-----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, TIIA1vHZrMHWKsTTGWkpQT8WleOssuC6GRejvCYXLzgpy/Kn8ceaxroYNbdVSDPL KprpLtILkJw5afbF7524kg== 0001068800-99-000243.txt : 19990517 0001068800-99-000243.hdr.sgml : 19990517 ACCESSION NUMBER: 0001068800-99-000243 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-11792 FILM NUMBER: 99622385 BUSINESS ADDRESS: STREET 1: 7TH & WASHINGTON TRAM 19 1 STREET 2: ONE MERCANTILE CENTER STREET CITY: ST LOUIS STATE: MO ZIP: 63101-1643 BUSINESS PHONE: 3144252525 MAIL ADDRESS: STREET 1: P O BOX 524 CITY: ST LOUIS STATE: MO ZIP: 63166 FORMER COMPANY: FORMER CONFORMED NAME: MERCANTILE TRUST CO DATE OF NAME CHANGE: 19720229 10-Q 1 MERCANTILE BANCORPORATION INC. FORM 10-Q ================================================================================ FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-11792 MERCANTILE BANCORPORATION INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 43-0951744 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) P.O. BOX 524 ST. LOUIS, MISSOURI 63166-0524 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 418-2525 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. X --------- --------- YES NO INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON STOCK, $.01 PAR VALUE, 157,936,081 SHARES OUTSTANDING AS OF THE CLOSE OF BUSINESS ON APRIL 30, 1999. ================================================================================ INDEX PART I--FINANCIAL INFORMATION
PAGE NO. -------- Item 1--Financial Statements Consolidated Statement of Income (Unaudited) Three months ended March 31, 1999 and 1998 3 Consolidated Balance Sheet March 31, 1999 and 1998 (Unaudited), and December 31, 1998 4 Consolidated Statement of Changes in Shareholders' Equity (Unaudited) Three months ended March 31, 1999 and 1998 5 Consolidated Statement of Cash Flows (Unaudited) Three months ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3--Quantitative and Qualitative Disclosures Regarding Market Risk There have been no material changes from the information provided in the December 31, 1998 Form 10-K. PART II--OTHER INFORMATION Item 4--Submission of Matters to a Vote of Security Holders 25 Item 6--Exhibits and Reports on Form 8-K 25 Signature 27 Exhibit Index 28
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31 1999 1998 ---- ---- INTEREST INCOME Interest and fees on loans and leases $431,903 $442,332 Investments in debt and equity securities Trading 2,579 2,065 Taxable 140,293 135,941 Tax-exempt 5,463 6,111 -------- -------- Total Investments in Debt and Equity Securities 148,335 144,117 Due from banks--interest bearing 3,691 3,093 Federal funds sold and repurchase agreements 3,009 3,638 -------- -------- Total Interest Income 586,938 593,180 INTEREST EXPENSE Interest bearing deposits 210,757 229,803 Foreign deposits 5,881 7,617 Short-term borrowings 30,857 52,329 Bank notes 133 2,323 Long-term debt and mandatorily redeemable preferred securities 55,081 28,387 -------- -------- Total Interest Expense 302,709 320,459 -------- -------- NET INTEREST INCOME 284,229 272,721 PROVISION FOR POSSIBLE LOAN LOSSES 7,479 8,537 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 276,750 264,184 OTHER INCOME Trust 29,142 28,128 Service charges 29,640 28,244 Investment banking and brokerage 11,082 11,066 Mortgage banking 6,199 5,943 Gain on sale of mortgage servicing rights -- 23,155 Securitization revenue 5,451 4,523 Securities gains 12,963 4,453 Miscellaneous 31,967 31,439 -------- -------- Total Other Income 126,444 136,951 OTHER EXPENSE Salaries 101,687 102,631 Employee benefits 21,652 22,547 Net occupancy 17,191 16,184 Equipment 23,689 20,858 Intangible asset amortization 14,323 14,596 Postage and freight 7,604 7,305 Miscellaneous 39,208 36,417 -------- -------- Total Other Expense 225,354 220,538 -------- -------- INCOME BEFORE INCOME TAXES 177,840 180,597 INCOME TAXES 59,803 65,738 -------- -------- NET INCOME $118,037 $114,859 ======== ======== PER SHARE DATA Basic earnings per share $.75 $.76 Diluted earnings per share .74 .75 Dividends declared .34 .31 The accompanying notes to consolidated financial statements are an integral part of these statements.
3 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (THOUSANDS)
MARCH 31 MARCH 31 1999 DEC. 31 1998 (UNAUDITED) 1998 (UNAUDITED) ----------- ------- ----------- ASSETS Cash and due from banks $ 1,210,972 $ 1,760,636 $ 1,316,663 Due from banks--interest bearing 291,561 367,304 280,676 Federal funds sold and repurchase agreements 366,270 226,730 336,417 Investments in debt and equity securities Trading 188,069 126,540 125,680 Available-for-sale (Amortized cost of $9,319,603, $9,185,770 and $8,784,082, respectively) 9,308,727 9,246,790 8,829,585 Held-to-maturity (Estimated fair value of $83,512, $99,336 and $314,356, respectively) 81,906 97,607 307,234 ----------- ----------- ----------- Total Investments in Debt and Equity Securities 9,578,702 9,470,937 9,262,499 Loans held-for-sale 176,050 217,941 249,407 Loans and leases, net of unearned income 22,300,949 22,093,317 21,513,860 ----------- ----------- ----------- Total Loans and Leases 22,476,999 22,311,258 21,763,267 Reserve for possible loan losses (309,048) (308,890) (293,565) ----------- ----------- ----------- Net Loans and Leases 22,167,951 22,002,368 21,469,702 Bank premises and equipment 533,807 545,559 542,774 Intangible assets 765,560 781,188 823,955 Other assets 663,996 645,455 1,116,631 ----------- ----------- ----------- Total Assets $35,578,819 $35,800,177 $35,149,317 =========== =========== =========== LIABILITIES Deposits Non-interest bearing $3,901,014 $ 4,453,048 $ 3,834,599 Interest bearing 20,398,177 20,526,576 20,935,126 Foreign 423,206 481,773 463,426 ----------- ----------- ----------- Total Deposits 24,722,397 25,461,397 25,233,151 Federal funds purchased and repurchase agreements 2,353,079 2,087,373 2,142,440 Other short-term borrowings 377,296 915,287 1,656,666 Bank notes -- 25,000 25,000 Long-term Federal Home Loan Bank advances 3,475,038 2,790,336 1,447,362 Other long-term debt 781,032 782,998 789,588 Company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I 150,000 150,000 150,000 Other liabilities 618,514 514,031 861,944 ----------- ----------- ----------- Total Liabilities 32,477,356 32,726,422 32,306,151 Commitments and contingent liabilities -- -- -- MARCH 31 DEC. 31 MARCH 31 1999 1998 1998 -------- ------- -------- SHAREHOLDERS' EQUITY Preferred stock--no par value Shares authorized 5,000 5,000 5,000 Shares issued and outstanding -- -- -- -- -- -- Common stock--$.01 par value Shares authorized 400,000 400,000 200,000 Shares issued 157,916 157,487 153,326 1,578 1,574 1,535 Capital surplus 1,009,106 999,595 1,065,295 Retained earnings 2,099,532 2,035,157 1,840,855 Accumulated other comprehensive income (6,600) 41,160 32,740 Treasury stock, at cost 47 83 1,845 (2,153) (3,731) (97,259) ----------- ----------- ----------- Total Shareholders' Equity 3,101,463 3,073,755 2,843,166 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $35,578,819 $35,800,177 $35,149,317 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
4 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED OTHER TOTAL COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS' STOCK SURPLUS EARNINGS INCOME STOCK EQUITY ------ ------- -------- ------------- -------- ------------- BALANCE AT DECEMBER 31, 1997 $1,489 $1,016,844 $1,724,752 $ 25,222 $ (6,005) $2,762,302 Net income 114,859 114,859 Other comprehensive income: Holding gains on available-for-sale securities, net of tax of $4,956 9,204 9,204 Less: Reclassification adjustment for securities gains included in net income above, net of tax of $1,559 (2,894) (2,894) -------- ---------- Other Comprehensive Income Net of Tax 6,310 6,310 ---------- Total Comprehensive Income 121,169 Common dividends declared: Mercantile Bancorporation Inc.--$.31 per share (41,747) (41,747) Pooled companies prior to acquisition (5,208) (5,208) Issuance of common stock in acquisitions of: HomeCorp, Inc. 9 6,727 13,765 27 20,528 Horizon Bancorp, Inc. 25 10,755 34,434 1,181 357 46,752 Issuance of common stock for: Employee incentive plans 9 28,628 2,193 30,830 Convertible notes 1 86 87 Purchase of treasury stock (93,804) (93,804) Pre-merger transactions of pooled companies and other 2 2,255 2,257 ------ ---------- ---------- -------- -------- ---------- BALANCE AT MARCH 31, 1998 $1,535 $1,065,295 $1,840,855 $ 32,740 $(97,259) $2,843,166 ====== ========== ========== ======== ======== ========== BALANCE AT DECEMBER 31, 1998 $1,574 $ 999,595 $2,035,157 $ 41,160 $ (3,731) $3,073,755 Net income 118,037 118,037 Other comprehensive income (loss): Holding losses on available-for-sale securities, net of tax benefit of $21,180 (39,334) (39,334) Less: Reclassification adjustment for securities gains included in net income above, net of tax of $4,537 (8,426) (8,426) -------- ---------- Other Comprehensive Loss Net of Tax Benefit (47,760) (47,760) ---------- Total Comprehensive Income 70,277 Common dividends declared--$.34 per share (53,662) (53,662) Issuance of common stock for: Employee incentive plans 4 9,384 2,863 12,251 Convertible notes 127 127 Purchase of treasury stock (1,285) (1,285) ------ ---------- ---------- ------- -------- ---------- BALANCE AT MARCH 31, 1999 $1,578 $1,009,106 $2,099,532 $ (6,600) $ (2,153) $3,101,463 ====== ========== ========== ======== ======== ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
5 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED MARCH 31 1999 1998 ---- ---- OPERATING ACTIVITIES Net income $ 118,037 $ 114,859 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 7,479 8,537 Depreciation and amortization 19,439 18,287 Provision for deferred income taxes (credits) 1,486 (2,305) Net change in loans held-for-sale 41,891 (146,378) Net change in trading securities 17,365 13,575 Net change in accrued interest receivable 5,911 14,722 Net change in accrued interest payable 11,465 8,449 Other, net 55,339 (41,856) ---------- ----------- Net Cash Provided (Used) by Operating Activities 278,412 (12,110) INVESTING ACTIVITIES Investments in debt and equity securities, other than trading securities Purchases (2,188,944) (2,474,948) Proceeds from maturities 964,683 1,332,649 Proceeds from sales of available-for-sale securities 1,098,838 606,143 Net change in loans and leases (278,974) 243,072 Purchases of loans and leases (141,874) (127,651) Proceeds from sale of mortgage servicing rights -- 26,330 Proceeds from sales of loans and leases 195,375 205,855 Purchases of premises and equipment (16,645) (20,392) Proceeds from sales of premises and equipment 8,045 3,830 Proceeds from sales of foreclosed property 11,425 9,975 Net cash and cash equivalents received from (paid for) acquisitions -- 34,448 Net cash and cash equivalents received from (paid for) sale of banking offices -- (3,524) Other, net 5,137 5,588 ---------- ----------- Net Cash Used by Investing Activities (342,934) (158,625) FINANCING ACTIVITIES Net change in non-interest bearing, savings, interest bearing demand and money market deposit accounts (563,103) (92,349) Net change in time certificates of deposit under $100,000 (297,613) (308,440) Net change in time certificates of deposit $100,000 and over 189,885 95,093 Net change in other time deposits (9,602) 14,787 Net change in foreign deposits (58,567) (122,013) Net change in short-term borrowings (296,867) 62,724 Principal payments on bank notes (25,000) (150,000) Issuance of long-term FHLB advances and other long-term debt 935,000 851,500 Principal payments on long-term debt (252,035) (5,275) Cash dividends paid (49,789) (44,580) Proceeds from issuance of common stock from employee incentive plans 7,631 10,568 Purchase of treasury stock (1,285) (93,804) ---------- ----------- Net Cash Provided (Used) by Financing Activities (421,345) 218,211 ---------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (485,867) 47,476 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,354,670 1,886,280 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,868,803 $ 1,933,756 ========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A ACCOUNTING POLICIES The consolidated financial statements include all adjustments which are, in the opinion of management, necessary for the fair statement of the results of these periods and are of a normal recurring nature. Certain reclassifications have been made to the 1998 historical financial statements to conform to the 1999 presentation. NOTE B NEW ACCOUNTING STANDARDS Financial Accounting Standard ("FAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was issued in June 1998, establishes accounting and reporting standards for derivative instruments and hedging activities. Under FAS 133, derivatives are recognized on the balance sheet at fair value as an asset or liability. Changes in the fair value of derivatives will be reported as a component of other comprehensive income or recognized as earnings through the income statement depending on the nature of the instrument. FAS 133 is effective for all quarters of fiscal years beginning after June 15, 1999 with earlier adoption permitted. The Corporation has not adopted FAS 133 yet and is currently evaluating FAS 133's effect on its financial position and results of operations, but it is not expected to have a material impact. NOTE C EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to the increase in the average shares outstanding that would have resulted from the exercise of dilutive stock options, the issuance of share equivalents under other employee incentive plans and the conversion of the entire balance of outstanding convertible notes. Net income is increased in the diluted earnings per share computation by interest expense that would not be incurred on notes if they converted, net of taxes. The components of basic and diluted earnings per share are as follows:
(THOUSANDS EXCEPT PER SHARE DATA) FIRST QUARTER 1999 1998 ---- ---- BASIC Net income $118,037 $114,859 Weighted average common shares outstanding 157,632,844 151,056,828 BASIC EARNINGS PER SHARE $.75 $.76 DILUTED Net income $118,037 $114,859 Interest on convertible notes, net of taxes 8 12 -------- -------- Diluted Net Income $118,045 $114,871 ======== ======== Weighted average common shares outstanding 157,632,844 151,056,828 Employee incentive plans 1,897,044 2,722,594 Convertible notes 71,807 98,140 ----------- ----------- Diluted Average Shares Outstanding 159,601,695 153,877,562 =========== =========== DILUTED EARNINGS PER SHARE $.74 $.75
7 NOTE D ACQUISITIONS On July 1, 1998, the Corporation acquired CBT Corporation ("CBT") of Paducah, Kentucky, and Firstbank of Illinois Co. ("Firstbank"), headquartered in Springfield, Illinois. The CBT and Firstbank acquisitions were accounted for under the pooling-of-interests method. Net income, net interest income and basic earnings per share in 1998 for the Corporation, CBT and Firstbank prior to this restatement were as follows:
(THOUSANDS EXCEPT PER SHARE DATA) SIX MONTHS ENDED JUNE 30, 1998 ---------------- CORPORATION Net income $198,902 Net interest income 482,912 Basic earnings per share 1.50 CBT Net income 7,151 Net interest income 21,038 Basic earnings per share 1.40 FIRSTBANK Net income 15,953 Net interest income 44,073 Basic earnings per share 1.21
NOTE E COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE CAPITAL TRUST I Mercantile Capital Trust I is a subsidiary of which the Corporation owns all the outstanding common securities; its sole assets are the $150,000,000 in mandatorily redeemable preferred securities, and considered together, the back-up undertakings constitute a full and unconditional guarantee by Mercantile Bancorporation Inc. of the trust's obligations under the preferred securities. NOTE F PENDING MERGER On April 30, 1999, a definitive Agreement and Plan of Merger by and between Mercantile and Firstar Corporation ("Firstar") was signed. Pursuant to the terms of the Merger Agreement, Mercantile will merge with and into Firstar in a transaction structured as and intended to be a tax-free reorganization, with Mercantile shareholders to receive Firstar common stock valued on that day at approximately $10.6 billion. The parties at the same time also signed stock option agreements granting each other options to purchase the other's stock, which options become exercisable upon the occurrence of certain events. Firstar is a $38 billion-asset bank holding company headquartered in Milwaukee. Under terms of the agreement, Mercantile shareholders will receive 2.091 shares of Firstar common stock for each share of Mercantile common stock owned. The transaction will be accounted for as a pooling-of-interests, and is expected to close in the fourth quarter of 1999, pending shareholder and regulatory approvals. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------------------------------------------------------------------------------------------------- EXHIBIT 1 HIGHLIGHTS
FIRST QUARTER ($ IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 CHANGE - ------------------------------------------------------------------------------------------------- PER SHARE DATA Diluted earnings per share $ .74 $ .75 (1.3)% Basic earnings per share .75 .76 (1.3) Dividends declared .34 .31 9.7 Book value at March 31 19.65 18.77 4.7 Market price at March 31 47.50 54.81 (13.3) - ------------------------------------------------------------------------------------------------- OPERATING RESULTS Taxable-equivalent net interest income $288,169 $276,956 4.0% Tax-equivalent adjustment 3,940 4,235 (7.0) Net interest income 284,229 272,721 4.2 Provision for possible loan losses 7,479 8,537 (12.4) Other income 126,444 136,951 (7.7) Other expense 225,354 220,538 2.2 Income taxes 59,803 65,738 (9.0) Net income $118,037 $114,859 2.8 - ------------------------------------------------------------------------------------------------- SELECTED RATIOS AND DATA Return on assets 1.33% 1.35% Return on equity 15.20 16.03 Efficiency ratio 54.35 53.28 Other expense to average assets 2.54 2.59 Net interest rate margin 3.61 3.62 Tangible equity to tangible assets 6.71 5.88 Equity to assets 8.72 8.09 Tier I capital to risk-adjusted assets 9.78 9.20 Total capital to risk-adjusted assets 12.33 12.11 Leverage 7.28 6.60 Reserve for possible loan losses to outstanding loans 1.37 1.35 Reserve for possible loan losses to non-performing loans 284.80 280.52 Non-performing loans to outstanding loans .48 .48 Banks 7 32 Banking offices 470 516 Full-time equivalent employees 10,441 11,034 - ------------------------------------------------------------------------------------------------- AVERAGE BALANCES Total assets $35,555,247 $34,038,516 4.5% Earning assets 32,378,963 31,027,000 4.4 Loans and leases 22,330,334 21,584,431 3.5 Deposits 25,047,723 24,885,651 .7 Shareholders' equity 3,106,499 2,866,071 8.4 - -------------------------------------------------------------------------------------------------
9 PERFORMANCE SUMMARY Net income for Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") in the first quarter of 1999 was $118,037,000 compared with the $114,859,000 earned in the same period a year ago. Diluted earnings per share was $.74 in 1999 compared with $.75 in the prior year and basic earnings per share was $.75 compared with $.76 in the first quarter of 1998. Return on average assets was 1.33% in 1999 compared with 1.35% in 1998, while return on average equity was 15.20% versus 16.03% last year. Other financial highlights for the first quarter of 1999 and 1998 are presented on Exhibit 1. There were significant transactions in both years and their impact on the results of operations are discussed below. ----------------------------------------------------------------------------------------------------------------------------- EXHIBIT 2 ACQUISITIONS ($ IN THOUSANDS)
CONSIDERATION ------------------------ GROSS ACCOUNTING DATE ASSETS DEPOSITS CASH SHARES METHOD ---- ------ -------- ---- ------ ---------- BANK ACQUISITIONS COMPLETED First Financial Bancorporation Sept. 28, 1998 $ 558,483 $ 477,573 $12 3,138,823 Pooling Financial Services Corporation of the Midwest Aug. 3, 1998 514,051 414,350 4 2,071,448 Pooling CBT Corporation July 1, 1998 1,006,384 695,923 34 5,123,214 Pooling Firstbank of Illinois Co. July 1, 1998 2,285,146 1,969,600 64 13,352,641 Pooling HomeCorp, Inc. Mar. 2, 1998 335,137 309,157 14 854,760 Pooling Horizon Bancorp, Inc. Feb. 2, 1998 536,507 454,230 2 2,549,970 Pooling NONBANK ACQUISITION COMPLETED Bruno Stolze & Company, Inc. Sept. 30, 1998 Purchase The Corporation's historical financial statements were not restated for the acquisition due to the immateriality of the acquiree's financial condition and results of operations to those of Mercantile. Terms of the transaction not disclosed. - --------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------ EXHIBIT 3 CASH BASED EARNINGS ($ IN THOUSANDS EXCEPT PER SHARE DATA)
FIRST QUARTER 1999 1998 CHANGE ---- ---- ------ Net Income $118,037 $114,859 2.8% Add Back: Goodwill amortization 13,790 13,954 (1.2) Other intangible asset amortization 533 642 (17.0) -------- -------- Total Intangible Asset Amortization 14,323 14,596 (1.9) Less: Tax effect (197) (229) (14.0) -------- -------- CASH BASED NET INCOME $132,163 $129,226 2.3 ======== ======== CASH BASED DILUTED EARNINGS PER SHARE $.83 $.84 (1.2)% CASH BASED PERFORMANCE RATIOS Return on tangible assets 1.52% 1.56% Return on tangible equity 22.66 25.41 Efficiency ratio 50.90 49.76 Other expense to average tangible assets 2.43 2.48 - --------------------------------------------------------------------
The Corporation believes it is important to also disclose cash based earnings and ratios, which excludes intangible asset amortization, because they are more indicative of cash flows, and thus, the Corporation's ability to support growth and pay dividends. In 1999, first quarter cash based diluted earnings per share was $.83 compared with the $.84 earned in 1998. See Exhibit 3 for other cash based performance ratios. Net interest income for the first quarter of 1999 was $284,229,000 compared with $272,721,000 in the year-earlier period, an increase of 4.2%. The net interest rate margin increased to 3.61% from 3.56% in the fourth quarter of 1998, yet was down slightly from 3.62% last year. Average earning assets for 1999 of $32.4 billion grew by $1.4 billion or 4.4% from $31.0 billion in the first quarter of 1998. The growth was primarily in commercial loans and securities partially offset by the paydown of residential mortgage loans. Other income was $126,444,000 in the first quarter of 1999, a decrease of 7.7% from a year ago. The first quarter of 1998 was favorably influenced by a $23,155,000 pre-tax gain on the sale of mortgage servicing rights and gains of $2,002,000 on the sale of an acquired corporate trust business and $2,658,000 on the sale of an out-of-market credit card portfolio. Excluding those gains from 1998 results and securities gains from both years, non-interest income was up by $8,798,000 or 8.4% from 1998. Fee growth in all core businesses accounted for the increase. The 10 Corporation introduced a program titled "Profit 2000" late in 1998 to proceed with initiatives to grow fee-based businesses and streamline the organization. Non-interest expenses in 1999 were $225,354,000, a modest 2.2% increase over 1998. The efficiency ratio was 54.35% compared with 53.28% last year, and the expense to average assets ratio improved to 2.54% compared with 2.59% in the first quarter of 1998. The cash based efficiency ratio was 50.90% compared with 49.76% last year, and the expense to tangible assets ratio was 2.43% compared with 2.48% in 1998. Most of the growth in operating expenses was related to investments made in technology and communications. The provision for possible loan losses for the quarter was $7,479,000 compared with $8,537,000 in 1998. Net charge-offs for 1999 and 1998 were $7,321,000 and $6,957,000, respectively, and on an annualized basis were .13% of average loans in both quarters. At March 31, 1999, the reserve for possible loan losses was $309,048,000, and covered 284.80% of non-performing loans compared with 335.25% at year-end 1998 and 280.52% last March 31. The Corporation modified its non-performing loan classifications in the first quarter of 1999 to make them more consistent with industry practice. Thesechanges are discussed on page 18 of this report. Non-performing loans (i.e., non-accrual and renegotiated loans) as of March 31, 1999 were $108,515,000 or .48% of total loans compared with the year-end 1998 figures of $92,137,000 or .41% and $104,650,000 or .48% at March 31, 1998. Impaired securities declined to $49,948,000 at March 31, 1999 from $63,296,000 at December 31, 1998 due to paydowns and selective sales. Foreclosed assets were $16,123,000 at March 31, 1999 versus $23,166,000 at March 31, 1998 and $13,500,000 at year-end. Consolidated assets of $35.6 billion were up 1.2% from last March 31. Core deposits decreased by 2.9% to $22.2 billion, loans were up 3.3% to $22.5 billion, and shareholders' equity of $3.1 billion was 9.1% higher than at March 31, 1998. All measures of capital adequacy remained adequate. Tier I capital to risk-adjusted assets was 9.78% while total capital to risk-adjusted assets at March 31, 1999 was 12.33%. The ratio of tangible equity to tangible assets was 6.71% at March 31, 1999. At March 31, 1999, Mercantile's assets were distributed as follows: St. Louis metropolitan area $18.5 billion, outstate Missouri $4.4 billion, metropolitan Kansas City $4.2 billion, Iowa and northwestern Illinois $3.6 billion, Arkansas $1.8 billion, outstate Illinois $2.2 billion and western Kentucky $.9 billion. On April 30, 1999, a definitive Agreement and Plan of Merger by and between Mercantile and Firstar Corporation ("Firstar") was signed. Mercantile will merge with and into Firstar in a transaction intended to be a tax-free reorganization, with Mercantile shareholders to receive 2.091 shares of Firstar common stock for each share of Mercantile common stock owned. At the same time, stock option agreements were signed granting each other options to purchase the other's stock, which options become exercisable upon the occurrence of certain events. Firstar, headquartered in Milwaukee, is a $38 billion-asset bank holding company with approximately 720 full-service banking offices in Ohio, Wisconsin, Kentucky, Illinois, Indiana, Iowa, Minnesota, Tennessee and Arizona. The transaction is expected to close in the fourth quarter of 1999, and will be accounted for as a pooling-of- interests. The following financial commentary presents a more thorough discussion and analysis of the results of operations and financial condition of the Corporation for the first quarter of 1999. LINE OF BUSINESS RESULTS The financial performance of Mercantile is monitored by an internal profitability measurement system that produces line of business results and key performance measures on a pre-tax basis. Mercantile's three major business units in 1999 include general commercial and retail banking ("Banking"), private banking and investments, and specialty retail banking ("Mercantile Credit Corp."). Asset/Liability Management ("ALM") includes the investment portfolio and the treasury function, and is a reportable business line under Financial Accounting Standard ("FAS") 131, "Disclosures about Segments of an Enterprise and Related Information". In 1998, the Corporation presented line of business results with ALM as a part of Banking. The management of ALM was separated from Banking in January 1999 and first quarter 1998 results have been restated for this change. 11 The reported results reflect the underlying economics of the businesses which are match-funded for interest rate risk. Expenses for centrally provided services are allocated based on usage of those services, and loan loss provision is allocated based on credit quality. The contribution of Mercantile's major business units to consolidated results for the first quarter of 1999 with comparable amounts for 1998 is summarized in Exhibit 4. - --------------------------------------------------------------------------------------------------------------------------------- EXHIBIT 4 LINE OF BUSINESS RESULTS ($ IN MILLIONS)
PRIVATE ASSET/ PARENT MERCANTILE BANKING & LIABILITY COMPANY BANKING CREDIT CORP. INVESTMENTS MANAGEMENT & OTHER CONSOLIDATED ------- ------------ ----------- ---------- ------- ------------ FIRST QUARTER 1999 ------------------ OPERATING RESULTS Taxable-equivalent net interest income $ 165 $ 75 $ 4 $ 51 $ (7) $ 288 Provision for possible loan losses 5 2 -- -- -- 7 Other income 45 32 37 12 -- 126 Other expense 126 57 26 -- 16 225 -------- ------ ------ ------ ------ ------- Taxable-equivalent Income Before Income Taxes $ 79 $ 48 $ 15 $ 63 $ (23) $ 182 ======== ====== ====== ====== ====== ======= Percent of Taxable-equivalent Income Before Income Taxes 43.4% 26.4% 8.2% 34.6% (12.6)% 100.0% AVERAGE BALANCES Loans and leases $ 15,450 $6,925 $ 168 $ -- $ (213) $22,330 Deposits 13,976 8,908 415 1,064 685 25,048 PERFORMANCE RATIOS Efficiency ratio 60.29% 53.91% 62.43% N/A N/A 54.35% Net interest rate margin 4.14 4.34 8.42 N/A N/A 3.61 Net charge-offs to average loans .11 .17 -- N/A N/A .13 ----------------------------------------------------------------------------------------------------------------------------- FIRST QUARTER 1998 ------------------ OPERATING RESULTS Taxable-equivalent net interest income $ 157 $ 76 $ 2 $ 51 $ (9) $ 277 Provision for possible loan losses 2 5 -- -- 2 9 Other income 35 62 34 5 1 137 Other expense 125 60 23 -- 12 220 -------- ------ ------ ------ ------ ------- Taxable-equivalent Income Before Income Taxes $ 65 $ 73 $ 13 $ 56 $ (22) $ 185 ======== ====== ====== ====== ====== ======= Percent of Taxable-equivalent Income Before Income Taxes 35.1% 39.5% 7.0% 30.3% (11.9)% 100.0% AVERAGE BALANCES Loans and leases $ 14,403 $7,282 $ 99 $ -- $ (200) $21,584 Deposits 13,600 8,962 289 1,238 797 24,886 PERFORMANCE RATIOS Efficiency ratio 65.10% 43.47% 63.88% N/A N/A 53.28% Net interest rate margin 4.10 4.17 8.00 N/A N/A 3.62 Net charge-offs to average loans .08 .26 -- N/A N/A .13 -----------------------------------------------------------------------------------------------------------------------------
Banking includes the Corporation's branch network and deposit gathering outside the St. Louis and Kansas City metropolitan areas, commercial lending and non-specialty retail lending. It is the largest business unit, and it houses most staff department functions. Pre-tax income improved by $14,000,000 or 21.5% from 1998. Loan growth, increases in net demand deposits and an expanded net interest rate margin accounted for an $8,000,000 increase in net interest income. The provision for loan losses increased by $3,000,000 from 1998 yet was only 13 basis points of average loans. The first quarter of 1998 included an abnormally low level of net charge-offs. Fee income improved by $10,000,000 due to growth in cash management fees, leasing income, service charges and miscellaneous ancillary sources. Operating expenses were held flat. Mercantile Credit Corp. includes the retail branch network in the St. Louis and Kansas City metropolitan areas, residential mortgage origination and servicing, credit card, indirect lending, insurance activities and consumer product management. The 12 management of St. Louis and Kansas City retail moved to Mercantile Credit Corp. from Banking in early 1999, and 1998 results were restated for this transfer. Pre-tax income declined by $25,000,000 from 1998, due to the gains on sales of mortgage servicing rights and an out-of-market credit card loan portfolio in 1998. Increased pre-tax profits in the indirect lending and credit card businesses were offset by declines in mortgage banking and in the St. Louis and Kansas City retail banking units, caused largely by the reduction in core deposits from the first quarter of 1998. Private Banking & Investments was structured to serve the investment management needs of high net worth individuals. This line of business includes private banking offices, personal and institutional trust activities, institutional money management and retail brokerage. Pre-tax income improved by $2,000,000 or 15.4% due to expanded deposit and loan bases as well as growth in trust fees and brokerage revenue. Parent Company and Other includes interest expense on Parent Company debt, goodwill amortization, consolidation eliminations, provision for loan losses not allocated to the business units and some general corporate expenses not allocated to the business units. The pre-tax loss was consistent with 1998. The ALM unit pre-tax profit improved by $7,000,000 due to a higher level of securities gains in 1999. NET INTEREST INCOME Net interest income for the first quarter of 1999 was $284,229,000, a 4.2% increase from the $272,721,000 earned last year. The net interest rate margin was 3.61% compared with 3.62% in 1998. Average earning assets in 1999 grew by $1.4 billion or 4.4% when compared with 1998, and average loans grew by $745,903,000 or 3.5%. This growth was funded by a $191,720,000 increase in purchased deposits, a $240,428,000 growth in equity and a $2.3 billion increase in long-term Federal Home Loan Bank ("FHLB") advances, partially offset by a $1.2 billion or 30.3% decrease in short-term borrowings. - --------------------------------------------------------------------- EXHIBIT 5 LOANS AND LEASES ($ IN THOUSANDS)
MARCH 31 1999 1998 CHANGE ---- ---- ------ Commercial $ 6,498,961 $ 5,384,406 20.7% Real estate--commercial 3,757,207 3,613,094 4.0 Real estate--construction 953,492 738,515 29.1 Real estate--residential mortgage 7,903,388 8,695,992 (9.1) Real estate--home equity credit loans 513,766 570,621 (10.0) Consumer 2,809,111 2,623,562 7.1 Credit card loans managed 441,074 537,077 (17.9) Securitized credit card loans (400,000) (400,000) -- ----------- ----------- Total Loans and Leases $22,476,999 $21,763,267 3.3 =========== =========== - ---------------------------------------------------------------------
Securities are the largest category of earning assets after loans, and averaged $9.5 billion in the first quarter of 1999, an increase of $522,599,000 or 5.8% from 1998. The portfolio grew as residential mortgage loans declined and an upward sloping yield curve provided more profitable investment opportunities. The held-to-maturity and available-for-sale portfolio at March 31, 1999 consisted of 68.51% in U.S. and other government agency securities (including 33.97% in mortgage-related issues), 4.25% in state and municipal securities, and 27.24% of other miscellaneous securities (largely privately-issued mortgage backed securities). The comparable distribution at March 31, 1998 was 65.59%, 31.08%, 5.65% and 28.76%, respectively. Growth in U.S. treasury and agency securities was partially offset by declines in state and municipal and privately-issued mortgage backed securities. The largest dollar volume of loan growth occurred in the commercial loan category. When compared with the first quarter of 1998, average commercial loans grew by $1.1 billion or 21.6%. The expertise of experienced lenders in certain specialized industries, coupled with a strong regional economy, accounted for the growth. Agriculture is a segment of the regional economy that did not contribute to commercial loan growth and agriculture-related commercial loans declined by 4.0%. An additional factor adding to the commercial loan growth was Mercantile's portfolio of $185,973,000 in loan participations purchased in the national markets and held for investment, compared with $45,650,000 last year. Other than these loans, commercial lending has a heavy relationship focus. The Corporation does not engage in commercial lending to emerging markets, including those in Latin America, Eastern Europe and in the Asia Pacific Region. Average commercial real estate mortgage and construction loans increased by $401,103,000 or 9.3%, also reflecting the strength of the regional economy. 13 Average residential real estate mortgage loans decreased by $733,981,000 or 8.4%. The interest rate environment since March 31, 1998 encouraged borrowers to prepay or refinance into conforming fixed-rate loans that Mercantile generally sells in the market. Average residential mortgage loans as a percentage of earning assets decreased from 28.17% in the first quarter of 1998 to 24.73% in 1999. Home equity credit loans also declined on average by 10.5% due to customer refinancing of those debts. Average direct consumer loans grew by $1,675,000 or .1%, while indirect consumer loans were up by $233,185,000 or 16.6%. The larger rate of growth in indirect lending was partially attributable to the centralization of that function and the use of risk-based pricing across the Mercantile system. Mercantile does not engage in significant subprime consumer lending in its own portfolio. Average credit card loans were down by 83.3% in 1999. Successful targeted marketing efforts, aimed at expanding relationships with the current Mercantile customer base, were offset by the sale of $112,000,000 in out-of-market credit card loans in the first quarter of 1998 as well as the third quarter 1998 reclassification of $80,000,000 in loans to investment securities in compliance with FAS 125 and terms of the credit card securitization agreement. On a managed portfolio basis, credit card loans averaged $626,035,000 in the first quarter of 1999 versus $764,616,000 in 1998. Core deposits remain Mercantile's largest, most reliable and most important funding source. Core deposits include both interest bearing and non-interest bearing demand deposits, money market and savings deposits, consumer certificates of deposit under $100,000 and other time deposits. For the first quarter of 1999, Mercantile was substantially core funded at 89.46% of average deposits and 69.20% of earning assets. Average core deposits decreased by $29,648,000 or .1% in the first quarter of 1999. All core deposit types increased on average except for certificates of deposit under $100,000 and other time deposits. Mercantile's average of consumer certificates to total core deposits declined to 40.22% from 43.84% in 1998. Changes in average core deposits for the past five quarters are shown in the Consolidated Quarterly Average Balance Sheet on page 23 of this report. Average non-interest bearing deposits increased by $304,073,000 or 8.1% from 1998. Cash and due from banks volume is related to non-interest bearing deposit volume and increased on average by $154,141,000 or 12.1%. Thus "net" non-interest bearing deposits grew by $149,932,000 or 6.1%. Successful efforts in managing float and minimizing reserve requirements coupled with deposit volume growth resulted in the increase in average net non-interest bearing funds. Part of the growth came from the U.S. government, a significant cash management customer of Mercantile Bank N.A. that pays for services rendered via compensating balances. These average balances have increased from $680,874,000 in the first quarter of 1998 to $765,653,000 in 1999. Average interest bearing demand, savings and money market accounts increased by .8%, 6.5%, and 9.3%, respectively, as customers preferred these types of deposits to retail certificates. Average short-term borrowings declined by $1.2 billion, to $2.7 billion, in the first quarter of 1999 as short-term FHLB advances were refunded with comparable longer term investments. Long-term FHLB advances averaged $3.2 billion in the first quarter of 1999 compared with $875,993,000 in the prior year. During 1998, these borrowings became a significant funding source for Mercantile due to their attractive pricing. As of March 31, 1999, there were no borrowings outstanding under the $3.0 billion bank note program developed in 1998. The remainder of bank notes issued under the old program matured during the first quarter of 1999. The factors discussed previously are consistent with Mercantile's overall corporate policy relative to rate sensitivity and liquidity, which is to produce the optimal yield and maturity mix consistent with interest rate expectations and projected liquidity needs. The Consolidated Quarterly Average Balance Sheet, with rates earned and paid, is summarized by quarter on page 23. OTHER INCOME Non-interest income decreased by 7.7% during the first quarter of 1999 to $126,444,000 as compared with the year-earlier period. In the first quarter of 1998, the Corporation recorded gains on the sales of: 1) mortgage servicing rights of $23,155,000; 2) an acquired corporate trust business of $2,002,000 and; 3) an acquired out-of-market credit card portfolio for $2,658,000. If 14 these 1998 items as well as securities gains in both years are excluded, non-interest income grew by 8.4%. Exhibit 6 portrays such transactions and a summary of all categories of fee income in the first quarter of 1999 and 1998. - ---------------------------------------------------------------------------- EXHIBIT 6 OTHER INCOME ($ IN THOUSANDS)
FIRST QUARTER 1999 1998 CHANGE ---- ---- ------ Trust $ 29,142 $ 28,128 3.6% Service charges 29,640 28,244 4.9 Retail brokerage revenue 6,261 4,882 28.2 Other investment banking 4,821 6,184 (22.0) Mortgage banking 6,199 29,098 -- Credit card fees 3,503 3,525 (.6) Securitization revenue 5,451 4,523 20.5 Securities gains 12,963 4,453 -- Electronic Federal Tax Payment System (EFTPS) fees 2,733 2,318 17.9 ATM fees 3,772 3,560 6.0 Income on operating leases 3,520 1,920 83.3 Loan commitment fees 1,832 1,999 (8.4) Loan late charges 2,306 2,223 3.7 Letters of credit fees 1,794 1,535 16.9 Official check fees 2,923 1,614 81.1 Safe deposit box rental 1,651 1,591 3.8 Insurance commissions 1,773 1,819 (2.5) Debit card income 1,555 1,034 50.4 Miscellaneous 4,605 8,301 (44.5) -------- -------- Total Other Income 126,444 136,951 (7.7) Less gains from: Sale of available-for-sale securities (12,963) (4,453) -- Sale of mortgage servicing rights -- (23,155) -- Sale of out-of-market credit card portfolio -- (2,658) -- Sale of corporate trust -- (2,002) -- -------- -------- Total Other Income After Gains $113,481 $104,683 8.4 ======== ======== Excludes such fees from the Corporation's mortgage banking and credit card operations, which are included in mortgage banking and credit card revenue. - ----------------------------------------------------------------------
Deposit service charges were the largest source of non-interest income and totaled $29,640,000 in the first quarter of 1999, which represented an increase of $1,396,000 or 4.9% over 1998. Growth occurred in both commercial and retail lines of business. A lower interest rate environment added to fees collected on commercial accounts. In 1999, trust fees were $29,142,000 compared with $28,128,000 during the first quarter of 1998, an increase of 3.6%. There was an increase in personal trust fees at Mercantile Trust Company N.A., which was partially offset by a reduced rate of revenue growth at Mississippi Valley Advisors Inc., the investment management subsidiary of Mercantile. In addition, there were some reclassifications from trust income in 1998 to miscellaneous fees in 1999 resulting from the integration of Firstbank of Illinois Co. in late 1998, thereby making the quarterly comparisons difficult. Mississippi Valley Advisors Inc. manages the 19 Mercantile Mutual Funds. These funds had assets of $4.4 billion at March 31, 1999 compared with $4.1 billion on March 31, 1998. In January 1998, the Corporation sold $1.9 billion in loan servicing which reduced originated mortgage servicing rights by approximately $3,200,000. This sale was consistent with the Corporation's goals to "right size" the servicing portfolio as all Mercantile servicing operations were consolidated in Nevada, Missouri, during mid-1998. The sale also lowered the prepayment risk associated with the servicing portfolio, and the gain funded the Corporation's 1998 systems cost to become Year 2000 compliant. Excluding the gain on sale, mortgage banking income was $6,199,000 in the first quarter of 1999 versus $5,943,000 the prior year, an increase of 4.3%. Mortgages serviced totaled $11.4 billion at March 31, 1999 compared with $10.9 billion at March 31, 1998. Total originated and purchased mortgage servicing rights on the balance sheet at March 31, 1999 were $48,089,000. The associated risk for impairment was not considered to be material although a lower interest rate environment could accelerate refinancing activity and cause quicker amortization, and thus cause possible future impairment in value of those assets. Retail brokerage and other investment banking revenue totaled $11,082,000, relatively flat compared with $11,066,000 last year. The Bruno Stolze & Company, Inc. discount brokerage acquisition in late 1998 favorably impacted 1999 revenues and foreign exchange revenue growth remained strong. However, sales of institutional fixed income securities remain unattractive in this low rate environment. Credit card fee income was $3,503,000 for the first quarter of 1999 compared with $3,525,000 last year. Credit card income primarily represents interchange fees received on transactions of Mercantile cardholders and cardholders' miscellaneous fees. In the fourth quarter of 1998, Mercantile credit cards were reissued under Missouri law, allowing the Corporation greater 15 flexibility in pricing and the opportunity to increase fee revenue in 1999. Last year's first quarter included the fee income on the out-of-market cards sold late in the period, so comparative results should be more favorable in 1999 as the year progresses. Securitization revenue was $5,451,000 in the first quarter of 1999 versus $4,523,000 in 1998, and represents amounts accruing to Mercantile on the $400,000,000 in credit card loans securitized in the Mercantile Credit Card Master Trust during May 1995, as well as amounts recognized under FAS 125 for investor certificate loans that were sold and reclassified to the investment portfolio. For securitized loans, amounts that would previously have been reported as interest income, interest expense, credit card fees and provision for loan losses are instead netted in non-interest income as securitization revenue. Because credit losses are absorbed against credit card servicing income over the life of these transactions, such income may vary depending upon the credit performance of the securitized loans. Mercantile acts as servicing agent and receives loan servicing fees equal to 2% per annum of the securitized receivables. As servicing agent, Mercantile continues to provide customer service to collect past due accounts and to provide other services typically performed for its customers. Accordingly, Mercantile's relationship with its credit card customers is not affected by the securitization. The securitized loans will start amortizing in November 1999, and credit card loans will be purchased by Mercantile from the trust for 12 consecutive months. Significant other revenue growth categories in both years included Electronic Federal Tax Payment System ("EFTPS"), operating lease income, both ATM and debit card fees, official check fees and letters of credit fees. All these businesses are key focuses of the Corporation. Net securities gains on investment securities totaled $12,963,000 and $4,453,000 in the first quarter of 1999 and 1998, respectively. Repositioning of 1998 acquired investment portfolios and more active portfolio management in the current interest rate environment accounted for the increased gains in 1999. Additionally, the Corporation opportunistically disposed of $8,036,000 of impaired investment securities in the first quarter of 1999 at gains of $1,275,000. The impaired balance declined to $49,948,000 from $63,296,000 at year-end 1998. OTHER EXPENSE Expenses other than interest expense and the provision for possible loan losses for the first quarter of 1999 totaled $225,354,000, an increase of $4,816,000 or 2.2% from 1998. The efficiency ratio, defined as operating expenses as a percentage of taxable-equivalent net interest income and other income, was 54.35% versus 53.28% last year, and the ratio of other expense to average assets was 2.54%, five basis points lower than in 1998. - -------------------------------------------------------------------- EXHIBIT 7 OTHER EXPENSE ($ IN THOUSANDS)
FIRST QUARTER 1999 1998 CHANGE ---- ---- ------ Salaries $101,687 $102,631 (.9)% Employee benefits 21,652 22,547 (4.0) -------- -------- Total Personnel Expense 123,339 125,178 (1.5) Net occupancy 17,191 16,184 6.2 Equipment 23,689 20,858 13.6 Postage and freight 7,604 7,305 4.1 Marketing/business development 3,306 4,033 (18.0) Office supplies 4,546 4,353 4.4 Communications 5,634 4,428 27.2 Legal and professional 4,126 3,435 20.1 Credit card 1,227 1,289 (4.8) FDIC insurance 1,274 1,367 (6.8) Foreclosed property expense 753 172 -- Miscellaneous 18,342 17,340 5.8 -------- -------- ----- Other Expense Before Intangible Asset Amortization 211,031 205,942 2.5 Intangible asset amortization 14,323 14,596 (1.9) -------- -------- Total Other Expense $225,354 $220,538 2.2 ======== ======== - --------------------------------------------------------------------
Salary expense declined by $944,000 or .9% from the first quarter of 1998. The impact of merit increases was more than offset by lower staff levels resulting from acquisition synergies, Profit 2000 initiatives, branch closings and better use of technology. Employee benefit costs declined in the first quarter of 1999 by 4.0%, to $21,652,000, due to the lower level of salary expense and attentiveness to this important expense category. Occupancy and equipment costs increased by 10.4% in the first quarter, reflecting a consistent program of investing in new technology to improve customer service and enhance 16 employee efficiency. Additionally, with the growth of the Mercantile leasing business, depreciation of equipment Mercantile leases to customers increased by $1,332,000 over the first quarter of 1998. The rent received on this equipment is a component of non-interest income. Exhibit 7 details the composition of all other operating expenses. Communications expense totaled $5,634,000 in the first quarter of 1999 compared with $4,428,000 last year, reflecting the costs of technology to expand both voice and data networking. Marketing and business development expense declined in 1999 as a corporate-wide image advertising campaign that began in 1997 wound down last year. During the first quarter of 1998, there was a reduction in miscellaneous expense of $1,200,000 from a gain realized on the sale of one non-strategic Mercantile branch office. Intangible asset amortization was $14,323,000 in the first quarter of 1999 compared with $14,596,000 in 1998. Mercantile contributed $1,000,000 to its charitable foundation in the first quarter of 1999 compared with $1,600,000 in 1998. During 1998, Mercantile recorded acquisition adjustments totaling $89,192,000 that were originally recorded as an accrued liability. Of that original liability, $60,368,000 has been utilized at March 31, 1999 and $28,824,000 remains to absorb future cash payments. Substantially all the merger-related provisions made for acquisitions prior to 1998 have been exhausted. During the fourth quarter of 1998, Mercantile recorded a $45,130,000 charge relating to cost management programs and customer service initiatives. The charge will fund the costs related to 26 branch closings and severance for approximately 1,400 staff reductions that will result from further centralization, consolidation of back office functions, branch closures and a wider span of control. These initiatives are continuing throughout 1999. Any additional costs that do not qualify for recognition in the charge are being expensed as incurred, but are not expected to be material. Total payments through March 31, 1999 were $12,064,000, and the remaining balance of $33,066,000 represents the liability for the future cash outflows associated with these specific actions. These scheduled Profit 2000 projects are jointly being reevaluated by Firstar and Mercantile as to viability and/or timing. INCOME TAXES For the quarter ended March 31, 1999, the Corporation recorded income tax expense of $59,803,000 compared with 1998 expense of $65,738,000. The effective tax rate was 33.63% in 1999 compared with 36.40% in 1998. The implementation of various business strategies and receipt of state tax refunds resulted in lower state and local income taxes in 1999 than in the first quarter of 1998. This lower effective tax rate is anticipated for the remainder of 1999. RESERVE FOR POSSIBLE LOAN LOSSES The reserve for possible loan losses was $309,048,000 or 1.37% of loans outstanding at March 31, 1999, compared with $308,890,000 or 1.38% at year's end and $293,565,000 or 1.35% at March 31, 1998. The reserve coverage of non-performing loans was 284.80% compared with 335.25% at year-end and 280.52% last year. Over 35% of the Corporation's current loan portfolio is invested in residential real estate loans for which the loan loss experience averaged only .03% for the past three years. If these residential mortgages and its allocated reserve are excluded, the remaining reserve for possible loan losses represents 2.03% of loans outstanding at March 31, 1999. The provision for possible loan losses for the first quarter of 1999 was $7,479,000 compared with $8,537,000 last year. The annualized ratio of net charge-offs to average loans was .13% in both quarters, while the corresponding net charge-off figures were $7,321,000 and $6,957,000, respectively. - -------------------------------------------------------------------- EXHIBIT 8 RESERVE FOR POSSIBLE LOAN LOSSES ($ IN THOUSANDS)
FIRST QUARTER 1999 1998 ---- ---- BEGINNING BALANCE $308,890 $284,165 PROVISION 7,479 8,537 Charge-offs (12,742) (12,772) Recoveries 5,421 5,815 -------- -------- NET CHARGE-OFFS (7,321) (6,957) Acquired Reserves -- 7,820 -------- -------- ENDING BALANCE $309,048 $293,565 ======== ======== LOANS AND LEASES March 31 balance $22,476,999 $21,763,267 =========== =========== Average balance $22,330,334 $21,584,431 =========== =========== RATIOS Reserve balance to outstanding loans 1.37% 1.35% Reserve balance to non-performing loans 284.80 280.52 Net charge-offs to average loans .13 .13 - ---------------------------------------------------------
17 For the total managed portfolio of credit card loans (including securitized loans), the ratio of net charge-offs to average loans was 5.27% in 1999 versus 7.35% last year. Net charge-offs on the out-of-territory portfolio that was sold late in the first quarter of 1998 totaled $2,316,000. By credit policy, losses are taken on credit card loans after six cycles of nonpayment, or within 15 days of receipt of personal bankruptcy notice, if earlier. Due to the 1995 securitization and FAS 125 accounting, very few credit card outstandings are accounted for as loans as of March 31, 1999. Over a 12-month period commencing in November 1999, $600,000,000 of loans in the Mercantile Credit Card Master Trust will return to the Corporation's balance sheet as loans. Currently $400,000,000 of credit card loans are off the balance sheet and in the trust as collateral for the debt of the trust. The other $200,000,000 in loans are also in the trust but are classified as investor certificates and held on Mercantile's balance sheet in the investment portfolio. Mercantile evaluates the reserve for loan losses on a quarterly basis to ensure the timely charge-off of loans and to determine the adequacy of the reserve. Management believes the consolidated reserve of 1.37% of loans and 284.80% of non-performing loans as of March 31, 1999 was adequate based on the risks identified at such date in the portfolio. NON-PERFORMING ASSETS Non-performing assets consist of non-accrual loans, renegotiated loans, foreclosed property and investment securities with an impairment in value that is considered other than temporary. A summary of these assets is presented in Exhibit 9. Non-performing loans (non-accrual and renegotiated loans) were $108,515,000 or .48% of total loans at March 31, 1999, compared with $92,137,000 or .41% at December 31, 1998 and $104,650,000 or .48% at March 31, 1998. By the Corporation's definition, all non-accrual and renegotiated commercial-related loans are considered impaired, and totaled $64,608,000 at March 31, 1999. The average balance of impaired loans was $59,302,000 in the first quarter of 1999. Foreclosed assets were $16,123,000 at March 31, 1999 compared with $13,500,000 at year's end and $23,166,000 last year. - ------------------------------------------------------------------------------- EXHIBIT 9 NON-PERFORMING ASSETS ($ IN THOUSANDS)
MARCH 31 DEC. 31 MARCH 31 1999 1998 1998 -------- ------- -------- NON-ACCRUAL LOANS Commercial $ 35,066 $ 21,799 $ 47,022 Real estate--commercial 24,853 20,935 27,222 Real estate--construction 3,246 3,411 1,922 Real estate--residential mortgage 29,754 31,355 17,676 Real estate--home equity credit loans 401 551 454 Consumer 13,752 12,633 7,975 -------- -------- -------- Total Non-accrual Loans 107,072 90,684 102,271 RENEGOTIATED LOANS 1,443 1,453 2,379 -------- -------- -------- TOTAL NON-PERFORMING LOANS 108,515 92,137 104,650 FORECLOSED ASSETS Foreclosed real estate 12,193 8,983 18,604 Other foreclosed assets 3,930 4,517 4,562 -------- -------- -------- TOTAL FORECLOSED ASSETS 16,123 13,500 23,166 -------- -------- -------- TOTAL NON-PERFORMING LOANS AND FORECLOSED ASSETS 124,638 105,637 127,816 Impaired investment securities 49,948 63,296 77,943 -------- -------- -------- TOTAL NON-PERFORMING ASSETS $174,586 $168,933 $205,759 ======== ======== ======== PAST-DUE LOANS (90 DAYS OR MORE) Commercial $ 7,486 $ 12,263 $ 6,123 Real estate--commercial 2,332 1,621 922 Real estate--construction 751 -- -- Real estate--residential mortgage 46,947 48,572 33,648 Real estate--home equity credit loans 484 503 1,785 Consumer 7,243 7,396 6,140 Credit card 404 672 1,982 -------- -------- -------- Total Past-due Loans $ 65,647 $ 71,027 $ 50,600 ======== ======== ======== RATIOS Non-performing loans to outstanding loans .48% .41% .48% Non-performing loans and foreclosed assets to outstanding loans and foreclosed assets .55 .47 .59 Non-performing assets to total assets .49 .47 .59 Excludes insured FHA and government guaranteed VA loans that are contractually past due more than 90 days. Since these loans are fully insured or guaranteed for the payment of both principal and interest, the Corporation does not consider these loans to be non-performing assets. The total of such insured or guaranteed loans was $5,114,000 at March 31, 1999, $7,855,000 at December 31, 1998, and $10,299,000 at March 31, 1998. Past-due loans 90 days or more are not included in non-performing asset totals or ratios. - -------------------------------------------------------------------------------
In the first quarter of 1999, the Corporation modified its reporting of non-accrual residential real estate mortgage loans. The new policy requires these mortgages to be transferred to non-accrual status at the inception of foreclosure proceedings or 180 days past due, whichever is first. Until foreclosure, the loans are reported as past due 90 days or more and still accruing interest. Under Mercantile's prior accounting policy, residential mortgages past due 90 days or more were part of non-accrual loans. This modification in reporting was affected by several factors. As stated previously, residential mortgage charge-offs as a 18 percentage of loans has averaged only .03% for the past three years and the amount of interest lost on non-performing residential mortgages historically has been minimal. This change in reporting is also consistent with industry standards and regulatory reporting requirements. Previously reported non-accrual and past due 90 days or more loan balances have been restated to reflect this reporting modification. Non-accrual loans totaled $107,072,000, an increase of $16,388,000 from December 31, 1998. The increase was primarily in the asset-based lending subsidiary and in rural markets. As of March 31, 1999, Mercantile had only three non-accrual loans with balances in excess of $2,000,000. As significant, the Corporation held no foreclosed assets with a book value exceeding $1,000,000. All loans classified as renegotiated were paying in accordance with their modified terms at March 31, 1999. Consumer loans are no longer classified as renegotiated, consistent with industry standards and regulatory reporting. All periods reported reflect this change. Loans past due 90 days and still accruing interest consisted largely of credit card loans, consumer loans and residential real estate mortgage loans. The Corporation's impaired investment securities represent selected pools of privately issued mortgage-backed securities, and have declined by $13,348,000 from December 31, 1998, to $49,948,000, due to paydowns and sales. In the first quarter of 1999, $8,036,000 in impaired securities were sold at gains of $1,275,000 which is part of securities gains reported in the Consolidated Statement of Income. The current yield on the net book value of these impaired securities is 10.93% at March 31, 1999. CAPITAL RESOURCES Mercantile maintains a capital base that provides a foundation for anticipated future asset growth and promotes depositor and investor confidence. Capital management is a continuous process at Mercantile and is focused on ensuring that adequate capital is provided for both current needs and anticipated growth. This strategy has enabled Mercantile to profitably expand its balance sheet while maintaining capital ratios that exceed regulatory capital requirements. At March 31, 1999, shareholders' equity was $3.1 billion, an increase of 9.1% from March 31, 1998. This increase was primarily derived from retained earnings, partially offset by an unfavorable FAS 115 adjustment of $47,760,000 during the first quarter of 1999. As of March 31, 1999, the balance of the valuation on available-for-sale securities reduced shareholders' equity by $6,600,000. The tangible equity to tangible assets ratio increased to 6.71% at March 31, 1999 from 5.88% a year ago. Additionally, all regulatory capital ratios have improved since last year and significantly exceed regulatory requirements. Exhibit 10 details significant capital information for March 31, 1999, December 31, 1998 and March 31, 1998. - ------------------------------------------------------------------------------- EXHIBIT 10 RISK-BASED CAPITAL ($ IN THOUSANDS)
MARCH 31 DEC. 31 MARCH 31 1999 1998 1998 -------- ------- -------- Capital Tier I $ 2,534,036 $ 2,451,449 $ 2,191,262 Total 3,193,141 3,125,488 2,884,005 Risk-adjusted assets 25,905,797 24,907,551 23,823,607 Tier I capital to risk-adjusted assets 9.78% 9.84% 9.20% Total capital to risk-adjusted assets 12.33 12.55 12.11 Leverage 7.28 7.16 6.60 Tangible equity to tangible assets 6.71 6.55 5.88 Double leverage 119.31 120.75 125.99 - -------------------------------------------------------------------------------
In the first quarter of 1998, the Corporation repurchased 1,750,000 shares of its common stock via designated broker-dealers at an average cost of $53.60 per share. These repurchases occurred through an accelerated stock repurchase program. The shares were reissued for the 1994 Stock Incentive Plan and the acquisitions of CBT Corporation and Firstbank of Illinois Co. Share repurchases through March 31, 1999 followed Mercantile's systematic reacquisition plan for the 1994 Stock Incentive Plan. At March 31, 1999, Mercantile had only 47,363 treasury shares, including 28,125 repurchased in the first quarter of 1999. None were tainted for pooling-of-interests accounting purposes. The Corporation has $53,450,000 of 9.00% mortgage-backed notes that mature in July 1999. Additionally, Mercantile's $400,000,000 credit card securitization is scheduled to begin a 12-month amortization period in November 1999. Excluding FHLB advances, the maturities of remaining long-term debt are laddered between 2001 and 2007. 19 The Parent Company's double leverage ratio, which measures the extent to which the equity capital of its subsidiaries is supported by Parent Company debt rather than equity, improved to 119.31% at March 31, 1999 compared with 125.99% last year. Intangible assets, which consisted largely of goodwill, totaled $765,560,000 at March 31, 1999 compared with $823,955,000 a year ago. On February 17, 1999, the Board of Directors declared a quarterly cash dividend of $.34 per share, an increase of 9.7% over the 1998 quarterly dividend of $.31 per share. The dividend was paid on April 1, 1999. Book value per share was $19.65 at March 31, 1999 compared with $18.77 a year earlier, an increase of 4.7%. Public debt ratings of the Corporation and Mercantile Bank N.A. are shown in Exhibit 11. ------------------------------------------------------------------------------------------------------------------------------ EXHIBIT 11 DEBT RATINGS
MARCH 31, 1999 -------------------------------------------------------------- FITCH THOMSON STANDARD MOODY'S IBCA BANKWATCH & POOR'S ------- ----- --------- -------- MERCANTILE BANCORPORATION INC. Issuer rating B Commercial paper F1 TBW-1 6.800% senior notes, due 2001 A2 A- BBB+ 7.050% senior notes, due 2004 A2 A- BBB+ 7.625% subordinated notes, due 2002 A3 BBB+ BBB 7.300% subordinated notes, due 2007 A3 BBB+ BBB Floating rate capital trust pass-through securities(SM) a2 BBB- MERCANTILE BANK N.A. Bank notes (long-term/short-term) A1/P-1 A/TBW-1 A-/A-2 6.375% subordinated notes, due 2004 A2 A A- BBB+ 9.000% mortgage-backed notes, due July 1999 Aaa Certificates of deposit (long-term/short-term) A1/P-1 A-/A-2 -----------------------------------------------------------------------------------------------------------------------------
YEAR 2000 Financial institutions are particularly vulnerable to Year 2000 issues because of industry reliance on electronic data processing and funds transfer systems. In 1996, the Corporation initiated a formal and centralized Year 2000 Program ("Program") with the objective of addressing all aspects of the Year 2000 issue. All business units of the organization were brought into the Program through the creation of a Year 2000 Operational Task Force. A Program Manager, who provides monthly Year 2000 status reports to executive management and quarterly reports to the Board of Directors, was appointed. The Corporation has substantially completed the assessment, analysis, remediation and validation phases of its Year 2000 Program and is well into the execution phase. As part of the Program, a comprehensive Year 2000 Program Plan ("Plan") was developed and implemented in the third quarter of 1997. The Plan addresses both Information Technology ("IT") projects, such as insuring that data processing and data network applications are Year 2000 compliant, and non-IT projects, such as insuring that all building facilities and security systems having "embedded technology" will be operational when Year 2000 arrives. Of the plan projects identified, approximately 92% have been completed. Most remaining projects are dependent upon external testing for completion, which is scheduled to be completed by the end of the second quarter of 1999. As part of its Plan, Mercantile identified those systems and business applications that are "mission-critical," that is, systems and business applications which, if they failed, would render Mercantile incapable of performing core business processes. As of March 31, 1999, renovation and testing of such identified mission-critical applications were 100% complete. As a financial institution, Mercantile's Year 2000 efforts are subject to regulation and monitoring by bank and bank holding company regulatory agencies. These agencies, under the auspices of the Federal Financial Institutions Examination Council ("FFIEC"), have established specific guidelines and interim deadlines for achieving Year 2000 compliance. Mercantile's Program has met all of the deadlines and complied with all guidelines to date, and fully intends and expects to continue to do so. 20 In addition to Year 2000 compatibility of all Mercantile applications, Mercantile's Year 2000 Program addresses third-party Year 2000 issues. Mercantile has numerous customers, vendors, service providers, counterparties and other business relationships with third parties. Failure of any of these parties to address Year 2000 issues could result in significant and in some cases material disruptions of business and costs to Mercantile. Mercantile has undertaken an assessment of all third-party credit relationships and thus far has completed its evaluation of such relationships which are considered to be material. Follow-up plans have been put in place to deal with such relationships that have been identified as "high risk." In addition, all customers with whom Mercantile exchanges electronic data have received notification of Year 2000-related date format impacts. Year 2000 date testing has been completed with approximately 48% of material third-party relationships. Review of third-party customers and supplies will be an ongoing process throughout 1999. Mercantile estimates that its total costs related to Year 2000 remediation will be approximately $31,000,000. Expenses of the Program in the first quarter of 1999 declined to $1,751,000 from $3,985,000 in the same period of 1998. Personnel costs for Mercantile employees and outside consultants working on the Program, and the cost of setting up testing environments are the largest components of the total Program cost. Other costs include costs for communication and training, and for required hardware and software replacement, upgrade or renovation. Year 2000 expenditures are expensed as incurred. It is not expected that Year 2000 costs or activities will have a material adverse impact on operations of the Corporation. The principal risks associated with the Year 2000 problem can be grouped into two categories. The first is the risk that Mercantile does not successfully ready its operations for the next century. The second is the risk of disruption of Mercantile operations due to operational failures of third parties. The first category includes those risks that are largely under Mercantile's control. As set forth above, the Corporation believes it has made the necessary corrections to its mission-critical systems, and therefore believes there is little risk of any critical system or asset not being able to process date-related functions. In the event that Mercantile has not successfully completed the remediation of its mission-critical systems, it could be materially adversely affected as a result of disruption of core business processes. The second risk category is largely outside of Mercantile's control. Computer failure of third parties may jeopardize Mercantile operations. The most serious impact on Mercantile operations from Year 2000 failures of others would result if basic services such as telecommunications, electric power and service provided by other financial institutions and governmental agencies were disrupted. Similarly, operational failures affecting Mercantile's sources of major funding, larger borrowers and capital market counterparties could affect the ability of such parties to continue to provide funding or meet obligations when due. Significant public disclosure of the state of readiness among basic infrastructure and other suppliers, funding sources and counterparties has not generally been available. Although inquiries are underway to assess this potential risk, Mercantile does not yet have the necessary information to estimate the likelihood of such significant disruptions. Liquidity planning is underway and an initial plan to address funding issues is expected to be completed by June 1999. Review of this plan will be an ongoing process throughout 1999. There can be no assurance that Year 2000 failures of third parties will not have a material adverse impact on Mercantile. Mercantile is developing remediation contingency plans and business resumption contingency plans specific to Year 2000 issues. Remediation contingency plans address the actions to be taken if the current approach to remediating a system is falling behind schedule, or otherwise appears in jeopardy of failing to deliver a Year 2000 ready system when needed. Business resumption contingency plans address the actions that would be taken if core business processes and critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. Remediation contingency plans with trigger dates for review and implementation have been developed for mission- critical applications. The effort to develop business resumption contingency plans is in progress. The first three phases of this effort, Organizational Planning Guidelines, Business Impact Analysis and Plan Development, are complete. The fourth phase, Method for Validation of Plans, is approximately 80% complete. This phase is due to be completed by June 30, 1999, as required by FFIEC guidelines. The review of these plans will be an ongoing process throughout 1999. As stated before, Mercantile is expected to merge with and into Firstar in the fourth quarter of 1999. However, conversions to Firstar's systems are not scheduled until the first quarter of 2000. 21 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME ($ IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1999 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. -------- -------- -------- -------- -------- INTEREST INCOME Interest and fees on loans and leases $442,332 $445,880 $443,631 $439,392 $431,903 Investments in debt and equity securities 144,117 149,856 146,296 150,417 148,335 Short-term investments 6,731 8,351 7,334 7,781 6,700 -------- -------- -------- -------- -------- Total Interest Income 593,180 604,087 597,261 597,590 586,938 Tax-equivalent adjustment 4,235 4,191 3,906 4,332 3,940 -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INTEREST INCOME 597,415 608,278 601,167 601,922 590,878 INTEREST EXPENSE Deposits 237,420 237,267 231,983 225,046 216,638 Borrowed funds 83,039 91,518 92,199 89,386 86,071 -------- -------- -------- -------- -------- Total Interest Expense 320,459 328,785 324,182 314,432 302,709 -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT NET INTEREST INCOME 276,956 279,493 276,985 287,490 288,169 PROVISION FOR POSSIBLE LOAN LOSSES 8,537 7,344 23,871 11,402 7,479 OTHER INCOME Trust 28,128 28,816 27,442 28,613 29,142 Service charges 28,244 29,073 30,498 31,462 29,640 Investment banking and brokerage 11,066 9,826 9,760 10,485 11,082 Mortgage banking 29,098 8,959 6,149 10,249 6,199 Securities gains 4,453 2,834 2,297 5,851 12,963 Other 35,962 35,243 85,693 41,717 37,418 -------- -------- -------- -------- -------- Total Other Income 136,951 114,751 161,839 128,377 126,444 OTHER EXPENSE Personnel expense 125,178 121,779 124,155 124,847 123,339 Net occupancy and equipment 37,042 37,270 38,608 39,509 40,880 Other 58,318 65,677 148,389 105,985 61,135 -------- -------- -------- -------- -------- Total Other Expense 220,538 224,726 311,152 270,341 225,354 -------- -------- -------- -------- -------- TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 184,832 162,174 103,801 134,124 181,780 INCOME TAXES Income taxes 65,738 50,836 36,751 39,639 59,803 Tax-equivalent adjustment 4,235 4,191 3,906 4,332 3,940 -------- -------- -------- -------- -------- Adjusted Income Taxes 69,973 55,027 40,657 43,971 63,743 -------- -------- -------- -------- -------- NET INCOME $114,859 $107,147 $ 63,144 $ 90,153 $118,037 ======== ======== ======== ======== ======== PER SHARE DATA Basic earnings per share $.76 $.71 $.41 $.57 $.75 Diluted earnings per share .75 .69 .41 .57 .74 SIGNIFICANT RATIOS Return on assets 1.35% 1.23% .74% 1.03% 1.33% Return on equity 16.03 14.88 8.48 11.66 15.20
22 MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN MILLIONS)
1998 1ST QTR. 2ND QTR. 3RD QTR. ------------------ ------------------ ------------------ VOLUME RATE VOLUME RATE VOLUME RATE ------ -------- ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 5,152 8.48% $ 5,608 8.38% $ 5,566 8.19% Real estate--commercial 3,585 8.53 3,631 8.47 3,750 8.58 Real estate--construction 729 8.86 726 8.78 742 8.69 Real estate--residential mortgage 8,742 7.66 8,505 7.60 8,203 7.60 Real estate--home equity credit loans 579 9.64 562 9.65 536 9.63 Consumer 2,550 9.15 2,655 9.08 2,763 9.04 Credit card 248 9.30 126 6.76 113 2.51 ------- ------- ------- Total Loans and Leases 21,585 8.22 21,813 8.20 21,673 8.21 Investments in debt and equity securities Trading 125 6.67 169 6.69 115 6.24 Taxable 8,404 6.47 8,728 6.47 8,560 6.49 Tax-exempt 434 8.38 417 8.47 411 7.94 ------- ------- ------- Total Investments in Debt and Equity Securities 8,963 6.57 9,314 6.56 9,086 6.56 Short-term investments 479 5.62 600 5.51 517 5.55 ------- ------- ------- Total Earning Assets 31,027 7.81 31,727 7.69 31,276 7.63 Non-earning assets 3,012 3,214 2,984 ------- ------- ------- Total Assets $34,039 $34,941 $34,260 ======= ======= ======= LIABILITIES Acquired Funds Deposits Non-interest bearing $ 3,746 $ 4,003 $ 3,801 Interest bearing demand 3,128 1.98 3,136 1.90 3,009 1.82 Money market accounts 3,884 4.11 3,979 4.08 3,960 4.06 Savings 1,647 2.50 1,762 2.62 1,774 2.72 Consumer time certificates under $100,000 9,836 5.60 9,685 5.57 9,420 5.53 Other time 196 5.93 196 5.50 174 5.20 ------- ------- ------- Total Core Deposits 22,437 4.41 22,761 4.36 22,138 4.33 Time certificates $100,000 and over 1,908 5.62 1,928 5.62 1,837 5.65 Foreign 541 5.63 441 5.60 397 5.61 ------- ------- ------- Total Purchased Deposits 2,449 5.64 2,369 5.63 2,234 5.65 ------- ------- ------- Total Deposits 24,886 4.55 25,130 4.50 24,372 4.47 Short-term borrowings 3,876 5.40 3,570 5.31 2,860 5.32 Bank notes 152 6.13 25 5.82 25 5.85 Long-term debt 1,823 6.23 2,911 5.87 3,641 5.69 ------- ------- ------- Total Acquired Funds 30,737 4.82 31,636 4.77 30,898 4.75 Other liabilities 436 424 383 SHAREHOLDERS' EQUITY 2,866 2,881 2,979 ------- ------- ------- Total Liabilities and Shareholders' Equity $34,039 $34,941 $34,260 ======== ======= ======= SIGNIFICANT RATIOS Net interest rate spread 2.99% 2.92% 2.88% Net interest rate margin 3.62 3.53 3.51 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET ($ IN MILLIONS)
1998 1999 4TH QTR. 1ST QTR. ------------------ ------------------ VOLUME RATE VOLUME RATE ------ -------- ------ -------- ASSETS Earning Assets Loans and leases, net of unearned income Commercial $ 5,820 7.81% $6,263 7.57% Real estate--commercial 3,874 8.42 3,767 8.21 Real estate--construction 877 8.37 948 8.11 Real estate--residential mortgage 8,105 7.41 8,008 7.40 Real estate--home equity credit loans 534 9.00 518 8.72 Consumer 2,803 8.97 2,785 8.79 Credit card 32 -- 41 12.77 ------- ------- Total Loans and Leases 22,045 8.00 22,330 7.76 Investments in debt and equity securities Trading 132 6.21 161 6.45 Taxable 8,825 6.47 8,926 6.29 Tax-exempt 437 7.73 399 8.12 ------- ------- Total Investments in Debt and Equity Securities 9,394 6.52 9,486 6.37 Short-term investments 575 5.30 563 4.76 ------- ------- Total Earning Assets 32,014 7.46 32,379 7.40 Non-earning assets 3,023 3,176 ------- ------- Total Assets $35,037 $35,555 ======= ======= LIABILITIES Acquired Funds Deposits Non-interest bearing $ 4,047 $ 4,050 Interest bearing demand 3,081 1.66 3,153 1.60 Money market accounts 4,141 3.89 4,244 3.82 Savings 1,770 2.49 1,754 2.49 Consumer time certificates under $100,000 9,363 5.46 9,012 5.29 Other time 173 4.51 194 3.91 ------- ------- Total Core Deposits 22,575 4.18 22,407 4.03 Time certificates $100,000 and over 1,901 5.43 2,164 5.27 Foreign 267 5.32 477 4.93 ------- ------- Total Purchased Deposits 2,168 5.42 2,641 5.22 ------- ------- Total Deposits 24,743 4.31 25,048 4.18 Short-term borrowings 2,886 4.78 2,701 4.57 Bank notes 25 5.60 10 5.47 Long-term debt 3,796 5.55 4,134 5.33 ------- ------- Total Acquired Funds 31,450 4.55 31,893 4.41 Other liabilities 495 556 SHAREHOLDERS' EQUITY 3,092 3,106 ------- ------- Total Liabilities and Shareholders' Equity $35,037 $35,555 ======= ======= SIGNIFICANT RATIOS Net interest rate spread 2.91% 2.99% Net interest rate margin 3.56 3.61 Taxable-equivalent basis. Includes company-obligated mandatorily redeemable preferred securities of Mercantile Capital Trust I.
23 SPECIAL NOTE Certain statements in this report that relate to the plans, objectives or future performance of Mercantile Bancorporation Inc. may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve certain risks and uncertainties. For example, by accepting deposits at fixed rates, at different times and for different terms, and lending funds at fixed rates for fixed periods, a bank accepts the risk that the cost of funds may rise and the use of the funds may be at a fixed rate. Similarly, the cost of funds may fall, but a bank may have committed by virtue of the term of a deposit to pay what becomes an above-market rate. Investments may decline in value in a rising interest rate environment. Because the business of banking is highly regulated, decisions of governmental authorities, such as the rate of deposit insurance, can have a major effect on operating results. Unanticipated events associated with Year 2000 compliance, relating to work on developments or modifications to the Corporation's computer systems and software, including work performed by suppliers or vendors or relating to the failure of third parties upon whom the Corporation relies, including customers, suppliers, governmental entities and others, to address their own Year 2000 issues, could affect Mercantile's future financial condition and operating results. Actual charges associated with completed acquisitions may prove to be greater than current estimates. In addition, management's objectives with respect to the Corporation's capital base and equity levels may not reach the targeted objectives within the targeted periods due to numerous factors, including those previously mentioned. All of these uncertainties, as well as others, are present in a banking operation and shareholders are cautioned that management's view of the future on which it prices its products, evaluates collateral, sets loan reserves and estimates costs of operation and regulation may prove to be other than as anticipated. Actual strategies and results in future periods may differ materially from those currently expected. 24 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The annual meeting of shareholders of Registrant was held on April 21, 1999. Of 157,625,883 shares issued, outstanding and eligible to be voted at the meeting, 133,329,084 shares, constituting a quorum, were represented in person or by proxy at the meeting. One (1) matter was submitted to a vote of the security-holders at the meeting. ELECTION OF CLASS II DIRECTORS. The only matter submitted was the election of four Class II director nominees to the Board of Directors, each to continue in office until the year 2002. The Restated Articles of Incorporation of the Registrant allow cumulative voting in all director elections and all shareholders were accordingly allowed to cumulate their votes for directors if they so desired. Upon tabulation of the votes cast, it was determined that all four director nominees had been elected. The voting results are set forth below:
NAME FOR WITHHELD ---- --- -------- Dr. Henry Givens 130,848,405 2,428,140 William A. Hall 130,450,877 2,923,164 Cinda A. Hallman 130,662,126 2,665,626 Craig D. Schnuck 130,838,635 2,499,359
Because Registrant has a staggered Board, the term of office of the following named Class I and Class III directors, who were not up for election at the 1999 annual meeting, continued after the meeting: Class I (to continue in office until 2001) Harry M. Cornell, Jr. Frank Lyon, Jr. Harvey Saligman John A. Wright Class III (to continue in office until 2000) Richard E. Beumer Alvin J. Siteman Thomas H. Jacobsen Patrick T. Stokes Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2 Agreement and Plan of Merger by and between Mercantile Bancorporation Inc. and Firstar Corporation Dated as of April 30, 1999. 27 Financial Data Schedule 99.1 Stock Option Agreement, dated April 30, 1999, between Firstar Corporation, a Wisconsin corporation ("Issuer"), and Mercantile Bancorporation Inc., a Missouri corporation ("Grantee"). 99.2 Stock Option Agreement, dated April 30, 1999, between Mercantile Bancorporation Inc., a Missouri corporation ("Issuer"), and Firstar Corporation, a Wisconsin corporation ("Grantee"). 25 (b) Reports on Form 8-K: Registrant filed no Current Reports on Form 8-K during the quarter ended March 31, 1999. However, a Current Report on Form 8-K was filed on May 4, 1999. Under Item 5 in that Report, Registrant disclosed that on April 30, 1999, it had entered into an Agreement and Plan of Merger with Firstar Corporation ("Firstar"). Pursuant to that Merger Agreement, as described in the Form 8-K, Registrant is to be merged into Firstar, with the shareholders of Registrant to receive 2.091 shares of the common stock, par value $0.01 per share of Firstar for each share of Registrant common stock. The Form 8-K also briefly described the terms of two Option Agreements between Registrant and Firstar, pursuant to which Registrant received an option to purchase approximately 9.9% of Firstar's outstanding common stock and Firstar received an option to purchase approximately 19.9% of Registrant's outstanding common stock. The options are exercisable only upon the occurrence of certain triggering events. Finally, the Form 8-K also disclosed that Registrant had entered into an amendment of its Rights Agreement in connection with and immediately prior to entering into the Merger Agreement and Option Agreements. Under Item 7 of the Form 8-K, the following documents were filed as Exhibits thereto: 4.1 Amendment to Rights Agreement dated as of May 20, 1998, by and between Mercantile Bancorporation Inc. and Harris Trust and Savings Bank as Rights Agent. 99.1 Press Release issued April 30, 1999. 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERCANTILE BANCORPORATION INC. (Registrant) Date May 14, 1999 /s/ JOHN W. MCCLURE --------------------------- -------------------------------- John W. McClure Chief Financial Officer 27 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- 2 Agreement and Plan of Merger by and between Mercantile Included herein Bancorporation Inc. and Firstar Corporation Dated as of April 30, 1999. 27 Financial Data Schedule Included herein 99.1 Stock Option Agreement, dated April 30, 1999, between Included herein Firstar Corporation, a Wisconsin corporation ("Issuer"), and Mercantile Bancorporation Inc., a Missouri corporation ("Grantee"). 99.2 Stock Option Agreement, dated April 30, 1999, between Included herein Mercantile Bancorporation Inc., a Missouri corporation ("Issuer"), and Firstar Corporation, a Wisconsin corporation ("Grantee").
28 EX-2 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER by and between MERCANTILE BANCORPORATION INC. and FIRSTAR CORPORATION DATED AS OF APRIL 30, 1999 TABLE OF CONTENTS -----------------
Page ---- AGREEMENT AND PLAN OF MERGER ARTICLE I THE MERGER 1.1 The Merger 2 1.2 Effective Time 2 1.3 Effects of the Merger 2 1.4 Conversion of Mercantile Common Stock 2 1.5 Firstar Capital Stock 4 1.6 Options 4 1.7 Certificate of Incorporation 5 1.8 By-Laws 5 1.9 Tax and Accounting Consequences 5 1.10 Board of Directors; Management 5 1.11 Headquarters of Surviving Corporation 6 ARTICLE II EXCHANGE OF SHARES 2.1 Firstar to Make Shares Available 6 2.2 Exchange of Shares 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF FIRSTAR 3.1 Corporate Organization 8 3.2 Capitalization 9 3.3 Authority; No Violation 10 3.4 Consents and Approvals 11 3.5 Reports 11 3.6 Financial Statements 12 3.7 Broker's Fees 12 3.8 Absence of Certain Changes or Events 12 3.9 Legal Proceedings 13 3.10 Taxes and Tax Returns 13 3.11 Employee Benefit Plans 14 3.12 SEC Reports 16 3.13 Compliance with Applicable Law 16 -i- 3.14 Certain Contracts 17 3.15 Agreements with Regulatory Agencies 17 3.16 Interest Rate Risk Management Instruments 18 3.17 Undisclosed Liabilities 18 3.18 Insurance 18 3.19 Environmental Liability 18 3.20 Charter Provisions; State Takeover Laws; Firstar Rights Agreement 19 3.21 Year 2000 19 3.22 Reorganization; Pooling of Interests 19 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERCANTILE 4.1 Corporate Organization 20 4.2 Capitalization 20 4.3 Authority; No Violation 21 4.4 Consents and Approvals 22 4.5 Reports 23 4.6 Financial Statements 23 4.7 Broker's Fees 24 4.8 Absence of Certain Changes or Events 24 4.9 Legal Proceedings 24 4.10 Taxes and Tax Returns 25 4.11 Employee Benefit Plans 26 4.12 SEC Reports 27 4.13 Compliance with Applicable Law 28 4.14 Certain Contracts 28 4.15 Agreements with Regulatory Agencies 29 4.16 Interest Rate Risk Management Instruments 29 4.17 Undisclosed Liabilities 29 4.18 Insurance 30 4.19 Environmental Liability 30 4.20 Charter Provisions; State Takeover Laws; Mercantile Rights Agreement 30 4.21 Year 2000 31 4.22 Reorganization; Pooling of Interests 31 ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Conduct of Businesses Prior to the Effective Time 31 5.2 Forbearances 31 -ii- ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Regulatory Matters 34 6.2 Access to Information 35 6.3 Shareholders' Approvals 36 6.4 Legal Conditions to Merger 36 6.5 Affiliates; Publication of Combined Financial Results 37 6.6 Stock Exchange Listing 37 6.7 Employee Benefit Plans 37 6.8 Indemnification; Directors' and Officers' Insurance 38 6.9 Additional Agreements 39 6.10 Advice of Changes 39 6.11 Dividends 39 6.12 Exemption from Liability Under Section 16(b) 40 ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger 40 7.2 Conditions to Obligations of Mercantile 41 7.3 Conditions to Obligations of Firstar 42 ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination 43 8.2 Effect of Termination 43 8.3 Amendment 44 8.4 Extension; Waiver 44 ARTICLE IX GENERAL PROVISIONS 9.1 Closing 45 9.2 Nonsurvival of Representations, Warranties and Agreements 45 9.3 Expenses 45 9.4 Notices 45 9.5 Interpretation 46 9.6 Counterparts 46 9.7 Entire Agreement 46 9.8 Governing Law 46 -iii- 9.9 Publicity 46 9.10 Assignment; Third Party Beneficiaries 47 9.11 Certain Agreements of the Surviving Corporation 47 Exhibit A - Mercantile Option Agreement Exhibit B - Firstar Option Agreement Exhibit 6.5(a)(1) - Form of Affiliate Letter Addressed to Firstar Exhibit 6.5(a)(2) - Form of Affiliate Letter Addressed to Mercantile
-iv- INDEX OF DEFINED TERMS
Section Page No. ------- -------- Agreement Recitals 1 BHC Act 3.1(a) 8 CERCLA 3.19 17 Certificate 1.4(b) 3 Closing 9.1 41 Closing Date 9.1 41 Code 1.6(b) 4 Confidentiality Agreement 6.2(b) 33 Derivative Instruments 3.16 16 Dissenting Shares 1.4(d) 3 DPC Shares 1.4(a) 2 DRIP Suspension Date 4.2(a) 19 Effective Time 1.2 2 ERISA 3.11(a) 13 Exchange Act 3.6 11 Exchange Agent 2.1 5 Exchange Fund 2.1 5 Exchange Ratio 1.4(a) 2 Federal Reserve Board 3.4 10 Firstar Recitals 1 Firstar 10-K 3.6 11 Firstar Articles 1.7 4 Firstar Benefit Plans 3.11(a) 13 Firstar Capital Stock 3.2(a) 8 Firstar Common Stock 1.4(a) 2 Firstar Contract 3.14(a) 16 Firstar Disclosure Schedule 3 7 Firstar DRIP 3.2(a) 8 Firstar ERISA Affiliate 3.11(a) 13 Firstar Option Agreement Recitals 1 Firstar Preferred Stock 3.2(a) 8 Firstar Regulatory Agreement 3.15 16 Firstar Reports 3.12(a) 15 Firstar Rights 3.2(a) 8 Firstar Rights Agreement 1.4(a) 3 Firstar Shareholder Rights 1.4(a) 3 Firstar Stock Plans 3.2(a) 8 GAAP 1.9 5 Governmental Entity 3.4 10 Indemnified Parties 6.8(a) 35 -v- Section Page No. ------- -------- IRS 3.10(a) 12 Joint Proxy Statement 3.4 10 Liens 3.2(b) 9 Material Adverse Effect 3.1(a) 8 MBCL 1.1(a) 1 Merger Recitals 1 Merger Consideration 1.1(b) 2 Missouri Articles 1.2 2 Missouri Secretary 1.2 2 Mercantile Recitals 1 Mercantile 10-K 4.6 21 Mercantile Articles 4.1(a) 18 Mercantile Benefit Plans 4.11(a) 24 Mercantile Capital Stock 4.2(a) 19 Mercantile Common Stock 1.4(a) 2 Mercantile Contract 4.14(a) 26 Mercantile Disclosure Schedule 4 18 Mercantile Employees 6.7(a) 35 Mercantile DRIP 4.2(a) 19 Mercantile ERISA Affiliate 4.11(a) 24 Mercantile Insiders 6.12 37 Mercantile Option Agreement Recitals 1 Mercantile Preferred Stock 4.2(a) 19 Mercantile Regulatory Agreement 4.15 27 Mercantile Reports 4.12(a) 25 Mercantile Rights 4.2(a) 19 Mercantile Rights Agreement 1.4(a) 3 Mercantile Shareholder Rights 1.4(a) 3 Mercantile Stock Plans 4.2(a) 19 New Benefit Plans 6.7(a) 35 Non-Subsidiary Affiliate 3.2(b) 9 NYSE 2.2(e) 7 OCC 3.5 10 Option Agreements Recitals 1 Regulatory Agencies 3.5 10 Requisite Regulatory Approvals 7.1(c) 37 S-4 3.4 10 SEC 3.4 10 Section 16 Information 6.12 37 Securities Act 3.12(a) 15 SRO 3.4 10 State Approvals 3.4 10 State Regulator 3.5 10 -vi- Section Page No. ------- -------- Subsidiary 3.1(a) 8 Surviving Corporation Recitals 1 Tax 3.10(b) 13 Taxes 3.10(b) 13 Trust Account Shares 1.4(a) 2 WBCL 1.1(a) 1 Wisconsin Articles 1.2 2 Wisconsin Department 1.2 2 Year 2000 Issues 3.21 18
-vii- AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of April 30, 1999 (this "Agreement"), by and between FIRSTAR CORPORATION, a Wisconsin corporation ("Firstar"), and MERCANTILE BANCORPORATION INC., a Missouri corporation ("Mercantile"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Boards of Directors of each of Firstar and Mercantile have determined that it is in the best interests of their respective companies and their shareholders to consummate the strategic business combination transaction provided for herein in which Mercantile will, subject to the terms and conditions set forth herein, merge with and into Firstar (the "Merger"), so that Firstar is the surviving corporation (hereinafter sometimes referred to in such capacity as the "Surviving Corporation") in the Merger; and WHEREAS, as a condition to, and immediately after, the execution of this Agreement, and as a condition to the execution of the Firstar Option Agreement, Mercantile and Firstar are entering into a stock option agreement with Mercantile as issuer, and Firstar as grantee, of the stock option contemplated thereby (the "Mercantile Option Agreement") in the form attached hereto as Exhibit A; and WHEREAS, as a condition to, and immediately after, the execution of this Agreement, and as a condition to the execution of the Mercantile Option Agreement, Mercantile and Firstar are entering into a Firstar stock option agreement with Firstar as issuer, and Mercantile as grantee, of the stock option contemplated thereby (the "Firstar Option Agreement"; and together with the Mercantile Option Agreement, the "Option Agreements") in the form attached hereto as Exhibit B; and WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. (a) Subject to the terms and conditions of this Agreement, in accordance with Business Corporation Law of the State of Wisconsin (the "WBCL") and the General and Business Corporation Law of the State of Missouri (the "MBCL"), at the Effective Time, Mercantile shall merge with and into Firstar. Firstar shall be the Surviving Corporation in the Merger, and shall continue its corporate existence under the laws of the State of Wisconsin. Upon consummation of the Merger, the separate corporate existence of Mercantile shall terminate. (b) Firstar and Mercantile may, upon mutual agreement, at any time change the method of effecting the combination of Mercantile and Firstar (including without limitation the provisions of this Article I) if and to the extent they deem such change to be desirable, including without limitation to provide for a merger of either party with a wholly-owned subsidiary of the other; provided, however, that no -------- ------- such change shall (A) alter or change the amount of consideration to be provided to holders of Mercantile Common Stock as provided for in this Agreement (the "Merger Consideration"), (B) adversely affect the tax treatment of shareholders as a result of receiving the Merger Consideration or (C) materially impede or delay consummation of the transactions contemplated by this Agreement. 1.2 Effective Time. The Merger shall become effective as set forth in articles of merger (the "Wisconsin Articles") that shall be filed with the Wisconsin Department of Financial Institutions (the "Wisconsin Department"), and in the articles of merger (the "Missouri Articles") that shall be filed with the Secretary of State of the State of Missouri (the "Missouri Secretary"), in each case on the Closing Date. The term "Effective Time" shall be the date and time when the Merger becomes effective, as set forth in the Wisconsin Articles and the Missouri Articles. 1.3 Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the WBCL and the MBCL. 1.4 Conversion of Mercantile Common Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Mercantile, Firstar or the holder of any of the following securities: (a) Subject to Section 2.2(e), each share of the common stock, par value $0.01 per share, of Mercantile (together with the Mercantile Shareholder Right attached thereto, the "Mercantile Common Stock") issued and outstanding immediately prior to the Effective Time, except for Dissenting Shares (as defined herein) and shares of Mercantile Common Stock owned, directly or indirectly, by Mercantile or Firstar or any of their respective wholly-owned Subsidiaries (other than (A) shares of Mercantile Common Stock held, directly or indirectly, in trust accounts, managed accounts and the like, or otherwise held in a fiduciary capacity, that are beneficially owned by third parties (any such shares, whether held directly or indirectly by Mercantile or Firstar, as the case may be, being referred to herein as "Trust Account Shares") and (B) any shares of Mercantile Common Stock held by Mercantile or Firstar or any of their respective Subsidiaries in respect of a debt previously contracted (any such shares of Mercantile Common Stock, and shares of Firstar Common Stock that are similarly held, whether held directly or indirectly by Mercantile or Firstar, being referred to herein as "DPC Shares")) shall be converted into the right to receive 2.091 shares (the "Exchange Ratio") of the common stock, par value $0.01 per share, of Firstar (together with the Firstar Shareholder Rights attached thereto, the "Firstar Common Stock"), together with the same number of Firstar Shareholder Rights attached thereto. -2- As used herein, (i) "Mercantile Shareholder Rights" shall mean the preferred share purchase rights issued to the holders of Mercantile Common Stock pursuant to the Rights Agreement, dated as of May 20, 1998 (as such may be amended, supplemented, restated or replaced from time to time), between Mercantile and Harris Trust and Savings Bank (the "Mercantile Rights Agreement"), and (ii) "Firstar Shareholder Rights" shall mean the preferred share purchase rights issued to the holders Firstar Common Stock pursuant to the Rights Agreement, dated as of November 20, 1998 (as such may be amended, supplemented, restated or replaced from time to time), between Firstar and Firstar Bank Milwaukee, N.A. (the "Firstar Rights Agreement"). (b) All of the shares of Mercantile Common Stock converted into the right to receive Firstar Common Stock pursuant to this Article I shall no longer be outstanding and shall automatically be cancelled and shall cease to exist as of the Effective Time, and each certificate previously representing any such shares of Mercantile Common Stock (each a "Certificate") shall thereafter represent only the right to receive (i) a certificate representing the number of whole shares of Firstar Common Stock and (ii) cash in lieu of fractional shares into which the shares of Mercantile Common Stock represented by such Certificate have been converted pursuant to this Section 1.4 and Section 2.2(e). Certificates previously representing shares of Mercantile Common Stock shall be exchanged for certificates representing whole shares of Firstar Common Stock and cash in lieu of fractional shares issued in consideration therefor upon the surrender of such Certificates in accordance with Section 2.2, without any interest thereon. If, prior to the Effective Time and as permitted by this Agreement, the outstanding shares of Firstar Common Stock or Mercantile Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization, an appropriate and proportionate adjustment shall be made to the Exchange Ratio. (c) At the Effective Time, all shares of Mercantile Common Stock that are owned, directly or indirectly, by Mercantile or Firstar or any of their respective wholly-owned Subsidiaries (other than Trust Account Shares and DPC Shares) shall be cancelled and shall cease to exist and no capital stock of Firstar or other consideration shall be delivered in exchange therefor. All shares of Firstar Common Stock that are owned by Mercantile or any of its wholly-owned Subsidiaries (other than Trust Account Shares and DPC Shares) shall as of the Effective Time become authorized but unissued shares of Firstar Common Stock. (d) Notwithstanding anything in this Agreement to the contrary, shares of Mercantile Common Stock that are outstanding immediately prior to the Effective Time and with respect to which dissenters' rights shall have been properly demanded in accordance with Section 455 of the MBCL ("Dissenting Shares") shall not be converted into the right to receive, or be exchangeable for, Firstar Common Stock or cash in lieu of fractional shares but, instead, the holders thereof shall be entitled to payment of the appraised value of such Dissenting Shares in accordance with the provisions of Section 455 of the MBCL; provided, however, -------- ------- that (i) if any holder of Dissenting Shares shall subsequently deliver a written withdrawal of such holder's demand for appraisal of such shares, or (ii) if any holder fails to establish such holder's entitlement to dis- -3- senters' rights as provided in Section 455 of the MBCL, such holder or holders (as the case may be) shall forfeit the right to appraisal of such shares of Mercantile Common Stock and each of such shares shall thereupon be deemed to have been converted into the right to receive, and to have become exchangeable for, as of the Effective Time, Firstar Common Stock and/or cash in lieu of fractional shares, without any interest thereon, as provided in Section 1.4(a) and Article II hereof. 1.5 Firstar Capital Stock. Except as otherwise provided in Section 1.4(c), at and after the Effective Time, each share of Firstar capital stock (including Firstar Common Stock) issued and outstanding immediately prior to the Closing Date shall remain an issued and outstanding share of capital stock of the Surviving Corporation and shall not be affected by the Merger. 1.6 Options. (a) At the Effective Time, each option granted by Mercantile to purchase shares of Mercantile Common Stock that is outstanding and unexercised immediately prior thereto shall cease to represent a right to acquire shares of Mercantile Common Stock and shall be converted automatically into an option to purchase shares of Firstar Common Stock in an amount and at an exercise price determined as provided below (and otherwise subject to the terms of the Mercantile Stock Plans and the agreements evidencing grants thereunder): (i) The number of shares of Firstar Common Stock to be subject to the new option shall be equal to the product of the number of shares of Mercantile Common Stock subject to the original option and the Exchange Ratio, provided that any -------- fractional shares of Firstar Common Stock resulting from such multiplication shall be rounded to the nearest whole share; and (ii) The exercise price per share of Firstar Common Stock under the new option shall be equal to the exercise price per share of Mercantile Common Stock under the original option divided by the Exchange Ratio, provided that such exercise price shall -------- be rounded to the nearest whole cent. (b) The adjustment provided herein with respect to any options that are "incentive stock options" (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")) shall be and is intended to be effected in a manner that is consistent with Section 424(a) of the Code. The duration and other terms of the new option shall be the same as the original option, except that all references to Mercantile shall be deemed to be references to Firstar. 1.7 Certificate of Incorporation. Subject to the terms and conditions of this Agreement, at the Effective Time, the Articles of Incorporation of Firstar, as the same may be amended as permitted hereby at the Effective Time (the "Firstar Articles"), shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended in accordance with applicable law, except that the first sentence of Section 1 of Article III thereof shall state in its entirety: -4- (1) The number of shares which the Corporation shall have authority to issue is 1,610,000,000, divided into the following classes: (a) 1,600,000,000 shares of the par value of $.01 each, designated as "Common Stock"; and (b) 10,000,000 shares of the par value of $1.00 each, designated as "Preferred Stock". 1.8 By-Laws. Subject to the terms and conditions of this Agreement, at the Effective Time, the By-Laws of Firstar shall be the By-Laws of the Surviving Corporation until thereafter amended in accordance with applicable law. 1.9 Tax and Accounting Consequences. It is intended that the Merger shall constitute a "reorganization" within the meaning of Section 368(a) of the Code, that this Agreement shall constitute a "plan of reorganization" for the purposes of Sections 354 and 361 of the Code and that the Merger shall be accounted for as a "pooling of interests" under generally accepted accounting principles ("GAAP"). 1.10 Board of Directors; Management. The directors and officers of Firstar immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation of the Surviving Corporation until their respective successors are duly elected or appointed and qualified. 1.11 Headquarters of Surviving Corporation. From and after the Effective Time, the location of the headquarters and principal executive offices of the Surviving Corporation shall be that of the headquarters and principal executive offices of Firstar as of the date of this Agreement. ARTICLE II EXCHANGE OF SHARES 2.1 Firstar to Make Shares Available. At or prior to the Effective Time, Firstar shall deposit, or shall cause to be deposited, with Firstar Bank Milwaukee, N.A., or another bank or trust company reasonably acceptable to each of Mercantile and Firstar (the "Exchange Agent"), for the benefit of the holders of Certificates, for exchange in accordance with this Article II, certificates representing the shares of Firstar Common Stock, and cash in lieu of any fractional shares (such cash and certificates for shares of Firstar Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund"), to be issued pursuant to Section 1.4 and paid pursuant to Section 2.2(a) in exchange for outstanding shares of Mercantile Common Stock. 2.2 Exchange of Shares. (a) As soon as practicable after the Effective Time, and in no event later than five business days thereafter, the Exchange Agent shall mail to each holder of record of one or more Certificates a letter of transmittal (which shall specify that -5- delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Certificates in exchange for certificates representing the shares of Firstar Common Stock and any cash in lieu of fractional shares into which the shares of Mercantile Common Stock represented by such Certificate or Certificates shall have been converted pursuant to this Agreement. Upon proper surrender of a Certificate or Certificates for exchange and cancellation to the Exchange Agent, together with such properly completed letter of transmittal, duly executed, the holder of such Certificate or Certificates shall be entitled to receive in exchange therefor, as applicable, (i) a certificate representing that number of whole shares of Firstar Common Stock to which such holder of Mercantile Common Stock shall have become entitled pursuant to the provisions of Article I and (ii) a check representing the amount of any cash in lieu of fractional shares that such holder has the right to receive in respect of the Certificate or Certificates surrendered pursuant to the provisions of this Article II, and the Certificate or Certificates so surrendered shall forthwith be cancelled. No interest will be paid or accrued on any cash in lieu of fractional shares or on any unpaid dividends and distributions payable to holders of Certificates. (b) No dividends or other distributions declared with respect to Firstar Common Stock shall be paid to the holder of any unsurrendered Certificate until the holder thereof shall surrender such Certificate in accordance with this Article II. After the surrender of a Certificate in accordance with this Article II, the record holder thereof shall be entitled to receive any such dividends or other distributions, without any interest thereon, that theretofore had become payable with respect to shares of Firstar Common Stock represented by such Certificate. (c) If any certificate representing shares of Firstar Common Stock is to be issued in a name other than that in which the Certificate or Certificates surrendered in exchange therefor is or are registered, it shall be a condition of the issuance thereof that the Certificate or Certificates so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer, and that the person requesting such exchange shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the issuance of a certificate representing shares of Firstar Common Stock in any name other than that of the registered holder of the Certificate or Certificates surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) After the Effective Time, there shall be no transfers on the stock transfer books of Mercantile of the shares of Mercantile Common Stock that were issued and outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented for transfer to the Exchange Agent, they shall be cancelled and exchanged for certificates representing shares of Firstar Common Stock as provided in this Article II. (e) Notwithstanding anything to the contrary contained herein, no certificates or scrip representing fractional shares of Firstar Common Stock shall be issued upon the surrender for exchange of Certificates, no dividend or distribution with respect to Firstar Common Stock shall be payable on or with respect to any fractional share, and such fractional share -6- interests shall not entitle the owner thereof to vote or to any other rights of a shareholder of Firstar. In lieu of the issuance of any such fractional share, Firstar shall pay to each former shareholder of Mercantile who otherwise would be entitled to receive such fractional share an amount in cash determined by multiplying (i) the closing-sale price of Firstar Common Stock on the New York Stock Exchange, Inc. (the "NYSE") as reported by The Wall Street Journal for the trading day ----------------------- immediately preceding the date of the Effective Time by (ii) the fraction of a share (rounded to the nearest thousandth when expressed in decimal form) of Firstar Common Stock to which such holder would otherwise be entitled to receive pursuant to Section 1.4. (f) Any portion of the Exchange Fund that remains unclaimed by the shareholders of Mercantile for 12 months after the Effective Time shall be paid to Firstar. Any former shareholders of Mercantile who have not theretofore complied with this Article II shall thereafter look only to Firstar for payment of the shares of Firstar Common Stock, cash in lieu of any fractional shares and any unpaid dividends and distributions on the Firstar Common Stock deliverable in respect of each share of Mercantile Common Stock, as the case may be, such shareholder holds as determined pursuant to this Agreement, in each case, without any interest thereon. Notwithstanding the foregoing, none of Mercantile, Firstar, the Exchange Agent or any other person shall be liable to any former holder of shares of Mercantile Common Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if reasonably required by Firstar, the posting by such person of a bond in such amount as Firstar may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Firstar Common Stock and any cash in lieu of fractional shares deliverable in respect thereof pursuant to this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF FIRSTAR Except as disclosed in the Firstar disclosure schedule delivered to Mercantile concurrently herewith (the "Firstar Disclosure Schedule") Firstar hereby represents and warrants to Mercantile as follows: 3.1 Corporate Organization. (a) Firstar is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin. Firstar has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not, either individually or in the -7- aggregate, have a Material Adverse Effect on Firstar. As used in this Agreement, the term "Material Adverse Effect" means, with respect to Mercantile, Firstar or the Surviving Corporation, as the case may be, a material adverse effect on (i) the business, operations, results of operations or financial condition of such party and its Subsidiaries taken as a whole or (ii) the ability of such party to timely consummate the transactions contemplated hereby. As used in this Agreement, the word "Subsidiary", when used with respect to any party, means any bank, corporation, partnership, limited liability company, or other organization, whether incorporated or unincorporated, that is consolidated with such party for financial reporting purposes. Firstar is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). (b) Each Firstar Subsidiary (i) is duly organized and validly existing under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have a Material Adverse Effect on Firstar and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. 3.2 Capitalization. (a) The authorized capital stock of Firstar consists of (i) 800,000,000 shares of Firstar Common Stock, of which, as of March 31, 1999, 661,214,244 shares were issued and outstanding and 2,887,734 shares were held in treasury, (ii) 10,000,000 shares of preferred stock, par value $1.00 per share (the "Firstar Preferred Stock" and, together with the Firstar Common Stock, the "Firstar Capital Stock"), of which, as of the date hereof, no shares are issued and outstanding. All of the issued and outstanding shares of Firstar Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. As of the date of this Agreement, except pursuant to the terms of (i) the Firstar Option Agreement, (ii) options and stock issued pursuant to employee and director stock plans of Firstar in effect as of the date hereof (the "Firstar Stock Plans") and (iii) the Firstar Rights Agreement, Firstar does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Firstar Capital Stock or any other equity securities of Firstar or any securities representing the right to purchase or otherwise receive any shares of Firstar Capital Stock (collectively, including the items contemplated by clauses (i) through (iii) of this sentence, the "Firstar Rights"). As of March 31, 1999, no shares of Firstar Capital Stock were reserved for issuance, except for 65,460,211 shares of Firstar Common Stock reserved for issuance upon exercise of the Firstar Option Agreement, no shares of Firstar Common Stock reserved for issuance in connection with the Firstar Dividend Reinvestment Plan (the "Firstar DRIP"), 25,897,722 shares of Firstar Common Stock reserved for issuance upon the exercise of stock options pursuant to the Firstar Stock Plans and 2,300,000 shares of Series A Junior Participating Preferred Stock reserved for issuance in connection with the Firstar Rights Agreement. Since March 31, 1999, Firstar has not issued any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, other than as would be permitted by Section 5.2 hereof and pursuant to the Firstar Option Agreement. -8- (b) Firstar owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity ownership interests of each of the Firstar Subsidiaries, free and clear of any liens, pledges, charges, encumbrances and security interests whatsoever ("Liens"), and all of such shares or equity ownership interests are duly authorized and validly issued and are fully paid, nonassessable (subject to 12 U.S.C. Section 55) and free of preemptive rights, with no personal liability attaching to the ownership thereof. No Firstar Subsidiary has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of capital stock or any other equity security of such Subsidiary or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of such Subsidiary. Section 3.2(b) of the Firstar Disclosure Schedule sets forth a list of the material investments of Firstar in corporations, joint ventures, partnerships, limited liability companies and other entities other than its Subsidiaries (each, a "Non-Subsidiary Affiliate"). 3.3 Authority; No Violation. (a) Firstar has full corporate power and authority to execute and deliver this Agreement and each of the Option Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Option Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of Firstar. The Board of Directors of Firstar has directed that this Agreement and the transactions contemplated hereby be submitted to Firstar's shareholders for approval at a meeting of such shareholders and, except for the approval of this Agreement and the transactions contemplated hereby by the affirmative vote of the holders of a majority of the outstanding shares of Firstar Common Stock entitled to vote thereon, no corporate proceedings on the part of Firstar are necessary to approve this Agreement and the Option Agreements and to consummate the transactions contemplated hereby and thereby. This Agreement and each of the Option Agreements have been duly and validly executed and delivered by Firstar and (assuming due authorization, execution and delivery by Mercantile) constitute valid and binding obligations of Firstar, enforceable against Firstar in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies). (b) Neither the execution and delivery of this Agreement and the Option Agreements by Firstar nor the consummation by Firstar of the transactions contemplated hereby or thereby, nor compliance by Firstar with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Firstar Articles or By-Laws or (ii) assuming that the consents and approvals referred to in Section 3.4 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Firstar, any of its Subsidiaries or Non-Subsidiary Affiliates or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event that, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of Firstar, any of its Subsidiaries or Non- Subsidiary Affiliates under, any of the terms, conditions or provisions of any note, bond, mortgage, inden- -9- ture, deed of trust, license, lease, agreement or other instrument or obligation to which Firstar, any of its Subsidiaries or its Non- Subsidiary Affiliates is a party, or by which they or any of their respective properties or assets may be bound or affected, except (in the case of clause (y) above) for such violations, conflicts, breaches or defaults that, either individually or in the aggregate, will not have a Material Adverse Effect on Firstar. 3.4 Consents and Approvals. Except for (i) the filing of applications and notices, as applicable, with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHC Act and the Federal Reserve Act, as amended, and approval of such applications and notices, (ii) the filing of any required applications or notices with any state or foreign agencies and approval of such applications and notices (the "State Approvals"), (iii) the filing with the Securities and Exchange Commission (the "SEC") of a joint proxy statement in definitive form relating to the meetings of Mercantile's and Firstar's shareholders to be held in connection with this Agreement and the transactions contemplated hereby (the "Joint Proxy Statement"), and of the registration statement on Form S-4 (the "S-4") in which the Joint Proxy Statement will be included as a prospectus, (iv) the filing of the Wisconsin Articles with the Wisconsin Department pursuant to the WBCL, (v) the filing of the Missouri Articles with the Missouri Secretary pursuant to the MBCL, (vi) any consents, authorizations, approvals, filings or exemptions in connection with compliance with the applicable provisions of federal and state securities laws relating to the regulation of broker-dealers, investment advisers or transfer agents, and federal commodities laws relating to the regulation of futures commission merchants and the rules and regulations thereunder and of any applicable industry self-regulatory organization ("SRO"), and the rules of the NYSE, or that are required under consumer finance, mortgage banking and other similar laws and (vii) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of the shares of Firstar Common Stock pursuant to this Agreement, no consents or approvals of or filings or registrations with any court, administrative agency or commission or other governmental authority or instrumentality (each a "Governmental Entity") are necessary in connection with (A) the execution and delivery by Firstar of this Agreement and the Option Agreements and (B) the consummation by Firstar of the transactions contemplated hereby and thereby. 3.5 Reports. Firstar and each of its Subsidiaries have timely filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 1997 with (i) the Federal Reserve Board, (ii) the Federal Deposit Insurance Corporation, (iii) any state regulatory authority (each a "State Regulator"), (iv) the Office of the Comptroller of the Currency (the "OCC"), (v) the SEC and (vi) any SRO (collectively "Regulatory Agencies"), and all other reports and statements required to be filed by them since January 1, 1997, including, without limitation, any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state, or any Regulatory Agency, and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, will not have a Material Adverse Effect on Firstar. Except for normal examinations conducted by a Regulatory Agency in the ordinary course of the business of Firstar and its Subsidiaries, no -10- Regulatory Agency has initiated any proceeding or, to the best knowledge of Firstar, investigation into the business or operations of Firstar or any of its Subsidiaries since January 1, 1997, except where such proceedings or investigation will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar. There is no unresolved violation, criticism, or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of Firstar or any of its Subsidiaries that, in the reasonable judgment of Firstar, will, either individually or in the aggregate, have a Material Adverse Effect on Firstar. 3.6 Financial Statements. The consolidated balance sheets of Firstar and its Subsidiaries as of December 31, for the fiscal years 1997 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the fiscal years 1996 through 1998, inclusive, are reported in Firstar's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "Firstar 10-K") filed with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are accompanied by the audit report of Arthur Andersen LLP, independent public accountants with respect to Firstar. The December 31, 1998 consolidated balance sheet of Firstar (including the related notes, where applicable) fairly presents in all material respects the consolidated financial position of Firstar and its Subsidiaries as of the date thereof, and the other financial statements referred to in this Section 3.6 (including the related notes, where applicable) fairly present in all material respects the results of the consolidated operations and changes in shareholders' equity and consolidated financial position of Firstar and its Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) complies in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been prepared in all material respects in accordance with GAAP consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes thereto. The books and records of Firstar and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements and reflect only actual transactions. 3.7 Broker's Fees. Except for Credit Suisse First Boston Corporation, none of Firstar nor any Firstar Subsidiary nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with the Merger or related transactions contemplated by this Agreement or the Option Agreements. 3.8 Absence of Certain Changes or Events. (a) Except as publicly disclosed in Firstar Reports filed prior to the date hereof, since December 31, 1998, no event or events have occurred that have had, either individually or in the aggregate, a Material Adverse Effect on Firstar. -11- (b) Except as publicly disclosed in Firstar Reports filed prior to the date hereof, since December 31, 1998, Firstar and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course. (c) Since December 31, 1998, neither Firstar nor any of its Subsidiaries has suffered any strike, work stoppage, slowdown, or other labor disturbance that will, either individually or in the aggregate, have a Material Adverse Effect on Firstar. 3.9 Legal Proceedings. (a) Neither Firstar nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of Firstar's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Firstar or any of its Subsidiaries or challenging the validity or propriety of the transactions contemplated by this Agreement or the Firstar Option Agreement as to which, in any such case, there is a reasonable probability of an adverse determination and that, if adversely determined, will, either individually or in the aggregate, have a Material Adverse Effect on Firstar. (b) There is no injunction, order, judgment, decree, or regulatory restriction (other than those that apply to similarly situated bank holding companies or banks) imposed upon Firstar, any of its Subsidiaries or the assets of Firstar or any of its Subsidiaries that has had, or will have, either individually or in the aggregate, a Material Adverse Effect on Firstar or the Surviving Corporation. 3.10 Taxes and Tax Returns. (a) Each of Firstar and its Subsidiaries has duly filed all federal, state, foreign and local information returns and tax returns required to be filed by it on or prior to the date hereof (all such returns being accurate and complete in all material respects) and has duly paid or made provisions for the payment of all Taxes and other governmental charges that have been incurred or are due or claimed to be due from it by federal, state, foreign or local taxing authorities on or prior to the date of this Agreement (including, without limitation, if and to the extent applicable, those due in respect of its properties, income, business, capital stock, deposits, franchises, licenses, sales and payrolls) other than (i) Taxes or other charges that are not yet delinquent or are being contested in good faith and have not been finally determined, or (ii) information returns, tax returns, Taxes or other governmental charges as to which the failure to file, pay or make provision for will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar. The federal and material state income tax returns of Firstar and its Subsidiaries have been examined by the Internal Revenue Service (the "IRS") or the relevant state taxing authorities, as the case may be, for all years to and including 1993 and any liability with respect thereto has been satisfied or any liability with respect to deficiencies asserted as a result of such examination has been reserved against in accordance with GAAP. To the best of Firstar's knowledge, there are no material disputes pending, or claims asserted for, Taxes or assessments upon Firstar or any of its Subsidiaries for which Firstar has not established reserves in accordance with GAAP. In addition, (A) proper and accurate amounts have been withheld by Firstar and its Subsidiaries from their employees for all prior periods in compliance in all material respects with the tax withholding provisions of applicable federal, state and local laws, except where failure to do -12- so will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar, (B) federal, state, and local returns that are accurate and complete in all material respects have been filed by Firstar and its Subsidiaries for all periods for which returns were due with respect to income tax withholding, Social Security and unemployment taxes, except where failure to do so will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar, (C) the amounts shown on such federal, state or local returns to be due and payable have been paid in full or provision therefor has been included by Firstar in its consolidated financial statements in accordance with GAAP, except where failure to do so will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar and (D) there are no Tax liens upon any property or assets of Firstar or its Subsidiaries except liens for current Taxes not yet due or liens that will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar. Neither Firstar nor any of its Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by Firstar or any of its Subsidiaries, and the IRS has not initiated or proposed in writing any such adjustment or change in accounting method, in either case that has had or will have, either individually or in the aggregate, a Material Adverse Effect on Firstar. Except as set forth in the financial statements described in Section 3.6 (including the related notes, where applicable), neither Firstar nor any of its Subsidiaries has entered into a transaction that is being accounted for as an installment obligation under Section 453 of the Code, that will have, either individually or in the aggregate, a Material Adverse Effect on Firstar. (b) As used in this Agreement, the term "Tax" or "Taxes" means all federal, state, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, -- ------- transfer, use, payroll, employment, severance, withholding, duties, intangibles, franchise, backup withholding, and other taxes, charges, levies or like assessments together with all penalties and additions to tax and interest thereon. (c) No deduction has been disallowed under Section 162(m) of the Code for employee remuneration of any amount paid or payable by Firstar or any Subsidiary of Firstar under any contract, plan, program, arrangement or understanding. 3.11 Employee Benefit Plans. (a) The Firstar Disclosure Schedule sets forth a true and complete list of each material employee or director benefit, employment or compensation plan, arrangement or agreement that is maintained, or contributed to, as of the date of this Agreement (the "Firstar Benefit Plans") by Firstar, any of its Subsidiaries or by any trade or business, whether or not incorporated (a "Firstar ERISA Affiliate"), all of which together with Firstar would be deemed a "single employer" within the meaning of Section 4001 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (b) Firstar has heretofore made available to Mercantile true and complete copies of each of the Firstar Benefit Plans and certain related documents, including, but not limited to, (i) the actuarial report for such Firstar Benefit Plan (if applicable) for each of the last two years and (ii) the most recent determination letter from the IRS (if applicable) for such Firstar Benefit Plan. -13- (c) (i) Each of the Firstar Benefit Plans has been operated and administered in all material respects in compliance with applicable laws, including, but not limited to, ERISA and the Code, (ii) each of the Firstar Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified, and, to the knowledge of Firstar, there are no existing circumstances or any events that have occurred that will adversely affect the qualified status of any such Firstar Benefit Plan, (iii) with respect to each Firstar Benefit Plan that is subject to Title IV of ERISA, the present value of accrued benefits under such Firstar Benefit Plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such Firstar Benefit Plan's actuary with respect to such Firstar Benefit Plan, did not, as of its latest valuation date, exceed the then-current value of the assets of such Firstar Benefit Plan allocable to such accrued benefits, (iv) no Firstar Benefit Plan provides benefits, including, without limitation, death or medical benefits (whether or not insured), with respect to current or former employees or directors of Firstar or its Subsidiaries beyond their retirement or other termination of service, other than (A) coverage mandated by applicable law, (B) death benefits or retirement benefits under any "employee pension plan" (as such term is defined in Section 3(2) of ERISA), (C) deferred compensation benefits accrued as liabilities on the books of Firstar or its Subsidiaries or (D) benefits the full cost of which is borne by the current or former employee or director (or his or her beneficiary), (v) no material liability under Title IV of ERISA has been incurred by Firstar, its Subsidiaries or any Firstar ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to Firstar, its Subsidiaries or any Firstar ERISA Affiliate of incurring a material liability thereunder, (vi) no Firstar Benefit Plan is a "multiemployer pension plan" (as such term is defined in Section 3(37) of ERISA), (vii) all contributions or other amounts payable by Firstar or its Subsidiaries as of the Effective Time with respect to each Firstar Benefit Plan in respect of current or prior plan years have been paid or accrued in accordance with GAAP and Section 412 of the Code, (viii) none of Firstar, its Subsidiaries or any other person, including any fiduciary, has engaged in a transaction in connection with which Firstar, its Subsidiaries or any Firstar Benefit Plan will be subject to either a material civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of the Code, and (ix) to the best knowledge of Firstar there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Firstar Benefit Plans or any trusts related thereto that will have, either individually or in the aggregate, a Material Adverse Effect on Firstar. (d) Neither the execution and delivery of this Agreement nor the shareholder approval or consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) (i) result (either alone or upon the occurrence of any additional acts or events) in any payment (including, without limitation, severance, unemployment compensation, "excess parachute payment" (within the meaning of Section 280G of the Code), forgiveness of indebtedness or otherwise) becoming due to any director or any employee of Firstar or any of its affiliates from Firstar or any of its affiliates under any Firstar Benefit Plan or otherwise, (ii) increase or affect the calculation of the amount of any benefits otherwise payable under any Firstar Benefit Plan or (iii) result in any acceleration of the time of payment or vesting of any such benefits. -14- 3.12 SEC Reports. No (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1997 by Firstar with the SEC pursuant to the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act (the "Firstar Reports") and prior to the date hereof or (b) communication mailed by Firstar to its shareholders since January 1, 1997 and prior to the date hereof, as of the date thereof, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date (but before the date hereof) shall be deemed to modify information as of an earlier date. Since January 1, 1997, as of their respective dates, all Firstar Reports filed under the Securities Act and the Exchange Act complied in all material respects with the published rules and regulations of the SEC with respect thereto. 3.13 Compliance with Applicable Law. (a) Firstar and each of its Subsidiaries hold all material licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under and pursuant to each, and have complied in all material respects with and are not in default in any material respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Firstar or any of its Subsidiaries, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default will not, either individually or in the aggregate, have a Material Adverse Effect on Firstar. (b) Except as will not have, either individually or in the aggregate, a Material Adverse Effect on Firstar, Firstar and each Firstar Subsidiary have properly administered all accounts for which it acts as a fiduciary, including accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents, applicable state and federal law and regulation and common law. None of Firstar, any Firstar Subsidiary, or any director, officer or employee of Firstar or of any Firstar Subsidiary, has committed any breach of trust with respect to any such fiduciary account that will have a Material Adverse Effect on Firstar, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account. 3.14 Certain Contracts. (a) Neither Firstar nor any of its Subsidiaries is a party to or bound by any contract, arrangement, commitment or understanding (whether written or oral) (i) with respect to the employment of any directors, officers or employees, other than in the ordinary course of business consistent with past practice, (ii) that is a "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this Agreement that has not been filed or incorporated by reference in the Firstar Reports, (iii) that materially restricts the conduct of any line of business by Firstar or upon consummation of the Merger will materially restrict the ability of the Surviving Corporation to engage in any line of business in which a bank holding company may lawfully engage or (iv) with or to a labor union or guild (including any collective bargaining agreement). Firstar has previously made available to Mercantile true and correct copies of all employment and deferred compensation agreements that are in writing and to which Firstar is a party. Each -15- contract, arrangement, commitment or understanding of the type described in this Section 3.14(a) and in Section 3.11(a), whether or not set forth in the Firstar Disclosure Schedule, is referred to herein as a "Firstar Contract", and neither Firstar nor any of its Subsidiaries knows of, or has received notice of, any violation of the above by any of the other parties thereto that, either individually or in the aggregate, will have a Material Adverse Effect on Firstar. (b) (i) Each Firstar Contract is valid and binding on Firstar or any of its Subsidiaries, as applicable, and in full force and effect, (ii) Firstar and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it to date under each Firstar Contract, except where such noncompliance, either individually or in the aggregate, will not have a Material Adverse Effect on Firstar, and (iii) no event or condition exists that constitutes or, after notice or lapse of time or both, will constitute, a material default on the part of Firstar or any of its Subsidiaries under any such Firstar Contract, except where such default, either individually or in the aggregate, will not have a Material Adverse Effect on Firstar. 3.15 Agreements with Regulatory Agencies. Neither Firstar nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been since January 1, 1997, a recipient of any supervisory letter from, or since January 1, 1997, has adopted any board resolutions at the request of any Regulatory Agency or other Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its credit policies, its management or its business (each, whether or not set forth in the Firstar Disclosure Schedule, a "Firstar Regulatory Agreement"), nor has Firstar or any of its Subsidiaries been advised since January 1, 1997, by any Regulatory Agency or other Governmental Entity that it is considering issuing or requesting any such Regulatory Agreement. 3.16 Interest Rate Risk Management Instruments. All derivative instruments, as such term is used in Statement of Financial Accounting Standards No. 133 (including, without limitation, interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements) ("Derivative Instruments"), to which Firstar or any of its Subsidiaries is a party, whether entered into for the account of Firstar or for the account of a customer of Firstar or one of its Subsidiaries, were entered into in the ordinary course of business and, to Firstar's knowledge, in accordance with prudent banking practice and applicable rules, regulations and policies of any Regulatory Authority and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations of Firstar or one of its Subsidiaries enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. Firstar and each of its Subsidiaries have duly performed in all material respects all of their material obligations thereunder to the extent that such obligations to perform have accrued; and, to Firstar's knowledge, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder. -16- 3.17 Undisclosed Liabilities. Except for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of Firstar included in the Firstar December 31, 1998 Form 10-K and for liabilities incurred in the ordinary course of business consistent with past practice, since December 31, 1998, neither Firstar nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) that, either individually or in the aggregate, has had or will have a Material Adverse Effect on Firstar. 3.18 Insurance. Firstar and its Subsidiaries have in effect insurance coverage with reputable insurers or are self-insured, that in respect of amounts, premiums, types and risks insured, constitutes reasonably adequate coverage against all risks customarily insured against by bank holding companies and their subsidiaries comparable in size and operations to Firstar and its Subsidiaries. 3.19 Environmental Liability. There are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that could reasonably result in the imposition, on Firstar of any liability or obligation arising under common law or under any local, state or federal environmental statute, regulation or ordinance including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), pending or threatened against Firstar, which liability or obligation will, either individually or in the aggregate, have a Material Adverse Effect on Firstar. To the knowledge of Firstar, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that will, individually or in the aggregate, have a Material Adverse Effect on Firstar. Firstar is not subject to any agreement, order, judgment, decree, letter or memorandum by or with any Governmental Entity, regulatory agency or third party imposing any liability or obligation with respect to the foregoing that will have, either individually or in the aggregate, a Material Adverse Effect on Firstar. 3.20 Charter Provisions; State Takeover Laws; Firstar Rights Agreement. (a) The provisions of Section 1131 of the WBCL are not applicable to this Agreement, the Firstar Option Agreement or the transactions contemplated hereby or thereby. The Board of Directors of Firstar has approved the transactions contemplated by this Agreement and the Firstar Option Agreement for purposes of Article V of the Firstar Articles and Section 1141 of the WBCL such that the provisions of such Article V and such Section 1141 will not apply to this Agreement or Firstar Option Agreement or any of the transactions contemplated hereby or thereby. (b) Firstar has taken all action, if any, necessary or appropriate so that the entering into of this Agreement and the Firstar Option Agreement, and the consummation of the transactions contemplated hereby and thereby, do not and will not result in the ability of any person to exercise any Firstar Shareholder Rights under the Firstar Rights Agreement or enable or require the Firstar Shareholder Rights to separate from the shares of Firstar Common Stock to which they are attached or to be triggered or become exercisable. No "Distribution Date" or "Shares Acquisition Date" (as such terms are defined in the Firstar Rights Plan) has occurred. -17- 3.21 Year 2000. None of Firstar or any of the Firstar Subsidiaries has received, or reasonably expects to receive, a "Year 2000 Deficiency Notification Letter" (as such term is employed in the Federal Reserve Board's Supervision and Regulation Letter No. SR 98-3(SUP), dated March 4, 1998). Firstar has made available to Mercantile a complete and accurate copy of Firstar's plan, including an estimate of the anticipated associated costs, for addressing the issues ("Year 2000 Issues") set forth in the interagency statements of the Federal Financial Institutions Examination Council addressed to the boards of directors and chief executive officers of all federally supervised financial institutions regarding Year 2000 safety and soundness for insured depository institutions. Between the date of this Agreement and the Effective Time, Firstar shall use reasonable best efforts to implement such plan. Firstar and its Subsidiaries has complied in all material respects with the "Interagency Guidelines Establishing Year 2000 Standards for Safety and Soundness" issued pursuant to section 39 of the Federal Deposit Insurance Act and effective October 15, 1998. 3.22 Reorganization; Pooling of Interests. As of the date of this Agreement, Firstar has no reason to believe that the Merger will not qualify as a "reorganization" within the meaning of Section 368(a) of the Code and as a "pooling of interests" for accounting purposes. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERCANTILE Except as disclosed in the Mercantile disclosure schedule delivered to Firstar concurrently herewith (the "Mercantile Disclosure Schedule") Mercantile hereby represents and warrants to Firstar as follows: 4.1 Corporate Organization. (a) Mercantile is a corporation duly organized, validly existing and in good standing under the laws of the State of Missouri. Mercantile has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not, either individually or in the aggregate, have a Material Adverse Effect on Mercantile. Mercantile is duly registered as a bank holding company under the BHC Act. True and complete copies of the Articles of Incorporation of Mercantile (the "Mercantile Articles") and By-Laws of Mercantile, as in effect as of the date of this Agreement, have previously been made available by Mercantile to Firstar. (b) Each Mercantile Subsidiary (i) is duly organized and validly existing under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether Federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure -18- to be so qualified would have a Material Adverse Effect on Mercantile, and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. 4.2 Capitalization. (a) The authorized capital stock of Mercantile consists of 400,000,000 shares of Mercantile Common Stock, of which, as of March 31, 1999, 157,868,547 shares were issued and outstanding, and 5,000,000 shares of preferred stock, no par value ("Mercantile Preferred Stock" and, together with the Mercantile Common Stock, the "Mercantile Capital Stock"), of which none is issued and outstanding as of the date hereof. As of March 31, 1999, 47,363 shares of Mercantile Common Stock were held in Mercantile's treasury. As of the date hereof, no shares of Mercantile Common Stock or Mercantile Preferred Stock were reserved for issuance, except for (i) the shares of Mercantile Common Stock issuable pursuant to the Mercantile Option Agreement, (ii) 11,074,528 shares reserved for issuance pursuant to employee and director stock plans of Mercantile in effect as of the date hereof (the "Mercantile Stock Plans"), (iii) 2,000,000 shares reserved for issuance pursuant to the Mercantile Shareholder Investment Plan (the "Mercantile DRIP") and (iv) 2,000,000 shares of Series B Junior Participating Preferred Stock reserved for issuance pursuant to the Mercantile Rights Agreement. All of the issued and outstanding shares of Mercantile Capital Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. As of the date of this Agreement, except for the Mercantile Option Agreement, the Mercantile Stock Plans and as contemplated by the Mercantile Rights Agreement, Mercantile does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Mercantile Capital Stock or any other equity securities of Mercantile or any securities representing the right to purchase or otherwise receive any shares of Mercantile Capital Stock (collectively, "Mercantile Rights"). Since March 31, 1999, Mercantile has not issued any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, other than as permitted by Section 5.2(b) and pursuant to (A) the exercise of employee stock options granted prior to such date, (B) the Mercantile DRIP and (C) pursuant to the Mercantile Option Agreement. Mercantile shall terminate or suspend the Mercantile DRIP prior to the next record date to be declared following the date hereof with respect to the quarterly dividend payable on shares of Mercantile Common Stock (currently anticipated to be on or about June 10, 1999) such that no shares of Mercantile Capital Stock shall thereafter be issued or become issuable pursuant thereto (the date of such termination or suspension, the "DRIP Suspension Date"). Mercantile has previously provided Firstar with a list of the option holders, the date of each option to purchase Mercantile Common Stock granted, the number of shares subject to each such option, the expiration date of each such option and the price at which each such option may be exercised under an applicable Mercantile Stock Plan. (b) Mercantile owns, directly or indirectly, all of the issued and outstanding shares of capital stock or other equity ownership interests of each of the Mercantile Subsidiaries, free and clear of any Liens, and all of such shares or equity ownership interests are duly authorized and validly issued and are fully paid, nonassessable (subject to 12 U.S.C. Section 55) and free of preemptive rights, with no personal liability attaching to the ownership thereof. No Mercantile -19- Subsidiary has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of capital stock or any other equity security of such Subsidiary or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of such Subsidiary. Section 4.2(b) of the Mercantile Disclosure Schedule sets forth a list of the material investments of Mercantile in Non-Subsidiary Affiliates. 4.3 Authority; No Violation. (a) Mercantile has full corporate power and authority to execute and deliver this Agreement and each of the Option Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the Option Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of Mercantile. The Board of Directors of Mercantile has directed that this Agreement and the transactions contemplated hereby be submitted to Mercantile's shareholders for adoption at a meeting of such shareholders and, except for the adoption of this Agreement by the affirmative vote of the holders of two-thirds of the outstanding shares of Mercantile Common Stock entitled to vote thereon, no other corporate proceedings on the part of Mercantile are necessary to approve this Agreement and the Option Agreements and to consummate the transactions contemplated hereby and thereby. This Agreement and each of the Option Agreements have been duly and validly executed and delivered by Mercantile and (assuming due authorization, execution and delivery by Firstar) constitute valid and binding obligations of Mercantile, enforceable against Mercantile in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies). (b) Neither the execution and delivery of this Agreement or the Option Agreements by Mercantile, nor the consummation by Mercantile of the transactions contemplated hereby or thereby, nor compliance by Mercantile with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Mercantile Articles or By-Laws, or (ii) assuming that the consents and approvals referred to in Section 4.4 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Mercantile, any of its Subsidiaries or Non-Subsidiary Affiliates or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event that, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of Mercantile, any of its Subsidiaries or its Non-Subsidiary Affiliates under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Mercantile, any of its Subsidiaries or Non-Subsidiary Affiliates is a party, or by which they or any of their respective properties or assets may be bound or affected, except (in the case of clause (y) above) for such violations, conflicts, breaches or defaults that either individually or in the aggregate will not have a Material Adverse Effect on Mercantile. -20- 4.4 Consents and Approvals. Except for (i) the filing of applications and notices, as applicable, with the Federal Reserve Board under the BHC Act and the Federal Reserve Act, as amended, and approval of such applications and notices, (ii) the State Approvals, (iii) the filing with the SEC of the Joint Proxy Statement and the S-4, (iv) the filing of the Wisconsin Articles with the Wisconsin Department pursuant to the WBCL, (v) the filing of the Missouri Articles with the Missouri Secretary pursuant to the MBCL, (vi) any consents, authorizations, approvals, filings or exemptions in connection with compliance with the applicable provisions of federal and state securities laws relating to the regulation of broker-dealers, investment advisers or transfer agents, and federal commodities laws relating to the regulation of futures commission merchants and the rules and regulations thereunder and of any applicable SRO, and the rules of the NYSE, or that are required under consumer finance, mortgage banking and other similar laws and (vii) such filings and approvals as are required to be made or obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of shares of Firstar Capital Stock pursuant to this Agreement, no consents or approvals of or filings or registrations with any Governmental Entity are necessary in connection with (A) the execution and delivery by Mercantile of this Agreement and the Option Agreements and (B) the consummation by Mercantile of the transactions contemplated hereby or thereby. 4.5 Reports. Mercantile and each of its Subsidiaries have timely filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 1997 with the Regulatory Agencies, and all other reports and statements required to be filed by them since January 1, 1997, including, without limitation, any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state, or any Regulatory Agency, and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, will not have a Material Adverse Effect on Mercantile. Except for normal examinations conducted by a Regulatory Agency in the ordinary course of the business of Mercantile and its Subsidiaries, no Regulatory Agency has initiated any proceeding or, to the best knowledge of Mercantile, investigation into the business or operations of Mercantile or any of its Subsidiaries since January 1, 1997, except where such proceedings or investigation will not have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. There is no unresolved violation, criticism, or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of Mercantile or any of its Subsidiaries that, in the reasonable judgment of Mercantile, will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. 4.6 Financial Statements. Mercantile has previously made available to Firstar copies of the consolidated balance sheets of Mercantile and its Subsidiaries as of December 31, for the fiscal years 1997 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the fiscal years 1996 through 1998, inclusive, as reported in Mercantile's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed with the SEC under the Exchange Act (the "Mercantile 10-K"), in each case accompanied by the audit report of KPMG LLP, independent public accountants with respect to Mercantile. The December 31, 1998 consolidated balance sheet of Mercantile (including the -21- related notes, where applicable) fairly presents in all material respects the consolidated financial position of Mercantile and its Subsidiaries as of the date thereof, and the other financial statements referred to in this Section 4.6 (including the related notes, where applicable) fairly present in all material respects the results of the consolidated operations and changes in shareholders' equity and consolidated financial position of Mercantile and its Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) complies in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been prepared in all material respects in accordance with GAAP consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes thereto. The books and records of Mercantile and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements and reflect only actual transactions. 4.7 Broker's Fees. Except for Donaldson, Lufkin & Jenrette and Morgan Stanley & Co. Incorporated, none of Mercantile nor any Mercantile Subsidiary nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with the Merger or related transactions contemplated by this Agreement or the Option Agreements. 4.8 Absence of Certain Changes or Events. (a) Except as publicly disclosed in Mercantile Reports filed prior to the date hereof, since December 31, 1998, no event or events have occurred that has had, individually or in the aggregate, a Material Adverse Effect on Mercantile. (b) Except as publicly disclosed in Mercantile Reports filed prior to the date hereof, since December 31, 1998, Mercantile and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course. (c) Since December 31, 1998, neither Mercantile nor any of its Subsidiaries has (i) except for such actions as are in the ordinary course of business or except as required by applicable law, (A) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer, employee, or director from the amount thereof in effect as of December 31, 1998, or (B) granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay, or paid any bonuses, that in the aggregate exceed 5% of Mercantile's 1998 salary and employee benefit expenses (other than customary year-end bonuses for fiscal 1998 and, if applicable, 1999) or (ii) suffered any strike, work stoppage, slowdown, or other labor disturbance that will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. 4.9 Legal Proceedings. (a) Neither Mercantile nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of Mercantile's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Mercantile or any of its Subsidiaries or challenging -22- the validity or propriety of the transactions contemplated by this Agreement or the Mercantile Option Agreement as to which, in any such case, there is a reasonable probability of an adverse determination and that, if adversely determined, will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. (b) There is no injunction, order, judgment, decree, or regulatory restriction (other than those that apply to similarly situated bank holding companies or banks) imposed upon Mercantile, any of its Subsidiaries or the assets of Mercantile or any of its Subsidiaries that has had or will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile or the Surviving Corporation. 4.10 Taxes and Tax Returns. (a) Each of Mercantile and its Subsidiaries has duly filed all federal, state, foreign and local information returns and tax returns required to be filed by it on or prior to the date hereof (all such returns being accurate and complete in all material respects) and has duly paid or made provisions for the payment of all Taxes and other governmental charges that have been incurred or are due or claimed to be due from it by federal, state, foreign or local taxing authorities on or prior to the date of this Agreement (including, without limitation, if and to the extent applicable, those due in respect of its properties, income, business, capital stock, deposits, franchises, licenses, sales and payrolls) other than (i) Taxes or other charges that are not yet delinquent or are being contested in good faith and have not been finally determined, or (ii) information returns, tax returns, Taxes or other governmental charges as to which the failure to file, pay or make provision for will not have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. The federal and material state income tax returns of Mercantile and its Subsidiaries have been examined by the IRS or the relevant state taxing authorities, as the case may be, through 1994 and any liability with respect thereto has been satisfied or any liability with respect to deficiencies asserted as a result of such examination has been reserved against in accordance with GAAP. To the best of Mercantile's knowledge, there are no material disputes pending, or claims asserted for, Taxes or assessments upon Mercantile or any of its Subsidiaries for which Mercantile has not established reserves in accordance with GAAP. In addition, (A) proper and accurate amounts have been withheld by Mercantile and its Subsidiaries from their employees for all prior periods in compliance in all material respects with the tax withholding provisions of applicable federal, state and local laws, except where failure to do so will not, either individually or in the aggregate, have a Material Adverse Effect on Mercantile, (B) federal, state and local returns that are accurate and complete in all material respects have been filed by Mercantile and its Subsidiaries for all periods for which returns were due with respect to income tax withholding, Social Security and unemployment taxes, except where failure to do so will not, either individually or in the aggregate, have a Material Adverse Effect on Mercantile, (C) the amounts shown on such federal, state or local returns to be due and payable have been paid in full or provision therefor has been included by Mercantile in its consolidated financial statements in accordance with GAAP, except where failure to do so will not, individually or in the aggregate, have a Material Adverse Effect on Mercantile and (D) there are no Tax liens upon any property or assets of Mercantile or its Subsidiaries except liens for current Taxes not yet due or liens that will not have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. Neither Mercantile nor any of its Subsidiaries has been required to in- -23- clude in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by Mercantile or any of its Subsidiaries, and the IRS has not initiated or proposed in writing any such adjustment or change in accounting method, in either case, that has had or will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. Except as set forth in the financial statements described in Section 4.6 (including the related notes, where applicable), neither Mercantile nor any of its Subsidiaries has entered into a transaction that is being accounted for as an installment obligation under Section 453 of the Code, that will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. (b) No deduction has been disallowed under Section 162(m) of the Code for employee remuneration of any amount paid or payable by Mercantile or any Subsidiary of Mercantile under any contract, plan, program, arrangement or understanding. 4.11 Employee Benefit Plans. (a) The Mercantile Disclosure Schedule sets forth a true and complete list of each material employee benefit, employment or compensation plan, arrangement or agreement that is maintained, or contributed to, as of the date of this Agreement (the "Mercantile Benefit Plans") by Mercantile, any of its Subsidiaries or by any trade or business, whether or not incorporated (a "Mercantile ERISA Affiliate"), all of which together with Mercantile would be deemed a "single employer" within the meaning of Section 4001 of ERISA. (b) Mercantile has heretofore made available to Firstar true and complete copies of each of the Mercantile Benefit Plans and certain related documents, including, but not limited to, (i) the actuarial report for such Mercantile Benefit Plan (if applicable) for the plan year ended December 31, 1998, and (ii) the most recent determination letter from the IRS (if applicable) for such Mercantile Benefit Plan. (c) (i) Each of the Mercantile Benefit Plans has been operated and administered in all material respects in compliance with applicable laws, including, but not limited to, ERISA and the Code, (ii) each of the Mercantile Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified, and, to the knowledge of Mercantile, there are no existing circumstances or any events that have occurred that will adversely affect the qualified status of any such Mercantile Benefit Plan, (iii) with respect to each Mercantile Benefit Plan that is subject to Title IV of ERISA, the present value of accrued benefits under such Mercantile Benefit Plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such Mercantile Benefit Plan's actuary with respect to such Mercantile Benefit Plan, did not, as of its latest valuation date, exceed the then current value of the assets of such Mercantile Benefit Plan allocable to such accrued benefits, (iv) no Mercantile Benefit Plan provides benefits, including, without limitation, death or medical benefits (whether or not insured), with respect to current or former employees or directors of Mercantile or its Subsidiaries beyond their retirement or other termination of service, other than (A) coverage mandated by applicable law, (B) death benefits or retirement benefits under any "employee pension plan" (as such term is defined in Section 3(2) of ERISA), (C) deferred compensation benefits accrued as liabilities on the books of Mercantile or its Subsidiaries or -24- (D) benefits the full cost of which is borne by the current or former employee or director (or his beneficiary), (v) no material liability under Title IV of ERISA has been incurred by Mercantile, its Subsidiaries or any Mercantile ERISA Affiliate that has not been satisfied in full, and no condition exists that presents a material risk to Mercantile, its Subsidiaries or any Mercantile ERISA Affiliate of incurring a material liability thereunder, (vi) no Mercantile Benefit Plan is a "multiemployer pension plan" (as such term is defined in Section 3(37) of ERISA), (vii) all contributions or other amounts payable by Mercantile or its Subsidiaries as of the Effective Time with respect to each Mercantile Benefit Plan in respect of current or prior plan years have been paid or accrued in accordance with GAAP and Section 412 of the Code, (viii) none of Mercantile, its Subsidiaries or any other person, including any fiduciary, has engaged in a transaction in connection with which Mercantile, its Subsidiaries or any Mercantile Benefit Plan will be subject to either a material civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of the Code, and (ix) to the best knowledge of Mercantile there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Mercantile Benefit Plans or any trusts related thereto that will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. (d) Neither the execution and delivery of this Agreement nor the shareholder approval or consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) (i) result (either alone or upon the occurrence of any additional acts or events) in any payment (including, without limitation, severance, unemployment compensation, "excess parachute payment" (within the meaning of Section 280G of the Code), forgiveness of indebtedness or otherwise) becoming due to any director or any employee of Mercantile or any of its affiliates from Mercantile or any of its affiliates under any Mercantile Benefit Plan or otherwise, (ii) increase or affect the calculation of the amount of any benefits otherwise payable under any Mercantile Benefit Plan or (iii) result in any acceleration of the time of payment or vesting of any such benefits. 4.12 SEC Reports. Mercantile has previously made available to Firstar an accurate and complete copy of each (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1997 by Mercantile with the SEC pursuant to the Securities Act or the Exchange Act (the "Mercantile Reports") and prior to the date hereof and (b) communication mailed by Mercantile to its shareholders since January 1, 1997 and prior to the date hereof, and no such Mercantile Report or communication, as of the date thereof, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date (but before the date hereof) shall be deemed to modify information as of an earlier date. Since January 1, 1997, as of their respective dates, all Mercantile Reports filed under the Securities Act and the Exchange Act complied in all material respects with the published rules and regulations of the SEC with respect thereto. 4.13 Compliance with Applicable Law. (a) Mercantile and each of its Subsidiaries hold all material licenses, franchises, permits and authorizations necessary for the lawful con- -25- duct of their respective businesses under and pursuant to each, and have complied in all material respects with and are not in default in any material respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Mercantile or any of its Subsidiaries, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default will not, either individually or in the aggregate, have a Material Adverse Effect on Mercantile. (b) Except as will not have, either individually or in the aggregate, a Material Adverse Effect on Mercantile, Mercantile and each Mercantile Subsidiary have properly administered all accounts for which it acts as a fiduciary, including accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents, applicable state and federal law and regulation and common law. None of Mercantile, any Mercantile Subsidiary, or any director, officer or employee of Mercantile or of any Mercantile Subsidiary, has committed any breach of trust with respect to any such fiduciary account that will have a Material Adverse Effect on Mercantile, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account. 4.14 Certain Contracts. (a) Neither Mercantile nor any of its Subsidiaries is a party to or bound by any contract, arrangement, commitment or understanding (whether written or oral) (i) with respect to the employment of any directors, officers or employees other than in the ordinary course of business consistent with past practice, (ii) that is a "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this Agreement that has not been filed or incorporated by reference in the Mercantile Reports, (iii) that materially restricts the conduct of any line of business by Mercantile or upon consummation of the Merger will materially restrict the ability of the Surviving Corporation to engage in any line of business in which a bank holding company may lawfully engage or (iv) with or to a labor union or guild (including any collective bargaining agreement). Mercantile has previously made available to Firstar true and correct copies of all employment and deferred compensation agreements that are in writing and to which Mercantile is a party. Each contract, arrangement, commitment or understanding of the type described in this Section 4.14(a) and in Section 4.11(a), whether or not set forth in the Mercantile Disclosure Schedule, is referred to herein as a "Mercantile Contract", and neither Mercantile nor any of its Subsidiaries knows of, or has received notice of, any violation of the above by any of the other parties thereto that will have, individually or in the aggregate, a Material Adverse Effect on Mercantile. (b) (i) Each Mercantile Contract is valid and binding on Mercantile or any of its Subsidiaries, as applicable, and in full force and effect, (ii) Mercantile and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it to date under each Mercantile Contract, except where such noncompliance, either individually or in the aggregate, will not have a Material Adverse Effect on Mercantile, and (iii) no event or condition exists that constitutes or, after notice or lapse of time or both, will constitute, a material default on the part of Mercantile or any of its Subsidiaries under any such Mercantile -26- Contract, except where such default, either individually or in the aggregate, will not have a Material Adverse Effect on Mercantile. 4.15 Agreements with Regulatory Agencies. Neither Mercantile nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been since January 1, 1997, a recipient of any supervisory letter from, or since January 1, 1997, has adopted any board resolutions at the request of any Regulatory Agency or other Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its credit policies, its management or its business (each, whether or not set forth in the Mercantile Disclosure Schedule, a "Mercantile Regulatory Agreement"), nor has Mercantile or any of its Subsidiaries been advised since January 1, 1997, by any Regulatory Agency or other Governmental Entity that it is considering issuing or requesting any such Regulatory Agreement. 4.16 Interest Rate Risk Management Instruments. All Derivative Instruments to which Mercantile or any of its Subsidiaries is a party, whether entered into for the account of Mercantile or for the account of a customer of Mercantile or one of its Subsidiaries, were entered into in the ordinary course of business and, to Mercantile's knowledge, in accordance with prudent banking practice and applicable rules, regulations and policies of any Regulatory Authority and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations of Mercantile or one of its Subsidiaries enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. Mercantile and each of its Subsidiaries have duly performed in all material respects all of their material obligations thereunder to the extent that such obligations to perform have accrued; and to Mercantile's knowledge, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder. 4.17 Undisclosed Liabilities. Except for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of Mercantile included in the Mercantile December 31, 1998 Form 10-K and for liabilities incurred in the ordinary course of business consistent with past practice, since December 31, 1998, neither Mercantile nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) that, either individually or in the aggregate, has had or will have a Material Adverse Effect on Mercantile. 4.18 Insurance. Mercantile and its Subsidiaries have in effect insurance coverage with reputable insurers or are self-insured, that in respect of amounts, premiums, types and risks insured, constitutes reasonably adequate coverage against all risks customarily insured against by bank holding companies and their subsidiaries comparable in size and operations to Mercantile and its Subsidiaries. -27- 4.19 Environmental Liability. There are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that reasonably could result in the imposition, on Mercantile of any liability or obligation arising under common law or under any local, state or federal environmental statute, regulation or ordinance including, without limitation, CERCLA, pending or threatened against Mercantile, which liability or obligation will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. To the knowledge of Mercantile, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. Mercantile is not subject to any agreement, order, judgment, decree, letter or memorandum by or with any Governmental Entity, regulatory agency or third party imposing any liability or obligation with respect to the foregoing that will have, either individually or in the aggregate, a Material Adverse Effect on Mercantile. 4.20 Charter Provisions; State Takeover Laws; Mercantile Rights Agreement. (a) The Board of Directors of Mercantile has approved the transactions contemplated by this Agreement and the Mercantile Option Agreement for purposes of Article 13, Section B of the Mercantile Articles and Sections 459.2 and 459.3 of the MBCL such that the provisions of Article 13, Section A of the Mercantile Articles or such sections of the MBCL will not apply to this Agreement or the Mercantile Option Agreement or any of the transactions contemplated hereby or thereby. (b) Mercantile has taken all action, if any, necessary or appropriate so that the entering into of this Agreement and the Mercantile Stock Option Agreement, and the consummation of the transactions contemplated hereby and thereby, do not and will not result in the ability of any person to exercise any Mercantile Shareholder Rights under the Mercantile Rights Agreement or enable or require the Mercantile Shareholder Rights to separate from the shares of Mercantile Common Stock to which they are attached or to be triggered or become exercisable. No "Distribution Date" or "Stock Acquisition Date" (as such terms are defined in the Mercantile Rights Plan) has occurred. 4.21 Year 2000. None of Mercantile or any of the Mercantile Subsidiaries has received, or reasonably expects to receive, a Year 2000 Deficiency Notification Letter. Mercantile has made available to Firstar a complete and accurate copy of Mercantile's plan, including an estimate of the anticipated associated costs, for addressing Year 2000 Issues. Between the date of this Agreement and the Effective Time, Mercantile shall use reasonable best efforts to implement such plan and any revisions thereto that may be reasonably requested by Firstar. Mercantile and its Subsidiaries has complied in all material respects with the "Interagency Guidelines Establishing Year 2000 Standards for Safety and Soundness" issued pursuant to section 39 of the Federal Deposit Insurance Act and effective October 15, 1998. 4.22 Reorganization; Pooling of Interests. As of the date of this Agreement, Mercantile has no reason to believe that the Merger will not qualify as a "reorganization" within -28- the meaning of Section 368(a) of the Code and, subject to Section 6.4, as a "pooling of interests" for accounting purposes. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Conduct of Businesses Prior to the Effective Time. During the period from the date of this Agreement to the Effective Time, except as expressly contemplated or permitted by this Agreement (including the Firstar Disclosure Schedule and the Mercantile Disclosure Schedule) or the Option Agreements, each of Mercantile and Firstar shall, and shall cause each of their respective Subsidiaries to, (a) conduct its business in the ordinary course, (b) use reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its key officers and key employees and (c) take no action that would adversely affect or delay the ability of either Mercantile or Firstar to obtain any necessary approvals of any Regulatory Agency or other Governmental Entity required for the transactions contemplated hereby or to perform its covenants and agreements under this Agreement or the Option Agreements or to consummate the transactions contemplated hereby or thereby. 5.2 Forbearances. During the period from the date of this Agreement to the Effective Time, except as set forth in the Mercantile Disclosure Schedule or the Firstar Disclosure Schedule, as the case may be, and, except as expressly contemplated or permitted by this Agreement or the Option Agreements or as otherwise indicated in this Section 5.2, neither Mercantile nor Firstar shall, and neither Mercantile nor Firstar shall permit any of their respective Subsidiaries to, without the prior written consent of the other party to this Agreement: (a) In the case of Mercantile, other than in the ordinary course of business, incur any indebtedness for borrowed money (other than short-term indebtedness incurred to refinance short- term indebtedness (it being understood that for purposes of this Section 5.2(a) "short-term" shall mean maturities of six months or less) and indebtedness of Mercantile or any of its Subsidiaries to Mercantile or any of its wholly-owned Subsidiaries), assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance (it being understood and agreed that incurrence of indebtedness in the ordinary course of business shall include, without limitation, the creation of deposit liabilities, purchases of Federal funds, sales of certificates of deposit and entering into repurchase agreements); (b) (i) in the case of Mercantile, adjust, split, combine or reclassify any capital stock; (ii) make, declare or pay any dividend, or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible (whether currently -29- convertible or convertible only after the passage of time or the occurrence of certain events) into or exchangeable for any shares of its capital stock (except (A) in the case of Firstar, for regular quarterly cash dividends at a rate not in excess of $0.30 per share of Firstar Common Stock, (B) in the case of Mercantile, for regular quarterly cash dividends on Mercantile Common Stock at a rate not in excess of $0.34 per share of Mercantile Common Stock and (C) dividends paid by any of the Subsidiaries of each of Mercantile and Firstar to Mercantile or Firstar or any of their Subsidiaries, respectively, and dividends paid in the ordinary course of business consistent with past practice by any Subsidiaries (whether or not wholly owned) of each of Mercantile and Firstar); (iii) in the case of Mercantile, grant any stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock, other than pursuant to the Mercantile Rights Agreement as in effect as of the date hereof; (iv) in the case of Mercantile, issue any additional shares of capital stock except pursuant to (A) the exercise of stock options outstanding as of the date hereof, (B) the Mercantile Option Agreement (C) the Mercantile Rights Agreement or (D) the Mercantile DRIP in the ordinary course of business prior to the DRIP Suspension Date; or (c) in the case of Mercantile, sell, transfer, mortgage, encumber or otherwise dispose of any material part of its business or any of its material properties or assets to any individual, corporation or other entity other than a Subsidiary, or cancel, release or assign any indebtedness to any such person or any claims held by any such person, except in the ordinary course of business or pursuant to contracts or agreements in force at the date of this Agreement; (d) in the case of Mercantile, except for transactions in the ordinary course of business or pursuant to contracts or agreements in force at the date of or permitted by this Agreement, make any material investment (either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets) in any other individual, corporation or other entity other than a Subsidiary thereof; (e) in the case of Mercantile, except for transactions in the ordinary course of business, terminate, or waive any material provision of, any Mercantile Contract or make any change in any instrument or agreement governing the terms of any of its securities, or material lease or contract, other than normal renewals of contracts and leases without material adverse changes of terms; (f) in the case of Mercantile, increase in any manner the compensation or fringe benefits of any of its employees or pay any pension or retirement allowance not required by any existing plan or agreement to any such employees or become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement (or any individual agreements evidencing grants or awards thereunder) or employment agreement with -30- or for the benefit of any employee other than in the ordinary course of business, or accelerate the vesting of, or the lapsing of restrictions with respect to, any stock options or other stock-based compensation; (g) solicit or encourage from any third party or enter into any negotiations, discussions or agreement in respect of, or authorize any individual, corporation or other entity to solicit or encourage from any third party or enter into any negotiations, discussions or agreement in respect of, or provide or cause to be provided any confidential information in connection with, any inquiries or proposals relating to the disposition of all or substantially all of its business or assets, or the acquisition of its voting securities, or the merger or consolidation of it or any of its Subsidiaries with any corporation or other entity, other than as provided by this Agreement (and it has discontinued any such negotiations or discussions initiated prior to the date hereof and shall promptly notify the other party hereto of all of the relevant details relating to all inquiries and proposals that it may receive from and after the date hereof through and excluding the Effective Time relating to any of such matters); (h) in the case of Mercantile, settle any material claim, action or proceeding involving money damages, except in the ordinary course of business; (i) knowingly take any action that would prevent or impede the Merger from qualifying (i) for "pooling of interests" accounting treatment or (ii) as a reorganization within the meaning of Section 368(a) of the Code; provided, however, that nothing contained herein -------- ------- shall limit the ability of Mercantile or Firstar to exercise its rights under the Firstar Option Agreement or the Mercantile Option Agreement, as the case may be; (j) amend its certificate of incorporation or its bylaws; (k) in the case of Mercantile, other than in prior consultation with Firstar, restructure or materially change its investment securities portfolio or its gap position, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported; (l) take any action that is intended or expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VII not being satisfied or in a violation of any provision of this Agreement, except, in every case, as may be required by applicable law; (m) implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP or regulatory guidelines; or (n) agree to take, make any commitment to take, or adopt any resolutions of its board of directors in support of, any of the actions prohibited to it by this Section 5.2. -31- ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Regulatory Matters. (a) Mercantile and Firstar shall promptly prepare and file with the SEC the Joint Proxy Statement and Firstar shall promptly prepare and file with the SEC the S-4, in which the Joint Proxy Statement will be included as a prospectus. Each of Mercantile and Firstar shall use their reasonable best efforts to have the S-4 declared effective under the Securities Act as promptly as practicable after such filing, and Mercantile and Firstar shall thereafter mail or deliver the Joint Proxy Statement to their respective shareholders. Firstar shall also use its reasonable best efforts to obtain all necessary state securities law or "Blue Sky" permits and approvals required to carry out the transactions contemplated by this Agreement, and Mercantile shall furnish all information concerning Mercantile and the holders of Mercantile Common Stock as may be reasonably requested in connection with any such action. (b) The parties hereto shall cooperate with each other and use their reasonable best efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Entities that are necessary or advisable to consummate the transactions contemplated by this Agreement (including, without limitation, the Merger) and the Option Agreements, and to comply with the terms and conditions of all such permits, consents, approvals and authorizations of all such Governmental Entities. Mercantile and Firstar shall have the right to review in advance, and, to the extent practicable, each will consult the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Firstar or Mercantile, as the case may be, and any of their respective Subsidiaries, that appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing rights of review and consultation, each of the parties hereto shall act reasonably and as promptly as practicable. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Entities necessary or advisable to consummate the transactions contemplated by this Agreement and the Option Agreements and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated herein. (c) Mercantile and Firstar shall, upon request, furnish each other with all information concerning themselves, their Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with the Joint Proxy Statement, the S-4 or any other statement, filing, notice or application made by or on behalf of Mercantile, Firstar or any of their respective Subsidiaries to any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement. (d) Mercantile and Firstar shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for con- -32- summation of the transactions contemplated by this Agreement or the Option Agreements that causes such party to believe that there is a reasonable likelihood that any Requisite Regulatory Approval will not be obtained or that the receipt of any such approval will be materially delayed. 6.2 Access to Information. (a) Upon reasonable notice and subject to applicable laws relating to the exchange of information, each of Mercantile and Firstar, for the purposes of verifying the representations and warranties of the other and preparing for the Merger and the other matters contemplated by this Agreement, shall, and shall cause each of their respective Subsidiaries to, afford to the officers, employees, accountants, counsel and other representatives of the other party, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, each of Mercantile and Firstar shall, and shall cause their respective Subsidiaries to, make available to the other party (i) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws or federal or state banking laws (other than reports or documents that Mercantile or Firstar, as the case may be, is not permitted to disclose under applicable law) and (ii) all other information concerning its business, properties and personnel as such party may reasonably request. Neither Mercantile nor Firstar nor any of their respective Subsidiaries shall be required to provide such access or to disclose such information where such access or disclosure would violate or prejudice the rights of Mercantile's or Firstar's, as the case may be, customers, jeopardize the attorney-client privilege of the institution in possession or control of such information or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) Each of Mercantile and Firstar shall hold all information furnished by or on behalf of the other party or any of such party's Subsidiaries or representatives pursuant to Section 6.2(a) in confidence to the extent required by, and in accordance with, the provisions of confidentiality agreements, dated April 21, 1999 and April 23, 1999, in each case between Mercantile and Firstar (together, the "Confidentiality Agreement"). (c) No investigation by either of the parties or their respective representatives shall affect the representations and warranties of the other set forth herein. 6.3 Shareholders' Approvals. Each of Mercantile and Firstar shall call a meeting of its shareholders to be held as soon as reasonably practicable for the purpose of voting upon the requisite shareholder approvals required in connection with this Agreement and the transactions contemplated hereby, and each shall use its reasonable best efforts to cause such meetings to occur as soon as reasonably practicable and on the same date. The Boards of Directors of each of Firstar and Mercantile shall use its reasonable best efforts to obtain from such shareholders the vote in favor of the approval of this Agreement required by the WBCL and, as applicable, the rules of the NYSE, in the case of Firstar, or by the MBCL, in the case of Mercantile, to consummate the transactions contemplated hereby. -33- 6.4 Legal Conditions to Merger. Each of Mercantile and Firstar shall, and shall cause its Subsidiaries to, use their reasonable best efforts (a) to take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements that may be imposed on such party or its Subsidiaries with respect to the Merger and, subject to the conditions set forth in Article VII hereof, to consummate the transactions contemplated by this Agreement, and (b) to obtain (and to cooperate with the other party to obtain) any material consent, authorization, order or approval of, or any exemption by, any Governmental Entity and any other third party that is required to be obtained by Firstar or Mercantile or any of their respective Subsidiaries in connection with the Merger and the other transactions contemplated by this Agreement. Without limiting the foregoing and notwithstanding any other provision hereof to the contrary, Mercantile shall promptly take (or has taken prior to the date hereof) any and all action with respect to any Mercantile Benefit Plan (including any Mercantile Stock Plan) and any award agreement thereunder (including, if necessary, appropriately amending such Plan) to the extent such action is reasonably necessary in order for the Merger to qualify for "pooling of interests" accounting treatment. 6.5 Affiliates; Publication of Combined Financial Results. (a) Each of Mercantile and Firstar shall use its reasonable best efforts to cause each director, executive officer and other person who is an "affiliate" (for purposes of Rule 145 under the Securities Act, in the case of Mercantile only, and for purposes of qualifying the Merger for "pooling of interests" accounting treatment) of such party to deliver to the other party hereto, as soon as practicable after the date of this Agreement, and prior to the date of the shareholders' meetings called by Mercantile and Firstar to approve this Agreement, a written agreement, in the form of Exhibit 6.5(a)(1) or (2), as applicable, hereto, providing that such person will not sell, pledge, transfer or otherwise dispose of any shares of Mercantile Common Stock or Firstar Common Stock held by such "affiliate" and, in the case of the "affiliates" of Mercantile, the shares of Firstar Common Stock to be received by such "affiliate" in the Merger. (b) The Surviving Corporation shall use its best efforts to publish as promptly as reasonably practical, but in no event later than 90 days after the end of the first month after the Effective Time in which there are at least 30 days of post-Merger combined operations (which month may be the month in which the Effective Time occurs), combined sales and net income figures as contemplated by and in accordance with the terms of SEC Accounting Series Release No. 135. 6.6 Stock Exchange Listing. Firstar shall cause the shares of Firstar Common Stock to be issued in the Merger to be approved for listing on the NYSE, subject to official notice of issuance, prior to the Effective Time. 6.7 Employee Benefit Plans. (a) From and after the Effective Time, unless otherwise mutually determined, the Firstar Benefit Plans and Mercantile Benefit Plans in effect as of the date of this Agreement shall remain in effect with respect to employees of Firstar or Mercantile (or their Subsidiaries), respectively, covered by such plans at the Effective Time until such time as the Surviving Corporation shall, subject to applicable law, the terms of this Agreement and the terms of such plans, adopt new benefit plans with respect to employees of -34- the Surviving Corporation and its Subsidiaries (the "New Benefit Plans"). Prior to the Closing Date, Firstar and Mercantile shall cooperate in reviewing, evaluating and analyzing the Mercantile Benefit Plans and Firstar Benefit Plans with a view towards developing appropriate New Benefit Plans for the employees covered thereby. From and after the Effective Time, Firstar will, or will cause the Surviving Corporation to, recognize the prior service with Mercantile or its subsidiaries of each employee of Mercantile or any of its subsidiaries as of the Effective Time (the "Mercantile Employees") in connection with all Firstar employee benefit plans in which such Mercantile Employees are eligible to participate following the Effective Time, for purposes of eligibility, vesting and levels of benefits (but not for purposes of benefit accruals under any defined benefit pension plan). From and after the Effective Time, Firstar will, or will cause the Surviving Corporation to, (i) cause any pre-existing conditions or limitations and eligibility waiting periods under any group health plans of Firstar to be waived with respect to the Mercantile Employees and their eligible dependents and (ii) give each Mercantile Employee credit for the plan year in which the Effective Time occurs towards applicable deductibles and annual out-of-pocket limits for expenses incurred prior to the Effective Time. (b) The foregoing notwithstanding, the Surviving Corporation agrees to honor in accordance with their terms all benefits vested as of the Effective Time under the Mercantile Benefit Plans provided that such Mercantile Benefit Plans are maintained and administered after the date hereof not in violation of Section 5.2(f) of this Agreement. (c) Nothing in this Section 6.7 shall be interpreted as preventing the Surviving Corporation from amending, modifying or terminating any Mercantile Benefit Plans, Firstar Benefit Plans, or other contracts, arrangements, commitments or understandings, in accordance with their terms and applicable law. 6.8 Indemnification; Directors' and Officers' Insurance. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any such claim, action, suit, proceeding or investigation in which any individual who is now, or has been at any time prior to the date of this Agreement, or who becomes prior to the Effective Time, a director or officer or employee of Mercantile or any of its Subsidiaries, including any entity specified in the Mercantile Disclosure Schedule (the "Indemnified Parties"), is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he or she is or was a director, officer or employee of Mercantile or any of its Subsidiaries or any entity specified in the Mercantile Disclosure Schedule or any of their respective predecessors or (ii) this Agreement, the Option Agreements or any of the transactions contemplated hereby or thereby, whether in any case asserted or arising before or after the Effective Time, the parties hereto agree to cooperate and use their best efforts to defend against and respond thereto. It is understood and agreed that after the Effective Time, Firstar shall indemnify and hold harmless, as and to the fullest extent permitted by law, each such Indemnified Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorney's fees and expenses in advance of the final disposition of any claim, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by law upon receipt of any undertak- -35- ing required by applicable law), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation. (b) Firstar shall use its reasonable best efforts to cause the individuals serving as officers and directors of Mercantile, its Subsidiaries or any entity specified in the Mercantile Disclosure Schedule immediately prior to the Effective Time to be covered for a period of six years from the Effective Time (or the period of the applicable statute of limitations, if longer) by the directors' and officers' liability insurance policy maintained by Mercantile (provided that Firstar may substitute therefor policies of at least -------- the same coverage and amounts containing terms and conditions that are not less advantageous than such policy) with respect to acts or omissions occurring prior to the Effective Time that were committed by such officers and directors in their capacity as such. (c) In the event Firstar or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Firstar assume the obligations set forth in this Section 6.8. (d) The provisions of this Section 6.8 shall survive the Effective Time and are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives. 6.9 Additional Agreements. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement (including, without limitation, any merger between a Subsidiary of Firstar, on the one hand, and a Subsidiary of Mercantile, on the other hand) or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of any of the parties to the Merger, the proper officers and directors of each party to this Agreement and their respective Subsidiaries shall take all such necessary action as may be reasonably requested by, and at the sole expense of, Firstar. 6.10 Advice of Changes. Mercantile and Firstar shall each promptly advise the other party of any change or event (i) having a Material Adverse Effect on it or (ii) that it believes would or would be reasonably likely to cause or constitute a material breach of any of its representations, warranties or covenants contained herein. 6.11 Dividends. After the date of this Agreement, each of Mercantile and Firstar shall coordinate with the other the declaration of any dividends in respect of Mercantile Common Stock and Firstar Common Stock and the record dates and payment dates relating thereto, it being the intention of the parties hereto that holders of Mercantile Common Stock shall not receive two dividends, or fail to receive one dividend, for any quarter with respect to their shares of Mercantile Common Stock and any shares of Firstar Common Stock any such holder receives in exchange therefor in the Merger. -36- 6.12 Exemption from Liability Under Section 16(b). Assuming that Mercantile delivers to Firstar the Section 16 Information in a timely fashion prior to the Effective Time, the Board of Directors of Firstar, or a committee of Non-Employee Directors thereof (as such term is defined for purposes of Rule 16b-3(d) under the Exchange Act), shall reasonably promptly thereafter and in any event prior to the Effective Time adopt a resolution providing that the receipt by the Mercantile Insiders of Firstar Common Stock in exchange for shares of Mercantile Common Stock, and of options to purchase shares of Firstar Common Stock upon conversion of options to purchase shares of Mercantile Common Stock, in each case pursuant to the transactions contemplated hereby and to the extent such securities are listed in the Section 16 Information, are intended to be exempt from liability pursuant to Section 16(b) under the Exchange Act such that any such receipt shall be so exempt. "Section 16 Information" shall mean information accurate in all respects regarding the Mercantile Insiders, the number of shares of Mercantile Common Stock held by each such Mercantile Insider and expected to be exchanged for Firstar Common Stock in the Merger, and the number and description of the options to purchase shares of Mercantile Common Stock held by each such Mercantile Insider and expected to be converted into options to purchase shares of Firstar Common Stock in connection with the Merger. "Mercantile Insiders" shall mean those officers and directors of Mercantile who are subject to the reporting requirements of Section 16(a) of the Exchange Act and who are listed in the Section 16 Information. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of the parties to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) Shareholder Approval. This Agreement and the transactions contemplated hereby shall have been approved by the respective requisite affirmative votes of the holders of Firstar Common Stock and Mercantile Common Stock entitled to vote thereon. (b) NYSE Listing. The shares of Firstar Common Stock that shall be issued to the shareholders of Mercantile upon consummation of the Merger shall have been authorized for listing on the NYSE, subject to official notice of issuance. (c) Other Approvals. All regulatory approvals required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired (all such approvals and the expiration of all such waiting periods being referred to herein as the "Requisite Regulatory Approvals"). -37- (d) S-4. The S-4 shall have become effective under the Securities Act and no stop order suspending the effectiveness of the S-4 shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. (e) No Injunctions or Restraints; Illegality. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Entity that prohibits, materially restricts or makes illegal consummation of the Merger. (f) Federal Tax Opinion. The parties hereto shall each have received the opinion of Wachtell, Lipton, Rosen & Katz, in form and substance reasonably satisfactory to Mercantile and Firstar, dated the Closing Date, substantially to the effect that, on the basis of facts, representations and assumptions set forth in each such opinion that are consistent with the state of facts existing at the Effective Time: (i) The Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and Mercantile and Firstar will each be a party to the reorganization within the meaning of Section 368(b) of the Code; (ii) No gain or loss will be recognized by Mercantile or Firstar as a result of the Merger; and (iii) No gain or loss will be recognized by shareholders of Mercantile who exchange all of their Mercantile Common Stock solely for Firstar Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Firstar Common Stock). In rendering such opinions, counsel may require and rely upon representations contained in certificates of officers of Mercantile, Firstar and others. (g) Pooling of Interests. Mercantile and Firstar shall each have received a letter from their respective independent accountants addressed to Firstar or Mercantile, as the case may be, to the effect that the Merger will qualify for "pooling of interests" accounting treatment. 7.2 Conditions to Obligations of Mercantile. The obligation of Mercantile to effect the Merger is also subject to the satisfaction, or waiver by Mercantile, at or prior to the Effective Time, of the following conditions: (a) Representations and Warranties. The representations and warranties of Firstar set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the -38- Closing Date; provided, however, that for purposes of this -------- ------- paragraph, such representations and warranties (other than the representations set forth in Sections 3.2(a), 3.8(a) or 3.17) shall be deemed to be true and correct unless the failure or failures of such representations and warranties to be so true and correct, either individually or in the aggregate, and without giving effect to any qualification as to materiality or Material Adverse Effect set forth in such representations or warranties, has had or will have a Material Adverse Effect on Firstar or the Surviving Corporation. Mercantile shall have received a certificate signed on behalf of Firstar by the Chief Executive Officer and the Chief Financial Officer of Firstar to the foregoing effect. (b) Performance of Obligations of Firstar. Firstar shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Mercantile shall have received a certificate signed on behalf of Firstar by the Chief Executive Officer and the Chief Financial Officer of Firstar to such effect. 7.3 Conditions to Obligations of Firstar. The obligation of Firstar to effect the Merger is also subject to the satisfaction or waiver by Firstar at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Mercantile set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, provided, however, -------- ------- that for purposes of this paragraph, such representations and warranties (other than the representations set forth in Section 4.2(a), 4.8(a) or 4.17) shall be deemed to be true and correct unless the failure or failures of such representations and warranties to be so true and correct, either individually or in the aggregate, and without giving effect to any qualification as to materiality set forth in such representations or warranties, has had or will have a Material Adverse Effect on Mercantile. Firstar shall have received a certificate signed on behalf of Mercantile by the Chief Executive Officer and the Chief Financial Officer of Mercantile to the foregoing effect. (b) Performance of Obligations of Mercantile. Mercantile shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Firstar shall have received a certificate signed on behalf of Mercantile by the Chief Executive Officer and the Chief Financial Officer of Mercantile to such effect. -39- ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the shareholders of Mercantile or Firstar: (a) by mutual consent of Mercantile and Firstar in a written instrument, if the Board of Directors of each so determines by a vote of a majority of the members of its entire Board; (b) by either the Board of Directors of Mercantile or the Board of Directors of Firstar if (i) any Governmental Entity that must grant a Requisite Regulatory Approval has denied approval of the Merger and such denial has become final and nonappealable or any Governmental Entity of competent jurisdiction shall have issued a final nonappealable order permanently enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement or (ii) any shareholder approval required by Section 7.1(a) is not obtained at shareholder meetings duly convened pursuant to Section 6.3 or at any postponement or adjournment thereof; (c) by either the Board of Directors of Mercantile or the Board of Directors of Firstar if the Merger shall not have been consummated on or before the first anniversary of the date of this Agreement, unless the failure of the Closing to occur by such date shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein; or (d) by either the Board of Directors of Mercantile or the Board of Directors of Firstar (provided that the terminating -------- party is not then in breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a breach of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of Firstar, in the case of a termination by Mercantile, or Mercantile, in the case of a termination by Firstar, which breach, either individually or in the aggregate, would constitute, if occurring or continuing on the Closing Date, the failure of the conditions set forth in Section 7.2 or 7.3, as the case may be, and that is not cured within 45 days following written notice to the party committing such breach or by its nature or timing cannot be cured prior to the Closing Date. 8.2 Effect of Termination. In the event of termination of this Agreement by either Mercantile or Firstar as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, and none of Mercantile, Firstar, any of their respective Subsidiaries or any of the officers or directors of any of them shall have any liability of any nature whatsoever hereunder, or in connection with the transactions contemplated hereby, except that (i) Sections 6.2(b), 8.2, 9.2 and 9.3 shall survive any termination of this Agreement, and (ii) notwithstanding anything to the contrary contained in this Agreement, neither Mercantile nor Firstar -40- shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. 8.3 Amendment. Subject to compliance with applicable law and Section 1.1(b), this Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with Merger by the shareholders of Mercantile and Firstar; provided, -------- however, that after any approval of the transactions contemplated by - ------- this Agreement by the respective shareholders of Mercantile or Firstar, there may not be, without further approval of such shareholders, any amendment of this Agreement that changes the amount or the form of the consideration to be delivered hereunder to the holders of Mercantile Common Stock, other than as contemplated by this Agreement. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 8.4 Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Board of Directors, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein; provided, however, that after any approval of the -------- ------- transactions contemplated by this Agreement by the respective shareholders of Mercantile or Firstar, there may not be, without further approval of such shareholders, any extension or waiver of this Agreement or any portion thereof that reduces the amount or changes the form of the consideration to be delivered to the holders of Mercantile Common Stock hereunder, other than as contemplated by this Agreement. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE IX GENERAL PROVISIONS 9.1 Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date and at a place to be specified by the parties, which shall be no later than five business days after the satisfaction or waiver (subject to applicable law) of the latest to occur of the conditions set forth in Article VII hereof, unless extended by mutual agreement of the parties (the "Closing Date"). 9.2 Nonsurvival of Representations, Warranties and Agreements. None of the representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement (other than the Option Agreements and the Confidentiality Agreement, which shall terminate in accordance with the terms thereof) shall survive the Effective -41- Time, except for Section 6.8 and for those other covenants and agreements contained herein and therein that by their terms apply in whole or in part after the Effective Time. 9.3 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, provided, however, that -------- ------- the costs and expenses of printing and mailing the Joint Proxy Statement, and all filing and other fees paid to the SEC in connection with the Merger, shall be borne equally by Mercantile and Firstar. 9.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Mercantile, to: Mercantile Bancorporation Inc. P.O. Box 524 St. Louis, Missouri 63166-0524 Attention: Jon W. Bilstrom General Counsel and Secretary Telecopier: (314) 418-1386 and (b) if to Firstar, to: Firstar Corporation 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Jennie P. Carlson Senior Vice President, General Counsel and Secretary Telecopier: 9.5 Interpretation. When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". No provision of this Agreement shall be construed to require Firstar, Mercantile or any of their respective Subsidiaries or affiliates to take or fail to take any action, including, without limitation, the disclosure or non- disclosure by either party of any information to its shareholders, that would (or its failure to take would) reasonably be expected to violate any applicable statue, law, legal duty, rule or regulation. -42- 9.6 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 9.7 Entire Agreement. This Agreement (including the documents and the instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof other than the Option Agreements and the Confidentiality Agreement. 9.8 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York, without regard to any applicable conflicts of law principles. 9.9 Publicity. Except as otherwise required by applicable law or the rules of the NYSE, neither Mercantile or Firstar shall, or shall permit any of its Subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to, or otherwise make any public statement concerning, the transactions contemplated by this Agreement without the consent of Firstar, in the case of a proposed announcement or statement by Mercantile, or Mercantile, in the case of a proposed announcement or statement by Firstar, which consent shall not be unreasonably withheld. 9.10 Assignment; Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Except as otherwise specifically provided in Section 6.8, this Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 9.11 Certain Agreements of the Surviving Corporation. Pursuant to Section 458 of the MBCL, and effective at the Effective Time, the Surviving Corporation agrees that (i) it will promptly pay to the holders of Dissenting Shares the amount, if any, to which they shall be entitled under the provisions of the MBCL with respect to the rights of dissenting shareholders, and (ii) it may be served with process in Missouri, and hereby irrevocably appoints the Missouri Secretary as its agent to accept service of process, in any proceeding based upon any cause of action against Mercantile arising in Missouri prior to the issuance of the Missouri Articles by the Missouri Secretary, and in any proceeding for the enforcement of rights of a holder of Dissenting Shares as such against the Surviving Corporation. -43- IN WITNESS WHEREOF, Mercantile and Firstar have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. FIRSTAR CORPORATION By: /s/ JERRY A. GRUNDHOFER --------------------------------------- Jerry A. Grundhofer President and Chief Executive Officer MERCANTILE BANCORPORATION INC. By: /s/ THOMAS H. JACOBSEN --------------------------------------- Thomas H. Jacobsen Chairman of the Board, President and Chief Executive Officer [Agreement and Plan of Merger] -44- EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,210,972 291,561 366,270 188,069 9,308,727 81,906 83,512 22,476,999 309,048 35,578,819 24,722,397 2,730,375 618,514 4,406,070 0 0 1,578 3,099,885 35,578,819 431,903 148,335 6,700 586,938 216,638 302,709 284,229 7,479 12,963 225,354 177,840 118,037 0 0 118,037 0.75 0.74 3.61 107,072 65,647 1,443 0 308,890 12,742 5,421 309,048 309,048 0 0 Only reported at fiscal year-end date.
EX-99.1 4 STOCK OPTION AGREEMENT THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED STOCK OPTION AGREEMENT, dated April 30, 1999, between Firstar Corporation, a Wisconsin corporation ("Issuer"), and Mercantile Bancorporation Inc., a Missouri corporation ("Grantee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto immediately prior to this Stock Option Agreement (this "Agreement"); and WHEREAS, as a condition to Grantee's entering into the Merger Agreement and in consideration therefor and for Grantee's entering into the Mercantile Option Agreement, Issuer has agreed to grant Grantee the Option (as hereinafter defined); NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 65,460,210 fully paid and nonassessable shares of Issuer's common stock, par value $0.01 per share ("Common Stock"), at a price of $31.56 per share (the "Option Price"); provided, however, that in no -------- ------- event shall the number of shares of Common Stock for which this Option is exercisable exceed 9.9% of the Issuer's issued and outstanding shares of Common Stock without giving effect to any shares subject to or issued pursuant to the Option. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. (b) In the event that any additional shares of Common Stock are either (i) issued or otherwise become outstanding after the date of this Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased, retired or otherwise cease to be outstanding after the date of the Agreement, the number of shares of Common Stock subject to the Option shall be increased or decreased, as appropriate, so that, after such issuance, such number equals 9.9% of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to breach any provision of the Merger Agreement. 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or part, and from time to time, if, but only if, both an Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined) shall have occurred prior to the occurrence of an Exercise Termination Event (as hereinafter defined), provided that the Holder shall have sent the written notice -------- of such exercise (as provided in subsection (e) of this Section 2) within 90 days following such Subsequent Triggering Event. Each of the following shall be an "Exercise Termination Event": (i) the Effective Time (as defined in the Merger Agreement) of the Merger; (ii) termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event, except a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non-volitional); or (iii) the passage of 12 months after termination of the Merger Agreement if such termination follows the occurrence of an Initial Triggering Event or is a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non-volitional) (provided that if an Initial Triggering -------- Event continues or occurs beyond such termination and prior to the passage of such 12-month period, the Exercise Termination Event shall be 12 months from the expiration of the Last Triggering Event but in no event more than 18 months after such termination). The "Last Triggering Event" shall mean the last Initial Triggering Event to expire. The term "Holder" shall mean the holder or holders of the Option. (b) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"), without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as hereinafter defined) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the shareholders of Issuer approve or accept any Acquisition Transaction. For purposes of this Agreement, "Acquisition Transaction" shall mean (w) a merger or consolidation, or any similar transaction, involving Issuer or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer, (x) a purchase, lease or other acquisition or assumption of all or a substantial portion of the assets or deposits of Issuer or any Significant Subsidiary of Issuer, (y) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing 10% or more of the voting power of Issuer, or (z) any substantially similar transaction; provided, however, that in no event shall any -------- ------- merger, consolidation, purchase or similar transaction involving only the Issuer and one or 2 more of its Subsidiaries or involving only any two or more of such Subsidiaries, provided that any such transaction is not entered -------- into in violation of the terms of the Merger Agreement, be deemed to be an Acquisition Transaction; (ii) Issuer or any Issuer Subsidiary, without having received Grantee's prior written consent, shall have authorized, recommended, proposed or publicly announced its intention to authorize, recommend or propose, to engage in an Acquisition Transaction with any person other than Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly withdrawn or modified, or publicly announced its interest to withdraw or modify, in any manner adverse to Grantee, its recommendation that the shareholders of Issuer approve the transactions contemplated by the Merger Agreement in anticipation of engaging in an Acquisition Transaction; (iii) Any person other than Grantee, any Grantee Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of its business shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Common Stock (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and regulations thereunder); (iv) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its shareholders by public announcement or written communication that is or becomes the subject of public disclosure to engage in an Acquisition Transaction; (v) After an overture is made by a third party to Issuer or its shareholders to engage in an Acquisition Transaction, Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach (x) would entitle Grantee to terminate the Merger Agreement and (y) shall not have been cured prior to the Notice Date (as hereinafter defined); or (vi) Any person other than Grantee or any Grantee Subsidiary, other than in connection with a transaction to which Grantee has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. (c) The term "Subsequent Triggering Event" shall mean either of the following events or transactions occurring after the date hereof: (i) The acquisition by any person of beneficial ownership of 20% or more of the then-outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in paragraph (i) of subsection (b) of this Section 2, except that the percentage referred to in clause (y) shall be 20%. 3 (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event of which it has notice (together, a "Triggering Event"), it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the Option. (e) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 60 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to -------- or approval of the Federal Reserve Board or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. (f) At the closing referred to in subsection (e) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer, provided that failure or refusal of Issuer to -------- designate such a bank account shall not preclude the Holder from exercising the Option. (g) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (f) of this Section 2, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to Issuer a copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (h) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Issuer and to resale restrictions arising under the Securities Act of 1933, as amended. A copy of such agreement is on file at the principal office of Issuer and will be provided to the holder hereof without charge upon receipt by Issuer of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to 4 Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance reasonably satisfactory to Issuer, to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the written notice of exercise of the Option provided for under subsection (e) of this Section 2 and the tender of the applicable purchase price in immediately available funds, the Holder shall be deemed, subject to the receipt of applicable regulatory approvals, to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock; (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all action as may from time to time be required (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. Section 18a and regulations promulgated thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as amended (the "BHCA"), or the Change in Bank Control Act of 1978, as amended, or any state banking law, prior approval of or notice to the Federal Reserve Board or to any state regulatory authority is necessary before the Option may be exercised, cooperating fully with the Holder in preparing such applications or notices and providing such information to the Federal Reserve Board or such state regulatory authority as they may require) in order to permit the Holder to exercise the Option and Issuer duly and effectively to issue shares of Common Stock pursuant hereto; and (iv) promptly to take all action provided herein to protect the rights of the Holder against dilution. 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Com- 5 mon Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. 5. In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 1 of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option and the Option Price shall be subject to adjustment from time to time as provided in this Section 5. In the event of any change in, or distributions in respect of, the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares, distributions on or in respect of the Common Stock, or the like, the type and number of shares of Common Stock purchasable upon exercise hereof and the Option Price shall be appropriately adjusted in such manner as shall fully preserve the economic benefits provided hereunder and proper provision shall be made in any agreement governing any such transaction to provide for such proper adjustment and the full satisfaction of the Issuer's obligations hereunder. 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, Issuer shall, at the request of Grantee delivered within 90 days of such Subsequent Triggering Event (whether on its own behalf or on behalf of any subsequent holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current a shelf registration statement under the 1933 Act covering this Option and any shares issued and issuable pursuant to this Option and shall use its reasonable best efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of this Option and any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee. Issuer will use its reasonable best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand two such registrations. The foregoing notwithstanding, if, at the time of any request by Grantee for registration of the Option or Option Shares as provided above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Holder's Option or Option Shares would interfere with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; and provided, however, that -------- ------- after any such required reduction the number of Option 6 Shares to be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be sold by the Holder and Issuer in the aggregate; and provided further, -------- ------- however, that if such reduction occurs, then the Issuer shall file a - ------- registration statement for the balance as promptly as practical and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in secondary offering underwriting agreements for the Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer agrees to send a copy thereof to any other person known to Issuer to be entitled to registration rights under this Section 6, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies. Notwithstanding anything to the contrary contained herein, in no event shall Issuer be obligated to effect more than two registrations pursuant to this Section 6 by reason of the fact that there shall be more than one Grantee as a result of any assignment or division of this Agreement. 7. (a) Immediately prior to the occurrence of a Repurchase Event (as hereinafter defined), (i) following a request of the Holder, delivered prior to an Exercise Termination Event, Issuer (or any successor thereto) shall repurchase the Option from the Holder at a price (the "Option Repurchase Price") equal to the amount by which (A) the Market/Offer Price (as hereinafter defined) exceeds (B) the Option Price, multiplied by the number of shares for which this Option may then be exercised and (ii) at the request of the owner of Option Shares from time to time (the "Owner"), delivered within 90 days of such occurrence (or such later period as provided in Section 10), Issuer shall repurchase such number of the Option Shares from the Owner as the Owner shall designate at a price (the "Option Share Repurchase Price") equal to the Market/Offer Price multiplied by the number of Option Shares so designated. The term "Market/Offer Price" shall mean the highest of (i) the price per share of Common Stock at which a tender offer or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by any third party pursuant to an agreement with Issuer, (iii) the highest closing price for shares of Common Stock within the six-month period immediately preceding the date the Holder gives notice of the required repurchase of this Option or the Owner gives notice of the required repurchase of Option Shares, as the case may be, or (iv) in the event of a sale of all or a substantial portion of Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining assets of Issuer as determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, and reasonably acceptable to the Issuer, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the Market/Offer Price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm selected by the Holder or Owner, as the case may be, and reasonably acceptable to the Issuer. (b) The Holder and the Owner, as the case may be, may exercise its right to require Issuer to repurchase the Option and any Option Shares pursuant to this Section 7 by surrendering for such purpose to Issuer, at its principal office, a copy of this Agreement or 7 certificates for Option Shares, as applicable, accompanied by a written notice or notices stating that the Holder or the Owner, as the case may be, elects to require Issuer to repurchase this Option and/or the Option Shares in accordance with the provisions of this Section 7. Within the latter to occur of (x) five business days after the surrender of the Option and/or certificates representing Option Shares and the receipt of such notice or notices relating thereto and (y) the time that is immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered to the Holder the Option Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor or the portion thereof, if any, that Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that Issuer is prohibited under applicable law or regulation from repurchasing the Option and/or the Option Shares in full, Issuer shall immediately so notify the Holder and/or the Owner and thereafter deliver or cause to be delivered, from time to time, to the Holder and/or the Owner, as appropriate, the portion of the Option Repurchase Price and the Option Share Repurchase Price, respectively, that it is no longer prohibited from delivering, within five business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer at any time after -------- ------- delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited under applicable law or regulation from delivering to the Holder and/or the Owner, as appropriate, the Option Repurchase Price and the Option Share Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its best efforts to obtain all required regulatory and legal approvals and to file any required notices, in each case as promptly as practicable in order to accomplish such repurchase), the Holder or Owner may revoke its notice of repurchase of the Option or the Option Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder and/or the Owner, as appropriate, that portion of the Option Repurchase Price or the Option Share Repurchase Price that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Holder, a new Stock Option Agreement evidencing the right of the Holder to purchase that number of shares of Common Stock obtained by multiplying the number of shares of Common Stock for which the surrendered Stock Option Agreement was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Option Repurchase Price less the portion thereof theretofore delivered to the Holder and the denominator of which is the Option Repurchase Price, or (B) to the Owner, a certificate for the Option Shares it is then so prohibited from repurchasing. (d) For purposes of this Section 7, a Repurchase Event shall be deemed to have occurred (i) upon the consummation of any merger, consolidation or similar transaction involving Issuer or any purchase, lease or other acquisition of all or a substantial portion of the assets of Issuer, other than any such transaction which would not constitute an Acquisition Transaction pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition by any person of beneficial ownership of 50% or more of the then outstanding shares of Common Stock, provided that no such event shall constitute a -------- Repurchase Event unless a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event. The parties hereto agree that Issuer's obligations to repurchase the Option or Option Shares under this Section 7 shall not terminate upon the occurrence of an Exercise Termination Event unless no 8 Subsequent Triggering Event shall have occurred prior to the occurrence of an Exercise Termination Event. 8. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its Subsidiaries, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding voting shares and voting share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or one of its Subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation. (b) The following terms have the meanings indicated: (i) "Acquiring Corporation" shall mean (A) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer is the continuing or surviving person, and (C) the transferee of all or substantially all of Issuer's assets. (ii) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (iii) "Assigned Value" shall mean the Market/Offer Price, as defined in Section 7. (iv) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is the -------- issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company that controls or is controlled by such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, -------- for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or 9 Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, and reasonably acceptable to the Acquiring Corporation. (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder. 9. (a) At the request of the holder of the Substitute Option (the "Substitute Option Holder"), the Substitute Option Issuer shall repurchase the Substitute Option from the Substitute Option Holder at a price (the "Substitute Option Repurchase Price") equal to the amount by which (i) the Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by the number of shares of Substitute Common Stock for which the Substitute Option may then be exercised, and at the request of the owner (the "Substitute Share Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase the Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to the Highest Closing Price multiplied by the number of Substitute Shares so designated. The term "Highest Closing Price" shall mean the highest closing price for shares of Substitute Common Stock within the six-month period immediately preceding the date the Substitute Option Holder gives notice of the required repurchase of the Substitute Option or the Substitute Share Owner gives notice of the required repurchase of the Substitute Shares, as applicable. (b) The Substitute Option Holder and the Substitute Share Owner, as the case may be, may exercise its respective right to require the Substitute Option Issuer to repur- 10 chase the Substitute Option and the Substitute Shares pursuant to this Section 9 by surrendering for such purpose to the Substitute Option Issuer, at its principal office, the agreement for such Substitute Option (or, in the absence of such an agreement, a copy of this Agreement) and certificates for Substitute Shares accompanied by a written notice or notices stating that the Substitute Option Holder or the Substitute Share Owner, as the case may be, elects to require the Substitute Option Issuer to repurchase the Substitute Option and/or the Substitute Shares in accordance with the provisions of this Section 9. As promptly as practicable, and in any event within five business days after the surrender of the Substitute Option and/or certificates representing Substitute Shares and the receipt of such notice or notices relating thereto, the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price and/or to the Substitute Share Owner the Substitute Share Repurchase Price therefor or, in either case, the portion thereof which the Substitute Option Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Substitute Option Issuer is prohibited under applicable law or regulation from repurchasing the Substitute Option and/or the Substitute Shares in part or in full, the Substitute Option Issuer following a request for repurchase pursuant to this Section 9 shall immediately so notify the Substitute Option Holder and/or the Substitute Share Owner and thereafter deliver or cause to be delivered, from time to time, to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the portion of the Substitute Share Repurchase Price, respectively, which it is no longer prohibited from delivering, within five business days after the date on which the Substitute Option Issuer is no longer so prohibited; provided, however, -------- ------- that if the Substitute Option Issuer is at any time after delivery of a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited under applicable law or regulation from delivering to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, in full (and the Substitute Option Issuer shall use its best efforts to obtain all required regulatory and legal approvals, in each case as promptly as practicable, in order to accomplish such repurchase), the Substitute Option Holder or Substitute Share Owner may revoke its notice of repurchase of the Substitute Option or the Substitute Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute Option Holder or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price or the Substitute Share Repurchase Price that the Substitute Option Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new Substitute Option evidencing the right of the Substitute Option Holder to purchase that number of shares of the Substitute Common Stock obtained by multiplying the number of shares of the Substitute Common Stock for which the surrendered Substitute Option was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Substitute Option Repurchase Price less the portion thereof theretofore delivered to the Substitute Option Holder and the denominator of which is the Substitute Option Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the Substitute Common Shares it is then so prohibited from repurchasing. 11 10. The 90-day, or 6-month periods for exercise of certain rights under Sections 2, 6, 7, 13 and 15 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights, for the expiration of all statutory waiting periods; (ii) to the extent necessary to avoid liability under Section 16(b) of the 1934 Act by reason of such exercise; and (iii) during any period in which Grantee is precluded from exercising such rights due to an injunction or other legal restriction, plus in each case such additional period as is reasonably necessary for the exercise of such rights promptly following the obtaining of such approvals or the expiration of such periods. 11. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. (c) Issuer has taken all action (including if required redeeming all of the Firstar Shareholder Rights or amending or terminating the Firstar Rights Agreement) so that the entering into of this Option Agreement, the acquisition of shares of Common Stock hereunder and the other transactions contemplated hereby do not and will not result in the grant of any rights to any person under the Firstar Rights Agreement or enable or require the Rights to be exercised, distributed or triggered. 12. Grantee hereby represents and warrants to Issuer that: (a) Grantee has all requisite corporate power and authority to enter into this Agreement and, subject to any approvals or consents referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grantee. This Agreement has been duly executed and delivered by Grantee. (b) The Option is not being, and any shares of Common Stock or other securities acquired by Grantee upon exercise of the Option will not be, acquired with a view to 12 the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the Securities Act. 13. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event, Grantee, subject to the express provisions hereof, may assign in whole or in part its rights and obligations hereunder within 90 days following such Subsequent Triggering Event (or such later period as provided in Section 10); provided, however, that until the date 15 days following the -------- ------- date on which the Federal Reserve Board approves an application by Grantee under the BHCA to acquire the shares of Common Stock subject to the Option, Grantee may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single party (e.g., ---- a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board. 14. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation making application to list the shares of Common Stock issuable hereunder on the New York Stock Exchange upon official notice of issuance and applying to the Federal Reserve Board under the BHCA for approval to acquire the shares issuable hereunder, but Grantee shall not be obligated to apply to state banking authorities for approval to acquire the shares of Common Stock issuable hereunder until such time, if ever, as it deems appropriate to do so. 15. (a) Grantee in its sole discretion may, at any time during which Issuer would be required to repurchase the Option or any Option Shares pursuant to Section 7, surrender the Option (together with any Option Shares issued to and then owned by the Holder) to Issuer in exchange for a cash payment equal to the Surrender Price (as hereinafter defined); provided, however, that Grantee may not exercise its -------- ------- rights pursuant to this Section 15 if Issuer has previously repurchased the Option (or any portion thereof) or any Option Shares pursuant to Section 7. The "Surrender Price" shall be equal to (i) $250,000,000, plus (ii) if applicable, the aggregate purchase price previously paid pursuant hereto by Grantee with respect to any Option Shares, minus (iii) if applicable, the excess of (A) the net cash, if any, received by Grantee pursuant to the arm's-length sale of Option Shares (or any other securities into which such Option Shares were converted or exchanged) to any party not affiliated with Grantee, over (B) the purchase price paid by Grantee with respect to such Option Shares. (b) Grantee may exercise its right to surrender the Option and any Option Shares pursuant to this Section 15 by surrendering for such purchase to Issuer, at its principal office, a copy of this Agreement, together with certificates for Option Shares, if any, accompanied by a written notice stating (i) that Grantee elects to surrender the Option and Option Shares, if any, in accordance with the provisions of this Section 15 and (ii) the Surrender 13 Price. Within two business days after the surrender of the Option and the Option Shares, if applicable, Issuer shall deliver or cause to be delivered to Grantee the Surrender Price. (c) To the extent that the Issuer is prohibited under applicable law or regulation from paying the Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee and thereafter deliver, or cause to be delivered, from time to time, to Grantee, that portion of the Surrender Price that Issuer is not or no longer prohibited from paying, within two business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer -------- ------- at any time after delivery of a notice of Surrender pursuant to Section 15(b) is prohibited under applicable law or regulation from paying to Grantee the Surrender Price in full, (i) Issuer shall (A) use its best efforts to obtain all required regulatory and legal approvals and to file any required notices as promptly as practicable in order to make such payments, (B) within two business days of the submission or receipt of any documents relating to any such regulatory and legal approvals, provide Grantee with copies of the same, and (C) keep Grantee advised of both the status of any such request for regulatory and legal approvals and any discussions with any relevant regulatory or other third party reasonably related to the same, and (ii) Grantee may revoke such notice of surrender by delivery of a notice of revocation, the Exercise Termination Event shall be extended to a date six months from the date on which the Exercise Termination Event would have occurred if not for the provisions of this Section 15(c) (during which period Grantee may exercise any of its rights hereunder, including any and all rights pursuant to this Section 15). (d) Grantee shall have rights substantially identical to those set forth in paragraphs (a), (b) and (c) of this Section 15 with respect to the Substitute Option and the Substitute Option Issuer during any period in which the Substitute Option Issuer would be required to repurchase the Substitute Option pursuant to Section 9. 16. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 17. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or Issuer or Substitute Option Issuer, as the case may be, is not permitted to repurchase pursuant to Section 7 or Section 9, as the case may be, the full number of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), or Issuer or Substitute Option Issuer is not permitted to pay the full Surrender Price, it is the express intention of Issuer (which shall be binding on the Substitute Option Issuer) to allow the Holder to acquire or to require Issuer or the Substitute Option Issuer, as the case may be, to repurchase such lesser number of shares, or to pay such 14 portion of the Surrender Price, as may be permissible, without any amendment or modification hereof. 18. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 19. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof (except to the extent that mandatory provisions of federal law apply). 20. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 21. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 22. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors except as assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 23. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Merger Agreement. 15 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. FIRSTAR CORPORATION By: /s/ JERRY A. GRUNDHOFER ---------------------------------------- Jerry A. Grundhofer President and Chief Executive Officer MERCANTILE BANCORPORATION INC. By: /s/ THOMAS H. JACOBSEN ---------------------------------------- Thomas H. Jacobsen Chairman of the Board, President and Chief Executive Officer [Firstar Stock Option] 16 EX-99.2 5 STOCK OPTION AGREEMENT THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED STOCK OPTION AGREEMENT, dated April 30, 1999, between Mercantile Bancorporation Inc., a Missouri corporation ("Issuer"), and Firstar Corporation, a Wisconsin corporation ("Grantee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto immediately prior to this Stock Option Agreement (this "Agreement"); and WHEREAS, as a condition to Grantee's entering into the Merger Agreement and in consideration therefor and for Grantee's entering into the Firstar Option Agreement, Issuer has agreed to grant Grantee the Option (as hereinafter defined); NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 31,415,840 fully paid and nonassessable shares of Issuer's common stock, par value $0.01 per Share ("Common Stock"), at a price of $51.25 per share (the "Option Price"); provided, however, that in no -------- ------- event shall the number of shares of Common Stock for which this Option is exercisable exceed 19.9% of the Issuer's issued and outstanding shares of Common Stock without giving effect to any shares subject to or issued pursuant to the Option. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. (b) In the event that any additional shares of Common Stock are either (i) issued or otherwise become outstanding after the date of this Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased, retired or otherwise cease to be outstanding after the date of the Agreement, the number of shares of Common Stock subject to the Option shall be increased or decreased, as appropriate, so that, after such issuance, such number equals 19.9% of the number of shares of Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to breach any provision of the Merger Agreement. 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or part, and from time to time, if, but only if, both an Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined) shall have occurred prior to the occurrence of an Exercise Termination Event (as hereinafter defined), provided that the Holder shall have sent the written notice -------- of such exercise (as provided in subsection (e) of this Section 2) within 90 days following such Subsequent Triggering Event. Each of the following shall be an "Exercise Termination Event": (i) the Effective Time (as defined in the Merger Agreement) of the Merger; (ii) termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event, except a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non-volitional); or (iii) the passage of 12 months after termination of the Merger Agreement if such termination follows the occurrence of an Initial Triggering Event or is a termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise to such right of termination is non-volitional) (provided that if an Initial Triggering -------- Event continues or occurs beyond such termination and prior to the passage of such 12-month period, the Exercise Termination Event shall be 12 months from the expiration of the Last Triggering Event but in no event more than 18 months after such termination). The "Last Triggering Event" shall mean the last Initial Triggering Event to expire. The term "Holder" shall mean the holder or holders of the Option. (b) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"), without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as hereinafter defined) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the shareholders of Issuer approve or accept any Acquisition Transaction. For purposes of this Agreement, "Acquisition Transaction" shall mean (w) a merger or consolidation, or any similar transaction, involving Issuer or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer, (x) a purchase, lease or other acquisition or assumption of all or a substantial portion of the assets or deposits of Issuer or any Significant Subsidiary of Issuer, (y) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing 10% or more of the voting power of Issuer, or (z) any substantially similar transaction; provided, however, that in no event shall any -------- ------- merger, consolidation, purchase or similar transaction involving only the Issuer and one or 2 more of its Subsidiaries or involving only any two or more of such Subsidiaries, provided that any such transaction is not entered into -------- in violation of the terms of the Merger Agreement, be deemed to be an Acquisition Transaction; (ii) Issuer or any Issuer Subsidiary, without having received Grantee's prior written consent, shall have authorized, recommended, proposed or publicly announced its intention to authorize, recommend or propose, to engage in an Acquisition Transaction with any person other than Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly withdrawn or modified, or publicly announced its interest to withdraw or modify, in any manner adverse to Grantee, its recommendation that the shareholders of Issuer approve the transactions contemplated by the Merger Agreement in anticipation of engaging in an Acquisition Transaction; (iii) Any person other than Grantee, any Grantee Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of its business shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Common Stock (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and regulations thereunder); (iv) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its shareholders by public announcement or written communication that is or becomes the subject of public disclosure to engage in an Acquisition Transaction; (v) After an overture is made by a third party to Issuer or its shareholders to engage in an Acquisition Transaction, Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach (x) would entitle Grantee to terminate the Merger Agreement and (y) shall not have been cured prior to the Notice Date (as hereinafter defined); or (vi) Any person other than Grantee or any Grantee Subsidiary, other than in connection with a transaction to which Grantee has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. (c) The term "Subsequent Triggering Event" shall mean either of the following events or transactions occurring after the date hereof: (i) The acquisition by any person of beneficial ownership of 20% or more of the then-outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in paragraph (i) of subsection (b) of this Section 2, except that the percentage referred to in clause (y) shall be 20%. 3 (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event and/or Subsequent Triggering Event of which it has notice (together, a "Triggering Event"), it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the Option. (e) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 60 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior notification to -------- or approval of the Federal Reserve Board or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. (f) At the closing referred to in subsection (e) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer, provided that failure or refusal of Issuer to -------- designate such a bank account shall not preclude the Holder from exercising the Option. (g) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (f) of this Section 2, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to Issuer a copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (h) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Issuer and to resale restrictions arising under the Securities Act of 1933, as amended. A copy of such agreement is on file at the principal office of Issuer and will be provided to the holder hereof without charge upon receipt by Issuer of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to 4 Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance reasonably satisfactory to Issuer, to the effect that such legend is not required for purposes of the 1933 Act; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the written notice of exercise of the Option provided for under subsection (e) of this Section 2 and the tender of the applicable purchase price in immediately available funds, the Holder shall be deemed, subject to the receipt of applicable regulatory approvals, to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock; (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all action as may from time to time be required (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. Section 18a and regulations promulgated thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as amended (the "BHCA"), or the Change in Bank Control Act of 1978, as amended, or any state banking law, prior approval of or notice to the Federal Reserve Board or to any state regulatory authority is necessary before the Option may be exercised, cooperating fully with the Holder in preparing such applications or notices and providing such information to the Federal Reserve Board or such state regulatory authority as they may require) in order to permit the Holder to exercise the Option and Issuer duly and effectively to issue shares of Common Stock pursuant hereto; and (iv) promptly to take all action provided herein to protect the rights of the Holder against dilution. 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Com- 5 mon Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. 5. In addition to the adjustment in the number of shares of Common Stock that are purchasable upon exercise of the Option pursuant to Section 1 of this Agreement, the number of shares of Common Stock purchasable upon the exercise of the Option and the Option Price shall be subject to adjustment from time to time as provided in this Section 5. In the event of any change in, or distributions in respect of, the Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares, distributions on or in respect of the Common Stock, or the like, the type and number of shares of Common Stock purchasable upon exercise hereof and the Option Price shall be appropriately adjusted in such manner as shall fully preserve the economic benefits provided hereunder and proper provision shall be made in any agreement governing any such transaction to provide for such proper adjustment and the full satisfaction of the Issuer's obligations hereunder. 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, Issuer shall, at the request of Grantee delivered within 90 days of such Subsequent Triggering Event (whether on its own behalf or on behalf of any subsequent holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current a shelf registration statement under the 1933 Act covering this Option and any shares issued and issuable pursuant to this Option and shall use its reasonable best efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of this Option and any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee. Issuer will use its reasonable best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand two such registrations. The foregoing notwithstanding, if, at the time of any request by Grantee for registration of the Option or Option Shares as provided above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Holder's Option or Option Shares would interfere with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; and provided, however, that -------- ------- after any such required reduction the number of Option 6 Shares to be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be sold by the Holder and Issuer in the aggregate; and provided further, -------- ------- however, that if such reduction occurs, then the Issuer shall file a - ------- registration statement for the balance as promptly as practical and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in secondary offering underwriting agreements for the Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer agrees to send a copy thereof to any other person known to Issuer to be entitled to registration rights under this Section 6, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies. Notwithstanding anything to the contrary contained herein, in no event shall Issuer be obligated to effect more than two registrations pursuant to this Section 6 by reason of the fact that there shall be more than one Grantee as a result of any assignment or division of this Agreement. 7. (a) Immediately prior to the occurrence of a Repurchase Event (as hereinafter defined), (i) following a request of the Holder, delivered prior to an Exercise Termination Event, Issuer (or any successor thereto) shall repurchase the Option from the Holder at a price (the "Option Repurchase Price") equal to the amount by which (A) the Market/Offer Price (as hereinafter defined) exceeds (B) the Option Price, multiplied by the number of shares for which this Option may then be exercised and (ii) at the request of the owner of Option Shares from time to time (the "Owner"), delivered within 90 days of such occurrence (or such later period as provided in Section 10), Issuer shall repurchase such number of the Option Shares from the Owner as the Owner shall designate at a price (the "Option Share Repurchase Price") equal to the Market/Offer Price multiplied by the number of Option Shares so designated. The term "Market/Offer Price" shall mean the highest of (i) the price per share of Common Stock at which a tender offer or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by any third party pursuant to an agreement with Issuer, (iii) the highest closing price for shares of Common Stock within the six-month period immediately preceding the date the Holder gives notice of the required repurchase of this Option or the Owner gives notice of the required repurchase of Option Shares, as the case may be, or (iv) in the event of a sale of all or a substantial portion of Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining assets of Issuer as determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, and reasonably acceptable to the Issuer, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the Market/Offer Price, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm selected by the Holder or Owner, as the case may be, and reasonably acceptable to the Issuer. (b) The Holder and the Owner, as the case may be, may exercise its right to require Issuer to repurchase the Option and any Option Shares pursuant to this Section 7 by surrendering for such purpose to Issuer, at its principal office, a copy of this Agreement or 7 certificates for Option Shares, as applicable, accompanied by a written notice or notices stating that the Holder or the Owner, as the case may be, elects to require Issuer to repurchase this Option and/or the Option Shares in accordance with the provisions of this Section 7. Within the latter to occur of (x) five business days after the surrender of the Option and/or certificates representing Option Shares and the receipt of such notice or notices relating thereto and (y) the time that is immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered to the Holder the Option Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor or the portion thereof, if any, that Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that Issuer is prohibited under applicable law or regulation from repurchasing the Option and/or the Option Shares in full, Issuer shall immediately so notify the Holder and/or the Owner and thereafter deliver or cause to be delivered, from time to time, to the Holder and/or the Owner, as appropriate, the portion of the Option Repurchase Price and the Option Share Repurchase Price, respectively, that it is no longer prohibited from delivering, within five business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer at any time after -------- ------- delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited under applicable law or regulation from delivering to the Holder and/or the Owner, as appropriate, the Option Repurchase Price and the Option Share Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its best efforts to obtain all required regulatory and legal approvals and to file any required notices, in each case as promptly as practicable in order to accomplish such repurchase), the Holder or Owner may revoke its notice of repurchase of the Option or the Option Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder and/or the Owner, as appropriate, that portion of the Option Repurchase Price or the Option Share Repurchase Price that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Holder, a new Stock Option Agreement evidencing the right of the Holder to purchase that number of shares of Common Stock obtained by multiplying the number of shares of Common Stock for which the surrendered Stock Option Agreement was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Option Repurchase Price less the portion thereof theretofore delivered to the Holder and the denominator of which is the Option Repurchase Price, or (B) to the Owner, a certificate for the Option Shares it is then so prohibited from repurchasing. (d) For purposes of this Section 7, a Repurchase Event shall be deemed to have occurred (i) upon the consummation of any merger, consolidation or similar transaction involving Issuer or any purchase, lease or other acquisition of all or a substantial portion of the assets of Issuer, other than any such transaction which would not constitute an Acquisition Transaction pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition by any person of beneficial ownership of 50% or more of the then outstanding shares of Common Stock, provided that no such event shall constitute a -------- Repurchase Event unless a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event. The parties hereto agree that Issuer's obligations to repurchase the Option or Option Shares under this Section 7 shall not terminate upon the occurrence of an Exercise Termination Event unless no 8 Subsequent Triggering Event shall have occurred prior to the occurrence of an Exercise Termination Event. 8. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its Subsidiaries, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding voting shares and voting share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or one of its Subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation. (b) The following terms have the meanings indicated: (i) "Acquiring Corporation" shall mean (A) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer is the continuing or surviving person, and (C) the transferee of all or substantially all of Issuer's assets. (ii) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (iii) "Assigned Value" shall mean the Market/Offer Price, as defined in Section 7. (iv) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided -------- that if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company that controls or is controlled by such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, -------- for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or 9 Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 19.9% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 19.9% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be, and reasonably acceptable to the Acquiring Corporation. (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder. 9. (a) At the request of the holder of the Substitute Option (the "Substitute Option Holder"), the Substitute Option Issuer shall repurchase the Substitute Option from the Substitute Option Holder at a price (the "Substitute Option Repurchase Price") equal to the amount by which (i) the Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by the number of shares of Substitute Common Stock for which the Substitute Option may then be exercised, and at the request of the owner (the "Substitute Share Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase the Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to the Highest Closing Price multiplied by the number of Substitute Shares so designated. The term "Highest Closing Price" shall mean the highest closing price for shares of Substitute Common Stock within the six-month period immediately preceding the date the Substitute Option Holder gives notice of the required repurchase of the Substitute Option or the Substitute Share Owner gives notice of the required repurchase of the Substitute Shares, as applicable. (b) The Substitute Option Holder and the Substitute Share Owner, as the case may be, may exercise its respective right to require the Substitute Option Issuer to repur- 10 chase the Substitute Option and the Substitute Shares pursuant to this Section 9 by surrendering for such purpose to the Substitute Option Issuer, at its principal office, the agreement for such Substitute Option (or, in the absence of such an agreement, a copy of this Agreement) and certificates for Substitute Shares accompanied by a written notice or notices stating that the Substitute Option Holder or the Substitute Share Owner, as the case may be, elects to require the Substitute Option Issuer to repurchase the Substitute Option and/or the Substitute Shares in accordance with the provisions of this Section 9. As promptly as practicable, and in any event within five business days after the surrender of the Substitute Option and/or certificates representing Substitute Shares and the receipt of such notice or notices relating thereto, the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price and/or to the Substitute Share Owner the Substitute Share Repurchase Price therefor or, in either case, the portion thereof which the Substitute Option Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Substitute Option Issuer is prohibited under applicable law or regulation from repurchasing the Substitute Option and/or the Substitute Shares in part or in full, the Substitute Option Issuer following a request for repurchase pursuant to this Section 9 shall immediately so notify the Substitute Option Holder and/or the Substitute Share Owner and thereafter deliver or cause to be delivered, from time to time, to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the portion of the Substitute Share Repurchase Price, respectively, which it is no longer prohibited from delivering, within five business days after the date on which the Substitute Option Issuer is no longer so prohibited; provided, however, -------- ------- that if the Substitute Option Issuer is at any time after delivery of a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited under applicable law or regulation from delivering to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, in full (and the Substitute Option Issuer shall use its best efforts to obtain all required regulatory and legal approvals, in each case as promptly as practicable, in order to accomplish such repurchase), the Substitute Option Holder or Substitute Share Owner may revoke its notice of repurchase of the Substitute Option or the Substitute Shares either in whole or to the extent of the prohibition, whereupon, in the latter case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute Option Holder or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price or the Substitute Share Repurchase Price that the Substitute Option Issuer is not prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new Substitute Option evidencing the right of the Substitute Option Holder to purchase that number of shares of the Substitute Common Stock obtained by multiplying the number of shares of the Substitute Common Stock for which the surrendered Substitute Option was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Substitute Option Repurchase Price less the portion thereof theretofore delivered to the Substitute Option Holder and the denominator of which is the Substitute Option Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the Substitute Common Shares it is then so prohibited from repurchasing. 11 10. The 90-day or 6-month periods for exercise of certain rights under Sections 2, 6, 7, 13 and 15 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights, and for the expiration of all statutory waiting periods; (ii) to the extent necessary to avoid liability under Section 16(b) of the 1934 Act by reason of such exercise and (iii) during any period in which Grantee is precluded from exercising such rights due to an injunction or other legal restriction, plus in each case such additional period as is reasonably necessary for the exercise of such rights promptly following the obtaining of such approvals or the expiration of such periods. 11. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. (c) Issuer has taken all action (including if required redeeming all of the Mercantile Shareholder Rights or amending or terminating the Mercantile Rights Agreement) so that the entering into of this Option Agreement, the acquisition of shares of Common Stock hereunder and the other transactions contemplated hereby do not and will not result in the grant of any rights to any person under the Mercantile Rights Agreement or enable or require the Rights to be exercised, distributed or triggered. 12. Grantee hereby represents and warrants to Issuer that: (a) Grantee has all requisite corporate power and authority to enter into this Agreement and, subject to any approvals or consents referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Grantee. This Agreement has been duly executed and delivered by Grantee. (b) The Option is not being, and any shares of Common Stock or other securities acquired by Grantee upon exercise of the Option will not be, acquired with a view to 12 the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the Securities Act. 13. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event, Grantee, subject to the express provisions hereof, may assign in whole or in part its rights and obligations hereunder within 90 days following such Subsequent Triggering Event (or such later period as provided in Section 10); provided, however, that until the date 15 days following the -------- ------- date on which the Federal Reserve Board approves an application by Grantee under the BHCA to acquire the shares of Common Stock subject to the Option, Grantee may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single party (e.g., ---- a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board. 14. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation making application to list the shares of Common Stock issuable hereunder on the New York Stock Exchange upon official notice of issuance and applying to the Federal Reserve Board under the BHCA for approval to acquire the shares issuable hereunder, but Grantee shall not be obligated to apply to state banking authorities for approval to acquire the shares of Common Stock issuable hereunder until such time, if ever, as it deems appropriate to do so. 15. (a) Grantee may in its sole discretion, at any time during which Issuer would be required to repurchase the Option or any Option Shares pursuant to Section 7, surrender the Option (together with any Option Shares issued to and then owned by the Holder) to Issuer in exchange for a cash payment equal to the Surrender Price (as hereinafter defined); provided, however, the Grantee may not exercise its rights -------- ------- pursuant to this Section 15 if Issuer has previously repurchased the Option (or any portion thereof) or any Option Shares pursuant to Section 7. The "Surrender Price" shall be equal to (i) $250,000,000, plus (ii) if applicable, the aggregate purchase price previously paid pursuant hereto by Grantee with respect to any Option Shares, minus (iii) if applicable, the excess of (A) the net cash, if any, received by Grantee pursuant to the arm's-length sale of Option Shares (or any other securities into which such Option Shares were converted or exchanged) to any party not affiliated with Grantee, over (B) the purchase price paid by Grantee with respect to such Option Shares. (b) Grantee may exercise its right to surrender the Option and any Option Shares pursuant to this Section 15 by surrendering for such purpose to Issuer, at its principal office, a copy of this Agreement, together with certificates for Option Shares, if any, accompanied by a written notice stating (i) that Grantee elects to surrender the Option and Option Shares, if any, in accordance with the provisions of this Section 15 and (ii) the Surrender 13 Price. Within two business days after the surrender of the Option and the Option Shares, if applicable, Issuer shall deliver or cause to be delivered to Grantee the Surrender Price. (c) To the extent that the Issuer is prohibited under applicable law or regulation from paying the Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee and thereafter deliver, or cause to be delivered, from time to time, to Grantee, that portion of the Surrender Price that Issuer is not or no longer prohibited from paying, within two business days after the date on which Issuer is no longer so prohibited; provided, however, that if Issuer -------- ------- at any time after delivery of a notice of surrender pursuant to Section 15(b) is prohibited under applicable law or regulation from paying to Grantee the Surrender Price in full, (i) Issuer shall (A) use its best efforts to obtain all required regulatory and legal approvals and to file any required notices as promptly as practicable in order to make such payments, (B) within two business days of the submission or receipt of any documents relating to any such regulatory and legal approvals, provide Grantee with copies of the same, and (C) keep Grantee advised of both the status of any such request for regulatory and legal approvals and any discussions with any relevant regulatory or other third party reasonably related to the same, and (ii) Grantee may revoke such notice or surrender by delivery of a notice of revocation to Issuer and, upon delivery of such notice of revocation, the Exercise Termination Event shall be extended to a date six months from the date on which the Exercise Termination Event would have occurred if not for the provisions of this Section 15(c) (during which period Grantee may exercise any of its rights hereunder, including any and all rights pursuant to this Section 15). (d) Grantee shall have rights substantially identical to those set forth in paragraphs (a), (b) and (c) of this Section 15 with respect to the Substitute Option and the Substitute Option Issuer during any period in which the Substitute Option Issuer would be required to repurchase the Substitute Option pursuant to Section 9. 16. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 17. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or Issuer or Substitute Option Issuer, as the case may be, is not permitted to repurchase pursuant to Section 7 or Section 9, as the case may be, the full number of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), or Issuer or Substitute Option Issuer is not permitted to pay the full amount of the Surrender Price pursuant to Section 15, it is the express intention of Issuer (which shall be binding on the Substitute Option Issuer) to allow the Holder to acquire or to require Issuer or Substitute Option Issuer to repurchase such lesser number of shares, or 14 to require Issuer or Substitute Option Issuer to pay such portion of the Surrender Price, as may be permissible, without any amendment or modification hereof. 18. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 19. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof (except to the extent that mandatory provisions of federal law apply). 20. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 21. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 22. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors except as assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 23. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Merger Agreement. 15 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. MERCANTILE BANCORPORATION INC. By: /s/ THOMAS H. JACOBSEN ---------------------------------- Thomas H. Jacobsen Chairman of the Board, President and Chief Executive Officer FIRSTAR CORPORATION By: /s/ JERRY A. GRUNDHOFER ---------------------------------- Jerry A. Grundhofer President and Chief Executive Officer [Mercantile Stock Option] -----END PRIVACY-ENHANCED MESSAGE-----