (2,325) (5,230) (5,230) -- -- (Gain) loss on sale of other assets (43,103) 44,997 (6,981) -- -- Amortization (accretion) of premium or discount on investments, net 13,036 73,832 98,042 (55,976) 70,454 Net loss on sales of investment securities (42,134) (3,860) (1,180) (46,480) (29,840) Deferred income taxes -- (514,168) (221,393) 12,905 559,595 Change in operating assets and liabilities: Increased in accrued interest receivable (760,945) (669,816) (41,665) (900,329) (752,893) (Increase) decrease in other assets (2,332,312) (292,353) 44,560 (98,930) (1,139,004) Increase (decrease) in accrued expenses and other liabilities (515,415) 129,892 231,847 190,332 306,352 ------------ ------------ ------------ ------------ ------------ Net Cash Provided by Operating Activities 3,251,520 5,182,729 8,253,223 4,438,754 5,312,879 ------------ ------------ ------------ ------------ ------------ Cash Flows From Investing Activities: Proceeds from sale of bank premises and equipment 240,780 75,373 107,801 375,399 623,163 Purchases of bank premises and equipment (399,584) (1,008,607) (1,390,338) (2,104,517) (4,113,343) Proceeds from sale of other real estate 1,243,478 485,047 215,655 157,485 707,611 Additions to other real estate (337,760) -- (838,036) -- -- Loan origination, net of repayments (30,574,190) (31,239,850) (36,654,317) (24,687,217) (45,884,993) Proceeds from sales and maturities of available-for-sale securities 61,727,925 46,991,017 67,889,680 61,523,071 26,649,369 Purchases of available-for-sale securities (85,983,648) (46,081,665) (72,848,265) (83,979,542) (58,592,403) Proceeds from maturities of held-to-maturity securities 4,249,757 5,341,175 9,507,765 17,409,006 13,110,358 Purchases of held-to-maturity securities -- (2,107,250) (2,607,250) (5,862,345) (21,346,851) Purchases of other investments (123,800) (664,500) (703,100) -- -- Proceeds from sales of other investments 25,000 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net Cash Used by Operating Activities (49,932,042) (28,209,260) (37,320,405) (37,168,660) (88,847,089) ------------ ------------ ------------ ------------ ------------ Cash Flows From Financing Activities: Net increase in deposits 30,850,146 10,244,764 21,627,160 45,661,663 77,765,034 Repayment of notes payable (3,391,872) -- (2,801,040) (1,225,000) (3,933,000) Proceeds from notes payable 3,909,787 -- 12,436 -- 6,650,000 Proceeds from advances from FHLB 55,200,000 32,600,000 22,055,205 3,750,000 45,828,274 Repayments of advances from FHLB (51,998,653) (15,233,699) (4,317,327) (10,664,952) (37,700,369) Proceeds from sale of treasury stock 2,037,450 88,660 88,660 114,099 126,192 Purchase of treasury stock (86,070) (61,079) (690,929) (880,685) (1,306,837) Dividends paid (310,455) (39,111) (609,398) (271,443) (20,202) ------------ ------------ ------------ ------------ ------------ Net cash provided by financing activities 36,210,333 27,599,535 35,364,767 36,483,682 87,409,092 ------------ ------------ ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (10,470,189) 4,573,004 6,297,585 3,753,776 3,874,882 Cash and Cash Equivalents - Beginning of Period 24,612,758 18,315,173 18,315,173 14,561,397 10,686,515 ------------ ------------ ------------ ------------ ------------ Cash and Cash Equivalents - End of Period $ 14,142,569 $ 22,888,177 $ 24,612,758 $ 18,315,173 $ 14,561,397 ============ ============ ============ ============ ============ Supplemental Cash Flow Information: Income taxes paid $ 1,762,017 $ 1,557,013 $ 1,800,631 $ 1,160,040 $ 1,648,740 ============ ============ ============ ============ ============ Interest paid $ 15,534,654 $ 14,134,326 $ 19,682,517 $ 16,954,261 $ 11,537,836 ============ ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
F-6 96 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Horizon Bancorp, Inc. and subsidiaries (collectively, the "Company") conform with generally accepted accounting principles and practices within the banking industry. The policies that materially affect financial position and the results of operations are summarized as follows: a. PRINCIPLES OF CONSOLIDATION - Horizon Bancorp, Inc. ("Horizon") is a one bank holding company which owns 100% of the outstanding stock of Horizon Bank (the "Bank") and Horizon Financial Services, Inc. The Bank owns 100% of the outstanding stock of Landau, Inc., which was formed for the purpose of holding, developing and managing other real estate acquired by the Bank through foreclosure. The Bank also owns 100% of the outstanding stock of Horizon Mortgage Company, which originates and sells fixed mortgage loans. On July 3, 1995, the Board of Directors of Central Arkansas Bancshares, Inc., a four bank holding company, adopted a plan whereby its four wholly owned subsidiaries, Merchants and Planters Bank, the Bank of Hot Springs, Grant County Bank and Bank of Malvern were consolidated into one bank, which would use the Bank of Malvern's charter and assume the name of "Horizon Bank." The consolidated financial statements include the accounts of Horizon Bancorp, Inc. and its subsidiaries. All material intercompany transactions have been eliminated. b. NATURE OF OPERATIONS - The Bank operates under an Arkansas bank charter and provides full banking services, including trust services. As a state bank, the Bank is subject to regulation of the Arkansas State Bank Department and the Federal Deposit Insurance Corporation. The area served by the Bank includes Clark, Garland, Grant and Hot Spring counties in southern Arkansas with services provided at 16 branch offices. c. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities 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 and such differences could be significant. d. CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and cash equivalents include cash, amounts on deposit with other banks and Federal funds sold. Generally, Federal funds are sold for one day periods. e. INVESTMENT SECURITIES - Investments in debt and equity securities are classified into three categories: (i) securities held as trading securities; (ii) securities which are available-for-sale; and (iii) securities being held-to-maturity. These categories are defined as follows: F-7 97 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (i) TRADING SECURITIES - Securities held principally for resale in the near term are classified as trading account securities and recorded at their fair values. Unrealized gains and losses on trading accounts securities are included in other income. The Bank had no such securities for 1996, 1995 or 1994. (ii) HELD-TO-MATURITY SECURITIES - Securities which the Bank has the intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the constant yield method over the period to maturity. (iii) AVAILABLE-FOR-SALE SECURITIES - Bonds, notes, debentures, and certain equity securities not classified as trading securities or held-to-maturity securities. Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of shareholders' equity. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the constant yield method over the period to maturity. f. OTHER INVESTMENTS - The Bank is a member of the Federal Home Loan Bank ("FHLB") system. As a member of FHLB, the Bank is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of outstanding home loans or 5% of outstanding advances from the FHLB of Dallas. No ready market exists for such stock and it has no quoted market value. At December 31, 1996 and 1995, the Bank's investment in such stock amounted to $2,776,200 and $2,223,100, respectively. The Bank also held stock in Arkansas Bankers' Bank, for which no ready market exists and which has no quoted market value. The Bank's investment in such stock amounted to $25,000 at December 31, 1996 and 1995. During 1996, the Company purchased less than 5% of the stock of Horizon Bank of Columbia County. The investment in such stock amounted to $150,000 at December 31, 1996. These investments are stated at cost. g. LOANS AND ALLOWANCES FOR LOAN LOSSES - Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114") as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure ("SFAS 118"). This adoption had no material effect on the Company's financial position or results of operations. SFAS 114 applies only to impaired loans. Groups of smaller balance homogeneous loans are collectively reviewed for impairment. A loan is defined as impaired by SFAS 114 when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. Specifically, SFAS 114 requires that the allowance for credit losses related to impaired loans be determined based on the F-8 98 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 present value of cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Prior to the adoption of SFAS 114, the Bank's methodology for determining the adequacy of the allowance for credit losses did not incorporate the concept of the time value of money and the expected future interest cash flow. As permitted by SFAS 118, interest revenue received on impaired loans continues to be either applied against principal or realized as interest revenue, according to management's judgment as to the collectibility of principal. All loans are charged off when management determines that principal and interest are not collectible. At December 31, 1996 and 1995, the Company had 16 and 13 loans, respectively, that management considered impaired. Balances of these loans were considered immaterial as were balances of loans considered to be impaired throughout the years ended December 31, 1996 and 1995. When the payment of principal or interest on a loan is delinquent for 90 days, or earlier in some cases, the loan is placed on non-accrual status and all accrued but unpaid interest is charged to operations. In certain cases where the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan, the accrued but unpaid interest may not be reversed at the time the loan is placed on a non-accrual status. Generally, any payments received on non-accrual loans are applied first to outstanding loan amounts and next to the recovery of lost interest. The allowance for loan losses is a valuation allowance for future potential losses incurred on loans. All losses are charged to the allowance when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance at the time of recovery. Throughout the year management estimates the likely level of losses to determine whether the allowance for loan losses is adequate to absorb reasonably anticipated losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb losses. Management's judgment as to the level of losses on existing loans involves, among other things, the consideration of current and anticipated economic conditions and their potential effects on specific borrowers, results of examination of the loan portfolio by regulatory agencies, and management's internal review of the loan portfolio. In determining the collectibility of certain loans, management also considers the estimated fair value of any underlying collateral. The amounts ultimately realized may differ from the carrying value of these assets due to economic, operating or other conditions beyond the Company's control. Estimates of anticipated loan losses involve judgment. While it is possible that in particular periods the Company may sustain losses which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the consolidated balance sheet is adequate to absorb anticipated losses which may exist in the current loan portfolio. F-9 99 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 h. BANK PREMISES AND EQUIPMENT - Land is carried at cost. Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation of buildings and related improvements is computed using the straight-line method and accelerated methods based on estimated useful lives. Depreciation of furniture and equipment is computed using accelerated methods. i. OTHER REAL ESTATE - Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value minus estimated costs to sell. Revenue and expenses from operations and additions to the valuation allowance are included in profit or loss on foreclosed real estate. The historical average holding period for such properties is 22 months. j. INTANGIBLE ASSETS - Intangible assets, including goodwill and deposit premium included in other assets on the consolidated balance sheet, are being amortized on the straight-line basis over periods ranging from 5 to 15 years. k. INCOME TAXES - The Company files its income tax returns on a consolidated basis with its subsidiaries. The separate income tax provision of the Company and its subsidiaries is determined in accordance with an allocation agreement between the Company and its subsidiaries which provides that such provision will essentially be determined on a separate return basis. The Company utilizes the liability method in accounting for deferred income taxes. Deferred income taxes are reported for temporary differences between the bases of the Company's assets and liabilities for financial statement and income tax purposes at the presently enacted tax rates for the periods when these differences are expected to reverse. These differences relate primarily to depreciation of bank premises and equipment, provision for valuation of foreclosed assets, and provisions to the allowance for loan losses. l. TREASURY STOCK - The Company determines the basis of treasury shares bought and sold using the specific identification method. m. ADVERTISING - The Bank expenses the costs of advertising as incurred. Total advertising expense was $304,293 and $327,379 for the years ended December 31, 1996 and 1995, respectively. n. TRUST DIVISION ASSETS - Property other than cash deposits held by the Bank in a fiduciary or agency capacity for its customers is not included in the balance sheets since such items are not assets of the Bank. o. TRUST FEES - Trust fees are recorded on the cash basis. F-10 100 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 p. RECLASSIFICATIONS - Certain reclassifications of 1995 and 1994 balances have been made to conform to the 1996 presentation. 2. CASH AND CASH DUE FROM BANKS Under the provisions of Federal Reserve Board Regulation D, the Company's Bank subsidiary is required to maintain certain minimum cash reserves based upon liabilities to depositors. The minimum cash reserve requirements at December 31, 1996, 1995 and 1994, were approximately $6,307,000, $3,559,000 and $164,000, respectively. The Bank was in compliance with these requirements. 3. INVESTMENT SECURITIES Debt and equity securities have been classified in the consolidated statements of financial condition according to management's intent. The amortized costs of investment securities and their approximate fair values at December 31 were as follows:
DECEMBER 31, 1996 ----------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Available-For-Sale Securities - ----------------------------- United States government and agency securities $ 71,744,422 $ 29,785 $317,740 $ 71,456,467 State and municipal securities 34,511,189 518,075 -- 35,029,264 Mortgage backed securities 41,662,410 1,600 486,908 41,177,102 ------------ -------- -------- ------------ Total available-for-sale $147,918,021 $549,460 $804,648 $147,662,833 ============ ======== ======== ============ Held-To-Maturity Securities - --------------------------- United States government and agency securities $ 8,194,704 $ 20,014 $ 31,764 $ 8,182,954 State and political subdivisions 4,702,531 59,086 -- 4,761,617 Mortgage backed securities 5,571,369 15,351 160,905 5,425,815 Other securities 300,000 4,622 -- 304,622 ------------ -------- -------- ------------ Total held-to-maturity $ 18,768,604 $ 99,073 $192,669 $ 18,675,008 ============ ======== ======== ============
F-11 101 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
DECEMBER 31, 1995 ----------------- AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Available-For-Sale Securities - ----------------------------- United States government and agency securities $ 61,442,436 $ 422,789 $187,774 $ 61,677,451 State and municipal securities 37,338,142 975,619 78,271 38,235,490 Mortgage backed securities 44,202,044 138,796 265,502 44,075,338 ------------ ---------- -------- ------------ Total available-for-sale $142,982,622 $1,537,204 $531,547 $143,988,279 ============ ========== ======== ============ Held-To-Maturity Securities United States government and agency securities $ 15,260,684 $ 119,973 $ 96,527 $ 15,284,130 State and political subdivisions 6,133,449 108,395 17,653 6,224,191 Mortgage backed securities 4,178,653 21,384 77,535 4,122,502 Other securities 170,000 8,326 -- 178,326 ------------ ---------- -------- ------------ Total held-to-maturity $ 25,742,786 $ 258,078 $191,715 $ 25,809,149 ============ ========== ======== ============
The amortized cost and estimated fair value of investments securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities with or without call or prepayment penalties.
AVAILABLE FOR SALE HELD TO MATURITY ------------------------------- ----------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---- ----- ---- ----- Due in one year or less $ 10,017,534 $ 10,034,425 $ 4,019,091 $ 4,027,647 Due after one year through five years 62,750,106 62,721,801 6,229,076 6,225,382 Due after five years through ten years 23,184,536 23,320,894 1,840,000 1,846,999 Due after ten years 10,303,435 10,405,521 1,109,068 1,152,812 ------------ ------------ ----------- ----------- 106,255,611 106,485,731 13,197,235 13,252,840 Mortgage-backed securities 41,662,410 41,177,102 5,571,369 5,422,168 ------------ ------------ ----------- ----------- $147,918,021 $147,662,833 $18,768,604 $18,675,008 ============ ============ =========== ===========
F-12 102 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 Gross realized gains and gross unrealized losses on sales of securities available for sale during the years ended December 31, 1996, 1995 and 1994 were:
1996 1995 1994 ---- ---- ---- Gross realized gains: U.S. Government and agency $ 31,159 $ 26,302 $122,019 State and municipal securities 8,073 14,516 65,873 Mortgage-backed securities/Other 72,412 170,908 532 -------- -------- -------- $111,644 $211,726 $188,424 ======== ======== ======== Gross realized losses: U.S. Government and agency $ 12,951 $ 1,410 $ 48,091 State and political subdivisions 19,034 16,676 110,493 Mortgage-backed securities 80,839 147,160 -- -------- -------- -------- $112,824 $165,246 $158,584 ======== ======== ========
Investment securities with amortized cost of approximately $77,133,000, $66,200,000 and $56,719,000 and estimated market values of approximately $76,859,000, $66,500,000 and $54,533,000 were pledged to collateralize public deposits and for other purposes as required or permitted by law at December 31, 1996, 1995 and 1994, respectively. The overall return or yield earned on mortgage-backed securities depends on the amount of interest collected over the life of the security and the amortization of any premium or discount. Premiums and discounts are recognized in income using the level-yield method over the assets' remaining lives adjusted for anticipated prepayments. Although the Company receives the full amount of principal if prepaid, the interest income that would have been collected during the remaining period to maturity, net of any discount or premium amortization, is lost. Accordingly, the actual yields and maturities of mortgage-backed securities depend on when the underlying mortgage principal and interest are repaid. Prepayments result when market interest rates fall below a mortgage's contractual interest rate and it is to the borrower's advantage to prepay the existing loan and obtain new, lower rate financing. In addition to changes in interest rates, mortgage prepayments depend on other factors such as loan types and geographic location of the related properties. The Company's asset base is exposed to risk, including the risk resulting from changes in interest rates, market values of collateral for borrowings and changes in the timing of cash flows. The Company monitors the effect of such risk by considering the mismatch of the maturities of its assets and liabilities in the current interest rate environment and the sensitivity of assets and liabilities to changes in interest rates. The Company's management has considered the effect of significant increases and decreases in interest rates and believes such changes, if they occurred, would be manageable and would not affect the ability of the Company to hold its assets to maturity. However, the Company is exposed to significant market risk in the unlikely event of significant and prolonged interest rate changes. F-13 103 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 4. LOANS ----- The components of loans in the consolidated balance sheet were as follows:
1996 1995 ---- ---- Real estate $149,877,144 $132,599,468 Commercial and industrial 82,840,748 58,900,158 Consumer loans 67,841,277 75,309,290 ------------ ------------ 300,559,169 266,808,916 Less unearned income (752,327) (2,523,979) Less allowance for loan losses (4,226,497) (4,117,474) ------------ ------------ Net loans $295,580,345 $260,167,463 ============ ============
Certain of the directors and officers of the Company and the entities in which it had a significant interest were customers of and had transactions with the Bank in the ordinary course of business. In the opinion of management, all loans and commitments to loan included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or any unfavorable features. The aggregate amount of loans to these directors, officers and their affiliates totaled $736,381 and $2,669,626 at December 31, 1996 and 1995, respectively. Loans on which the accrual of interest has been discontinued aggregated $2,170,840 at December 31, 1996. 5. ALLOWANCE FOR LOAN LOSSES An analysis of the activity in the allowance for loan losses is as follows:
1996 1995 ---- ---- Balance - beginning of year $ 4,117,474 $ 4,246,223 Allowance acquired in business combination Provision for loan losses 1,241,435 875,000 Charge-offs (1,404,403) (1,337,544) Recoveries 271,991 333,795 ----------- ----------- Balance - end of year $ 4,226,497 $ 4,117,474 =========== ===========
6. BANK PREMISES AND EQUIPMENT Bank premises and equipment consisted of: F-14 104 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
1996 1995 ---- ---- Land $ 2,564,680 $ 1,934,348 Buildings and improvements 9,008,921 8,862,353 Furniture and equipment 7,633,024 7,189,582 ----------- ----------- 19,206,625 17,986,283 Accumulated depreciation (7,974,513) (6,896,293) ----------- ----------- $11,232,112 $11,089,990 =========== ===========
7. DEPOSITS Deposits consisted of:
1996 1995 ---- ---- Non-interest-bearing $ 45,002,623 $ 45,005,797 Interest-bearing transaction accounts 105,263,385 92,964,026 Savings 42,805,592 30,689,083 Time, $100,000 and over 62,510,495 30,007,448 Other time 183,953,255 219,241,836 ------------ ------------ Total $439,535,350 $417,908,190 ============ ============
The aggregate amount of short-term jumbo certificate of deposits, each with a minimum denomination of $100,000, was approximately $62,510,000 in 1996, and $62,572,000 in 1995. At December 31, 1996, the scheduled maturities of time deposits were as follows: 1997 $194,912,750 1998 36,145,000 1999 9,870,000 2000 2,126,000 2001 and thereafter 3,410,000 ------------ $246,463,750 ============
F-15 105 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 8. BORROWED FUNDS The Company had advances from the FHLB at December 31, 1996 as follows:
ADVANCES -------- Maturing during year ending December 31: 1997 $ 2,047,672 1998 422,309 1999 10,202,691 2000 2,028,319 Thereafter 10,055,019 ----------- $24,756,010 ===========
The interest rate on the FHLB borrowings is currently LIBOR less 9 basis points. The average rate of interest paid in 1996 was approximately 5.24%. At December 31, 1995, the Company had advances from the FHLB of $7,018,132. The Company had pledged all of its FHLB stock, with a carrying value of $2,776,200 and $2,223,100 as of December 31, 1996 and 1995, as collateral for these advances. Additionally, the Bank has an agreement with the FHLB whereby the Bank provides Blanket Floating Lien collateral on borrowings in an aggregate amount of 65% of the unpaid principal balance of the Bank's qualifying collateral or 35% of the Bank's assets. Notes payable consisted of the following:
1996 1995 ---- ---- Guaranty of Employee Stock Ownership and Savings Plan ("ESOP") notes payable at a variable interest rate (8.5% at December 31, 1996), due in quarterly installments with balance due April 15, 1997, collateralized by common stock of the Bank. $ 374,940 $ 594,940 Note payable to First Tennessee Bank at a variable interest rate (7.96% at December 1, 1996), due in annual installments with balance due January 15, 2004, collateralized by common stock of Bank. 2,000,000 4,800,000 Note payable to Sungard Trust Systems, payable in monthly installments of $208, through June 30, 2001 11,396 -- ---------- ---------- $2,386,336 $5,394,940 ========== ==========
F-16 106 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 Aggregate maturities of notes payable were as follows: 1997 $ 377,436 1998 2,496 1999 2,496 2000 2,496 2001 1,412 Thereafter 2,000,000 ---------- $2,386,336 ==========
9. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the 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 the Bank's 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. Management believes that, as of December 31, 1996, the Bank meets all capital adequacy requirements to which it is subject. Banking regulators have specified guidelines for purposes of evaluating a bank and a bank holding company's capital adequacy. The following is a summary of the Bank's capital ratios at December 31, 1996 and 1995.
1996 1995 ------------------ ------------------ ACTUAL MINIMUM ACTUAL MINIMUM RATIO REQUIRED RATIO REQUIRED ----- -------- ----- -------- Total risk based capital ratio 13.00% 8.00% 13.00% 8.00% Tier 1 risk based capital ratio 12.00 4.00 11.75 4.00 Leverage ratio 8.00 4.00 7.12 4.00
Dividends paid by the Company are substantially funded by dividends from the Company's subsidiaries. The amount of dividends a subsidiary bank may pay without prior regulatory approval is 50% of the Bank's net income. F-17 107 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 10. EMPLOYEE STOCK OWNERSHIP PLAN The Company has established an Employee Stock Ownership and Savings Plan ("ESOP"). The ESOP has borrowings which are collateralized by 1,200 shares of the Bank's stock and a guaranty of the Company. Since the notes payable are guaranteed by the Company, they are included on the consolidated balance sheets as a liability and as a corresponding reduction of shareholders' equity. Contributions to the ESOP totaling $231,600, $175,150 and $295,500 were made by the Company during the years ended December 31, 1996, 1995 and 1994, respectively. 11. INCOME TAXES The consolidated provision for income taxes consisted of:
1996 1995 1994 ---- ---- ---- Current provision $1,843,313 $ 991,631 $1,043,931 Deferred provision (benefit) (221,393) 12,905 559,595 ---------- ---------- ---------- $1,621,920 $1,004,536 $1,603,526 ========== ========== ==========
The provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate to income before income taxes primarily due to differences resulting from tax-exempt interest income. Deferred taxes are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities included in other assets at December 31, 1996 and 1995 consists of:
1996 1995 ---- ---- Deferred tax assets: Reserve for loan losses $1,259,910 $1,099,813 Deferred compensation 220,589 315,976 Securities available for sale 97,734 -- Other 14,462 17,590 ---------- ---------- Total deferred tax assets 1,592,695 1,433,379 ---------- ---------- Deferred tax liabilities: Securities available for sale -- 341,923 Intangibles 636,770 687,091 Bank premises and equipment 301,406 246,065 Other 156,750 321,581 ---------- ---------- Total deferred tax liabilities 1,094,926 1,596,660 ---------- ---------- Net deferred tax asset (liability) $ 497,769 $ (163,281) ========== ==========
12. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily F-18 108 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies (below) may have a material effect on the estimated fair value amounts. (a) CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. (b) INVESTMENT SECURITIES AND OTHER INVESTMENTS - For investment securities, fair values are based on quoted market prices or dealer quotes. FHLB stock is valued at par value as par is comparable to the redemption value. (c) LOANS - The fair value 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 and anticipated prepayment speeds. (d) ACCRUED INTEREST RECEIVABLE AND PAYABLE - For accrued interest receivable and payable, the carrying amounts approximates their fair values. (e) DEMAND DEPOSITS AND TIME DEPOSITS - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. (f) ADVANCES FROM FHLB AND NOTES PAYABLE - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. (g) COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN - The fair values of commitment 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 fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value estimates at December 31, 1996 and 1995 revealed no material differences between the committed or guaranteed amounts and the fair value of such items. The carrying amounts and estimated fair values of financial instruments in thousands at December 31, 1996 and 1995, were as follows: F-19 109 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Financial assets: - ----------------- Cash and federal funds sold $ 24,613 $ 24,613 $ 18,315 $ 18,315 Available-for-sale securities 147,663 147,663 143,988 143,988 Held-to-maturity securities 18,769 18,675 25,743 25,809 Loans 295,580 295,970 260,167 251,028 Accrued interest receivable 4,305 4,305 4,264 4,264 Other investments 2,951 2,951 2,248 2,248 Financial liabilities: - ---------------------- Demand deposits $193,072 $193,072 $168,659 $168,659 Time deposits 246,463 242,614 249,249 251,555 Advances from FHLB 24,756 24,763 7,018 7,018 Notes payable 2,386 2,374 5,395 5,395 Accrued interest payable 1,744 1,744 1,984 1,984 Federal Funds Purchased -- -- -- --
13. OFF-BALANCE SHEET AND CREDIT RISK The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditions as it does for on-balance sheet instruments. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Outstanding letters of credit totaled approximately $376,683 at December 31, 1996. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the lending contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. F-20 110 HORIZON BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 At December 31, 1996, outstanding commitments to originate loans totaled approximately $29,509,000. Commitments are typically for less than one year at fixed and variable rates of interest. All of the Bank's loans, commitments and standby letters of credit have been granted to customers in the Company's market area. Investments in state and municipal securities also involve governmental entities within the Company's market area. Commercial and standby letters of credit were granted primarily to commercial borrowers. 14. FORECLOSED REAL ESTATE Loss on foreclosed real estate in 1996 included net expense of $33,557 and net revenue of $23,450 from the operation of foreclosed real estate. 15. RESTRICTIONS ON RETAINED EARNINGS The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. During 1996, the Bank sought and obtained regulatory approval to pay dividends in excess of 50% of current year earnings. Accordingly, at December 31, 1996 no retained earnings were available for dividend declaration. 16. SUBSEQUENT EVENT (UNAUDITED) On July 31, 1997, Horizon entered into an Agreement and Plan of Merger (the "Merger Agreement") with Mercantile Bancorporation Inc. ("MBI"). At September 30, 1997, MBI reported, on a consolidated basis, total assets of approximately $30.0 billion and operated 24 commercial banks and one federally-chartered thrift located throughout Missouri, Illinois, eastern Kansas, Iowa and Arkansas. The Merger Agreement provides for shareholders of Horizon to receive approximately 4.0301 (on a post-split basis; MBI completed a three-for-two stock split, effective October 1, 1997) shares of MBI common stock for each share of outstanding common stock of Horizon upon consummation of the merger ("the "Merger") of Horizon with and into Ameribanc, Inc., a wholly owned subsidiary of MBI. The Merger is contingent upon approval of various regulatory authorities and the shareholders of Horizon. F-21 111 ANNEX A ------- [Letterhead of Stephens Inc.] July 31, 1997 Board of Directors Horizon Bancorp, Inc. 576 Main Street, P.O. Box 515 Arkadelphia, Arkansas 71923 Members of the Board: We have acted as your financial advisor in connection with the proposed merger with Mercantile Bancorporation Inc. ("Mercantile") (the "Transaction"). The terms and conditions of the Transaction are more fully set forth in the Agreement and Plan of Merger by and between Horizon Bancorp, Inc. ("Horizon" or the "Company") and Mercantile (the "Merger Agreement"). The Merger Agreement provides for, among other things, that each outstanding share of common stock, par value $1.00, of Horizon is to be converted into the right to receive 2.6867 shares (the "Exchange Ratio") of common stock, $0.01 par value of Mercantile (which number shall be adjusted to 4.0301 after giving effect to the stock dividend to be declared by Mercantile on October 1, 1997 and will be further adjusted for any other stock splits and stock dividends). The Exchange Ratio was computed by dividing 1,700,000 (the number of shares of Mercantile Common Stock to be issued in the Transaction) by the number of outstanding shares of Horizon as of the date of the Merger Agreement. On July 30, 1997, the last reported sale price per share of Mercantile was $70.81. You have requested our opinion as to the fairness to the disinterested shareholders of the Company from a financial point of view of the consideration to be received by them in the Transaction. For purposes of this opinion, the term "disinterested shareholders" means holders of the Company's one class of common stock (the "Common Stock") other than (1) directors, officers and employees of the Company, (2) any holder of five percent or more of the outstanding shares of Common Stock and (3) Horizon and its affiliates. In connection with our opinion, we have, among other things: (i) analyzed certain financial and other data publicly available or made available to us with respect to Horizon and Mercantile, including the consolidated financial statements for recent years and interim periods to June 30, 1997 and certain other relevant financial and operating data relating to Horizon and Mercantile made available to us from published sources and from the internal records of Horizon and Mercantile; (ii) reviewed the Merger Agreement dated July 31, 1997; (iii) compared the respective contributions of loans, deposits, equity, and income by Horizon and Mercantile to the combined entity; A-1 112 (iv) analyzed, on a pro forma basis, the effect of the Transaction of the Company's earnings, book value, balance sheet, and capitalization ratios, both in the aggregate, and where applicable, on a per share basis; (v) reviewed the historical market prices and trading volumes of the common stock of Horizon and Mercantile; (vi) compared Horizon and Mercantile from a financial point of view with certain other companies which we deemed to be relevant; (vii) considered the financial terms, to the extent publicly available, of selected business combinations in the banking industry; (viii) reviewed and discussed with representatives of the management of Horizon and Mercantile certain information of a business and financial nature regarding Horizon and Mercantile furnished to us by Horizon and Mercantile; (ix) assisted in your deliberations regarding the material terms of the Transaction and your negotiations with Mercantile; and (x) performed such other analyses and examinations as we have deemed appropriate. In connection with our review, we have not assumed any obligation to independently verify any of the forgoing information and have relied on all such information being complete and accurate in all material respects. We are not an expert in the evaluation of loan portfolios for purposes of assessing the adequacy of the allowances for losses with respect thereto and have assumed, with your consent, that such allowances for each of Horizon and Mercantile are in the aggregate adequate to cover such losses. In addition, we have not assumed responsibility for reviewing any individual credit files or making an independent evaluation, appraisal or inspection of the real, personal, tangible or intangible assets (including investment securities) or individual properties of Horizon or Mercantile, nor have we been furnished with any such evaluations or appraisals. We have also assumed, with your consent, that there have been no material changes in Horizon's or Mercantile's assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statement reviewed by us and that any off-balance sheet activities of Horizon and Mercantile, including derivatives and other similar financial instruments, will not materially and adversely affect the future financial position or results of operations of Horizon or Mercantile. We have further assumed, with your consent, that in the course of obtaining the necessary regulatory and third party consents for the Transaction, no restriction, limitation or order will be imposed that would have or would be expected to have a material adverse effect on the contemplated benefits of the Transaction or the transactions contemplated thereby, and that the Transaction will be consummated in accordance with the terms of the Merger Agreement (including provisions relating to the consideration to be exchanged in the Transaction), without any amendments to, and without any waiver by Horizon of, any of the material conditions to its obligations thereunder. Finally, our opinion is based on economic, monetary, market and other conditions as in effect on, and the information made available to us as of, the date hereof. A-2 113 As part of our investment banking business, we are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. We will receive a fee for acting as financial advisor to Horizon, a substantial portion of which is contingent upon the consummation of the Transaction. In the ordinary course of our business, we may from time to time trade the equity securities of Horizon or Mercantile for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. Based upon the foregoing and in reliance thereon, it is our opinion as investment bankers that, as of the date hereof, the consideration to be received by the disinterested shareholders in the Transaction is fair to them from a financial point of view. This opinion is furnished pursuant to our engagement letter dated July 16, 1997. It is addressed to the Board of Directors of Horizon and is not intended to be and shall not be deemed to constitute a recommendation to any shareholder as to how such shareholder should vote with respect to the Transaction. This opinion and a summary discussion of our underlying analyses and role as your financial advisor may be included in the communications to the shareholders of Horizon and Mercantile provided that we approve of such disclosures prior to publication. In furnishing this opinion, we do not admit that we are experts within the meaning of the term "experts" as used in the Securities Act and the rules and regulations promulgated thereunder, nor do we admit this opinion constitutes a report or valuation within the meaning of Section 11 of the Securities Act. Very truly yours, /s/ Stephens Inc. Stephens Inc. A-3 114 ANNEX B ------- Following is the text of the dissenters' rights provisions set forth at Sections 4-27-1302 through 4-27-1328 of the Arkansas Business Corporation Act of 1987, as amended: 4-27-1302 RIGHT OF DISSENT A. A shareholder is entitled to dissent from and obtain payment of the fair value of his shares in the event of any of the following corporate actions: 1. Consummation of a plan of merger to which the corporation is a party: (i) If shareholder approval is required for the merger by Sec. 4-27-1103 or the articles of incorporation and the shareholder is entitled to vote on the merger, or (ii) If the corporation is a subsidiary that is merged with its parent under Sec. 4-27-1104; 2. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan; 3. Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one (1) year after the date of the sale; 4. An amendment of the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it: (i) Alters or abolishes a preferential right of the shares; (ii) Creates, alters, or abolishes a right in respect of redemption, including a provision respecting a sinking fund for the redemption or repurchase, of the shares; (iii) Alters or abolishes a preemptive right of the holder of the shares to acquire shares or other securities; (iv) Excludes or limits the right of the shares to vote on any matter, or to cumulate votes, other than a limitation by dilution through issuance of shares or other securities with similar voting rights; or (v) Reduces the number of shares owned by the shareholder to a fraction of a share if the fractional share so created is to be acquired for cash under Sec. 4-27-604; or B-1 115 5. Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, by-laws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. B. A shareholder entitled to dissent and obtain payment for his shares under this subchapter may not challenge the corporate action creating his entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation. 4-27-1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS A. A record shareholder may assert dissenters' rights as to fewer than all the shares registered in his name only if he dissents with respect to all shares beneficially owned by any one (1) person and notifies the corporation in writing of the name and address of each person on whose behalf he asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which he dissents and his other shares were registered in the names of different shareholders. B. A beneficial shareholder may assert dissenters' rights as to shares held on his behalf only if: 1. He submits to the corporation the record shareholder's written consent to dissent not later than the time the beneficial shareholder asserts dissenters' rights; and 2. He does so with respect to all shares of which he is the beneficial shareholder or over which he has power to direct the vote. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS 4-27-1320 NOTICE OF DISSENTERS' RIGHTS A. If proposed corporate action creating dissenters' rights under Sec. 4-27-1302 is submitted to a vote at a shareholders' meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters' rights under this chapter and be accompanied by a copy of this chapter. B. If corporate action creating dissenters' rights under Sec. 4-27-1302 is taken without a vote of shareholders, the corporation shall notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in Sec. 4-27-1322. 4-27-1321 NOTICE OF INTENT TO DEMAND PAYMENT A. If proposed corporate action creating dissenters' rights under Sec. 4-27-1302 is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights: 1. Must deliver to the corporation before the vote is taken written notice of his intent to demand payment for his shares if the proposed action is effectuated; and 2. Must not vote his shares in favor of the proposed action. B-2 116 B. A shareholder who does not satisfy the requirements of subsection A. of this section is not entitled to payment for his shares under this subchapter. 4-27-1322 DISSENTERS' NOTICE A. If proposed corporate action creating dissenters' rights under Sec. 4-27-1302 is authorized at a shareholders' meeting, the corporation shall deliver a written dissenters' notice to all shareholders who satisfied the requirements of Sec. 4-27-1321. B. The dissenters' notice must be sent no later than ten (10) days after the corporate action was taken, and must: 1. State where the payment demand must be sent and where and when certificates for certified shares must be deposited; 2. Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; 3. Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not he acquired beneficial ownership of the shares before that date; 4. Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty (30) nor more than sixty (60) days after the date the notice required by subsection A. of this section is delivered; and 5. Be accompanied by a copy of this subchapter. 4-27-1323 DUTY TO DEMAND PAYMENT A. A shareholder sent a dissenters' notice described in Sec. 4-27-1322 must demand payment, certify whether he acquired beneficial ownership of the shares before the date required to be set forth in the dissenters' notice pursuant to Sec. 4-27-1322B.3. and deposit his certificates in accordance with the terms of the notice. B. The shareholder who demands payment and deposits his share certificates under subsection A. of this section retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. C. A shareholder who does not demand payment or deposit his share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for his shares under this subchapter. B-3 117 4-27-1324 SHARE RESTRICTIONS A. The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under Sec. 4-27-1326. B. The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. 4-27-1325 PAYMENT A. Except as provided in Sec. 4-27-1327, as soon as the proposed corporate action is taken, or upon receipt of a payment demand, the corporation shall pay each dissenter who complied with Sec. 4-27-1323 the amount the corporation estimates to be the fair value of his shares, plus accrued interest. B. The payment must be accompanied by: 1. The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen (16) months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; 2. A statement of the corporation's estimate of the fair value of the shares; 3. An explanation of how the interest was calculated; 4. A statement of the dissenter's right to demand payment under Sec. 4-27-1328; and 5. A copy of this subchapter. 4-27-1326 FAILURE TO TAKE ACTION A. If the corporation does not take the proposed action within sixty (60) days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. B. If after returning deposited certificates and releasing transfer restrictions, the corporate takes the proposed action, it must send a new dissenters' notice under Sec. 4-27-1322 and repeat the payment demand procedure. 4-27-1327 AFTER-ACQUIRED SHARES A. A corporation may elect to withhold payment required by Sec. 4-27-1325 from a dissenter unless he was the beneficial owner of the shares before the date set forth in the dissenters' notice as the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action. B-4 118 B. To the extent the corporation elects to withhold payment under subsection A. of this section, after taking the proposed corporate action, it shall estimate the fair value of the shares, plus accrued interest, and shall pay this amount to each dissenter who agrees to accept it in full satisfaction of his demand. The corporation shall send with its offer a statement of its estimate of the fair value of the shares, an explanation of how the interest was calculated, and a statement of the dissenter's right to demand payment under Sec. 4-27-1328. 4-27-1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER A. A dissenter may notify the corporation in writing of his own estimate of the fair value of his shares and amount of interest due, and demand payment of his estimate (less any payment under Sec. 4-27-1325), or reject the corporation's offer under Sec. 4-27-1327 and demand payment of the fair value of his shares and interest due, if 1. The dissenter believes that the amount paid under Sec. 4-27-1325, or offered under Sec. 4-27-1327, is less than the fair value of his shares or that the interest due is incorrectly calculated; 2. The corporation fails to make payment under Sec. 4-27-1325 within sixty (60) days after the date set for demanding payment; or 3. The corporation, having failed to take the proposed action does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty (60) days after the date set for demanding payment. B. A dissenter waives his right to demand payment under this section unless he notifies the corporation of his demand in writing under subsection A. of this section within thirty (30) days after the corporation made or offered payment of his shares. 4-27-1330 COURT ACTION A. If a demand for payment under Sec. 4-27-1328 remains unsettled, the corporation shall commence a proceeding within sixty (60) days after receiving the payment demand and petition the court to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the sixty-day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. B. The corporation shall commence the proceeding in the circuit court of the county where the corporation's principal office (or, if none in this state, its registered office) is located. If the corporation is a foreign corporation without a registered office in this state, it shall commence the proceeding in the county in this state where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. C. The corporation shall make all dissenters (whether or not residents of this state) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. B-5 119 D. The jurisdiction of the court in which the proceeding is commenced under subsection B of this section is plenary and exclusive. The court may appoint one (1) or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them, or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. E. Each dissenter made a party to the proceeding is entitled to judgment: 1. For the amount, if any, by which the court finds the fair value of his shares, plus interest, exceeds the amount paid by the corporation; or 2. For the fair value, plus accrued interest, of his after- acquired shares for which the corporation elected to withhold payment under Sec. 4-27-1327. 4-27-1331 COURT COSTS AND COUNSEL FEES A. The court in an appraisal proceeding commenced under Sec. 4-27-1330 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent the court finds the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding payment under Sec. 4-27-1328. B. The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: 1. Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of Sections 4-27-1320--4-27-1328; or 2. Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. C. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. B-6 120 PROXY HORIZON BANCORP, INC. 526 MAIN STREET, SUITE 204 ARKADELPHIA, ARKANSAS 71923 FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ------------, 1998 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS The undersigned shareholder(s) of HORIZON BANCORP, INC. ("Horizon"), does hereby nominate, constitute and appoint --------- and ---------- or each of them (with full power to act alone), true and lawful proxies and attorneys-in-fact, with full power of substitution, for the undersigned and in the name, place and stead of the undersigned to vote all of the shares of Common Stock, $1.00 par value, of Horizon standing in the name of the undersigned on its books at the close of business on ---------, 1997 at the Special Meeting of Shareholders to be held at the offices of Horizon, 526 Main Street, Suite 204, Arkadelphia, Arkansas on -------, -----------, 1998, at ------ a.m. Central Time, and at any adjournments or postponements thereof, with all the powers the undersigned would possess if personally present, as follows: 1. To consider and vote upon the adoption and approval of the Agreement and Plan of Merger, dated July 31, 1997 (the "Merger Agreement"), pursuant to which Horizon will be merged with and into Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"), in a transaction that would result in the business and operations of Horizon being continued through such wholly owned subsidiary, and whereby, upon consummation of the merger, each share of Horizon Common Stock will be converted into the right to receive 4.0301 shares of MBI Common Stock, as set forth in detail in the accompanying Proxy Statement/Prospectus. / / FOR / / AGAINST / / ABSTAIN 2. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The undersigned hereby revokes any other proxies to vote at such meeting and hereby ratifies and confirms all that the proxies and attorneys-in-fact, or each of them, appointed hereunder may lawfully do by virtue hereof. Said proxies and attorneys-in-fact, without limiting their general authority, are specifically authorized to vote in accordance with their best judgment with respect to all matters incident to the conduct of the Special Meeting. (PLEASE SIGN AND DATE ON REVERSE SIDE) (Continued on Reverse Side) THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL LISTED ABOVE. Dated: --------------- -------------------------------------- Signature of Shareholder -------------------------------------- Signature of Shareholder When signing as an attorney, executor, administrator, trustee or guardian, please give full title. If more than one person holds the power to vote the same shares, all must sign. All joint owners must sign. The undersigned hereby acknowledges receipt of the Notice of Special Meeting and the Proxy Statement/Prospectus (with all enclosures and attachments), dated ----------, 1997, relating to the Special Meeting. PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE. 121 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ------------------------------------------ Item 20. Indemnification of Officers and Directors - --------------------------------------------------- Sections 351.355(1) and (2) of The General and Business Corporation Law of the State of Missouri provide that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of an action or suit by or in the right of the corporation, the corporation may not indemnify such persons against judgments and fines and no person shall be indemnified as to any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the court in which the action or suit was brought determines upon application that such person is fairly and reasonably entitled to indemnity for proper expenses. Section 351.355(3) provides that, to the extent that a director, officer, employee or agent of the corporation has been successful in the defense of any such action, suit or proceeding or any claim, issue or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred in connection with such action, suit or proceeding. Section 351.355(7) provides that a corporation may provide additional indemnification to any person indemnifiable under subsection (1) or (2), provided such additional indemnification is authorized by the corporation's articles of incorporation or an amendment thereto or by a shareholder-approved bylaw or agreement, and provided further that no person shall thereby be indemnified against conduct which was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct or which involved an accounting for profits pursuant to Section 16(b) of the Securities Exchange Act of 1934. Article 12 of the Restated Articles of Incorporation of MBI provides that MBI shall extend to its directors and executive officers the indemnification specified in subsections (1) and (2) and the additional indemnification authorized in subsection (7) and that it may extend to other officers, employees and agents such indemnification and additional indemnification. Pursuant to directors' and officers' liability insurance policies, with total annual limits of $45,000,000, MBI's directors and officers are insured, subject to the limits, retention, exceptions and other terms and conditions of such policy, against liability for any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the directors or officers of MBI, individually or collectively, or any matter claimed against them solely by reason of their being directors or officers of MBI. II-1 122 Item 21. Exhibits and Financial Statement Schedules - ---------------------------------------------------- A. Exhibits. See Exhibit Index. -------- B. Financial Statement Schedules. Not Applicable. ----------------------------- Item 22. Undertakings - ---------------------- (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of MBI pursuant to the foregoing provisions, or otherwise, MBI has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by MBI of expenses incurred or paid by a director, officer or controlling person of MBI in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, MBI will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (2) MBI hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of MBI's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) MBI hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (4) MBI undertakes that every prospectus (i) that is filed pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415 (Section 230.415 of this chapter), will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) MBI hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one II-2 123 business day of receipt of such request and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in the documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (6) MBI hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. (7) MBI hereby undertakes: (a) To file during any period in which offers and sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof), which individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (b) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 124 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri, on November 24, 1997. 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 offering by Mercantile Bancorporation Inc. of shares of its common stock, and the preferred share purchase rights which trade therewith, with respect to the acquisition of Horizon Bancorp, Inc., and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Thomas H. Jacobsen Chairman of the Board November 24, 1997 - ---------------------------- President and Chief Executive Thomas H. Jacobsen Officer Principal Executive Officer /s/ John Q. Arnold Vice Chairman and November 24, 1997 - ---------------------------- Chief Financial Officer John Q. Arnold Principal Financial Officer II-4 125 Signature Title Date --------- ----- ---- /s/ Michael T. Normile Senior Vice President - Finance November 24, 1997 - ---------------------------- and Control Michael T. Normile Principal Accounting Officer /s/ Richard E. Beumer Director November 24, 1997 - ---------------------------- Richard E. Beumer /s/ Harry M. Cornell, Jr. Director November 24, 1997 - ---------------------------- Harry M. Cornell, Jr. Director , 1997 - ---------------------------- Carlene M. Ellis /s/ William A. Hall Director November 24, 1997 - ---------------------------- William A. Hall /s/ Thomas A. Hays Director November 11, 1997 - ---------------------------- Thomas A. Hays /s/ Frank Lyon, Jr. Director November 9, 1997 - ---------------------------- Frank Lyon, Jr. /s/ Robert W. Murray Director November 10, 1997 - ---------------------------- Robert W. Murray /s/ Harvey Saligman Director November 24, 1997 - ---------------------------- Harvey Saligman /s/ Craig D. Schnuck Director November 7, 1997 - ---------------------------- Craig D. Schnuck /s/ Alvin J. Siteman Director November 24, 1997 - ---------------------------- Alvin J. Siteman II-5 126 Signature Title Date --------- ----- ---- /s/ Robert L. Stark Director November 7, 1997 - ---------------------------- Robert L. Stark /s/ Patrick T. Stokes Director November 24, 1997 - ---------------------------- Patrick T. Stokes /s/ John A. Wright Director November 10, 1997 - ---------------------------- John A. Wright
II-6 127 EXHIBIT INDEX
Exhibit Number Description Page - ------ ----------- ---- 2.1 Agreement and Plan of Merger, dated as of July 31, 1997, by and among MBI, Merger Sub and Horizon. 2.2 Form of Voting Agreement, dated as of July 31, 1997, and entered into by and between MBI and certain of the shareholders of Horizon. 3.1 MBI's Restated Articles of Incorporation, as amended and currently in effect, filed as Exhibit 3 to MBI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, incorporated herein by reference. 3.2 MBI's by-laws, as amended and currently in effect, filed as Exhibit 3.2 to Amendment No. 2 to MBI's Registration Statement on Form S-4 (No. 333-17757), are incorporated herein by reference. 4.1 Form of Indenture Regarding Subordinated Securities between MBI and The First National Bank of Chicago, Trustee, filed as Exhibit 4.1 to MBI's Report on Form 8-K dated September 24, 1992, is incorporated herein by reference. 4.2 Rights Agreement, dated as of May 23, 1988, between MBI and Mercantile Bank, as Rights Agent (including as exhibits thereto the form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and the form of Right Certificate), filed as Exhibits 1 and 2 to MBI's Registration Statement No. 0-6045 on Form 8-A, dated May 24, 1988, is incorporated herein by reference. 4.3 Form of Indenture Regarding Senior Debt Securities, filed as Exhibit 4.1 to MBI's Registration Statement on Form S-3 (No. 333-25775), is incorporated herein by reference. 4.4 Form of Indenture Regarding Subordinated Debt Securities, filed as Exhibit 4.2 to MBI's Registration Statement on Form S-3 (No. 333-25775), is incorporated herein by reference. 4.5 Indenture, dated February 4, 1997, First Supplemental Indenture, dated February 4, 1997, and Supplemental Indenture of First Supplemental Indenture, dated May 22, 1997, between MBI, as issuer, and The Chase Manhattan Bank, as Indenture Trustee, filed as Exhibits 4.5, 4.6 and 4.12, respectively, to MBI's Registration Statement on Form S-4 (No. 333-25131), are incorporated herein by Reference. 5.1 Opinion of Thompson Coburn as to the legality of the securities being registered. 8.1 Opinion of Thompson Coburn regarding certain tax matters in the Merger. II-7 128 Exhibit Number Description Page - ------ ----------- ---- 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, is incorporated herein by reference. 10.2 The Mercantile Bancorporation Inc. Amended and Restated Executive Incentive Compensation Plan, filed as Annex H to MBI's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders, is incorporated herein by reference. 10.3 The Mercantile Bancorporation Inc. Employee Stock Purchase Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference. 10.4 The Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. 10.5 Amendment Number One to the Mercantile Bancorporation Inc. 1991 Employee Incentive Plan, filed as Exhibit 10-6 to MBI's Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.6 The Mercantile Bancorporation Inc. Amended and Restated Stock Incentive Plan, filed as Annex G to MBI's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders, is incorporated herein by reference. 10.7 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan for Non-Employee Directors, filed as Appendix E to MBI's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders, is incorporated herein by reference. 10.8 The Mercantile Bancorporation Inc. 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, 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, is incorporated herein by reference. 10.11 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 (File No. 33-63609), is incorporated herein by reference. 10.12 The Mercantile Bancorporation Inc. Supplemental Retirement Plan, filed as Exhibit 10-12 to MBI's Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. II-8 129 Exhibit Number Description Page - ------ ----------- ---- 10.13 Agreement and Plan of Reorganization, dated October 27, 1996, by and among MBI, Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 2.1 to MBI's Report on Form 8-K filed November 6, 1996, is incorporated herein by reference. 10.14 Amendment to Agreement and Plan of Reorganization, dated January 24, 1997, by and among MBI, Ameribanc, Inc. and Mark Twain Bancshares, Inc., filed as Exhibit 10-16 to Amendment No. 2 to MBI's Registration Statement (File No. 333-17757), is incorporated herein by reference. 10.15 Stock Option Agreement, dated October 27, 1996, by and between MBI, as grantee, and Mark Twain Bancshares, Inc., as issuer, filed as Exhibit 2.2 to MBI's Report on Form 8-K filed on November 6, 1996, is incorporated herein by reference. 10.16 Agreement and Plan of Reorganization, dated December 22, 1996, by and between MBI and Roosevelt Financial Group, Inc., filed as Exhibit 2.1 to MBI's Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference. 10.17 Stock Option Agreement, dated December 22, 1996, by and between MBI, as grantee, and Roosevelt Financial Group, Inc., as issuer, filed as Exhibit 2.1 to MBI's Report on Form 8-K filed on December 30, 1996, is incorporated herein by reference. 10.18 Employment Agreement for Alvin J. Siteman, dated November 18, 1996, filed as Exhibit 10.3 to MBI's Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by reference. 10.19 Employment Agreement for John P. Dubinsky, dated October 27, 1996, filed as Exhibit 10.4 to MBI's Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by reference. 10.20 Employment Agreement for Stanley J. Bradshaw, dated December 22, 1996, filed as Exhibit 10 to MBI's Report on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference. 23.1 Consent of KPMG Peat Marwick LLP with regard to the use of its reports on MBI's financial statements. 23.2 Consent of Moore Stephens Frost with regard to the use of its report on Horizon's financial statements. 23.3 Consent of Deloitte & Touche LLP with regard to the use of its report on Horizon's financial statements. 23.4 Consent of KPMG Peat Marwick LLP with regard to the use of its report on Roosevelt's financial statements. 23.5 Consent of Stephens Inc. II-9 130 Exhibit Number Description Page - ------ ----------- ---- 23.6 Consent of Thompson Coburn (included in Exhibit 5.1). 24.1 Power of Attorney (included on signature page hereto).
II-10 EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 ================================================================================ AGREEMENT AND PLAN OF MERGER AMONG MERCANTILE BANCORPORATION INC., A MISSOURI CORPORATION AND AMERIBANC, INC., A MISSOURI CORPORATION AND HORIZON BANCORP, INC. AN ARKANSAS CORPORATION ------------------------------------------------- JULY 31, 1997 ================================================================================ 2 TABLE OF CONTENTS -----------------
Page ---- Recitals 1 ARTICLE I --------- THE MERGER 1.01 The Merger 1 1.02 Closing 1 1.03 Effective Time 1 1.04 Additional Actions 2 1.05 Articles of Incorporation and By-Laws 2 1.06 Board of Directors and Officers 2 1.07 Conversion of Securities 2 1.08 Exchange Procedures 3 1.09 Dissenting Shares 4 1.10 No Fractional Shares 5 1.11 Closing of Stock Transfer Books 5 1.12 Anti-Dilution 5 1.13 Reservation of Right to Revise Transaction 6 1.14 Material Adverse Effect 6 ARTICLE II ---------- REPRESENTATIONS AND WARRANTIES OF SELLER 2.01 Organization and Authority 6 2.02 Subsidiaries 7 2.03 Capitalization 7 2.04 Authorization 8 2.05 Seller Financial Statements 9 2.06 Seller Reports 9 2.07 Title to and Condition of Assets 10 2.08 Real Property 10 2.09 Taxes 12 2.10 Material Adverse Effect 12 2.11 Loans, Commitments and Contracts 12 2.12 Absence of Defaults 15 2.13 Litigation and Other Proceedings 15 2.14 Directors' and Officers' Insurance 15 2.15 Compliance with Laws 15 2.16 Labor 17 2.17 Material Interests of Certain Persons 17 2.18 Allowance for Loan and Lease Losses; Non-Performing Assets; Financial Assets 17 - i - 3 2.19 Employee Benefit Plans 19 2.20 Conduct of Seller to Date 20 2.21 Absence of Undisclosed Liabilities 21 2.22 Proxy Statement, Etc 22 2.23 Registration Obligations 22 2.24 Tax and Regulatory Matters 22 2.25 Brokers and Finders 22 2.26 Interest Rate Risk Management Instruments 22 2.27 Accuracy of Information 23 2.28 Year 2000 Compliant 23 ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES OF THE BUYERS 3.01 Organization and Authority 23 3.02 Capitalization of Mercantile 23 3.03 Authorization 24 3.04 Mercantile Financial Statements 25 3.05 Mercantile Reports 25 3.06 Material Adverse Effect 26 3.07 Registration Statement, Etc 26 3.08 Brokers and Finders 26 ARTICLE IV ---------- CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME 4.01 Conduct of Businesses Prior to the Effective Time 26 4.02 Forbearances of Seller 26 4.03 Forbearances of the Buyers 29 ARTICLE V --------- ADDITIONAL AGREEMENTS 5.01 Access and Information; Due Diligence 29 5.02 Registration Statement; Regulatory Matters 30 5.03 Shareholder Approval 30 5.04 Current Information 31 5.05 Conforming Entries 31 5.06 Environmental Reports 32 5.07 Agreements of Affiliates 32 5.08 Expenses 33 5.09 Miscellaneous Agreements and Consents 33 5.10 Employee Agreements and Benefits 33 5.11 Press Releases 34 5.12 State Takeover Statutes 34 - ii - 4 5.13 Directors' and Officers' Indemnification 34 5.14 Tax Opinion Certificates 35 5.15 Best Efforts to Insure Pooling 35 ARTICLE VI ---------- CONDITIONS 6.01 Conditions to Each Party's Obligation To Effect the Merger 35 6.02 Conditions to Obligations of Seller 36 6.03 Conditions to Obligations of the Buyers 36 ARTICLE VII ----------- TERMINATION, AMENDMENT AND WAIVER 7.01 Termination 37 7.02 Effect of Termination 38 7.03 Amendment 38 7.04 Waiver 38 ARTICLE VIII ------------ GENERAL PROVISIONS 8.01 Non-Survival of Representations, Warranties and Agreements 39 8.02 Indemnification 39 8.03 No Assignment; Successors and Assigns 39 8.04 Severability 40 8.05 No Implied Waiver 40 8.06 Headings 40 8.07 Entire Agreement 40 8.08 Counterparts 40 8.09 Notices 40 8.10 Governing Law 41 Exhibit A - Affiliate Letter Exhibit B - Director/Officer Certificate Exhibit C - Shareholder Certificate Exhibit D - Buyer's Opinion Exhibit E - Seller's Opinion
- iii - 5 AGREEMENT AND PLAN OF MERGER ---------------------------- This AGREEMENT AND PLAN OF MERGER (this "Agreement"), made and entered into as of July 31, 1997 by and among Mercantile Bancorporation Inc., a Missouri corporation ("Mercantile"), Ameribanc, Inc., a Missouri corporation ("Merger Sub" and, collectively, with Mercantile, the "Buyers"), and Horizon Bancorp, Inc., an Arkansas corporation ("Seller"). WHEREAS, Merger Sub is a wholly owned subsidiary of Mercantile, and each of Mercantile and Merger Sub is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"); and WHEREAS, Seller is registered as a bank holding company under the BHCA; and WHEREAS, the respective Boards of Directors of Seller and Merger Sub and the Executive Committee of the Board of Directors of Mercantile have approved the merger (the "Merger") of Seller with and into Merger Sub pursuant to the terms and subject to the conditions contained in this Agreement; and WHEREAS, the parties desire to provide certain undertakings, conditions, representations, warranties and covenants in connection with the transactions contemplated by this Agreement. NOW THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: ARTICLE I --------- THE MERGER 1.01 The Merger. Subject to the terms and conditions of this ---------- Agreement, Seller shall be merged with and into Merger Sub in accordance with Chapter 351 of the Missouri Revised Statutes (the "Missouri Statute") and the provisions of the Arkansas Business Corporation Act (the "Arkansas Statute"), and the separate corporate existence of Seller shall cease. Merger Sub shall be the surviving corporation (sometimes hereinafter referred to as the "Surviving Corporation") and shall continue to be governed by the laws of the State of Missouri. 1.02 Closing. The closing (the "Closing") of the Merger, ------- unless the parties hereto shall otherwise mutually agree, shall take place at the offices of Mercantile in St. Louis, Missouri, at 10:00 am, local time, on the date that the Effective Time (as defined in Section 1.03) occurs (the "Closing Date"). 1.03 Effective Time. The Merger shall become effective (the -------------- "Effective Time") upon the later of (i) the issuance of a Certificate of Merger by the Office of the Secretary of State of the State - 1 - 6 of Missouri and (ii) the filing of Articles of Merger with the Office of the Secretary of State of the State of Arkansas. Unless otherwise mutually agreed in writing by Buyers and Seller, subject to the terms and conditions of this Agreement, the Effective Time shall occur on such date as Buyers shall notify Seller in writing (such notice to be at least five business days in advance of the Effective Time) but (i) not earlier than the satisfaction of all conditions set forth in Section 6.01(a) and 6.01(b) (the "Approval Date") and (ii) not later than the first business day of the first full calendar month commencing at least five business days after the Approval Date. On the Closing Date, the parties hereto will cause the Merger to be consummated by delivering to the Secretary of State of the State of Missouri and the Secretary of State of the State of Arkansas, for filing, Articles of Merger in such form as required by, and executed and acknowledged in accordance with, the relevant provisions of the Missouri Statute and the Arkansas Statute. 1.04 Additional Actions. If, at any time after the Effective ------------------ Time, the Surviving Corporation 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 Corporation its right, title or interest in, to or under any of the rights, properties or assets of Seller or Merger Sub, or (b) otherwise carry out the purposes of this Agreement, Seller and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such deeds, assignments or assurances 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 Corporation and otherwise to carry out the purposes of this Agreement, and the officers and directors of the Surviving Corporation are authorized in the name of Seller or otherwise to take any and all such action. 1.05 Articles of Incorporation and By-Laws. The Articles of ------------------------------------- Incorporation and By-Laws of Merger Sub in effect immediately prior to the Effective Time shall be the Articles of Incorporation and By-Laws of the Surviving Corporation, unless otherwise appealed or amended. 1.06 Board of Directors and Officers. At the Effective Time, ------------------------------- the directors and officers of Merger Sub immediately prior to the Effective Time shall be the directors and officers, respectively, of the Surviving Corporation following the Merger, and such directors and officers shall hold office in accordance with the Surviving Corporation's By-Laws and applicable law. 1.07 Conversion of Securities. ------------------------ At the Effective Time, by virtue of the Merger and without any action on the part of the Buyers, Seller or the holder of any of the following securities: (a) Each share of the common stock, $1.00 par value, of Merger Sub that is issued and outstanding immediately prior to the Effective Time shall remain outstanding and shall be unchanged after the Merger and shall thereafter constitute all of the issued and outstanding capital stock of the Surviving Corporation; and (b) Subject to Sections 1.10 and 1.12 hereof, each share of common stock, $1.00 par value, of Seller ("Seller Common Stock") issued and outstanding at the Effective Time (other than any shares held by Seller, Mercantile or any of their - 2 - 7 respective Subsidiaries (as defined in Section 2.02 hereof) (in each case other than in a fiduciary capacity or as a result of debts previously contracted), which shall be cancelled, and other than any Dissenting Shares (as defined in Section 1.09)), shall cease to be outstanding and shall be converted into and become the right to receive 2.6867 shares (the "Exchange Ratio") of common stock, $0.01 par value, and the associated "Rights" under the "Rights Agreement," as those terms are defined in Section 3.02 hereof, of Mercantile (collectively, "Mercantile Common Stock"). The Exchange Ratio was computed by (i) aggregating (A) the total number of shares of Seller Common Stock that were issued and outstanding on the date of this Agreement (as set forth in Section 2.03 hereof) with (B) the total number of shares of Seller Common Stock that are reserved for issuance pursuant to options, warrants, scrip, rights to subscribe to, calls or commitments relating to, or securities or rights convertible into, Seller Common Stock (as set forth in Section 2.03 hereof) and dividing such number of shares of Seller Common Stock (computed by aggregating (A) and (B) hereof) into (ii) 1,700,000, the aggregate number of shares of Mercantile Common Stock to be issued in the Merger. For purposes of this Agreement, and notwithstanding Section 1.12 hereof, after the payment of the three-for-two Mercantile Common Stock dividend that is payable on October 1, 1997 to shareholders of record of Mercantile as of September 10, 1997 (the "Stock Dividend"), the Exchange Ratio shall equal 4.0301 and the aggregate number of shares of Mercantile Common Stock to be issued in the Merger shall not exceed 2,550,000. 1.08 Exchange Procedures. ------------------- (a) As soon as practicable following the Effective Time, Mercantile shall mail or cause to be mailed to holders of record of certificates formerly representing shares of Seller Common Stock (the "Certificates"), as identified on the Seller Shareholder List (as provided pursuant to Section 1.11 hereof), letters advising them of the effectiveness of the Merger and instructing them to tender such Certificates to Mercantile or its duly appointed agent as exchange agent (the "Exchange Agent"), or in lieu thereof, such evidence of lost, stolen or mutilated Certificates and such surety bond or other security as the Exchange Agent may reasonably require (the "Required Documentation"). (b) Subject to Section 1.11, after the Effective Time, each previous holder of a Certificate that surrenders such Certificate or in lieu thereof, the Required Documentation, to the Exchange Agent, with a properly completed and executed letter of transmittal with respect to such Certificate, will be entitled to a certificate or certificates representing the number of full shares of Mercantile Common Stock into which the Certificate so surrendered shall have been converted pursuant to this Agreement, and any distribution theretofore declared and not yet paid with respect to such shares of Mercantile Common Stock and any amount due with respect to fractional shares, without interest (the "Merger Consideration"). Such shares of Mercantile Common Stock, any amount due with respect to fractional shares and any distribution shall be delivered by Mercantile to each such holder as promptly as practicable after such surrender. - 3 - 8 (c) Each outstanding Certificate, until duly surrendered to the Exchange Agent, shall be deemed to evidence ownership of the Merger Consideration into which the stock previously represented by such Certificate shall have been converted pursuant to this Agreement. (d) After the Effective Time, holders of Certificates shall cease to have rights with respect to the stock previously represented by such Certificates, and their sole rights shall be to exchange such Certificates for the Merger Consideration. After the closing of the transfer books as described in Section 1.11 hereof, there shall be no further transfer on the records of Seller of Certificates, and if such Certificates are presented to Seller for transfer, they shall be cancelled against delivery of the Merger Consideration. Neither Buyers nor the Exchange Agent shall be obligated to deliver the Merger Consideration until such holder surrenders the Certificates or furnishes the Required Documentation as provided herein. No dividends or distributions declared after the Effective Time (including any redemption by Mercantile of the Rights associated therewith) on the Mercantile Common Stock will be remitted to any person entitled to receive Mercantile Common Stock under this Agreement until such person surrenders the Certificate representing the right to receive such Mercantile Common Stock or furnishes the Required Documentation, at which time such dividends or declarations shall be remitted to such person, without interest and less any taxes that may have been imposed thereon. Certificates surrendered for exchange by an affiliate shall not be exchanged until Buyers have received a written agreement from such affiliate as required pursuant to Section 5.07 hereof. Neither the Exchange Agent nor any party to this Agreement nor any affiliate thereof shall be liable to any holder of stock represented by any Certificate for any Merger Consideration issuable or payable in the Merger that is paid to a public official pursuant to applicable abandoned property, escheat or similar laws. 1.09 Dissenting Shares. ----------------- (a) "Dissenting Shares" means any shares held by any holder who becomes entitled to payment of the fair value of such shares under Subchapter 13 of the Arkansas Statute. Any holders of Dissenting Shares shall be entitled to payment for such shares only to the extent permitted by and in accordance with the provisions of such law and Mercantile shall cause the Surviving Corporation to pay such consideration with funds provided by Mercantile. (b) Each party hereto shall give the other prompt notice of any written demands for the payment of the fair value of any shares, withdrawals of such demands, and any other instruments, served pursuant to the Arkansas Statute received by such party and Seller shall give Mercantile the opportunity to participate in all negotiations and proceedings with respect to such demands. Seller shall not voluntarily make any payment with respect to any demands for payment of fair value and shall not, except with the prior written consent of Mercantile, which consent shall not be unreasonably withheld, settle or offer to settle any such demands. - 4 - 9 1.10 No Fractional Shares. Notwithstanding any other provision -------------------- of this Agreement, neither certificates nor scrip for fractional shares of Mercantile Common Stock shall be issued in the Merger. Each holder of shares of Seller Common Stock who otherwise would have been entitled to a fraction of a share of Mercantile Common Stock shall receive (by check from the Exchange Agent, mailed to the shareholder with the certificate(s) for Mercantile Common Stock which such holder is to receive pursuant to the Merger) in lieu thereof, and at the time such holder receives the shares of Mercantile Common Stock to which the holder is entitled, 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 Closing of Stock Transfer Books. ------------------------------- (a) The stock transfer books of Seller shall be closed at the end of business on the business day immediately preceding the Closing Date. In the event of a transfer of ownership of Seller Common Stock that is not registered in the transfer records prior to the closing of such record books, the Merger Consideration issuable or payable with respect to such stock may be delivered to the transferee, if the Certificate or Certificates representing such stock is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and all applicable stock transfer taxes are paid. (b) At the Effective Time, Seller shall provide Buyers with a complete and verified list of registered holders of Seller Common Stock based upon its stock transfer books as of the closing of said transfer books, including the names, addresses, certificate numbers and taxpayer identification numbers of such holders (the "Seller Shareholder List"). Buyers shall be entitled to rely upon the Seller Shareholder List to establish the identity of those persons entitled to receive the Merger Consideration, which list shall be conclusive with respect thereto. In the event of a dispute with respect to ownership of stock represented by any Certificate, Buyers shall be entitled to deposit any Merger Consideration represented thereby in escrow with an independent third party and thereafter be relieved with respect to any claims thereto. 1.12 Anti-Dilution. Other than the adjustment to the Exchange ------------- Ratio set forth in Section 1.07 hereof with respect to the Stock Dividend, if between the date of this Agreement and the Effective Time a share of Mercantile Common Stock shall be changed into a different number of shares of Mercantile Common Stock or a different class of shares by reason of reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or if a stock dividend thereon shall be declared with a record date within such period, then appropriate and proportionate adjustment or adjustments will be made to the Exchange Ratio such that each shareholder of Seller shall be entitled to receive such number of shares of Mercantile Common Stock or other securities as such shareholder would have received pursuant to such reclassification, recapitalization, split-up, combination, exchange of shares or readjustment or as a result of such stock dividend had the record date therefor been immediately following the Effective Time. - 5 - 10 1.13 Reservation of Right to Revise Transaction. Buyers may at ------------------------------------------ any time change the method of effecting the acquisition of Seller by Buyers (including, without limitation, the provisions of this Article I) if and to the extent Buyers deem such change to be desirable, including, without limitation, to provide for (i) a merger of Merger Sub with and into Seller, in which Seller is the surviving corporation, or (ii) a merger of Seller directly into Mercantile, in which Mercantile is the surviving corporation; provided, however, that no such change shall (A) alter or change the amount or kind of the consideration to be received by the shareholders of Seller in the Merger, (B) adversely affect the tax treatment to Seller shareholders, as generally described in Section 6.01(e) hereof, or (C) materially impede or delay receipt of any approvals, referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. 1.14 Material Adverse Effect. As used in this Agreement, the ----------------------- term "Material Adverse Effect" with respect to an entity means any condition, event, change or occurrence that has or may reasonably be expected to have a material adverse effect on the condition (financial or otherwise), properties, business or results of operations, of such entity and its Subsidiaries, taken as a whole as reflected in the Seller Financial Statements (as defined in Section 2.05(b)) or the Mercantile Financial Statements (as defined in Section 3.04), as the case may be; it being understood that a Material Adverse Effect shall not include: (i) a change with respect to, or effect on, such entity and its Subsidiaries resulting from a change in law, rule, regulation, generally accepted accounting principles or regulatory accounting principles; (ii) a change with respect to, or effect on, such entity and its Subsidiaries resulting from any other matter affecting depository institutions generally including, without limitation, changes in general economic conditions and changes in prevailing interest and deposit rates; (iii) in the case of Seller, any financial change resulting from adjustments taken pursuant to Section 5.05 hereof; or (iv) a change disclosed in the Seller Financial Statements or the Mercantile Financial Statements, as the case may be. ARTICLE II ---------- REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to the Buyers to enter into and perform their respective obligations under this Agreement, and notwithstanding any examinations, inspections, audits and other investigations made by the Buyers, Seller hereby represents and warrants to the Buyers as follows: 2.01 Organization and Authority. Seller is a corporation duly -------------------------- organized, validly existing and in good standing under the laws of the State of Arkansas, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its 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. Seller is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHCA. True and complete copies of the Articles of Incorporation and By-Laws of Seller and the Charter and By-Laws of Horizon Bank, an Arkansas state-chartered bank and wholly owned subsidiary of Seller ("Horizon Bank"), each as in effect on the date of this Agreement, are attached hereto as Schedule 2.01. Also attached hereto as Schedule 2.01 are ------------- ------------- true and complete lists of the - 6 - 11 shareholders of each of the Seller and Horizon Bank (including directors' qualifying shares), as of a date not earlier than the fifth business day prior to the date of this Agreement. 2.02 Subsidiaries. ------------ (a) Schedule 2.02 sets forth, a complete and correct ------------- list of all of Seller's "Subsidiaries" (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC"); each a "Seller Subsidiary" and, collectively, the "Seller Subsidiaries"), and all outstanding Equity Securities (as defined in Section 2.03) of each, all of which are owned directly or indirectly by Seller. Except as disclosed in Schedule 2.02, all of the outstanding shares of ------------- capital stock of the Seller Subsidiaries owned directly or indirectly by Seller are validly issued, fully paid and nonassessable and are owned free and clear of any lien, claim, charge, option, encumbrance, agreement, mortgage, pledge, security interest or restriction (a "Lien") with respect thereto. Each of the Seller Subsidiaries is a corporation or bank duly incorporated or organized and validly existing under the laws of its jurisdiction of incorporation or organization, and has corporate power and authority to own or lease its properties and assets and to carry on its business as it is now being conducted. Each of the Seller Subsidiaries is duly qualified to do business in each jurisdiction where its ownership or leasing of property or the conduct of its business requires it so to be qualified, except where the failure to so qualify would not have a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. Neither Seller nor any Seller Subsidiary owns beneficially, directly or indirectly, any shares of any class of Equity Securities or similar interests of any corporation, bank, business trust, association or organization, or any interest in a partnership or joint venture of any kind, other than those identified as Seller Subsidiaries in Schedule 2.02 hereof. ------------- (b) Horizon Bank is a commercial bank duly organized, validly existing and in good standing under the laws of the State of Arkansas. The deposits of Horizon Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") under the Federal Deposit Insurance Act of 1950, as amended (the "FDI Act"). 2.03 Capitalization. The authorized capital stock of Seller -------------- consists of (i) 2,000,000 shares of Seller Common Stock, of which, as of the date hereof, 666,240 shares were issued and 632,743 shares were outstanding and (ii) 25,000 shares of Preferred Stock, $100.00 par value, of Seller, of which, as of the date hereof, no shares were issued and outstanding. As of the date hereof, Seller had not reserved any shares of Seller Common Stock for issuance and no Seller stock options were outstanding. Except as set forth above, there are no other Equity Securities of Seller outstanding. "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. All of the issued and outstanding shares of Seller Common Stock are validly issued, fully paid and nonassessable, and have not been issued in violation of any preemptive right of any - 7 - 12 shareholder of Seller. Neither Seller nor any Seller Subsidiary has taken or agreed to take any action or has any knowledge of any fact or circumstance and neither Seller nor any Seller Subsidiary will take any action that would prevent the Merger from qualifying for pooling-of-interests accounting treatment. 2.04 Authorization. ------------- (a) Seller has the corporate power and authority to enter into this Agreement and, subject to the approval of this Agreement by the shareholders of Seller and Regulatory Authorities (as defined in Section 2.06), to carry out its obligations hereunder. The only shareholder vote required for Seller to approve this Agreement is the affirmative vote of the holders of a majority of the outstanding shares of Seller Common Stock entitled to vote at a meeting called for such purpose. The execution, delivery and performance of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby in accordance with and subject to the terms of this Agreement have been duly authorized by the Board of Directors of Seller. Subject to the approval of Seller's shareholders and subject to the receipt of such approvals of the Regulatory Authorities as may be required by statute or regulation, this Agreement is a valid and binding obligation of Seller enforceable against Seller in accordance with its terms. (b) Neither the execution nor delivery nor performance by Seller of this Agreement, nor the consummation by Seller of the transactions contemplated hereby, nor compliance by Seller with any of the provisions hereof, will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of Seller or any of the Seller Subsidiaries under any of the terms, conditions or provisions of (x) its Articles of Incorporation, charter or By-Laws or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Seller or any of the Seller Subsidiaries is a party or by which it may be bound, or to which Seller or any of the Seller Subsidiaries or any of the properties or assets of Seller or any of the Seller Subsidiaries may be subject, or (ii) subject to compliance with the statutes and regulations referred to in subsection (c) of this Section 2.04 violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Seller or any of the Seller Subsidiaries or any of their respective properties or assets. (c) Other than in connection or in compliance with the provisions of the Missouri Statute, the Arkansas Statute, the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), the securities or blue sky laws of the various states or filings, consents, reviews, authorizations, approvals or exemptions required under the BHCA, or any required approvals of the Federal Reserve Board and the Commissioner of the State Bank Department of the State of Arkansas (the "Arkansas Commissioner") or other - 8 - 13 governmental agencies or governing boards having regulatory authority over Seller or any Seller Subsidiary, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Seller of the transactions contemplated by this Agreement. 2.05 Seller Financial Statements. --------------------------- (a) Attached hereto as Schedule 2.05(a) are copies of ---------------- the following documents: (i) Audited consolidated balance sheets of Seller as of December 31, 1996 and 1995, related audited consolidated statements of income, changes in shareholders' equity and cash flows for each of the three (3) years in the period ended December 31, 1996, together with the notes thereto, audited by Seller's independent auditors; (ii) Unaudited consolidated balance sheets of Seller as of March 31, 1997 and 1996 and related consolidated statements of income and changes in shareholders' equity for the three-month period ended March 31, 1997; (iii) The Form F.R. Y-9C and F.R. Y-9LP reports of Seller as of December 31, 1996, 1995 and 1994 and as of March 31, 1997 and the Form F.R.Y-6 reports of Seller as of December 31, 1996, 1995 and 1994 and any Form F.R. Y-6A reports of Seller filed since January 1, 1997; and (iv) The Consolidated Reports of Condition and Income of Horizon Bank as of and for the years ended December 31, 1996, 1995 and 1994 and as of and for the three-months ended March 31, 1997, as filed by Horizon Bank with the FDIC. (b) The financial statements contained in the document referenced in Schedule 2.05(a) are referred to collectively as the ---------------- "Seller Financial Statements." The Seller Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") or regulatory accounting principles, as the case may be, consistently applied during the periods involved, and present fairly the consolidated financial position of Seller and the Seller Subsidiaries at the dates thereof and the consolidated results of operations, changes in shareholders' equity and cash flows of Seller and the Seller Subsidiaries for the periods stated therein. (c) Seller and the Seller Subsidiaries have each prepared, kept and maintained through the date hereof true, correct and complete financial and other books and records of their affairs which fairly reflect their respective financial conditions, results of operations, changes in shareholders' equity and cash flows. 2.06 Seller Reports. Since January 1, 1995, each of Seller and -------------- the Seller Subsidiaries has timely filed all material reports, registrations and statements, together with any required amendments - 9 - 14 thereto, that it was required to file with (i) the Federal Reserve Board, (ii) the FDIC, (iii) the Arkansas Commissioner and (iv) any federal, state, municipal or local government, securities, banking, savings and loan, environmental, insurance and other governmental or regulatory authority, and the agencies and staffs thereof (the entities in the foregoing clauses (i) through (iv) being referred to herein collectively as the "Regulatory Authorities" and individually as a "Regulatory Authority"), having jurisdiction over the affairs of it. All such material reports and statements filed with any such Regulatory Authority are collectively referred to herein as the "Seller Reports." As of each of their respective dates, the Seller Reports complied in all material respects with all the rules and regulations promulgated by the applicable Regulatory Authority. With respect to Seller Reports filed with the Regulatory Authorities, there is no material unresolved violation, criticism or exception by any Regulatory Authority with respect to any report or statement filed by, or any examinations of, Seller or any of the Seller Subsidiaries. 2.07 Title to and Condition of Assets. -------------------------------- (a) Except as may be reflected in the Seller Financial Statements and with the exception of all "Real Property" (which is the subject of Section 2.08 hereof) Seller and the Seller Subsidiaries have, and at the Closing Date will have, good and marketable title to their owned properties and assets, including, without limitation, those reflected in the Seller Financial Statements (except those disposed of in the ordinary course of business since the date thereof), free and clear of any Lien, except for Liens for (i) taxes, assessments or other governmental charges not yet delinquent and (ii) as set forth or described in the Seller Financial Statements or any subsequent Seller Financial Statements delivered to Buyers prior to the Effective Time. (b) No material properties or assets that are reflected as owned by Seller or any of the Seller Subsidiaries in the Seller Financial Statements as of March 31, 1997 have been sold, leased, transferred, assigned or otherwise disposed of since such date, except in the ordinary course of business. (c) All furniture, fixtures, vehicles, machinery and equipment and computer software owned or used by Seller or the Seller Subsidiaries, including any such items leased as a lessee (taken as a whole as to each of the foregoing with no single item deemed to be of material importance) are in good working order and free of known defects, subject only to normal wear and tear. The operation by Seller or the Seller Subsidiaries of such properties and assets is in compliance in all material respects with all applicable laws, ordinances and rules and regulations of any governmental authority having jurisdiction over such use. 2.08 Real Property. ------------- (a) The legal description of each parcel of real property owned by Seller or any of the Seller Subsidiaries (other than real property acquired in foreclosure or in lieu of foreclosure in the course of the collection of loans and being held by Seller or a Seller Subsidiary for disposition as required by law) is set forth in Schedule 2.08(a) under the heading "Owned ---------------- Real Property" (such real property being herein referred to as the "Owned Real Property"). The legal description of each parcel of real property leased by - 10 - 15 Seller or any of the Seller Subsidiaries is also set forth in Schedule 2.08(a) under the heading "Leased Real Property" (such real ---------------- property being herein referred to as the "Leased Real Property"). Seller shall update Schedule 2.08(a) within ten (10) days of acquiring or leasing any real property after the date hereof. Collectively, the Owned Real Property and the Leased Real Property is herein referred to as the "Real Property." (b) There is no pending action involving Seller or any of the Seller Subsidiaries as to the title of or the right to use any of the Real Property. (c) Neither Seller nor any of the Seller Subsidiaries has any interest in any other real property except interests as a mortgagee, and except for any real property acquired in foreclosure or in lieu of foreclosure and being held for disposition as required by law. (d) None of the buildings, structures or other improvements located on the Real Property encroaches upon or over any adjoining parcel of real estate or any easement or right-of-way or "setback" line 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 Owned Real Property are the subject of any official complaint or notice by any governmental authority of violation of any applicable zoning ordinance or building code, and there is no zoning ordinance, building code, use or occupancy restriction or condemnation action or proceeding pending, or, to the best knowledge of Seller, threatened, with respect to any such building, structure or improvement. The Owned Real Property is in generally good condition for its intended purpose, ordinary 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 in the Seller Financial Statements or with respect to such easements, Liens, defects or encumbrances as do not individually or in the aggregate materially adversely affect the use or value of the parcel of Owned Real Property, Seller and the Seller Subsidiaries have, and at the Closing Date will have, good and marketable title to their respective Owned Real Properties. (g) Neither Seller nor any of the Seller Subsidiaries has caused or allowed the generation, treatment, storage, disposal or release at any Real Property of any Toxic Substance, except in accordance with all applicable federal, state and local laws and regulations. "Toxic Substance" means any hazardous, toxic or dangerous substance, pollutant, waste, gas or material, including, without limitation, petroleum and petroleum products, metals, liquids, semi-solids or solids, that are regulated under any federal, state or local statute, ordinance, rule, regulation or other law pertaining to environmental protection, contamination, quality, waste management or cleanup. - 11 - 16 (h) Except as disclosed on Schedule 2.08(a), there are ---------------- no underground storage tanks located on, in or under any Owned Real Property. Neither Seller nor any Seller Subsidiaries own or operate any underground storage tank at any Leased Real Property. 2.09 Taxes. Seller and each Seller Subsidiary have timely ----- filed or will timely file (including extensions) all tax returns required to be filed at or prior to the Closing Date ("Seller Returns"). Each of Seller and the Seller Subsidiaries has paid, or set up adequate reserves on the Seller Financial Statements for the payment of, all taxes required to be paid in respect of the periods covered by such Seller Returns and has set up adequate reserves on the most recent Seller Financial Statements for the payment of all taxes anticipated to be payable in respect of all periods up to and including the latest period covered by such Seller Financial Statements. Neither Seller nor any Seller Subsidiary has any liability 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 Seller or any of the Seller Subsidiaries which would not be covered by existing reserves. Neither Seller nor any of the Seller Subsidiaries is delinquent in the payment of any tax, assessment or governmental charge, nor has it requested any extension of time within which to file any tax returns in respect of any fiscal year which have not since been filed and no requests for waivers of the time to assess any tax are pending. No federal or state income tax return of Seller or any Seller Subsidiaries has been audited by the Internal Revenue Service (the "IRS") or any state tax authority for the seven (7) most recent full calendar years. There is no deficiency or refund litigation or, to the best knowledge of Seller, matter in controversy with respect to Seller Returns. Neither Seller nor any of the Seller Subsidiaries has extended or waived any statute of limitations on the assessment of any tax due that is currently in effect. 2.10 Material Adverse Effect. Since March 31, 1997, there has ----------------------- been no Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. 2.11 Loans, Commitments and Contracts. -------------------------------- (a) Schedule 2.11(a) contains a complete and accurate ---------------- listing as of the date hereof of all contracts entered into with respect to deposits of $500,000 or more, by account, and all loan agreements and commitments, notes, security agreements, repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements, and other documents relating to or involving extensions of credit and other commitments to extend credit by Seller or any of the Seller Subsidiaries with respect to any one entity or related group of entities in excess of $500,000 to which Seller or any of the Seller Subsidiaries is a party or by which it is bound, by account, and, where applicable, such other information as shall be necessary to identify any related group of entities. (b) Except for the contracts and agreements required to be listed on Schedule 2.11(a) and the loans required to be listed ---------------- on Schedule 2.11(f), and except as otherwise listed on Schedule ---------------- -------- 2.11(b), as of the date hereof neither Seller nor any of the ------- Seller Subsidiaries is a party to or is bound by any: - 12 - 17 (i) agreement, contract, arrangement, understanding or commitment with any labor union; (ii) franchise or license agreement; (iii) written employment, severance, termination pay, agency, consulting or similar agreement or commitment in respect of personal services; (iv) material agreement, arrangement or commitment (A) not made in the ordinary course of business, and (B) pursuant to which Seller or any of the Seller Subsidiaries is or may become obligated to invest in or contribute to any Seller Subsidiary other than pursuant to Seller Employee Plans (as that term is defined in Section 2.19 hereof) and agreements relating to joint ventures or partnerships set forth in Schedule 2.02, true and complete ------------- copies of which have been furnished to Buyers; (v) agreement, indenture or other instrument not disclosed in the Seller Financial Statements relating to the borrowing of money by Seller or any of the Seller Subsidiaries or the guarantee by Seller or any of the Seller Subsidiaries of any such obligation (other than trade payables or instruments related to transactions entered into in the ordinary course of business by Seller or any of the Seller Subsidiaries, such as deposits, Federal Funds borrowings and repurchase and reverse repurchase agreements), other than such agreements, indentures or instruments providing for annual payments of less than $100,000; (vi) contract containing covenants which limit the ability of Seller or any of the Seller Subsidiaries to compete in any line of business or with any person or which involves any restrictions on the geographical area in which, or method by which, Seller or any of the Seller Subsidiaries may carry on their respective businesses (other that as may be required by law or any applicable Regulatory Authority); (vii) contract or agreement which is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K as promulgated by the SEC to be performed after the date of this Agreement that has not been filed or incorporated by reference in the Seller Reports; (viii) lease with annual rental payments aggregating $50,000 or more; (ix) loans or other obligations payable or owing to any officer, director or employee except (A) salaries, wages and directors' fees or other compensation incurred and accrued in the ordinary course of business and (B) obligations due in respect of any depository accounts maintained by any of the foregoing at Seller or any of the Seller Subsidiaries in the ordinary course of business; or - 13 - 18 (x) other agreement, contract, arrangement, understanding or commitment involving an obligation by Seller or any of the Seller Subsidiaries of more than $250,000 and extending beyond six months from the date hereof that cannot be cancelled without cost or penalty upon notice of 30 days or less, other than contracts entered into in respect of deposits, loan agreements and commitments, notes, security agreements, repurchase and reverse repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements and other documents relating to transactions entered into by Seller or any of the Seller Subsidiaries in the ordinary course of business and not involving extensions of credit with respect to any one entity or related group of entities in excess of $500,000. (c) Seller and/or the Seller Subsidiaries carry property, liability, director and officer errors and omissions, products liability and other insurance coverage as set forth in Schedule 2.11(c) under the heading "Insurance." ---------------- (d) True, correct and complete copies of the agreements, contracts, leases, insurance policies and other documents referred to in Section 2.11(b) have been included with Schedule 2.11(b) --------------- ---------------- hereto. True, correct and complete copies of the agreements, contracts, leases, insurance policies and other documents referred to in Sections 2.11(a) and (c) have been or shall be furnished or ------------------------ made available to Buyers. (e) To the best knowledge of Seller, each of the agreements, contracts, leases, insurance policies and other documents referred to in Schedules 2.11 (a), (b) and (c) is a ------------------------------- valid, binding and enforceable obligation of the parties sought to be bound thereby, except as the enforceability thereof against the parties thereto (other than Seller or any of the Seller Subsidiaries) may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws now or hereafter in effect relating to the enforcement of creditors' rights generally, and except that equitable principles may limit the right to obtain specific performance or other equitable remedies. (f) Schedule 2.11(f) under the heading "Loans" contains ---------------- a true, correct and complete listing, as of the date of this Agreement, by account, of (i) all loans in excess of $250,000 of Seller or any of the Seller Subsidiaries which have been accelerated during the past twelve months; (ii) all loan commitments or lines of credit of Seller or any of the Seller Subsidiaries in excess of $250,000 which have been terminated by Seller or any of the Seller Subsidiaries during the past twelve months by reason of default or adverse developments in the condition of the borrower or other events or circumstances affecting the credit of the borrower; (iii) all loans, lines of credit and loan commitments in excess of $250,000, as to which Seller or any of the Seller Subsidiaries has given written notice of its intent to terminate during the past twelve months; (iv) with respect to all loans in excess of $250,000 all notification letters and other written communications from Seller or any of the Seller Subsidiaries to any of their respective borrowers, customers or other parties during the past twelve months wherein Seller or any of the Seller Subsidiaries has requested or demanded that actions be taken to correct existing defaults or facts or circumstances which may become defaults; (v) each borrower, customer or other party - 14 - 19 which has notified Seller or any of the Seller Subsidiaries during the past twelve months of, or has asserted against Seller or any of the Seller Subsidiaries, in each case in writing, any "lender liability" or similar claim, and, to the best knowledge of Seller, each borrower, customer or other party which has given Seller or any of the Seller Subsidiaries any oral notification of, or orally asserted to or against Seller or any of the Seller Subsidiaries, any such claim; or (vi) all loans in excess of $100,000 (A) that are contractually past due 90 days or more in the payment of principal and/or interest, (B) that are on non-accrual status, (C) that have been classified "doubtful," "loss" or the equivalent thereof by any Regulatory Authority, (D) where a reasonable doubt exists as to the timely future collectibility of principal and/or interest, whether or not interest is still accruing or the loan is less than 90 days past due, (E) the interest rate terms have been reduced and/or the maturity dates have been extended subsequent to the agreement under which the loan was originally created due to concerns regarding the borrower's ability to pay in accordance with such initial terms, or (F) where a specific reserve allocation exists in connection therewith. 2.12 Absence of Defaults. Neither Seller nor any of the Seller ------------------- Subsidiaries is in violation of its charter documents or By-Laws or in default under any material agreement, commitment, arrangement, lease, insurance policy or other instrument, whether entered into in the ordinary course of business or otherwise and whether written or oral, and there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default. 2.13 Litigation and Other Proceedings. Except as set forth -------------------------------- on Schedule 2.13 or otherwise disclosed in the Seller Financial Statements, ------------- neither Seller nor any of the Seller Subsidiaries is a party to any pending or, to the best knowledge of Seller, threatened claim, action, suit, investigation or proceeding, or is subject to any order, judgment or decree, except for matters which, in the aggregate, will not have, or reasonably could not be expected to have, a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. Without limiting the generality of the foregoing, there are no actions, suits or proceedings pending or, to the best knowledge of Seller, threatened against Seller or any of the Seller Subsidiaries or any of their respective officers or directors by any shareholder of Seller or any of the Seller Subsidiaries (or any former shareholder of Seller or any of the Seller Subsidiaries) or involving claims under the Community Reinvestment Act of 1977, as amended, the Bank Secrecy Act, the fair lending laws or any other similar laws. 2.14 Directors' and Officers' Insurance. Each of Seller and ---------------------------------- the Seller Subsidiaries has taken or will take all requisite action (including, without limitation, the making of claims and the giving of notices) pursuant to its directors' and officers' liability insurance policy or policies in order to preserve all rights thereunder with respect to all matters (other than matters arising in connection with this Agreement and the transactions contemplated hereby) occurring prior to the Effective Time that are known to Seller. 2.15 Compliance with Laws. -------------------- (a) To the best knowledge of Seller, Seller and each of the Seller Subsidiaries have all permits, licenses, authorizations, orders and approvals of, and have made all filings, applications and registrations with, all Regulatory Authorities that are required in - 15 - 20 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 Seller and the Seller Subsidiaries, taken as a whole. (b) (i) Each of Seller and the Seller Subsidiaries has complied with all laws, regulations and orders (including, without limitation, zoning ordinances, building codes, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and securities, tax, environmental, civil rights, and occupational health and safety laws and regulations including, without limitation, in the case of Seller or any Seller Subsidiary that is a bank or savings association, banking organization, banking corporation or trust company, all statutes, rules, regulations and policy statements pertaining to the conduct of a banking, deposit-taking, lending or related business, or to the exercise of trust powers) and governing instruments applicable to it and to the conduct of its business, except where such failure to comply would not have a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole, and (ii) neither Seller nor any of the Seller Subsidiaries is in default under, and no event has occurred which, with the lapse of time or notice or both, could result in the default under, the terms of any judgment, order, writ, decree, permit, or license of any Regulatory Authority or court, whether federal, state, municipal or local, and whether at law or in equity. (c) Neither Seller nor any of the Seller Subsidiaries is subject to or reasonably likely to incur a liability as a result of its ownership, operation, or use of any Property (as defined below) of Seller (whether directly or, to the best knowledge of Seller, as a consequence of such Property being acquired in foreclosure or in lieu of foreclosure or being part of the investment portfolio of Seller or any of the Seller Subsidiaries) (A) that is contaminated by or contains any Toxic Substance (as defined in Section 2.08) including, without limitation, petroleum, asbestos, PCBs, pesticides, herbicides and any other substance or waste that is hazardous to human health or the environment and regulated by federal, state or local law, or (B) on which any Toxic Substance has been stored, disposed of, placed or used at the Property or in the construction of structures thereon; and which, in each case, reasonably could be expected to have a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. "Property" shall include all property (real or personal, tangible or intangible) owned or controlled by Seller or any of the Seller Subsidiaries, including, without limitation, property acquired under foreclosure or in lieu of foreclosure, property in which any venture capital or similar unit of Seller or any of the Seller Subsidiaries has an interest and, to the best knowledge of Seller, property held by Seller or any of the Seller Subsidiaries in its capacity as a trustee. No claim, action, suit or proceeding is threatened or pending and no material claim has been asserted against Seller or any of the Seller Subsidiaries relating to Property of Seller or any of the Seller Subsidiaries before any court or other Regulatory Authority or arbitration tribunal relating to Toxic Substances, pollution or the - 16 - 21 environment, and there is no outstanding judgment, order, writ, injunction, decree or award against or affecting Seller or any of the Seller Subsidiaries with respect to the same. Except for statutory or regulatory restrictions of general application, no Regulatory Authority has placed any restriction on the business of Seller or any of the Seller Subsidiaries which reasonably could be expected to have a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. (d) Neither Seller nor any of the Seller Subsidiaries has received any notification or communication that has not been finally resolved from any Regulatory Authority (i) asserting that any Seller or any of the Seller Subsidiaries or any Property is not in substantial compliance with any of the statutes, regulations or ordinances that such Regulatory Authority enforces, (ii) threatening to revoke any license, franchise, permit or governmental authorization that is material to the Condition of Seller and the Seller Subsidiaries, taken as a whole, including, without limitation, such company's status as an insured depository institution under the FDI Act, (iii) requiring or threatening to require Seller or any of the Seller Subsidiaries, or indicating that Seller or any of the Seller Subsidiaries may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting or purporting to direct, restrict or limit in any manner the operations of Seller or any of the Seller Subsidiaries, including, without limitation, any restriction on the payment of dividends. No such cease and desist order, agreement or memorandum of understanding or other agreement is currently in effect. (e) Neither Seller nor any of the Seller Subsidiaries is required by Section 32 of the FDI Act to give prior notice to any federal banking agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive officer. 2.16 Labor. No work stoppage involving Seller or any of the ----- Seller Subsidiaries is pending or, to the best knowledge of Seller, threatened. Neither Seller nor any of the Seller Subsidiaries is involved in, or, to the best knowledge of Seller, threatened with or affected by, any labor dispute, arbitration, lawsuit or administrative proceeding. None of the employees of Seller or the Seller Subsidiaries are represented by any labor union or any collective bargaining organization. 2.17 Material Interests of Certain Persons. No officer or ------------------------------------- director of Seller or any of the Seller Subsidiaries, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any interest in any contract or property (real or personal, tangible or intangible), used in, or pertaining to the business of, Seller or any of the Seller Subsidiaries, which in the case of Seller and each of the Seller Subsidiaries would be required to be disclosed by Item 404 of Regulation S-K promulgated by the SEC. 2.18 Allowance for Loan and Lease Losses; Non-Performing Assets; ----------------------------------------------------------- Financial Assets. - ---------------- (a) All of the accounts, notes, and other receivables that are reflected in the Seller Financial Statements as of March 31, 1997 were acquired in the ordinary course of - 17 - 22 business and were collectible in full in the ordinary course of business, except for possible loan and lease losses which are adequately provided for in the allowance for loan and lease losses reflected in such Seller Financial Statements, and the collection experience of Seller and the Seller Subsidiaries since March 31, 1997 to the date hereof, has not deviated in any material and adverse manner from the credit and collection experience of Seller and the Seller Subsidiaries, taken as a whole, for the year ended December 31, 1996. (b) The allowances for loan losses contained in the Seller Financial Statements were established in accordance with the past practices and experiences of Seller and the Seller Subsidiaries, and the allowance for loan and lease losses shown on the consolidated balance sheet of Seller and the Seller Subsidiaries as of March 31, 1997, were adequate in all material respects under the requirements of GAAP, or regulatory accounting principles, as the case may be, to provide for possible losses on loans and leases (including, without limitation, accrued interest receivable) and credit commitments (including, without limitation, stand-by letters of credit) as of the date of such balance sheet. (c) Schedule 2.18(c) sets forth as of the date of this ---------------- Agreement all assets classified by Seller as real estate acquired through foreclosure or repossession, including foreclosed assets. (d) The aggregate amount of all Non-Performing Assets (as defined below) on the books of Seller and the Seller Subsidiaries does not exceed $5,000,000. "Non-Performing Assets" shall mean (i) all loans (A) that are contractually past due 90 days or more in the payment of principal and/or interest, (B) that are on nonaccrual status, (C) that have been classified "doubtful," "loss" or the equivalent thereof by any Regulatory Agency or (D) where the interest rate terms have been reduced and/or the maturity dates have been extended subsequent to the agreement under which the loan was originally created due to concerns regarding the borrower's ability to pay in accordance with such initial terms, and (ii) all assets classified by Seller as real estate acquired through foreclosure or in lieu of foreclosure, including in-substance foreclosures, and all other assets acquired through foreclosure or in lieu of foreclosure. (e) All loans receivable (including discounts) and accrued interest entered on the books of Seller and the Seller Subsidiaries, to the extent unpaid on the Closing Date, arose out of bona fide arm's-length transactions, were made for good and valuable consideration in the ordinary course of Seller's or the appropriate Seller Subsidiary's respective business, and the notes or other evidences of indebtedness with respect to such loans or discounts are true and genuine and are what they purport to be. The loans, discounts and the accrued interest reflected on the books of Seller and the Seller Subsidiaries are subject to no defenses, set-offs or counterclaims (including, without limitation, those afforded by usury or truth-in-lending laws), except as may be provided by bankruptcy, insolvency or similar laws affecting creditors' rights generally or by general principles of equity. All such loans are owned by Seller or the appropriate Seller Subsidiary free and clear of any liens, restrictions or encumbrances. - 18 - 23 (f) The notes and other evidences of indebtedness evidencing the loans described in (e) above, and all pledges, mortgages, deeds of trust and other collateral documents or security instruments relating thereto are and will be, in all material respects, valid, true, genuine and enforceable, and what they purport to be. Seller and each of the Seller Subsidiaries has good and valid title to the investment securities shown on their respective Seller Financial Statements and all securities entered on the books of Seller or the appropriate Seller Subsidiary subsequent to March 31, 1997, except for those sold or redeemed in the ordinary course of business. A complete and accurate list of such investment securities as of March 31, 1997 is attached as Schedule 2.18(f). Such list shall be updated each ---------------- month in writing until the Closing. 2.19 Employee Benefit Plans. ---------------------- (a) Schedule 2.19(a) lists all pension, retirement, ---------------- supplemental retirement, stock option, stock purchase, stock ownership, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, medical, disability, workers' compensation, vacation, group insurance, severance and other employee benefit, incentive and welfare policies, contracts, plans and arrangements, and all trust agreements related thereto, maintained by or contributed to by Seller or any of the Seller Subsidiaries in respect of any of the present or former directors, officers, or other employees of and/or consultants to Seller or any of the Seller Subsidiaries (collectively, "Seller Employee Plans"). Seller has furnished Buyers with the following documents with respect to each Seller Employee Plan: (i) a true and complete copy of all written documents comprising such Seller Employee Plan (including amendments and individual agreements relating thereto) or, if there is no such written document, an accurate and complete description of the Seller Employee Plan; (ii) the most recently filed Form 5500 or Form 5500-C/R (including all schedules thereto), if applicable; (iii) the most recent financial statements and actuarial reports, if any; (iv) the summary plan description currently in effect and all material modifications thereof, if any; and (v) the most recent IRS determination letter, if any. (b) All Seller Employee Plans have been maintained and operated in all material respects in accordance with their terms and the requirements of all applicable statutes, orders, rules and final regulations, including, without limitation, to the extent applicable, ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). All contributions required to be made to Seller Employee Plans have been made or reserved. (c) With respect to each of the Seller Employee Plans which is a pension plan (as defined in Section 3(2) of ERISA) (the "Pension Plans"): (i) each Pension Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined to be so qualified by the IRS and such determination letter may still be relied upon, and each related trust is exempt from taxation under Section 501(a) of the Code; (ii) the present value of all benefits vested and all benefits accrued under each Pension Plan which is subject to Title IV of ERISA did not, in each case, as of the last - 19 - 24 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) 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 Seller or any of the Seller Subsidiaries, to any tax or penalty; (iv) no Pension Plan or any trust created thereunder has been terminated, nor has there been any "reportable events" with respect to any Pension Plan, as that term is defined in Section 4043 of ERISA since January 1, 1989; and (v) no Pension Plan or any trust created thereunder has incurred any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA (whether or not waived). No Pension Plan is a "multiemployer plan" as that term is defined in Section 3(37) of ERISA. (d) Except as disclosed in Schedule 2.19(d), neither ---------------- Seller nor any of the Seller Subsidiaries has any liability for any post-retirement health, medical or similar benefit of any kind whatsoever, except as required by statute or regulation. (e) Neither Seller nor any of the Seller Subsidiaries has any material liability under ERISA or the Code as a result of its being a member of a group described in Sections 414(b), (c), (m) or (o) of the Code. (f) Except as disclosed in Schedule 2.19(f), neither the ---------------- execution nor delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby, will (i) result in any payment (including, without limitation, severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of Seller or any of the Seller Subsidiaries from any of such entities, (ii) increase any benefit otherwise payable under any of the Seller Employee Plans or (iii) result in the acceleration of the time of payment of any such benefit. Seller shall use its best efforts to insure that no amounts paid or payable by Seller, the Seller Subsidiaries or Buyers to or with respect to any employee or former employee of Seller or any of the Seller Subsidiaries will fail to be deductible for federal income tax purposes by reason of Section 280G of the Code. 2.20 Conduct of Seller to Date. Except as disclosed in ------------------------- Schedule 2.20, from and after March 31, 1997 through the date of this - ------------- Agreement, except as set forth in the Seller Financial Statements: (i) Seller and the Seller Subsidiaries have conducted their respective businesses in the ordinary and usual course consistent with past practices; (ii) neither Seller nor any of the Seller Subsidiaries has issued, sold, granted, conferred or awarded any of its Equity Securities, or any corporate debt securities which would be classified under GAAP as long-term debt on the balance sheets of Seller or the Seller Subsidiaries; (iii) Seller has not effected any stock split or adjusted, combined, reclassified or otherwise changed its capitalization; (iv) Seller has not declared, set aside or paid any dividend (other than its regular quarterly dividends) or other distribution in respect of its capital stock, or purchased, redeemed, retired, repurchased or exchanged, or otherwise acquired or disposed of, directly or indirectly, any of its Equity Securities, whether pursuant to the terms of such Equity Securities or otherwise; (v) neither Seller nor any of the Seller Subsidiaries has incurred any obligation or liability (absolute or contingent), except liabilities incurred in the ordinary course of business, or subjected to Lien any of its assets or properties other than in the ordinary course of business consistent with past practice; (vi) - 20 - 25 neither Seller nor any of the Seller Subsidiaries has discharged or satisfied any Lien or paid any obligation or liability (absolute or contingent), other than in the ordinary course of business; (vii) neither Seller nor any of the Seller Subsidiaries has sold, assigned, transferred, leased, exchanged, or otherwise disposed of any of its properties or assets other than for a fair consideration in the ordinary course of business; (viii) except as required by contract or law, neither Seller nor any of the Seller Subsidiaries has (A) increased the rate of compensation of, or paid any bonus to, any of its directors, officers, or other employees, except in accordance with existing policy, (B) entered into any new, or amended or supplemented any existing, employment, management, consulting, deferred compensation, severance, or other similar contract, (C) entered into, terminated, or substantially modified any of the Seller Employee Plans or (D) agreed to do any of the foregoing; (ix) neither Seller nor any Seller Subsidiary has suffered any material damage, destruction, or loss, whether as the result of fire, explosion, earthquake, accident, casualty, labor trouble, requisition, or taking of property by any Regulatory Authority, flood, windstorm, embargo, riot, act of God or the enemy, or other casualty or event, and whether or not covered by insurance; (x) neither Seller nor any of the Seller Subsidiaries has cancelled or compromised any debt, except for debts charged off or compromised in accordance with the past practice of Seller and the Seller Subsidiaries; and (xi) neither Seller nor any of the Seller Subsidiaries has entered into any material transaction, contract or commitment outside the ordinary course of its business. 2.21 Absence of Undisclosed Liabilities. ---------------------------------- (a) As of the date of this Agreement, neither Seller nor any of the Seller Subsidiaries has any debts, liabilities or obligations equal to or exceeding $25,000, individually or $50,000 in the aggregate, whether accrued, absolute, contingent or otherwise and whether due or to become due, which are required to be reflected in the Seller Financial Statements or the notes thereto in accordance with GAAP except: (i) liabilities and obligations reflected on the Seller Financial Statements; (ii) operating leases reflected on Schedule -------- 2.11(b); and ------- (iii) debts, liabilities or obligations incurred since March 31, 1997 in the ordinary and usual course of their respective businesses, none of which are for breach of contract, breach of warranty, torts, infringements or lawsuits and none of which have a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. (b) Neither Seller nor any of the Seller Subsidiaries was as of March 31, 1997, and since such date to the date hereof, has become a party to, any contract or agreement, excluding deposits, loan agreements, and commitments, notes, security agreements, repurchase and reverse repurchase agreements, bankers' acceptances, outstanding letters of credit and commitments to issue letters of credit, participation agreements and other documents relating to transactions entered into by Seller or any of the Seller Subsidiaries in the ordinary course of business, that had, has or may be reasonably expected to have a Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. - 21 - 26 2.22 Proxy Statement, Etc. None of the information regarding -------------------- Seller or any of the Seller Subsidiaries to be supplied by Seller for inclusion or included in (i) the Registration Statement on Form S-4 to be filed with the SEC by Mercantile for the purpose of registering the shares of Mercantile Common Stock to be exchanged for shares of Seller Common Stock pursuant to the provisions of this Agreement (the "Registration Statement"), (ii) the Proxy Statement to be mailed to Seller's shareholders in connection with the meeting to be called to consider this Agreement and the Merger (the "Proxy Statement") or (iii) any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby will, at the respective times such documents are filed with any Regulatory Authority and, in the case of the Registration Statement, when it becomes effective and, with respect to the Proxy Statement, when mailed, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the meeting of Seller's shareholders referred to in Section 5.03, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. All documents which Seller or any of the Seller Subsidiaries is responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. 2.23 Registration Obligations. Neither Seller nor any of the ------------------------ Seller Subsidiaries is under any obligation, contingent or otherwise, which will survive the Effective Time by reason of any agreement to register any transaction involving any of its securities under the Securities Act. 2.24 Tax and Regulatory Matters. Neither Seller nor any of the -------------------------- Seller Subsidiaries has taken or agreed to take any action or has any knowledge of any fact or circumstance that would (i) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code or (ii) materially impede or delay receipt of any approval referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement. 2.25 Brokers and Finders. Except for Stephens, Inc. to whom a ------------------- fee not to exceed $440,000 shall be paid, neither Seller nor any of the Seller Subsidiaries nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Seller or any of the Seller Subsidiaries in connection with this Agreement or the transactions contemplated hereby. 2.26 Interest Rate Risk Management Instruments. ----------------------------------------- (a) Set forth on Schedule 2.26(a) is a list as of the ---------------- date hereof of all interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements to which Seller or any of the Seller Subsidiaries is a party or by which any of their properties or assets may be bound. (b) All such interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements to which Seller or any of the Seller Subsidiaries is a party or by which any of their properties or assets may be bound were entered into in the ordinary course of business and, to the best knowledge of Seller, in - 22 - 27 accordance with prudent banking practice and applicable rules, regulations and policies of Regulatory Authorities and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations of Seller or a Seller Subsidiary and are in full force and effect. Seller and each of the Seller Subsidiaries has duly performed in all material respects all of its obligations thereunder to the extent that such obligations to perform have accrued, and to the best knowledge of Seller, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder. 2.27 Accuracy of Information. The statements contained in this ----------------------- Agreement, the Schedules and any other written document executed and delivered by or on behalf of Seller pursuant to the terms of this Agreement are true and correct as of the date hereof or as of the date delivered in all material respects, and such statements and documents do not omit any material fact necessary to make the statements contained therein not misleading. 2.28 Year 2000 Compliant. To the best knowledge of Seller, all ------------------- computer software and hardware utilized by Seller or any Seller Subsidiary is Year 2000 compliant, which, for purposes of this Agreement, shall mean that the data outside the range 1990-1999 will be correctly processed in any level of computer hardware or software including, but not limited to, microcode, firmware, applications programs, files and data bases. All computer software is designed to be used prior to, during and after the calendar year 2000 A.D., and that such software will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data that represents or references different centuries or more than one century. ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES OF THE BUYERS As an inducement to Seller to enter into and perform its obligations under this Agreement, and notwithstanding any examinations, inspections, audits or other investigations made by Seller, the Buyers hereby represent and warrant to Seller as follows: 3.01 Organization and Authority. Buyer and Merger Sub are each -------------------------- corporations duly organized, validly existing and in good standing under the laws of the State of Missouri, are each qualified to do business and are each in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and has corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted, except where the failure to be so qualified would not have a Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole. Each of Mercantile and Merger Sub is registered as a bank holding company with the Federal Reserve Board under the BHCA. 3.02 Capitalization of Mercantile. The authorized capital ---------------------------- stock of Mercantile consists of (i) 200,000,000 shares of Mercantile Common Stock, of which, as of June 30, 1997, 78,589,969 shares were issued and 74,042,343 were outstanding and (ii) 5,000,000 shares of preferred stock, no par value ("Mercantile Preferred Stock"), issuable in series, of which as of the date hereof, no shares were issued - 23 - 28 and outstanding. Mercantile has designated 2,000,000 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 between Mercantile and Mercantile Bank National Association, as Rights Agent. As of June 30, 1997, Mercantile had reserved: (i) 8,534,265 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"); and (ii) 13,042,110 shares of Mercantile Common Stock for issuance upon the acquisition of Roosevelt Financial Group, Inc. ("Roosevelt") pursuant to the Agreement and Plan of Reorganization dated as of December 22, 1996 by and between Mercantile and Roosevelt. From June 30, 1997 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 and the acquisition of Roosevelt. Mercantile continually evaluates possible acquisitions and may prior to the Effective Time enter into one or more agreements providing for, and may consummate, the acquisition by it of another bank, association, bank holding company, savings and loan holding company or other company (or the assets thereof) for consideration that may include Equity Securities. In addition, prior to the Effective Time, Mercantile may, depending on market conditions and other factors, otherwise determine to issue equity, equity-linked or other securities for financing purposes or repurchase its outstanding Equity Securities. Notwithstanding the foregoing, neither Mercantile nor any Mercantile Subsidiary has taken or agreed to take any action or has any knowledge of any fact or circumstance and neither Mercantile nor Merger Sub will take any action that would (i) prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code, (ii) materially impede or delay receipt of any approval referred to in Section 6.01(b) or the consummation of the transactions contemplated by this Agreement or (iii) prevent the Merger from qualifying for pooling-of-interests accounting treatment. Except as set forth above, there are no other Equity Securities of Mercantile outstanding. All of the issued and outstanding shares of Mercantile Common Stock are validly issued, fully paid, and nonassessable, and have not been issued in violation of any preemptive right of any shareholder of Mercantile. At the Effective Time, the Mercantile Common Stock to be issued in the Merger will be duly authorized, validly issued, fully paid and nonassessable, will not be issued in violation of any preemptive right of any shareholder of Mercantile and will be listed for trading on the NYSE. 3.03 Authorization. ------------- (a) Mercantile and Merger Sub each have the corporate power and authority to enter into this Agreement and to carry out their respective obligations hereunder. The execution, delivery and performance of this Agreement by Mercantile and Merger Sub and the consummation by Mercantile and Merger Sub of the transactions contemplated hereby have been duly authorized by all requisite corporate action of Mercantile and Merger Sub. Subject to the receipt of such approvals of the Regulatory Authorities as may be required by statute or regulation, this Agreement is a valid and binding obligation of Mercantile and Merger Sub enforceable against each in accordance with its terms. (b) Neither the execution, delivery and performance by Mercantile and Merger Sub of this Agreement, nor the consummation by Mercantile and Merger Sub of the - 24 - 29 transactions contemplated hereby, nor compliance by Mercantile and Merger Sub with any of the provisions hereof, will (i) violate, conflict with or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any Lien upon any of the properties or assets of Mercantile or Merger Sub under any of the terms, conditions or provisions of (x) their respective Articles of Incorporation or By-Laws, or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Mercantile or Merger Sub is a party or by which they may be bound, or to which Mercantile or Merger Sub or any of their respective properties or assets may be subject, or (ii) subject to compliance with the statutes and regulations referred to in subsection (c) of this Section 3.03, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Mercantile or Merger Sub or any of their respective properties or assets; other than violations, conflicts, breaches, defaults, terminations, accelerations or Liens which would not have a Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole. (c) Other than in connection with or in compliance with the provisions of the Missouri Statute, the Arkansas Statute, the Securities Act, the Exchange Act, the securities or blue sky laws of the various states or filings, consents, reviews, authorizations, approvals or exemptions required under the BHCA, the FDI Act or any required approvals of any other Regulatory Authority, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by Mercantile and Merger Sub of the transactions contemplated by this Agreement. 3.04 Mercantile Financial Statements. The supplemental ------------------------------- consolidated balance sheets of Mercantile and its Subsidiaries as of December 31, 1996, 1995 and 1994 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, 1996, together with the notes thereto, audited by KPMG Peat Marwick LLP, as filed with the SEC on Form 8-K dated May 13, 1997 (collectively, the "Mercantile Financial Statements"), have been prepared in accordance with GAAP, present fairly the consolidated financial position of Mercantile and its Subsidiaries at the dates thereof and the consolidated results of operations, changes in shareholders' equity and cash flows of Mercantile and its Subsidiaries for the periods stated therein and are derived from the books and records of Mercantile and its Subsidiaries, which are complete and accurate in all material respects and have been maintained in accordance with good business practices. Neither Mercantile nor any of its Subsidiaries has any material contingent liabilities that are not described in the Mercantile Financial Statements. 3.05 Mercantile Reports. Since January 1, 1995, each of ------------------ Mercantile and its Subsidiaries has filed all reports, registrations and statements, together with any required amendments thereto, that it was required to file with any Regulatory Authority. All such reports and statements filed with any such Regulatory Authority are collectively referred to herein as the "Mercantile Reports." As of its respective date, each Mercantile Report complied in all material respects with all the rules and regulations promulgated by the applicable Regulatory Authority and did not contain any untrue statement - 25 - 30 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 Effect. Since March 31, 1997, there has ----------------------- been no Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole. 3.07 Registration Statement, Etc. None of the information ---------------------------- regarding Mercantile or any of its Subsidiaries to be supplied by Buyers for inclusion or included in (i) the Registration Statement, (ii) the Proxy Statement, or (iii) any other documents to be filed with any Regulatory Authority in connection with the transactions contemplated hereby will, at the respective times such documents are filed with any Regulatory Authority and, in the case of the Registration Statement, when it becomes effective and, with respect to the Proxy Statement, when mailed, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the meeting of shareholders referred to in Section 5.03, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. All documents which Mercantile or Merger Sub are responsible for filing with any Regulatory Authority in connection with the Merger will comply as to form in all material respects with the provisions of applicable law. 3.08 Brokers and Finders. Neither Mercantile, Merger Sub nor ------------------- any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Mercantile or Merger Sub in connection with this Agreement or the transactions contemplated hereby. ARTICLE IV ---------- CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME 4.01 Conduct of Businesses Prior to the Effective Time. During ------------------------------------------------- the period from the date of this Agreement to the Effective Time, Seller and the Seller Subsidiaries shall conduct their 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 business organization, employees and advantageous business relationships and retain the services of their officers and key employees. 4.02 Forbearances of Seller. Except as set forth in Schedule ---------------------- -------- 4.02 and except to the extent required by law, regulation or Regulatory - ---- Authority, or with the prior written consent of Buyers (unless otherwise specifically noted in this Section 4.02), during the period from the date of this Agreement to the Effective Time, Seller shall not and shall not permit any of the Seller Subsidiaries to: (a) declare, set aside or pay any dividends or other distributions, directly or indirectly, in respect of its capital stock (other than dividends from any of the Seller Subsidiaries to Seller or to another of the Seller Subsidiaries), except that Seller may declare and pay regular quarterly cash dividends of not more than $0.32 per share on the - 26 - 31 Seller Common Stock; provided, however, that if the Effective Time shall not have occurred on or before March 1, 1998, Seller may declare, set aside or pay a dividend for each share of Seller Common Stock for each quarter thereafter in which the Mercantile Board of Directors shall declare a dividend on shares of Mercantile Common Stock that equals the product or (i) the Exchange Ratio and (ii) the amount of the dividend per share declared by the Board of Directors of Mercantile; provided, further, however, that Seller shall not declare or pay a quarterly dividend for any quarter in which Seller shareholders will be entitled to receive a regular quarterly dividend on the shares of Mercantile Common Stock to be issued in the Merger; (b) enter into or amend any employment, severance or similar agreement or arrangement with any director, officer or employee, or materially modify any of the Seller Employee Plans or grant any salary or wage increase or materially increase any employee benefit (including incentive or bonus payments), except (i) normal individual increases in compensation to employees consistent with past practice, (ii) as required by law or contract and (iii) such increases of which Seller notifies Buyers in writing and which Buyers do not disapprove within 10 days of the receipt of such notice; (c) authorize, recommend, propose or announce an intention to authorize, recommend or propose, or enter into an agreement in principle with respect to, any merger, consolidation or business combination (other than the Merger), any acquisition of a material amount of assets or securities, any disposition of a material amount of assets or securities or any release or relinquishment of any material contract rights; (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) without first consulting with and obtaining the written consent of Mercantile, cause or permit Horizon Bank to enter into, renew or increase any loan or credit commitment (including stand-by letters of credit) to, or invest or agree to invest in any person or entity or modify any of the material provisions or renew or otherwise extend the maturity date of any existing loan or credit commitment (collectively, "Lend to") in an amount equal to or in excess of $500,000 or in any amount which, when aggregated with any and all loans or credit commitments of Seller and the Seller Subsidiaries to such person or entity, would be equal to or in excess of $500,000; provided, however, that Seller or any of the Seller Subsidiaries may make any such loan or credit commitment in the event (A) Seller or any Seller Subsidiary has delivered to Buyers or their designated representative a notice of its intention to make such loan and - 27 - 32 such information as Buyers or their designated representative may reasonably require in respect thereof and (B) Buyers or their designated representative shall not have reasonably objected to such loan by giving written or facsimile notice of such objection within two (2) business days following the delivery to Buyers or their designated representative of the notice of intention and information as aforesaid; provided further, however, that nothing in this paragraph shall prohibit Seller or any Seller Subsidiary from honoring any contractual obligation in existence on the date of this Agreement. Notwithstanding this Section 4.02(g), Seller shall be authorized without first consulting with Buyers or obtaining Buyers' prior written consent, to cause or permit Horizon Bank to increase the aggregate amount of any credit facilities theretofore established in favor of any person or entity (each a "Pre-Existing Facility"), provided that the aggregate amount of any and all such increases shall not be in excess of the lesser of ten percent (10%) of such Pre-Existing Facilities or $25,000; (h) directly or indirectly (including through its officers, directors, employees or other representatives) (i) initiate, solicit or encourage any discussions, inquiries or proposals with any third party (other than Buyers) relating to the disposition of any significant portion of the business or assets of Seller or any of the Seller Subsidiaries or the acquisition of Equity Securities of Seller or any of the Seller Subsidiaries or the merger of Seller or any of the Seller Subsidiaries with any person (other than Buyers) or any similar transaction (each such transaction being referred to herein as an "Acquisition Transaction"), or (ii) provide any such person with information or assistance or negotiate with any such person with respect to an Acquisition Transaction, and Seller shall promptly notify Buyers orally of all the relevant details relating to all inquiries, indications of interest and proposals which it may receive with respect to any Acquisition Transaction; (i) take any action that would (A) materially impede or delay the consummation of the transactions contemplated by this Agreement or the ability of Buyers or Seller to obtain any approval of any Regulatory Authority required for the transactions contemplated by this Agreement or to perform its covenants and agreements under this Agreement, (B) prevent or impede the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code or (C) prevent the Merger from qualifying for pooling-of-interests accounting treatment; (j) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible or liable for the obligations of any other individual, corporation or other entity; (k) materially restructure or change its investment securities portfolio, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported, or execute individual investment transactions of greater than $2,000,000 for U.S. Treasury or Federal Agency Securities and $250,000 for all other investment instruments; - 28 - 33 (l) agree in writing or otherwise to take any of the foregoing actions or engage in any activity, enter into any transaction or intentionally take or omit to take any other act which would make any of the representations and warranties in Article II of this Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other act; or (m) enter into, increase or renew any loan or credit commitment (including standby letters of credit) to any executive officer or director of Seller or any of the Seller Subsidiaries, any holder of 10% or more of the outstanding shares of Seller Common Stock, or any entity controlled, directly or indirectly, by any of the foregoing or engage in any transaction with any of the foregoing which is of the type or nature sought to be regulated in 12 U.S.C. Sec. 371c and 12 U.S.C. Sec. 371c-1, without first obtaining the prior written consent of Buyers, which consent shall not be unreasonably withheld. For purposes of this subsection (m), "control" shall have the meaning associated with that term under 12 U.S.C. Sec. 371c. 4.03 Forbearances of the Buyers. During the period from the -------------------------- date of this Agreement to the Closing Date, the Buyers shall not, without the prior consent of Seller, agree in writing or otherwise to engage in any activity, enter into any transaction or take or omit to take any other action (a) that would (i) materially impede or delay the consummation of the transactions contemplated by this Agreement or the ability of Mercantile or Seller to obtain any necessary approvals of any regulatory authority required for the transactions contemplated by this Agreement or to perform its covenants and agreements under this Agreement, (ii) prevent or impede the transactions contemplated hereby from qualifying for pooling-of-interests accounting treatment or as a reorganization within the meaning of Section 368 of the Code or (iii) prevent the Merger from qualifying for pooling-of-interests accounting treatment; or (b) which would make any of the representations and warranties of Article III of this Agreement untrue or incorrect in any material respect if made anew after engaging in such activity, entering into such transaction, or taking or omitting such other action. ARTICLE V --------- ADDITIONAL AGREEMENTS 5.01 Access and Information; Due Diligence. Buyers and Seller ------------------------------------- shall each afford to the other, and to the other's accountants, counsel and other representatives, full access during normal business hours, during the period prior to the Effective Time, to all their respective properties, books, contracts, commitments and records and, during such period, each shall furnish promptly to the other (i) a copy of each report, schedule and other document filed or received by it during such period pursuant to the requirements of federal and state securities laws and (ii) all other information concerning its business, properties and personnel as the other may reasonably request. Each party shall, and shall cause its advisors and representatives to, (A) hold confidential all information obtained in connection with any transaction contemplated hereby with respect to the other party and its Subsidiaries which is not - 29 - 34 otherwise public knowledge, (B) in the event of a termination of this Agreement, return all documents (including copies thereof) obtained hereunder from the other party or any of its Subsidiaries to it and (C) use their respective best efforts to cause all of such party's confidential information obtained pursuant to this Agreement or in connection with the negotiation of this Agreement to be treated as confidential and not use, or knowingly permit others to use, any such information unless such information becomes generally available to the public. 5.02 Registration Statement; Regulatory Matters. ------------------------------------------ (a) Mercantile shall prepare and, subject to the review and consent of Seller with respect to matters relating to Seller, file with the SEC as soon as is reasonably practicable the Registration Statement (or the equivalent in the form of preliminary proxy materials) with respect to the shares of Mercantile Common Stock to be issued in the Merger. Mercantile shall prepare and, subject to the review and consent of Seller with respect to matters relating to Seller, use its best efforts to file as soon as is reasonably practicable an application for approval of the Merger with the Federal Reserve Board, and such additional regulatory authorities as may require an application, 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 Seller and the Seller Subsidiaries shall furnish Mercantile all information concerning Seller and the Seller Subsidiaries and the shareholders thereof as Mercantile may reasonably request in connection with any such action. (b) Seller and Buyers shall cooperate and use their respective best efforts to prepare all documentation, to effect all filings and to obtain all permits, consents, approvals and authorizations of all third parties and Regulatory Authorities necessary to consummate the transactions contemplated by this Agreement and, as and if directed by Mercantile, to consummate such other transactions by and among Mercantile's Subsidiaries and the Seller Subsidiaries concurrently with or following the Effective Time, provided that such actions do not: (i) materially impede or delay the receipt of any approval referred to in Section 6.01(b); (ii) prevent or impede the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368 of the Code; or (iii) the consummation of the transactions contemplated by this Agreement. 5.03 Shareholder Approval. Seller shall call a special meeting -------------------- of its shareholders to be held as soon as is reasonably possible for the purpose of voting upon this Agreement and the Merger and related matters. In connection with such meeting, Mercantile shall prepare, subject to the review and consent of Seller, the Proxy Statement (which shall be part of the Registration Statement to be filed with the SEC by Mercantile) and mail the same to the shareholders of Seller. The Board of Directors of Seller shall submit for approval of Seller's shareholders the matters to be voted upon at such meeting. The Board of Directors of Seller hereby does and will recommend this Agreement and the transactions contemplated hereby to the shareholders of Seller and use its reasonable best efforts to obtain any vote of Seller's shareholders necessary for the approval of this Agreement. - 30 - 35 5.04 Current Information. During the period from the date of ------------------- this Agreement to the Closing Date, (i) each party will promptly furnish the other 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 and (ii) Mercantile shall promptly furnish to the Seller copies of all filings by Mercantile with each of the Federal Reserve Board and the SEC. Each party shall promptly notify the other party of the following events immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the affected party with respect thereto: (a) 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 material respect; (b) any Material Adverse Change; (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 litigation involving such party. 5.05 Conforming Entries. ------------------ (a) Notwithstanding that Seller believes that Seller and Seller Subsidiaries have established all reserves and taken all provisions for possible loan losses required by GAAP and applicable laws, rules and regulations, Seller recognizes that Buyers may have adopted different loan, accrual and reserve policies (including loan classifications and levels of reserves for possible loan losses). From and after the date of this Agreement to the Effective Time, Seller and Buyers shall consult and cooperate with each other with respect to conforming the loan, accrual and reserve policies of Seller and the Seller Subsidiaries to those policies of Buyers, as specified in each case in writing to Seller, based upon such consultation and as hereinafter provided. (b) In addition, from and after the date of this Agreement to the Effective Time, Seller and Buyers shall consult and cooperate with each other with respect to determining appropriate Seller accruals, reserves and charges to establish and take in respect of excess equipment write-off or write-down of various assets and other appropriate charges and accounting adjustments taking into account the parties' business plans following the Merger, as specified in each case in writing to Seller, based upon such consultation and as hereinafter provided. (c) Seller and Buyers shall consult and cooperate with each other with respect to determining the amount and the timing for recognizing for financial accounting purposes Seller's expenses of the Merger and the restructuring charges related to or to be incurred in connection with the Merger. (d) Subject to the language contained in the second sentence hereof, at the request of Mercantile, Seller shall (i) establish and take such reserves and accruals to conform Seller'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, - 31 - 36 and to recognize for various accounting purposes such expenses of the Merger and restructuring charges related to or to be incurred in connection with the Merger, and (iii) effect such divestitures or otherwise implement such restructuring in respect of its investment securities portfolio to conform Seller'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 Seller. (e) With respect to clauses (a) through (d) of this Section 5.05, it is the objective of Mercantile and Seller that such reserves, accruals, charges and divestitures, if any, to be taken shall be consistent with GAAP. (f) No reserves, accruals or charges taken in accordance with Section 5.05(d) above may be a basis to assert a violation of a breach of a representation, warranty or covenant of Seller herein. 5.06 Environmental Reports. Buyer, at the expense of Buyers, --------------------- may perform, as soon as reasonably practicable, but not later than ninety (90) days after the date hereof, a phase one environmental investigation and/or asbestos survey by Environmental Operations, Inc. on all real property owned, leased or operated by Seller or any of the Seller Subsidiaries as of the date hereof (but excluding space in retail and similar establishments leased by Seller for automatic teller machines or leased bank branch facilities where the space leased comprises less than 20% of the total space leased to all tenants of such property) and within fifteen (15) days after being notified by Sellers of the acquisition or lease of any real property acquired or leased by Seller or any of the Seller Subsidiaries after the date hereof (but excluding space in retail and similar establishments leased by Seller for automatic teller machines or leased bank facilities where the space leased comprises less than 20% of the total space leased to all tenants of such property). If the results of the phase one investigation indicate, in Buyers' reasonable opinion, that additional investigation is warranted, Buyers may perform, at Buyers' expense, a phase two subsurface investigation or investigations by Environmental Operations, Inc. on properties deemed to warrant such additional study. Buyers shall perform any such phase two investigation as soon as reasonably practicable after receipt of the phase one report(s) for such properties. Should the cost of taking all remedial or other corrective actions and measures (i) required by applicable law or (ii) recommended by Environmental Operations, Inc. in such phase one or phase two report or reports in light of potentially serious life, health or safety concerns, in the aggregate, exceed the sum of Five Hundred Thousand Dollars ($500,000), as reasonably estimated by Environmental Operations, Inc. or if the cost of such actions or measures cannot be so reasonably estimated by Environmental Operations, Inc. to be such amounts or less with any reasonable degree of certainty, Buyers shall have the right pursuant to Section 7.01(e) hereof, for a period of fifteen (15) business days following receipt from Environmental Operations, Inc. of such estimate or indication that the cost of such actions and measures cannot be so reasonably estimated, to terminate this Agreement. 5.07 Agreements of Affiliates. Set forth as Schedule 5.07 is a ------------------------ ------------- list (which includes all individual and beneficial ownership and also identifies how all such beneficially owned shares are registered on the stock record book of Seller) of all persons whom Seller believes to be "affiliates" of Seller for purposes of Rule 145 under the Securities Act and for pooling-of-interests accounting treatment. 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 - 32 - 37 substantially the form set forth as Exhibit A to this Agreement providing that --------- each such person will agree not to sell, pledge, transfer or otherwise dispose of the shares of Mercantile Common Stock to be received by such person in the Merger during the period designated in such letter and thereafter in compliance with the applicable provisions of the Securities Act. Prior to the Closing Date, and via letter, Seller shall amend and supplement Schedule 5.07 and use ------------- its best efforts to cause each additional person who is identified as an "affiliate" to execute a written agreement as provided in this Section 5.07. 5.08 Expenses. Each party hereto shall bear its own expenses -------- incident to preparing, entering into and carrying out this Agreement and to consummating the Merger; provided, however, that the Buyers 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 respective best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as possible, including, without limitation, using its respective best efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby. Each party shall, and shall cause each of its respective Subsidiaries to, use its best efforts to obtain consents of all third parties and Regulatory Authorities necessary or, in the opinion of Buyers, desirable for the consummation of the transactions contemplated by this Agreement. (b) Seller, prior to the Effective Time, shall (i) consult and cooperate with Buyers regarding the implementation of those policies and procedures established by Buyers for its governance and that of its Subsidiaries and not otherwise referenced in Section 5.05 hereof, including, without limitation, policies and procedures pertaining to the accounting, asset/liability management, audit, credit, human resources, treasury and legal functions, and (ii) at the reasonable request of Buyers, conform Seller's existing policies and procedures in respect of such matters to Buyers' policies and procedures or, in the absence of any existing Seller policy or procedure regarding any such function, introduce Buyers' policies or procedures in respect thereof, unless to do so would cause Seller or any of the Seller Subsidiaries to be in violation of any law, rule or regulation of any Regulatory Authority having jurisdiction over Seller and/or the Seller Subsidiary affected thereby. 5.10 Employee Agreements and Benefits. -------------------------------- (a) Following the Effective Time, Buyers shall cause the Surviving Corporation to honor in accordance with their terms all employment, severance and other compensation contracts set forth on Schedule 2.11(b) between Seller, any of the Seller ---------------- Subsidiaries, and any current or former director, officer, employee or agent - 33 - 38 thereof, and all provisions for vested benefits or other vested amounts earned or accrued through the Effective Time under the Seller Employee Plans. (b) The provisions of the Seller Stock Plans and any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the Equity Securities of Seller or any of the Seller Subsidiaries shall be deleted and terminated as of the Effective Time. (c) Except as set forth in Section 5.10(b) hereof, the Seller Employee Plans shall not be terminated by reason of the Merger but shall continue thereafter as plans of the Surviving Corporation until such time as the employees of Seller and the Seller Subsidiaries are integrated into Mercantile's employee benefit plans that are available to other employees of Mercantile and its Subsidiaries, subject to the terms and conditions specified in such plans and to such changes therein as may be necessary to reflect the consummation of the Merger. Mercantile shall take such steps as are necessary or required to integrate the employees of Seller and the Seller Subsidiaries into Mercantile's employee benefit plans available to other employees of Mercantile and its Subsidiaries as soon as practicable after the Effective Time, with (i) full credit for prior service with Seller or any of the Seller Subsidiaries for purposes of vesting and eligibility for participation (but not benefit accruals under any defined benefit plan), and co-payments and deductibles, and (ii) waiver of all waiting periods and pre-existing condition exclusions or penalties. 5.11 Press Releases. Seller and the Buyers 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 or any of the transactions contemplated hereby. 5.12 State Takeover Statutes. Seller will take all steps ----------------------- necessary to exempt the transactions contemplated by this Agreement and any agreement contemplated hereby from, and if necessary challenge the validity of, any applicable state takeover law. 5.13 Directors' and Officers' Indemnification. Mercantile ---------------------------------------- agrees that the Merger shall not affect or diminish any of the duties and obligations of indemnification of Seller or any of the Seller Subsidiaries existing as of the Effective Time in favor of employees, agents, directors or officers of Seller or any of the Seller Subsidiaries arising by virtue of its Articles of Incorporation, Charter or By-Laws in the form in effect at the date of this Agreement or arising by operation of law or arising by virtue of any contract, resolution or other agreement or document existing at the date of this Agreement, and such duties and obligations shall continue in full force and effect for so long as they would (but for the Merger) otherwise survive and continue in full force and effect. To the extent that Seller's existing directors' and officers' liability insurance policy would provide coverage for any action or omission occurring prior to the Effective Time, Seller agrees to give proper notice to the insurance carrier and to Mercantile of a potential claim thereunder so as to preserve Seller's rights to such insurance coverage. Mercantile represents that the directors' and officers' liability insurance policy maintained by it provides for coverage of "prior acts" for directors and officers of entities acquired by Mercantile including Seller and the Seller Subsidiaries on and after the Effective Time. - 34 - 39 5.14 Tax Opinion Certificates. Seller shall cause such of its ------------------------ executive officers, directors and/or holders of one percent (1%) or more of the Seller Common Stock (including shares beneficially held or constructively owned) as may be reasonably requested by Thompson Coburn to timely execute and deliver to Thompson Coburn certificates substantially in the form of Exhibit B --------- or Exhibit C hereto, as the case may be. --------- 5.15 Best Efforts to Insure Pooling. Each of Mercantile and ------------------------------ Seller undertakes and agrees to use its best efforts to cause the Merger to qualify for pooling-of-interests accounting treatment. ARTICLE VI ---------- CONDITIONS 6.01 Conditions to Each Party's Obligation To Effect the Merger. ---------------------------------------------------------- The respective obligations of each party to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following conditions: (a) Shareholder Approval. The approval of this Agreement -------------------- and the Merger shall have received the requisite vote of shareholders of Seller at the special meeting of shareholders called pursuant to Section 5.03 hereof. (b) Regulatory Approval. This Agreement and the ------------------- transactions contemplated hereby shall have been approved by the Federal Reserve Board and any other federal and/or state regulatory agencies whose approval is required for consummation of the transactions contemplated hereby and all requisite waiting periods imposed by the foregoing shall have expired. (c) Effectiveness of Registration Statement. The --------------------------------------- Registration Statement shall have been declared effective and shall not be subject to a stop order or any threatened stop order. (d) No Judicial Prohibition. Neither Seller, Mercantile ----------------------- nor Merger Sub shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger. (e) Tax Opinion. Each of Buyers and Seller shall have ----------- received from Thompson Coburn an opinion (which opinion shall not have been withdrawn at or prior to the Effective Time) reasonably satisfactory in form and substance to it to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code and to the effect that, as a result of the Merger, except with respect to fractional share interests and assuming that such Seller Common Stock is a capital asset in the hands of the holder thereof at the Effective Time, (i) holders of Seller Common Stock who receive Mercantile Common Stock in the Merger will not recognize gain or loss for federal income tax purposes on the receipt of such stock, (ii) the basis of such Mercantile Common Stock will equal the basis of the Seller Common Stock for which it is - 35 - 40 exchanged and (iii) the holding period of such Mercantile Common Stock will include the holding period of the Seller Common Stock for which it is exchanged. 6.02 Conditions to Obligations of Seller. The obligations of ----------------------------------- Seller to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following additional conditions: (a) Representations and Warranties. The representations ------------------------------ and warranties of Buyers set forth in Article III of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time (as though made on and as of the Effective Time, except (i) to the extent such representations and warranties are by their express provisions made as of a specified date, (ii) where the facts which caused the failure of any representation or warranty to be so true and correct have not resulted, and are not likely to result, in a Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole, and (iii) for the effect of transactions contemplated by this Agreement, and Seller shall have received a certificate of any Executive Vice President of Mercantile, signing solely in his capacity as an officer of Mercantile, to such effect. (b) Performance of Obligations. Buyers shall have -------------------------- performed in all material respects all obligations required to be performed by it under this Agreement prior to the Effective Time, and Seller shall have received a certificate of any Executive Vice President of Mercantile, signing solely in his capacity as an officer of Mercantile, to that effect. (c) Permits, Authorizations, etc. Buyers shall have ----------------------------- obtained any and all material permits, authorizations, consents, waivers and approvals required for the lawful consummation of the Merger. (d) No Material Adverse Effect. Since the date of this -------------------------- Agreement, there shall have been no Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole. (e) Opinion of Counsel. Mercantile shall have delivered ------------------ to Seller an opinion of Mercantile's counsel dated as of the Closing Date or a mutually agreeable earlier date in substantially the form set forth as Exhibit D to this Agreement. ---------- 6.03 Conditions to Obligations of the Buyers. The obligations --------------------------------------- of the Buyers to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions: (a) Representations and Warranties. The representations ------------------------------ and warranties of Seller set forth in Article II of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time (as though made on and as of the Effective Time, except (i) to the extent such representations and warranties are by their express provisions made as of a specific date, (ii) where the facts - 36 - 41 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 Seller and its Subsidiaries, taken as a whole, and (iii) for the effect of transactions contemplated by this Agreement) and Buyers shall have received a certificate of the Chairman and the President of Seller, signing solely in their capacities as officers of Seller, to such effect. (b) Performance of Obligations. Seller shall have -------------------------- performed in all material respects all obligations required to be performed by it under this Agreement prior to the Effective Time, and Buyers shall have received a certificate of the Chairman and the President of Seller signing solely in their capacities as officers of Seller, to that effect. (c) Permits, Authorizations, etc. Seller shall have ----------------------------- obtained any and all material permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the Merger. (d) No Material Adverse Effect. Since the date of this -------------------------- Agreement, there shall have been no Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole. (e) Opinion of Counsel. Seller shall have delivered to ------------------ Buyers an opinion of Seller's counsel dated as of the Closing Date or a mutually agreeable earlier date in substantially the form set forth as Exhibit E to this Agreement. --------- (f) Election of Dissenting Shareholders. Unless ----------------------------------- otherwise waived by the Buyers in their sole discretion, holders of less than five percent (5%) of the total value of shares of Seller Common Stock outstanding shall have taken such steps as are then possible to dissent from the Merger pursuant to the Arkansas Statute. (g) Pooling Letter. The Buyers shall have received as -------------- soon as practicable after the date of this Agreement an opinion of KPMG Peat Marwick LLP, satisfactory in form and substance to the Buyers, to the effect that the Merger will qualify for pooling-of-interests accounting treatment, which opinion shall have not been withdrawn. 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 Seller: (a) by mutual consent by the Executive Committee of the Board of Directors of Mercantile and by the Board of Directors of Seller; (b) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Seller at any time after July 31, 1998 if the Merger shall not - 37 - 42 theretofore have been consummated (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein); (c) by the Executive Committee of the Board of Directors of Mercantile or the Board of Directors of Seller if (i) the Federal Reserve Board or any other federal and/or state regulatory agency whose approval is required for the consummation of the transactions contemplated hereby has denied approval of the Merger and such denial has become final and nonappealable or (ii) the shareholders of Seller shall not have approved this Agreement at the meeting referred to in Section 5.03; (d) by the Executive Committee of the Board of Directors of Mercantile, on the one hand, or by the Board of Directors of Seller, on the other hand, in the event of a material volitional breach by the other party to this Agreement of any representation, warranty or agreement contained herein, which breach is not cured within 30 days after written notice thereof is given to the breaching party by the non-breaching party or is not waived by the non-breaching party during such period; or (e) by the Executive Committee of the Board of Directors of Mercantile 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 there shall be no liability on the part of Buyers or Seller or their respective officers or directors except as set forth in the second sentence of Section 5.01 and in Sections 5.08 and 8.02, and except that no termination of this Agreement pursuant to Section 7.01(e) shall relieve the breaching party of any liability to the non-breaching party hereto arising from the intentional, deliberate and willful non-performance of any covenant contained herein, after giving notice to such breaching party and an opportunity to cure as set forth in Section 7.01(e). 7.03 Amendment. This Agreement, the Exhibits and the Schedules --------- hereto may be amended by the parties hereto, by action taken by or on behalf of the Executive Committee of the Board of Directors of Mercantile and the respective Boards of Directors of Merger Sub or Seller, at any time before or after approval of this Agreement by the shareholders of Seller; provided, however, that after any such approval by the shareholders of Seller no such modification shall (A) alter or change the amount or kind of Merger Consideration to be received by holders of Seller Common Stock as provided in this Agreement or (B) adversely affect the tax treatment to Seller shareholders as a result of the receipt of the Merger Consideration. This Agreement, the Exhibits and the Schedules hereto may not be amended except by an instrument in writing signed on behalf of each of Buyers and Seller. 7.04 Waiver. Any term, condition or provision of this ------ Agreement may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. - 38 - 43 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 Buyers and Seller or in any instrument delivered by Buyers or Seller pursuant to or in connection with this Agreement shall expire at the Effective Time or upon termination of this Agreement in accordance with its terms. In the event of consummation of the Merger, the agreements contained in or referred to in Sections 1.05-1.11, 5.02(b), 5.08, 5.10 and 5.13 shall survive the Effective Time. In the event of termination of this Agreement in accordance with its terms, the agreements contained in or referred to in the second sentence of Section 5.01 and Sections 5.08, 7.02 and 8.02 shall survive such termination. 8.02 Indemnification. Buyers and Seller (hereinafter, in such --------------- capacity being referred to as the "Indemnifying Party") agree to indemnify and hold harmless each other and their officers, directors and controlling persons (each such other party being hereinafter referred to, individually and/or collectively, as the "Indemnified Party") against any and all losses, claims, damages or liabilities, joint or several, to which the Indemnified Party may become subject under the Securities Act, the Exchange Act or other federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof): (a) arise primarily out of any information furnished to the Indemnified Party by the Indemnifying Party and included in the Registration Statement as originally filed or in any amendment thereof, or in the Proxy Statement, or in any amendment therefor or supplement thereof, or are based primarily upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in the Proxy Statement, or in any amendment thereof or supplement thereto, and provided for inclusion thereof by the Indemnifying Party or (b) arise primarily out of or are based primarily upon the omission or alleged omission by the Indemnifying Party to state in the Registration Statement as originally filed or in any amendment thereof, or in the Proxy Statement, or in any amendment thereof, a material fact required to be stated therein or necessary to make the statements made therein not misleading, and agrees to reimburse each such Indemnified Party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. 8.03 No Assignment; Successors and Assigns. This Agreement ------------------------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors (including any corporation deemed to be a successor corporation of any of the parties by operation of law) and assigns, but neither this Agreement nor any right or obligation set forth in any provision hereof may be transferred or assigned (except by operation of law) 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 1.07, 1.10, 1.11, 5.10, 5.13 and 8.02 which may be enforced against Mercantile or Seller, as the case may be, by the parties therein identified or described. - 39 - 44 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 any ----------------- 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 of any provision hereof. 8.07 Entire Agreement. This Agreement and the Schedules and ---------------- Exhibits hereto constitute the entire agreement between the parties with respect to the subject matter hereof, supersede 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, telex or telecopy 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): (i) if to the Buyers: Mercantile Bancorporation Inc. Mercantile Tower P.O. Box 524 St. Louis, MO 63166-0524 Attention: John W. Rowe Executive Vice President Telecopy: (314) 425-2752 - 40 - 45 Copy to: Jon W. Bilstrom, Esq. General Counsel Mercantile Bancorporation Inc. Mercantile Tower P.O. Box 524 St. Louis, MO 63166-0524 Telecopy: (314) 425-1386 and Robert M. LaRose, Esq. Thompson Coburn One Mercantile Center St. Louis, Missouri 63101 Telecopy: (314) 552-7000 (ii) if to Seller: Horizon Bancorp, Inc. 526 Main Street, Suite 204 Arkadelphia, Arkansas 71923 Attention: Ross M. Whipple Chairman and Chief Executive Officer Telecopy: (501) 246-7122 Copy to: Garland W. Binns, Jr., Esq. Horne, Hollingsworth & Parker 401 West Capitol, Suite 501 Little Rock, Arkansas 72203 Telecopy: (501) 372-7142 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. [remainder of this page intentionally left blank] - 41 - 46 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. Attest: MERCANTILE BANCORPORATION INC. /s/ William A. Hayter By: /s/ John W. Rowe - --------------------------- --------------------------------------------- William A. Hayter John W. Rowe Executive Vice President, Mercantile Bank National Association, Authorized Officer Attest: AMERIBANC, INC. /s/ David W. Grant By: /s/ John W. Rowe - --------------------------- --------------------------------------------- David W. Grant John W. Rowe Vice President Attest: HORIZON BANCORP, INC. /s/ Steve DeMott By: /s/ Ross M. Whipple - --------------------------- --------------------------------------------- Ross M. Whipple Chairman and Chief Executive Officer - 42 - EX-2.2 3 FORM OF VOTING AGREEMENT 1 Exhibit 2.2 ----------- VOTING AGREEMENT This Voting Agreement dated as of July 31, 1997, is entered into between Mercantile Bancorporation Inc. ("Mercantile"), and the undersigned director and shareholder ("Shareholder") of Horizon Bancorp, Inc. ("Horizon"). WHEREAS, Horizon and Mercantile have proposed to enter into an Agreement and Plan of Merger (the "Agreement"), dated as of today, which contemplates the acquisition by Mercantile of 100% of the capital stock of Horizon (collectively, the "Horizon Stock") by means of a merger between Horizon and Mercantile's subsidiary, Ameribanc, Inc. (the "Merger"); and WHEREAS, Mercantile is willing to expend the substantial time, effort and expense necessary to implement the Merger, only if Shareholder enters into this Voting Agreement; and WHEREAS, the undersigned shareholder of Horizon believes that the Merger is in his best interest and the best interest of Horizon; NOW, THEREFORE, in consideration of the premises, Shareholder hereby agrees as follows: 1. Voting Agreement - Shareholder shall vote all of the ---------------- shares of Horizon Stock he now owns or hereafter acquires, in favor of the Merger at the meeting of shareholders of Horizon to be called for the purpose of approving the Merger (the "Meeting"). 2. No Competing Transaction - Shareholder shall not vote ------------------------ any of his shares of Horizon Stock in favor of any other merger or sale of all or substantially all the assets of Horizon to any person other than Mercantile or its affiliates until closing of the Merger, termination of the Agreement or abandonment of the Merger by the mutual agreement of Horizon and Mercantile, whichever comes first. 3. Transfers Subject to Agreement - Shareholder shall not ------------------------------ transfer his shares of Horizon Stock unless the transferee, prior to such transfer, executes a voting agreement with respect to the transferred shares substantially to the effect of this Voting Agreement and 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. No Ownership Interest. Nothing contained in this --------------------- Voting Agreement shall be deemed to vest in Mercantile any direct or indirect ownership or incidence of ownership of or with respect to any shares of Horizon Stock. All rights, ownership and economic benefits of and relating to the shares of Horizon Stock shall remain and belong to Shareholder and Mercantile shall have no authority to manage, direct, superintend, restrict, regulate, govern or administer any of the policies or operations of Horizon or exercise any power or authority to direct Shareholder in the voting of any of his shares of Horizon Stock, except as otherwise expressly provided herein, or the performance of his duties or responsibilities as a director of Horizon. 6. Evaluation of Investment. Shareholder, by reason of ------------------------ his knowledge and experience in financial and business matters and in his capacity as a director of a financial institution, believes himself capable of evaluating the merits and risks of the potential investment in common stock of Mercantile, $0.01 par value ("Mercantile Common Stock"), contemplated by the Agreement. 2 7. Documents Delivered. Shareholder acknowledges having ------------------- reviewed the Agreement and its attachments and that reports, proxy statements and other information with respect to Mercantile filed with the Securities and Exchange Commission (the "Commission") were, prior to his execution of this Voting Agreement, available for inspection and copying at the Offices of the Commission and that Mercantile delivered the following such documents to Horizon: (a) Mercantile's Annual Report on Form 10-K for the year ended December 31, 1996; (b) Mercantile's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997; and (c) Mercantile's Current Reports on Form 8-K dated May 2, 1997, May 13, 1997 and July 14, 1997 and Current Report on Form 8-K/A dated May 22, 1997. 8. Amendment and Modification. This Voting Agreement may -------------------------- be amended, modified or supplemented at any time by the written approval of such amendment, modification or supplement by Shareholder and Mercantile. 9. Entire Agreement. This Voting Agreement evidences the ---------------- entire agreement among the parties hereto with respect to the matters provided for herein and there are no agreements, representations or warranties with respect to the matters provided for herein other than those set forth herein and in the Agreement. This Voting Agreement supersedes any agreements among Horizon and its shareholders concerning the Merger, disposition or control of the stock of Horizon. 10. Severability. The parties agree that if any provision ------------ of this Voting Agreement shall under any circumstances be deemed invalid or inoperative, this Voting Agreement shall be construed with the invalid or inoperative provisions deleted and the rights and obligations of the parties shall be construed and enforced accordingly. 11. Counterparts. This Voting Agreement may be executed ------------ in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Governing Law. The validity, construction, ------------- enforcement and effect of this Voting Agreement shall be governed by the internal laws of the State of Missouri, without regard to its conflict of laws principles. 13. Headings. The headings for the paragraphs of this -------- Voting Agreement are inserted for convenience only and shall not constitute a part hereof or affect the meaning or interpretation of this Voting Agreement. 14. Termination. This voting agreement shall terminate ----------- upon the consummation of the Merger or upon termination of the Agreement, whichever comes first. 15. Successors. This Voting 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 - 2 - 3 representatives. This Voting Agreement shall survive the death or incapacity of Shareholder. This agreement may be assigned by Mercantile only to an affiliate of Mercantile. MERCANTILE BANCORPORATION INC. By: ------------------------------------------ John W. Rowe, Executive Vice President Mercantile Bank National Association Authorized Officer SHAREHOLDER ------------------------------------------ - 3 - EX-5.1 4 OPINION RE LEGALITY 1 Exhibit 5.1 ----------- [Letterhead of Thompson Coburn] November 24, 1997 Mercantile Bancorporation Inc. P.O. Box 524 St. Louis, Missouri 63166-0524 Re: Registration Statement on Form S-4 ---------------------------------- Ladies and Gentlemen: We refer you to the Registration Statement on Form S-4 filed by Mercantile Bancorporation Inc. (the "Company") on November 24, 1997 (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 2,550,000 shares of the Company's common stock, $0.01 par value (the "Shares"), in connection with the acquisition by merger of Horizon Bancorp, Inc. ("Horizon") pursuant to the Agreement and Plan of Merger dated July 31, 1997 (the "Merger Agreement"), by and among the Company, Horizon and Ameribanc, 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 merger transaction, certificates received from state officials and statements we have received from officers and representatives of the Company. In delivering this opinion, the undersigned assumed the genuineness of all signatures; the authenticity of all documents submitted to us as originals; the conformity to the originals of all documents submitted to us as certified, photostatic or conformed copies; the authenticity of the originals of all such latter documents; and the correctness of statements submitted to us by officers and representatives of the Company. Based only on the foregoing, the undersigned is of the opinion that: 1. The Company has been duly incorporated and is validly existing under the laws of the State of Missouri; and 2. The Shares to be sold by the Company, when issued as provided in the Merger Agreement, will be validly issued, fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the section of the Proxy Statement/Prospectus entitled "Legal Matters." Very truly yours, /s/ Thompson Coburn EX-8.1 5 OPINION 1 Exhibit 8.1 ----------- [Letterhead Thompson Coburn] November 24, 1997 Board of Directors Horizon Bancorp, Inc. 526 Main Street Arkadelphia, Arkansas 71923 Ladies and Gentlemen: You have requested our opinion with regard to certain federal income tax consequences of the proposed merger (the "Merger") of Horizon Bancorp, Inc. ("Horizon") with and into Ameribanc, Inc. ("Ameribanc"), a wholly owned subsidiary of Mercantile Bancorporation Inc. ("MBI"). In connection with the preparation of our opinion, we have examined and have relied upon the following: (i) The Agreement and Plan of Merger by and among MBI, Ameribanc, and Horizon dated as of July 31, 1997, including the schedules and exhibits thereto (the "Agreement"); (ii) MBI's Registration Statement on Form S-4, including the Proxy Statement/Prospectus contained therein, filed with the Securities and Exchange Commission on November 24, 1997 (the "Registration Statement"); (iii) The representations and undertaking of MBI substantially in the form of Exhibit A hereto; (iv) The representations and undertakings of Horizon and certain holders of Horizon common stock, par value $1.00 per share ("Horizon Common Stock"), substantially in the forms of Exhibit B and Exhibit C hereto; and (v) 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. 2 Horizon Bancorp, Inc. November 24, 1997 Page 2 OPINION Subject to the foregoing, to the conditions and limitations expressed elsewhere herein, and assuming that the Merger is consummated in accordance with the Agreement, we are of the opinion that for federal income tax purposes: 1. 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"). 2. Each shareholder of Horizon who exchanges, in the Merger, shares of Horizon Common Stock solely for shares of MBI common stock, par value $0.01 per share ("MBI Common Stock"): a) will recognize no gain or loss as a result of the exchange, except with regard to cash received in lieu of a fractional share, as discussed below (Code section 354(a)(1)); b) will have an aggregate basis for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 3, below) equal to the aggregate adjusted tax basis of the shares of Horizon Common Stock surrendered (Code section 358(a)(1)); and c) will have a holding period for the shares of MBI Common Stock received (including any fractional share of MBI Common Stock deemed to be received, as described in paragraph 3, below) which includes the period during which the shares of Horizon Common Stock surrendered were held, provided that the shares of Horizon Common Stock surrendered were capital assets in the hands of such holder at the time of the Merger (Code section 1223(1)). 3. Each shareholder of Horizon 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 Horizon 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 shareholders of Horizon who acquired shares of Horizon Common Stock pursuant to the exercise of employee stock options or otherwise as compensation, and (ii) the tax consequences to special classes of shareholders, if any, including without limitation, foreign persons, insurance companies, tax-exempt entities, retirement plans, and dealers in securities; and (2) federal, state, local, or foreign taxes (or any other federal, state, local, or foreign laws) not specifically referred to and discussed herein. Further, our opinion is based upon the Code, Treasury Regulations proposed or promulgated thereunder, and administrative interpretations and judicial precedents relating thereto, all of which are 3 Horizon Bancorp, Inc. November 24, 1997 Page 3 subject to change at any time, possibly with retroactive effect, and we assume no obligation to advise you of any subsequent change thereto. If there is any change in the applicable law or regulations, or if there is any new administrative or judicial interpretation of the applicable law or regulations, any or all of the federal income tax consequences described herein may become inapplicable. The foregoing opinion reflects our legal judgment solely on the issues presented and discussed herein. This opinion has no official status or binding effect of any kind. Accordingly, we cannot assure you that the Internal Revenue Service or any court of competent jurisdiction will agree with this opinion. We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to all references made to this letter and to this firm in the Registration Statement. Very truly yours, /s/ Thompson Coburn EX-23.1 6 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 November 24, 1997 EX-23.2 7 CONSENT OF MOORE STEPHENS FROST 1 Exhibit 23.2 ------------ CONSENT OF MOORE STEPHENS FROST As independent public accountants, we hereby consent to the use in the Registration Statement on Form S-4, dated November 24, 1997, of our report dated February 28, 1997. We also consent to the reference to our firm under "Experts" in the prospectus. /s/ Moore Stephens Frost Moore Stephens Frost Little Rock, Arkansas November 24, 1997 EX-23.3 8 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.3 ------------ INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Mercantile Bancorporation, Inc. on Form S-4 of our report dated March 6, 1996, on the consolidated financial statements of Horizon Bancorp, Inc. as of December 31, 1995 and 1994, and for the years then ended appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus /s/ Deloitte & Touche LLP Little Rock, Arkansas November 24, 1997 EX-23.4 9 INDEPENDENT AUDITORS' CONSENT 1 Exhibit 23.4 ------------ INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders Mercantile Bancorporation Inc.: We consent to the use of our report related to the consolidated financial statements of Roosevelt Financial Group, Inc. incorporated herein by reference and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP St. Louis, Missouri November 24, 1997 EX-23.5 10 CONSENT OF STEPHENS INC. 1 Exhibit 23.5 ------------ CONSENT OF STEPHENS INC. We hereby consent to the inclusion of our opinion letter dated July 31, 1997 to the Board of Horizon Bancorp, Inc. as an annex to the Joint Proxy Statement/Prospectus which forms a part of the Registration Statement of Form S-4 relating to the proposed merger of Horizon Bancorp, Inc. with and into Mercantile Bancorporation Inc. and to the references to such opinion under "Summary - Opinion of Horizon Bancorp's Financial Advisor," "The Merger - Background of and Reasons of Horizon Bancorp for the Merger" and "The Merger - Opinion of Horizon Bancorp's Financial Advisor," in such Joint Proxy Statement/ Prospectus. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Stephens, Inc. Stephens Inc. November 20, 1997 -----END PRIVACY-ENHANCED MESSAGE-----