UNION PLANTERS CORP, S-4/A, 1998-06-19

UNION PLANTERS CORP
S-4/A, 1998-06-19
NATIONAL COMMERCIAL BANKS

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<PAGE> 1
As filed with the Securities and Exchange Commission on April 10, 1998
Registration No. 333-49959

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

UNION PLANTERS CORPORATION
(Exact name of registrant as specified in its charter)

TENNESSEE 6712 62-0859007
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code Number)

7130 GOODLETT FARMS PARKWAY
MEMPHIS, TENNESSEE 38018
(901) 580-6000
(Address, including zip code, and telephone number of
registrant's principal executive offices)

E. JAMES HOUSE, JR, ESQ.,
SECRETARY AND MANAGER OF THE LEGAL DEPARTMENT OF
UNION PLANTERS CORPORATION
7130 GOODLETT FARMS PARKWAY
MEMPHIS, TENNESSEE 38018
(901) 580-6495
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

COPIES TO:

R. NASH NEYLAND, ESQ. ROBERT E. CRAWFORD, JR. ESQ.
Wyatt, Tarrant & Combs Winstead Sechrest & Minick P.C.
6075 Poplar Avenue, Suite 650 5400 Renaissance Tower, 1201 Elm Street
Memphis, Tennessee 38119 Dallas, Texas 75270
(901) 537-1000 (214) 745-5390

Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT (2) PRICE (2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,019,825
Common Stock, $5.00, par Shares (with
value per share, Preferred Share Rights) $ 29.71 $ 60,009,000.75 $ 17,702.65
(and associated Preferred
Share Rights)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

- ----------
(1) This Registration Statement covers the maximum number of shares of common
stock of the Registrant which is expected to be issued in connection with
the merger described herein.

(2) Estimated solely for the purpose of calculating the registration fee and
based, pursuant to Rule 457(f)(2) under the Securities Act of 1933, as
amended, on the book value per share of the Common Stock of Merchants
Bancshares, Inc. as of the latest practicable date prior to filing this
Registration Statement.

(3) This Amendment No. 1 registers 67,360 additional shares pursuant to Rule
462(b). Additional Registration Fee of $590.37 paid with this
Pre-Effective Amendment No. 1.

DELAYING AMENDMENT

The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2

MERCHANTS BANCSHARES, INC.
5005 WOODWAY, SUITE 300
HOUSTON, TEXAS 77056

TO THE SHAREHOLDERS OF MERCHANTS BANCSHARES, INC. June __, 1998

You are cordially invited to attend a special meeting of the
shareholders (the "Special Meeting") of Merchants Bancshares, Inc. ("Merchants")
to be held at Merchants Bank - Tanglewood, located at 5005 Woodway, Houston,
Texas, at 10:00 a.m., local time, on July 30, 1998, notice of which is enclosed.

At the Special Meeting, you will be asked to consider and vote on a
proposal to approve the Agreement and Plan of Merger, as amended (the
"Agreement") and a related Amended and Restated Plan of Merger (the "Plan of
Merger"), by and between Merchants, Union Planters Corporation, a Tennessee
corporation ("UPC"), and Union Planters Holding Corporation ("UP Holding"), a
Tennessee corporation which is a wholly-owned subsidiary of UPC. Pursuant to the
Agreement and the Plan of Merger Merchants will merge (the "Merger") with and
into UP Holding, with the effect that UP Holding will be the surviving
corporation resulting from the Merger. Upon consummation of the Merger, each
share of Merchants common stock issued and outstanding (excluding shares held by
Merchants or UPC, or their respective subsidiaries, in each case other than
shares held in a fiduciary capacity or as a result of debts previously
contracted, and excluding shares held by dissenting shareholders) will be
converted into and exchanged for the right to receive 1.0345 shares of UPC
common stock and the associated Preferred Share Rights (as defined in the
accompanying Proxy Statement/Prospectus), subject to possible adjustment as
described in the accompanying Proxy Statement/Prospectus, with cash being paid
in lieu of issuing fractional shares. Under certain circumstances more fully
described in the accompanying Proxy Statement/Prospectus, Merchants may
terminate the Merger if the average closing price of UPC Common Stock on the New
York Stock Exchange falls below $49.62. The Board of Directors of Merchants has
no current intention of waiving its right to terminate the Merger in such
circumstances without resoliciting the shareholders of Merchants. The
accompanying Proxy Statement/Prospectus sets forth certain of the factors which
the Board of Directors of Merchants will consider in deciding whether to
exercise its right to terminate the Merger under those circumstances.

Enclosed are the (i) Notice of Special Meeting, (ii) Proxy
Statement/Prospectus, (iii) proxy card for the Special Meeting and (iv)
pre-addressed return envelope for the proxy card. The Proxy Statement/Prospectus
describes in more detail the Agreement, the Plan of Merger, and the proposed
Merger, including a description of your rights as a shareholder of Merchants to
exercise statutory dissenters' rights, the conditions to consummation of the
Merger and the effects of the Merger on the rights of Merchants' shareholders.
Please read these materials carefully and consider thoughtfully the information
set forth in them.

Price Waterhouse LLP Corporate Finance Group, Merchants' financial
advisor, has issued an opinion to your Board of Directors dated as of May 26,
1998 regarding the fairness, from a financial point of view, of the
consideration to be paid by UPC pursuant to the Agreement. A copy of the opinion
is attached as Appendix C to the Proxy Statement/Prospectus.

THE BOARD OF DIRECTORS OF MERCHANTS HAS UNANIMOUSLY APPROVED AND
ADOPTED THE AGREEMENT AND THE PLAN OF MERGER AND CONSUMMATION OF THE MERGER
CONTEMPLATED THEREBY, AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT
AND THE PLAN OF MERGER.

Approval of the Agreement and the Plan of Merger will require the
affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of Merchants common stock entitled to be voted at the Special
Meeting. Whether or not you plan to attend the Special Meeting, you are urged to
complete, sign, and return promptly the enclosed proxy card. If you attend the
Special Meeting, you may vote in person even if you previously returned your
proxy card. The proposed Merger with UPC is a significant step for Merchants and
your vote on this matter is of great importance.

ON BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO VOTE FOR ADOPTION OF
THE AGREEMENT AND THE PLAN OF MERGER BY MARKING THE ENCLOSED PROXY CARD "FOR"
PROPOSAL 1.

I look forward to seeing you at the Special Meeting.

Sincerely,

J.W. Lander, Jr.
President

<PAGE> 3

MERCHANTS BANCSHARES, INC.
5005 WOODWAY, SUITE 300
HOUSTON, TEXAS 77056

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AT 10:00 A.M. ON JULY 30, 1998

NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the
"Special Meeting") of Merchants Bancshares, Inc. ("Merchants") will be held at
Merchants Bank - Tanglewood, located at 5005 Woodway, Houston, Texas 77056, on
July 30, 1998, at, 10:00 a.m., local time, for the following purposes:

1. MERGER. To consider and vote upon a proposal to approve the
Agreement and Plan of Merger, dated as of January 16, 1998, as amended by
Amendment Number 1 thereto dated as of May 26, 1998 (the "Agreement"), and the
related Amended and Restated Plan of Merger (the "Plan of Merger"), by and
between Merchants, Union Planters Corporation, a Tennessee corporation ("UPC"),
and Union Planters Holding Corporation, a Tennessee corporation which is a
wholly-owned subsidiary of UPC ("UP Holding"), pursuant to which (i) Merchants
will merge (the "Merger") with and into UP Holding, with the effect that UP
Holding will be the surviving corporation resulting from the Merger, and (ii)
each share of the $1.00 par value common stock of Merchants ("Merchants Common
Stock") issued and outstanding at the effective time of the Merger (excluding
shares held by Merchants or UPC, or their respective subsidiaries, in each case
other than shares held in a fiduciary capacity or as a result of debts
previously contracted and excluding shares held by dissenting shareholders) will
be converted into and exchanged for the right to receive 1.0345 shares of the
$5.00 par value common stock of UPC, and the associated Preferred Share Rights
(as defined in the accompanying Proxy Statement/Prospectus), subject to possible
adjustment, and cash in lieu of issuing any fractional share. Copies of each of
the Agreement and the Plan of Merger are set forth as Appendix A and Appendix B,
respectively, to the accompanying Proxy Statement/Prospectus and are
incorporated by reference therein.

2. OTHER BUSINESS. To transact such other business as may come properly
before the Special Meeting or any adjournments or postponements of the Special
Meeting.

Only shareholders of record at the close of business on June 1, 1998
will be entitled to receive notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. APPROVAL OF THE AGREEMENT AND THE PLAN OF
MERGER REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF
THE ISSUED AND OUTSTANDING SHARES OF MERCHANTS COMMON STOCK ENTITLED TO BE VOTED
AT THE SPECIAL MEETING.

Merchants shareholders have the right to dissent from the Merger and to
receive the "fair value" of their shares of Merchants Common Stock in cash,
provided the proper steps are taken to properly "perfect" statutory dissenters'
rights. Statutory dissenters' rights are more fully discussed in various
sections of the accompanying Proxy Statement/Prospectus, and a copy of the Texas
statutes governing statutory dissenters' rights is attached thereto as Appendix
D. Merchants shareholders considering the exercise of their dissenters' rights
should carefully review these materials and information before voting with
respect to the Agreement and Plan of Merger.

THE BOARD OF DIRECTORS OF MERCHANTS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT AND THE PLAN OF MERGER.

BY ORDER OF THE BOARD OF DIRECTORS

Norman H. Bird
Secretary

June __, 1998
Houston, Texas

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE,
AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID RETURN ENVELOPE IN ORDER TO ENSURE THAT YOUR SHARES WILL BE
REPRESENTED AT THE SPECIAL MEETING.

<PAGE> 4

PROSPECTUS
COMMON STOCK, $5.00 PAR VALUE
UNION PLANTERS CORPORATION

PROXY STATEMENT

FOR SPECIAL MEETING OF SHAREHOLDERS OF
MERCHANTS BANCSHARES, INC.

This Prospectus of Union Planters Corporation, a bank holding company
organized and existing under the laws of the State of Tennessee ("UPC"), relates
to up to 2,019,825 shares of common stock, $5.00 par value, of UPC (together
with associated Preferred Share Rights (as defined herein), "UPC Common Stock"),
which are issuable to the shareholders of Merchants Bancshares, Inc., a
corporation organized and existing under the laws of the State of Texas
("Merchants"), upon consummation of the proposed merger (the "Merger") of
Merchants with and into Union Planters Holding Corporation ("UP Holding"), a
corporation organized under the laws of the State of Tennessee, which is a
wholly-owned subsidiary of UPC, with the effect that UP Holding will be the
surviving corporation of the Merger. The Merger will be consummated pursuant to
the terms of the Agreement and Plan of Merger, dated as of January 16, 1998, as
amended by Amendment Number 1 thereto dated as of May 26, 1998 (the
"Agreement"), and the related Amended and Restated Plan of Merger (the "Plan of
Merger"), by and between UPC, Merchants and UP Holding. At the effective time of
the Merger (the "Effective Time"), except as described herein, each issued and
outstanding share of common stock, par value $1.00 per share, of Merchants
("Merchants Common Stock") will be converted into and exchanged for the right to
receive 1.0345 shares of UPC Common Stock, subject to certain possible
adjustments described herein (the "Exchange Ratio"). Cash (without interest)
will be paid in lieu of the issuance of any fractional shares of UPC Common
Stock.

The Exchange Ratio is adjustable upward only if certain conditions
are met concerning the quoted price of UPC Common Stock. The Board of Directors
of Merchants (the "Merchants Board") would likely invoke the adjustment
mechanism in the Agreement if the conditions permit by giving notice of its
election to terminate, in which case UPC must determine whether to proceed with
the Merger at a higher Exchange Ratio and avoid termination. In making this
determination, the principal factors UPC will consider include the projected
effect of the Merger on UPC's pro forma earnings per share and whether UPC's
assessment of Merchants' earning potential as part of UPC justifies the issuance
of an increased number of shares of UPC Common Stock. If UPC declines to adjust
the Exchange Ratio, Merchants may elect to proceed without the adjustment by
withdrawing its election to terminate, although it has no current intention to
so elect without resoliciting the approval of Merchants' shareholders. In making
such determination, the Merchants Board will consider whether the Merger remains
in the best interest of Merchants and its shareholders, despite a decline in the
price of UPC Common Stock, and whether the consideration to be received by the
holders of Merchants Common Stock remains fair from a financial point of view.
See "DESCRIPTION OF TRANSACTION - Possible Adjustment of Exchange Ratio."

This Prospectus also serves as the Proxy Statement of Merchants, and is
being furnished to the shareholders of Merchants in connection with the
solicitation of proxies by the Merchants Board for use at its special meeting of
shareholders (including any adjournment or postponement thereof, the "Special
Meeting"), to be held on July 30, 1998, to consider and vote upon the Agreement
and the Plan of Merger and the transactions contemplated therein. This Proxy
Statement/Prospectus ("Proxy Statement") and related materials enclosed herewith
are being mailed to shareholders of Merchants on or about June __, 1998.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS ACCOUNTS, OR OTHER
OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.

---------------

The date of this Proxy Statement is June__, 1998.

<PAGE> 5

AVAILABLE INFORMATION

Each of UPC and Merchants is subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, is required to file reports, proxy and information
statements, and other information with the Securities and Exchange Commission
(the "SEC"). Copies of such reports, proxy and information statements, and other
information can be obtained, at prescribed rates, from the SEC by addressing
written requests for such copies to the Public Reference Section at the SEC at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition,
such reports, proxy and information statements, and other information can be
inspected and copied at the public reference facilities referred to above and at
the regional offices of the SEC at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The SEC also maintains a site on the World Wide
Web at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the SEC. The shares of UPC Common Stock are listed and traded on the New
York Stock Exchange (the "NYSE") under the symbol "UPC," and reports, proxy and
information statements, and other information concerning UPC also may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The shares of Merchants Common Stock are not listed or traded on any exchange or
market.

This Proxy Statement constitutes part of the Registration Statement on
Form S-4 of UPC (including any exhibits and amendments thereto, the
"Registration Statement") filed with the SEC under the Securities Act of 1933,
as amended (the "Securities Act"), relating to the securities offered hereby.
This Proxy Statement does not include all of the information in the Registration
Statement, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. For further information about UPC, Merchants and the
securities offered hereby, reference is made to the Registration Statement. The
Registration Statement may be inspected and copied, at prescribed rates, at the
SEC's public reference facilities at the addresses set forth above.

All information contained in this Proxy Statement or incorporated
herein by reference with respect to UPC was supplied by UPC, and all information
contained in this Proxy Statement or incorporated herein by reference with
respect to Merchants was supplied by Merchants.

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS PROXY STATEMENT IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR ANY DISTRIBUTION
OF THE SECURITIES BEING OFFERED PURSUANT TO THIS PROXY STATEMENT SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF UPC OR MERCHANTS OR THE INFORMATION SET FORTH OR INCORPORATED BY
REFERENCE HEREIN SINCE THE DATE OF THIS PROXY STATEMENT.

THIS PROXY STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH
RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND BUSINESS OF UPC
AND MERCHANTS, AND UPC FOLLOWING THE CONSUMMATION OF THE MERGER AND THE OTHER
ACQUISITIONS (AS DEFINED UNDER "BUSINESS OF UPC -- RECENT DEVELOPMENTS"),
INCLUDING STATEMENTS RELATING TO THE COST SAVINGS AND REVENUE ENHANCEMENTS THAT
ARE EXPECTED TO BE REALIZED FROM THE MERGER AND THE OTHER ACQUISITIONS AND THE
EXPECTED IMPACT OF THE MERGER AND THE OTHER ACQUISITIONS ON UPC'S FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHER
THINGS, THE FOLLOWING POSSIBILITIES: (I) EXPECTED COST SAVINGS FROM THE MERGER
AND THE OTHER ACQUISITIONS CANNOT BE FULLY REALIZED; (II) DEPOSIT ATTRITION,
CUSTOMER LOSS, OR REVENUE LOSS FOLLOWING THE MERGER AND THE OTHER ACQUISITIONS
IS GREATER THAN EXPECTED; (III) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY
INCREASES SIGNIFICANTLY; (IV) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION
OF THE BUSINESSES OF UPC AND THE INSTITUTIONS TO BE ACQUIRED ARE GREATER THAN
EXPECTED; (V) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; (VI)
GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE
THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT
QUALITY; (VII)

<PAGE> 6

CHANGES OCCUR IN THE REGULATORY ENVIRONMENT; (VIII) CHANGES OCCUR IN BUSINESS
CONDITIONS AND INFLATION; (IX) CHANGES OCCUR IN THE SECURITIES MARKETS; AND (X)
DISRUPTIONS OF THE OPERATIONS OF UPC OR ANY OF ITS SUBSIDIARIES, OR ANY OTHER
GOVERNMENTAL OR PRIVATE ENTITY AS A RESULT OF THE "YEAR 2000 PROBLEM." THE
FORWARD-LOOKING EARNINGS ESTIMATES INCLUDED IN THIS PROXY STATEMENT HAVE NOT
BEEN EXAMINED OR COMPILED BY THE INDEPENDENT PUBLIC ACCOUNTANTS OF UPC OR
MERCHANTS, NOR HAVE SUCH ACCOUNTANTS APPLIED ANY PROCEDURES THERETO.
ACCORDINGLY, SUCH ACCOUNTANTS DO NOT EXPRESS AN OPINION OR ANY OTHER FORM OF
ASSURANCE ON THEM. FURTHER INFORMATION ON OTHER FACTORS THAT COULD AFFECT THE
FINANCIAL RESULTS OF UPC AFTER THE MERGER AND THE OTHER ACQUISITIONS IS INCLUDED
IN THE SEC FILINGS INCORPORATED BY REFERENCE HEREIN.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents previously filed with the SEC by UPC pursuant
to the Exchange Act are hereby incorporated by reference herein (SEC File No.
1-10160):

The following documents previously filed with the SEC by UPC pursuant to the
Exchange Act are hereby incorporated by reference herein (SEC File No. 1-10160):

(a) UPC's Annual Report on Form 10-K for the year ended December
31, 1997 (provided that any information included or
incorporated by reference in response to Items 402(a)(8), (i),
(k), or (1) of Regulation S-K of the SEC shall not be deemed
to be incorporated herein and is not part of the Registration
Statement)(the "UPC 1997 Form 10-K");

(b) UPC's Quarterly Report on Form 10-Q for the three months ended
March 31, 1998, and its amendment to such form on Form 10-Q/A
( the "UPC March 31, 1998 Form 10-Q");

(d) The description of the current management and Board of
Directors of UPC contained in the Proxy Statement of UPC filed
pursuant to Section 14(a) of the Exchange Act with respect to
UPC's Annual Meeting of Shareholders held on April 16, 1998;

(e) UPC's Registration Statement on Form 8-A dated January 19,
1989, filed on February 1, 1989; (SEC File No. 0-6919) in
connection with UPC's designation and authorization of its
Series A Preferred Stock; and

(f) The description of the UPC Common Stock contained in UPC's
Registration Statement under Section 12(b) of the Exchange Act
and any amendment or report filed for the purpose of updating
such description.

The following documents previously filed with the SEC by Merchants
pursuant to the Exchange Act are hereby incorporated by reference herein (SEC
File No. 0-11033):

(a) Merchants' Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "Merchants 1997 Form 10-K");

(b) Merchants Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (the "Merchants March 1998 Form 10-Q"); and

Copies of the Merchants 1997 Form 10-K and the Merchants March 1998
Form 10-Q accompany this Proxy Statement as Appendices E and F respectively.

<PAGE> 7

All documents filed by UPC pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
final adjournment of the Special Meeting shall be deemed to be incorporated by
reference in this Proxy Statement and to be a part hereof from the date of
filing of such documents. All Documents filed by Merchants pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the Merchants
March 1998 Form 10-Q and prior to final adjournment of the Special Meeting shall
be deemed to be incorporated by reference in this Proxy Statement and to be a
part hereof from the date of filing of such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes hereof to the
extent that a statement contained herein or in any subsequently filed document
which also is, or is deemed to be, incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part hereof, except as so modified or superseded.

UPC will provide without charge, upon the written or oral request of
any person, including any beneficial owner, to whom this Proxy Statement is
delivered, a copy of any and all information (excluding certain exhibits)
relating to UPC that has been incorporated by reference in the Registration
Statement. Such requests should be directed to E. James House, Jr., Secretary
and Manager of the Legal Department, Union Planters Corporation, 7130 Goodlett
Farms Parkway, Memphis, Tennessee 38018 (telephone (901) 580-6584). Merchants
will provide without charge, upon the written or oral request of any person,
including any beneficial owner, to whom this Proxy Statement is delivered, a
copy of any and all information (excluding certain exhibits) relating to
Merchants that has been incorporated by reference in the Registration Statement
of which this Proxy Statement is a part. Such requests should be directed to
J.W. Lander, III, President, Merchants Bancshares, Inc., 5005 Woodway, Suite
300, Houston, Texas 77056 (telephone (713) 622-0042). In order to ensure timely
delivery of the documents, any request should be made by July 25, 1998.

<PAGE> 8

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY...........................................................................................................1

THE PARTIES....................................................................................................1
MEETING OF SHAREHOLDERS........................................................................................2
THE MERGER.....................................................................................................3
COMPARATIVE MARKET PRICES OF COMMON STOCK......................................................................7
HISTORICAL AND PRO-FORMA COMPARATIVE PER SHARE DATA............................................................7
SELECTED FINANCIAL DATA.......................................................................................10

SPECIAL MEETING OF MERCHANTS SHAREHOLDERS........................................................................14

DATE, PLACE, TIME, AND PURPOSE................................................................................14
RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES........................................14
SOLICITATION OF PROXIES.......................................................................................15
DISSENTERS' RIGHTS............................................................................................15
RECOMMENDATION................................................................................................16

DESCRIPTION OF TRANSACTION.......................................................................................16

GENERAL.......................................................................................................16
POSSIBLE ADJUSTMENT OF EXCHANGE RATIO.........................................................................16
RIGHT TO RESTRUCTURE TRANSACTION..............................................................................18
BACKGROUND OF AND REASONS FOR THE MERGER......................................................................19
RECOMMENDATION OF THE MERCHANTS BOARD.........................................................................20
UPC'S REASONS FOR THE MERGER.................................................................................21
OPINION OF MERCHANTS' FINANCIAL ADVISOR.......................................................................21
EFFECTIVE TIME OF THE MERGER..................................................................................24
DISSENTERS' RIGHTS............................................................................................25
DISTRIBUTION OF UPC STOCK CERTIFICATES........................................................................26
LIMITATION ON NEGOTIATIONS....................................................................................27
CONDITIONS TO CONSUMMATION OF THE MERGER......................................................................27
REGULATORY APPROVAL...........................................................................................27
WAIVER, AMENDMENT, AND TERMINATION............................................................................27
CONDUCT OF BUSINESS PENDING THE MERGER........................................................................28
MANAGEMENT AND OPERATIONS AFTER THE MERGER....................................................................30
INTERESTS OF CERTAIN PERSONS IN THE MERGER....................................................................31
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.........................................................32
ACCOUNTING TREATMENT..........................................................................................33
EXPENSES AND FEES.............................................................................................34
RESALES OF UPC COMMON STOCK...................................................................................34

EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS...................................................................35

ANTI-TAKEOVER PROVISIONS GENERALLY............................................................................35
AUTHORIZED CAPITAL STOCK......................................................................................35
PREEMPTIVE RIGHTS.............................................................................................37
AMENDMENT OF CHARTER AND BYLAWS...............................................................................37
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING................................................38
DIRECTOR REMOVAL AND VACANCIES................................................................................38
LIMITATIONS ON DIRECTOR LIABILITY.............................................................................38
INDEMNIFICATION...............................................................................................39
SPECIAL MEETINGS OF SHAREHOLDERS..............................................................................40
</TABLE>

-iv-
<PAGE> 9

<TABLE>
<S> <C>
ACTIONS BY SHAREHOLDERS WITHOUT A MEETING.....................................................................40
SHAREHOLDER NOMINATIONS AND PROPOSALS.........................................................................41
BUSINESS COMBINATIONS.........................................................................................41
LIMITATIONS ON ABILITY TO VOTE STOCK..........................................................................43
DISSENTERS' RIGHTS OF APPRAISAL...............................................................................43
SHAREHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS.............................................................44
DIVIDENDS.....................................................................................................44

COMPARATIVE MARKET PRICES AND DIVIDENDS..........................................................................45

BUSINESS OF MERCHANTS............................................................................................46

GENERAL.......................................................................................................46

BENEFICIAL OWNERSHIP OF MERCHANTS COMMON STOCK...................................................................46

BUSINESS OF UPC..................................................................................................47

GENERAL.......................................................................................................47
RECENT DEVELOPMENTS...........................................................................................48

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION...........................................................50

CERTAIN REGULATORY CONSIDERATIONS................................................................................57

GENERAL.......................................................................................................57
PAYMENT OF DIVIDENDS..........................................................................................58
CAPITAL ADEQUACY..............................................................................................59
SUPPORT OF SUBSIDIARY INSTITUTIONS............................................................................60
PROMPT CORRECTIVE ACTION......................................................................................60

DESCRIPTION OF UPC CAPITAL STOCK.................................................................................61

UPC COMMON STOCK..............................................................................................62
UPC PREFERRED STOCK...........................................................................................62

OTHER MATTERS....................................................................................................63

SHAREHOLDER PROPOSALS............................................................................................63

EXPERTS..........................................................................................................63

OPINIONS.........................................................................................................63
</TABLE>

APPENDICES:

Appendix A -- Agreement and Plan of Merger, dated as of January 16,
1998, and between Union Planters Corporation, Union
Planters Holding Corporation and Merchants Banchares,
Inc., and Amendment Number 1 thereto dated as of May
27, 1998

Appendix B -- Amended and Restated Plan of Merger of Merchants
Bancshares, Inc. into and with Union Planters Holding
Corporation

Appendix C -- Opinion of Price Waterhouse LLP

Appendix D -- Copy of Articles 5.11, 5.12 and 5.13 of the Texas
Business Corporation Act regarding Dissenters' Rights

Appendix E -- Merchants' Annual Report on Form 10-K for the fiscal
year ended December 31, 1997

Appendix F -- Merchants' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998

<PAGE> 10

SUMMARY

THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROXY STATEMENT AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY
IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF THE MATTERS COVERED IN THIS
PROXY STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT. SHAREHOLDERS ARE URGED TO READ CAREFULLY THE ENTIRE PROXY STATEMENT,
INCLUDING THE APPENDICES. AS USED IN THIS PROXY STATEMENT, THE TERMS "UPC" AND
"MERCHANTS" REFER TO UNION PLANTERS CORPORATION AND MERCHANTS BANCSHARES, INC.,
RESPECTIVELY, AND, WHERE THE CONTEXT REQUIRES, TO THOSE ENTITIES AND THEIR
RESPECTIVE SUBSIDIARIES.

THE PARTIES

MERCHANTS. Merchants, a Texas corporation, is a bank holding company
registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"). As of March 31, 1998, Merchants had total consolidated assets of
approximately $552 million, total consolidated loans of approximately $335
million, total consolidated deposits of approximately $489 million, and total
consolidated shareholders' equity of approximately $59 million.

Merchants conducts its business activities through its wholly-owned
bank subsidiary, Merchants Bank, which was organized in 1970 as a commercial
bank chartered under the laws of the State of Texas. Merchants operates from its
main office in Houston, Texas and at 13 branch offices located in the Texas
counties of Harris, Galveston and Brazoria.

The principal executive offices of Merchants are located at 5005
Woodway, Suite 300, Houston, Texas 77056 and its telephone number at such
address is (713) 622-0042. Additional information with respect to Merchants and
its subsidiaries is included elsewhere herein and in documents incorporated by
reference in this Proxy Statement. See "AVAILABLE INFORMATION," "DOCUMENTS
INCORPORATED BY REFERENCE," "BUSINESS OF MERCHANTS", the Merchants 1997 Form
10-K, a copy of which is attached hereto as Appendix E, and the Merchants March
1998 Form 10-Q, a copy of which is attached hereto as Appendix F.

UPC. UPC, a Tennessee corporation, is a bank holding company registered
with the Federal Reserve under the BHC Act. As of March 31, 1998, UPC had total
consolidated assets of approximately $18.4 billion, total consolidated loans of
approximately $12.7 billion, total consolidated deposits of approximately $13.6
billion, and total consolidated shareholders' equity of approximately $1.8
billion.

UPC conducts its business activities through its principal bank
subsidiary, the $15.7 billion asset Union Planters Bank, National Association
("UPB"), a multi-state national banking association headquartered in Memphis,
Tennessee with branches in Tennessee, Arkansas, Missouri, Kentucky, Alabama,
Mississippi and Louisiana, one savings association headquartered in Tennessee,
two other Tennessee chartered banks headquartered in Tennessee, two recently
acquired Arkansas state-chartered banks, and one Florida chartered bank
headquartered in Miami, Florida (collectively with UPB, the "UPC Banking
Subsidiaries"). Through the UPC Banking Subsidiaries, UPC provides a diversified
range of financial services in the communities in which it operates and
maintains approximately 518 banking offices and 676 automated teller machines
("ATMs"). UPC's total deposits at March 31, 1998 are allocable by state (before
consolidating adjustments) approximately as follows: $6.7 billion in Tennessee;
$2.9 billion in Mississippi; $1.3 billion in Florida; $1.2 billion in Missouri;
$596 million in Arkansas; $598 million in Louisiana; $412 million in Alabama;
and $103 million in Kentucky.

Acquisitions have been, and are expected to continue to be, an
important part of the expansion of UPC's business strategy. UPC completed 13
acquisitions in 1994, three in 1995, seven in 1996, and six in 1997, adding
approximately $3.8 billion in total assets in 1994, $1.3 billion in 1995, $4.2
billion in 1996 and $3.6 billion in 1997. Through June 1, 1998, UPC has
completed the acquisition of two financial institutions with approximately $520
million in aggregate total assets as of March 31, 1998 (the "Recently Completed
Acquisitions"). As of June 1, 1998, UPC is a party to definitive agreements to
acquire ten financial institutions, in

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<PAGE> 11

addition to Merchants, and to purchase certain branch locations and assume
deposit liabilities of California Federal Bank in Florida (the "CalFed Branch
Purchase") (collectively referred to herein as the "Other Pending
Acquisitions"). The Other Pending Acquisitions had aggregate total assets of
approximately $12.6 billion at March 31, 1998. For purposes of this Proxy
Statement, the "Recently Completed Acquisitions" and "Other Pending
Acquisitions" are referred to as "Other Acquisitions"). The largest of the Other
Pending Acquisitions is UPC's pending acquisition of Magna Group, Inc. ("MGR"),
St. Louis, Missouri, which had total consolidated assets of approximately $7.3
billion at March 31, 1998. On May 1, 1998, MGR acquired Charter Financial, Inc.,
and its subsidiary, Charter Bank, S.B. (the "Charter Acquisition"). Charter is
located in Sparta, Illinois and at at the time of consummation total assets of
approximately $406 million, total deposits of approximately $309 million, and
total stockholders' equity of approximately $67 million. The Charter Acquisition
was accounted for as a purchase. For purposes of this Proxy Statement, including
the historical and equivalent pro forma data, the term "Other Acquisitions" and
"Other Pending Acquisitions" include the Charter Acquisition. For additional
information, see "BUSINESS OF UPC -- Recent Developments" and "PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION."

For a discussion of UPC's acquisition program, including a discussion
of the significant charges UPC has incurred incidental to acquisitions in the
past three fiscal years, see the caption "Acquisitions" (on page 10) in UPC's
1997 Annual Report to Shareholders and Note 2 to UPC's audited consolidated
financial statements for the years ended December 31, 1997, 1996, and 1995 (on
pages 49 and 50) contained in UPC's 1997 Annual Report to Shareholders. UPC's
1997 Annual Report to Shareholders is included as Exhibit 13 to the UPC 1997
Form 10-K and Exhibit 13 is incorporated by reference herein to the extent
indicated herein.

The principal executive offices of UPC are located at 7130 Goodlett
Farms Parkway, Memphis, Tennessee 38018, and its telephone number at such
address is (901) 580-6000. Additional information with respect to UPC and its
subsidiaries is included elsewhere herein and in documents incorporated by
reference in this Proxy Statement. See "AVAILABLE INFORMATION," "DOCUMENTS
INCORPORATED BY REFERENCE," and "BUSINESS OF UPC."

UNION PLANTERS HOLDING CORPORATION. Union Planters Holding Corporation
("UPHC"), a Tennessee corporation, is a wholly-owned subsidiary of UPC. UPHC is
a bank holding company which owns all of the common stock of UPB and other
permissible investments. Certain of the directors and officers of UPHC are
executive officers of UPC. Immediately after consummation of the Merger, Gulf
Southwest Nevada Bancorp, Inc., ("Gulf Southwest"), a wholly-owned subsidiary of
Merchants which owns all of the outstanding capital stock of Merchants Bank,
will also be merged with and into UPHC so that UPHC will directly own all of the
outstanding capital stock of Merchants Bank.

MEETING OF SHAREHOLDERS

This Proxy Statement is being furnished to the holders of Merchants
Common Stock in connection with the solicitation by the Merchants Board of
proxies for use at the Special Meeting at which Merchants shareholders will be
asked to vote upon (i) a proposal to approve the Agreement and the Plan of
Merger and (ii) such other business as may properly come before the Special
Meeting. The Special Meeting will be held at Merchants Bank -Tanglewood located
at 5005 Woodway, Houston, Texas 77056, at 10:00 a.m., local time, on July 30,
1998. See "SPECIAL MEETING OF MERCHANTS SHAREHOLDERS -- Date, Place, Time, and
Purpose."

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<PAGE> 12

The Merchants Board has fixed the close of business on June 1, 1998, as
the record date (the "Merchants Record Date") for determination of the
shareholders entitled to notice of and to vote at the Special Meeting. Only
holders of record of shares of Merchants Common Stock on the Merchants Record
Date will be entitled to notice of and to vote at the Special Meeting. Each
share of Merchants Common Stock is entitled to one vote. On the Merchants Record
Date, there were 1,952,465 shares of Merchants Common Stock outstanding. See
"SPECIAL MEETING OF MERCHANTS SHAREHOLDERS -- Record Date, Voting Rights,
Required Vote, and Revocability of Proxies."

Approval of the Agreement and the Plan of Merger and the transactions
contemplated thereby requires the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of Merchants Common Stock
entitled to be voted at the Special Meeting. The directors and executive
officers of Merchants (including immediate family members and affiliated
entities) owned, as of May 15, 1998, 413,699 shares or approximately 21.2% of
the outstanding shares of Merchants Common Stock.

The directors and executive officers of UPC owned, as of the Merchants
Record Date, no shares of Merchants Common Stock. As of the Merchants Record
Date, UPC held no shares of Merchants Common Stock in a fiduciary capacity for
others, or as a result of debts previously contracted, and Merchants held no
shares of Merchants Common Stock in a fiduciary capacity for others. See
"SPECIAL MEETING OF MERCHANTS SHAREHOLDERS --Record Date, Voting Rights,
Required Vote, and Revocability of Proxies."

For information with respect to the number and percentage of shares of
Merchants Common Stock beneficially owned by directors and executive officers of
Merchants as well as to the beneficial owners of 5% or more of the outstanding
shares of Merchants Common Stock, see "BUSINESS OF MERCHANTS -- Beneficial
Ownership of Merchants Common Stock."

THE MERGER

GENERAL. The Agreement provides for the acquisition of Merchants by UPC
pursuant to the merger of Merchants with and into UP Holding, a wholly-owned
subsidiary of UPC, with the effect that UP Holding will be the surviving
corporation resulting from the Merger. At the Effective Time, each share of
Merchants Common Stock then issued and outstanding (excluding shares held by
Merchants, UPC, or their respective subsidiaries, in each case other than shares
held in a fiduciary capacity or as a result of debts previously contracted, and
excluding shares held by dissenting shareholders) will be converted into and
exchanged for the right to receive 1.0345 shares of UPC Common Stock, subject to
possible adjustment as described below (the "Exchange Ratio").

In the event both of the following conditions are satisfied, (i) the
"Average Closing Price" (defined in the Agreement as the average of the daily
last sale prices of UPC Common Stock quoted on the NYSE-Composite Transactions
List (as reported by The Wall Street Journal or, if not reported thereby,
another authoritative source as reasonably selected by UPC) for the 20
consecutive full trading days on which such shares are traded on the NYSE ending
at the close of trading on the later of the date of the Special Meeting and the
date on which the last required consent of any regulatory authority required for
the Merger shall be received and any required waiting periods shall have expired
(the "Determination Date")) is less than $49.62 and (ii) (1) the quotient
obtained by dividing the Average Closing Price by $58.375 (the "UPC Ratio") is
less than (2) the quotient obtained by dividing the weighted average of the
closing prices (the "Index Price") of 15 bank holding companies designated in
the Agreement (the "Index Group") on the Determination Date by the Index Price
on January 23, 1998, times .85 (the "Index Ratio"), then Merchants will have the
right to terminate the Agreement unless UPC elects to adjust the Exchange Ratio
in the manner described under "DESCRIPTION OF TRANSACTION -- Possible Adjustment
of Exchange Ratio." Under no circumstances would the Exchange Ratio be less than
1.0345 shares of UPC Common Stock for each share of Merchants Common Stock. The
possible upward adjustment of the Exchange Ratio depends on the factors
mentioned above and is not subject to a contractual limit. See "DESCRIPTION OF
TRANSACTION - Possible Adjustment of Exchange Ratio." The Board of Directors of
Merchants has no current intention of waiving its right to terminate the Merger
in such circumstances without resoliciting shareholders of Merchants. For a
description of certain of the factors that the Board of Directors Merchants will
consider in deciding whether to exercise its rights to terminate the Merger in
these circumstances, see "DESCRIPTION OF THE TRANSACTION -- Possible Adjustment
of the Exchange Ratio."

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<PAGE> 13

No fractional shares of UPC Common Stock will be issued. Rather, cash
(without interest) will be paid in lieu of any fractional share interest to
which any Merchants shareholder would otherwise be entitled upon consummation of
the Merger, in an amount equal to such fractional part of a share of UPC Common
Stock multiplied by the closing price of one share of UPC Common Stock on the
NYSE (as reported by The Wall Street Journal or, if not reported thereby,
another authoritative source as reasonably selected by UPC) on the last trading
day preceding the Effective Time. See "DESCRIPTION OF TRANSACTION -- General."

UPC has reserved the right to revise the structure of the Merger in
order to achieve tax benefits or for any other reason it deems advisable,
subject to certain limitations. See "DESCRIPTION OF TRANSACTION - Right to
Restructure Transaction."

REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF
MERCHANTS. The Merchants Board believes that the Agreement and the Merger are in
the best interests of Merchants and its shareholders. If the Merger is
consummated, the shareholders of Merchants will acquire an equity interest in a
much larger and more diversified enterprise. The UPC Common Stock is traded on
the NYSE, and, accordingly, is more readily marketable than the Merchants Common
Stock. The Merchants Board believes that the Merger will result in a company
with expanded opportunities for profitable growth and that the combined
resources of Merchants and UPC will provide an enhanced ability to compete in
the changing and competitive financial services industry. ACCORDINGLY, THE
MERCHANTS BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND THE PLAN OF MERGER,
AND UNANIMOUSLY RECOMMENDS THAT MERCHANTS SHAREHOLDERS VOTE FOR APPROVAL OF THE
AGREEMENT AND THE PLAN OF MERGER. See "DESCRIPTION OF TRANSACTION -- Background
of and Reasons for the Merger."

In unanimously approving the Agreement and the Plan of Merger, the
Merchants Board considered, among other things, Merchants' and UPC's financial
condition, the financial terms and income tax consequences of the Merger, the
likelihood of the Merger being approved by regulatory authorities without undue
conditions or delay and the opinion of Price Waterhouse LLP dated as of May 26,
1998 as to the fairness to the shareholders of Merchants of the consideration to
be received by the shareholders of Merchants, from a financial point of view.
See "DESCRIPTION OF TRANSACTION -- Background of and Reasons for the Merger."

OPINION OF FINANCIAL ADVISOR. Price Waterhouse LLP Corporate Finance
Group ("PWCF") has rendered an opinion to the Merchants Board dated as of May
26, 1998 that, based on and subject to the procedures, matters, and limitations
described in its opinion and such other matters as it considered relevant, as of
the date of its opinion, the consideration to be received by the shareholders of
Merchants is fair, from a financial point of view, to the shareholders of
Merchants. The opinion of PWCF dated as of May 26, 1998 is attached as Appendix
C to this Proxy Statement. Merchants shareholders are urged to read the PWCF
opinion in its entirety for a description of the procedures followed, matters
considered, and limitations on the reviews undertaken in connection therewith.
See "DESCRIPTION OF TRANSACTION -- Opinion of Merchants' Financial Advisor."

EFFECTIVE TIME. Subject to the conditions to the obligations of the
parties to effect the Merger, the Effective Time will occur on the date and at
the time that the Texas Articles of Merger become effective with the Secretary
of State of the State of Texas and the Tennessee Articles of Merger become
effective with the Secretary of State of the State of Tennessee. Subject to the
terms and conditions of the Agreement, unless otherwise agreed upon by Merchants
and UPC, the Agreement provides that the parties will use their reasonable
efforts to cause the Effective Time to occur on such date as may be designated
by UPC within 30 days following the last to occur of (i) the effective date of
the last consent of any regulatory authority having authority over and approving
or exempting the Merger (taking into account any requisite waiting period in
respect thereof), (ii) the date on which the shareholders of Merchants approve
the Agreement and the Plan of Merger and (iii) the date on which all other
conditions precedent (other than those conditions which relate to actions to be
taken at the Closing) to each party's obligations under the Agreement have been
satisfied or waived (to the extent waivable by such party). It is anticipated
that the Effective Time will occur on July 31, 1998, the day immediately
following the Special Meeting. See "DESCRIPTION OF TRANSACTION -- Effective Time
of the Merger," "-- Conditions to Consummation of the Merger," and "-- Waiver,
Amendment, and Termination."

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<PAGE> 14

NO ASSURANCE CAN BE PROVIDED THAT THE NECESSARY SHAREHOLDER APPROVAL
CAN BE OBTAINED OR THAT THE OTHER CONDITIONS PRECEDENT TO THE MERGER CAN OR WILL
BE SATISFIED. MERCHANTS AND UPC ANTICIPATE THAT ALL CONDITIONS TO THE
CONSUMMATION OF THE MERGER WILL BE SATISFIED SO THAT THE MERGER CAN BE
CONSUMMATED ON OR ABOUT JULY 31, 1998.
HOWEVER, DELAYS IN THE CONSUMMATION OF THE MERGER COULD OCCUR.

EXCHANGE OF STOCK CERTIFICATES. Promptly after the Effective Time, UPC
will cause UPB, acting in its capacity as exchange agent for UPC (the "Exchange
Agent"), to mail to each holder of record, other than dissenting shareholders,
of a certificate or certificates (collectively, the "Certificates") which,
immediately prior to the Effective Time, represented outstanding shares of
Merchants Common Stock, a letter of transmittal and instructions for use in
effecting the surrender and cancellation of the Certificates in exchange for
certificates representing shares of UPC Common Stock. Cash will be paid to the
holders of Merchants Common Stock in lieu of issuing any fractional shares of
UPC Common Stock. In no event will the holder of any surrendered Certificate(s)
be entitled to receive interest on any cash to be issued to such holder, and in
no event will Merchants, UPC, or the Exchange Agent be liable to any holder of
Merchants Common Stock for any UPC Common Stock or dividends thereon or cash
delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat, or similar law.

REGULATORY APPROVAL AND OTHER CONDITIONS. The Merger is subject to the
prior approval of the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), and of the Texas Department of Banking (the "Texas
Department"). By letter dated March 18, 1998, the Federal Reserve advised UPC
that the Merger had been approved. The Texas Department has elected not to
disapprove the Merger.

Consummation of the Merger is subject to various other conditions,
including receipt of the required approval of the Merchants shareholders,
receipt of an opinion of counsel as to the tax-free nature of certain aspects of
the Merger, and certain other conditions. See "DESCRIPTION OF TRANSACTION --
Regulatory Approval" and "-- Conditions to Consummation of the Merger."

WAIVER, AMENDMENT, AND TERMINATION. The Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time by mutual consent
of the Merchants Board and the Board of Directors of UPC (the "UPC Board"), or
(i) by the action of the Board of Directors of either company under certain
circumstances, including, but not limited to, if the Merger is not consummated
by September 30, 1998, unless the failure to consummate by such date is due to a
willful breach of the Agreement by the party seeking to terminate and (ii) by
the Merchants Board, in certain circumstances, if an adjustment is not made to
the Exchange Ratio. To the extent permitted by law, the Agreement may be amended
upon the written agreement of UPC and Merchants without the approval of
shareholders before approval of the Agreement and the Plan of Merger by
Merchants shareholders, and the Merger may be abandoned without the approval of
Merchants' shareholders, whether before or after approval of the Agreement and
the Plan of Merger by Merchants' shareholders. See "DESCRIPTION OF TRANSACTION
- -- Possible Adjustment of Exchange Ratio" and "-- Waiver, Amendment, and
Termination."

DISSENTERS' RIGHTS. Holders of Merchants Common Stock have the right
under Article 5.12 of the Texas Business Corporation Act ("Texas BCA"), to
dissent from the Merger and, upon consummation of the Merger and such holders'
further compliance with Articles 5.11, 5.12, and 5.13 of the Texas BCA, to be
paid the "fair value" of their shares of Merchants Common Stock in cash. See
"DESCRIPTION OF TRANSACTION -- Dissenters' Rights", and Appendix D hereto, which
is a copy of Articles 5.11, 5.12, and 5.13 of the Texas BCA.

INTERESTS OF CERTAIN PERSONS IN THE MERGER. Certain members of
Merchants' management and the Merchants Board have interests in the Merger in
addition to their interests as shareholders of Merchants generally. These
interests relate to: (i) the receipt, under certain circumstances, by certain of
the executive officers of certain economic benefits pursuant to the terms of
their respective employment agreements; (ii) the receipt by J.W. Lander III of
$400,000 for a noncompetition agreement triggered by consummation of the Merger,
such noncompetition provision being contained in his current employment
agreement with Merchants; (iii) maintenance by UPC of Merchants' existing
directors' and officers' liability insurance policy (or a comparable policy) for
a period of four years after the Effective Time; and (iv) the continued
indemnification by UPC of the former directors, officers,

5
<PAGE> 15

employees, and agents of Merchants and its subsidiaries following consummation
of the Merger. See "DESCRIPTION OF TRANSACTION -- Interests of Certain Persons
in the Merger."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. It is intended
that the Merger will be treated as a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, for federal income tax purposes, no gain or loss will be recognized
by a Merchants shareholder upon the exchange of all of such shareholder's shares
of Merchants Common Stock solely for shares of UPC Common Stock (except with
respect to cash received in lieu of a fractional share of UPC Common Stock).
Consummation of the Merger is conditioned upon receipt by UPC of an opinion of
Wyatt, Tarrant & Combs and upon receipt by FNB of an opinion of Winstead
Sechrest & Minick, P.C., in each case dated the date of the Effective Time,
substantially to this effect (the "Tax Opinions"). The conditions relating to
the receipt of the Tax Opinions may be waived by both UPC and FNB. Neither UPC
nor FNB currently intends to waive the conditions relating to the receipt of Tax
Opinions. If the conditions relating to the receipt of the Tax Opinions were
waived and the material federal income tax consequences of the Merger were
materially different from those described in this Proxy Statement, Merchants
would resolicit the approval of its shareholders prior to consummating the
Merger. TAX CONSEQUENCES OF THE MERGER FOR INDIVIDUAL TAXPAYERS CAN VARY,
HOWEVER, AND ALL MERCHANTS SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS TO DETERMINE THE EFFECT OF THE MERGER ON THEM UNDER FEDERAL, STATE,
LOCAL, AND FOREIGN TAX LAWS. For a further discussion of the federal income tax
consequences of the Merger, see "DESCRIPTION OF TRANSACTION -- Certain Federal
Income Tax Consequences of the Merger."

ACCOUNTING TREATMENT. It is intended that the Merger will be accounted
for as a pooling of interests transaction for accounting and financial reporting
purposes and UPC will not consummate the Merger if such accounting treatment is
not available. See "DESCRIPTION OF TRANSACTION -- Accounting Treatment."

CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS. At the Effective Time,
Merchants shareholders (other than dissenting shareholders), whose rights are
governed by Merchants' Articles of Incorporation, as amended (the "Charter"),
and Bylaws, as amended (the "Bylaws"), and by the Texas BCA, will automatically
become UPC shareholders, and their rights as UPC shareholders will be governed
by UPC's Restated Charter (the "Charter") and Bylaws and the Tennessee Business
Corporation Act (the "TBCA"). The rights of UPC shareholders differ from the
rights of Merchants shareholders in certain important respects, including, but
not limited to: (i) anti-takeover provisions generally, (ii) authorized capital
stock, (iii) preemptive rights, (iv) amendment of charter and bylaws, (v)
classified board of directors and absence of cumulative voting, (vi) director
liability, (viii) indemnification (ix) special meetings of shareholders, (x)
shareholder nominations and proposals, (xii) business combinations, (xiii)
limitations on ability to vote stock, (xiv) dissenters rights of appraisal, (xv)
shareholders' rights to examine books and records, and (xvi) dividends. See
"EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS."

LIMITATION ON NEGOTIATIONS. Pursuant to Section 8.8 of the Agreement,
Merchants is prohibited from soliciting or knowingly encouraging any
"Acquisition Proposal" (defined generally as any tender offer, exchange offer or
other proposal for a merger, acquisition of all or a substantial portion of the
stock or assets of, or other business combination involving Merchants). As
protection against possible violation of this limitation, Merchants has agreed,
under certain cirsumstances, to pay to UPC the sum of $6,200,000 in immediately
available funds in the event and at the time that Merchants enters into a letter
of intent or agreement with respect to an Acquisition Proposal or supports or
indicates an intent to support an Acquisition Proposal other than pursuant to
the Agreement. This provision would survive the termination of the Agreement
under certain circumstances. See "DESCRIPTION OF TRANSACTION - Limitation on
Negotiations".

CONDUCT OF BUSINESS PENDING THE MERGER. Each party has agreed in the
Agreement to, among other things, operate its business and to take no action
that would materially adversely affect the ability of any party to perform its
covenants and agreements under the Agreement. In addition, Merchants has agreed
not to take certain actions relating to the operation of Merchants pending
consummation of the Merger without the prior written consent of UPC, except as
otherwise permitted by the Agreement, including, among other things: (i)
becoming responsible for any obligation for borrowed money in excess of an
aggregate of $100,000, except in the ordinary course of business consistent with
past practices; (ii) paying any dividends, except as permitted by the Agreement

6
<PAGE> 16

in accordance with past practices, or exchanging any shares of its capital
stock, issuing any additional shares of its capital stock, or giving any person
the right to acquire any such shares; (iii) acquiring control over any other
entity; (iv) subject to certain exceptions, granting any increase in
compensation or benefits, or paying any bonus, to any of its directors,
officers, or employees; or (v) except as previously disclosed to UPC or
permitted by the Agreement, modifying or adopting any employee benefit plans,
including any employment contract. See "DESCRIPTION OF TRANSACTION -- Conduct of
Business Pending the Merger."

COMPARATIVE MARKET PRICES OF COMMON STOCK

Shares of UPC Common Stock are traded on the NYSE under the symbol
"UPC." Shares of Merchants Common Stock are not traded on any exchange or in the
over-the-counter market.

The following table sets forth the reported closing sale prices per
share for UPC Common Stock and the equivalent per share prices giving effect to
the Merger (as explained below) for Merchants Common Stock on (i) Friday,
January 16, 1998, the last trading day preceding the public announcement of the
execution of the Agreement, and (ii) June 18, 1998, the latest practicable date
prior to the mailing of this Proxy Statement.

<TABLE>
<CAPTION>
UPC Equivalent Price
Common Stock Per FNB Share(1)
------------ ----------------
<S> <C> <C>
December 30, 1997 $60.06 $62.1346
June 18, 1998 54.75 56.64
</TABLE>

- ---------------------

(1) The equivalent price per share of Merchants Common Stock at each specified
date represents the closing sale price of a share of UPC Common Stock on such
date multiplied by an Exchange Ratio of 1.0345. See "COMPARATIVE MARKET PRICES
AND DIVIDENDS."

There can be no assurance as to what the market price of the UPC Common Stock
will be if and when the Merger is consummated, or anytime thereafter.

HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA

The following table sets forth certain comparative per share data
relating to earnings before extraordinary items and accounting changes, cash
dividends and book value on: (i) a historical basis for UPC and Merchants; (ii)
a pro forma combined basis per share of UPC Common Stock, giving effect to the
Merger only; (iii) a pro forma combined basis per share of UPC Common Stock,
giving effect to the Merger and the Other Acquisitions (see, "BUSINESS OF UPC --
Recent Developments"); (iv) an equivalent pro forma basis per share of Merchants
Common Stock, giving effect to the Merger only; and (v) an equivalent pro forma
basis per share of Merchants Common Stock, giving effect to the Merger and the
Other Acquisitions. The UPC pro forma combined information and the Merchants
equivalent pro forma information give effect to the Merger and the Other
Acquisitions and reflect an Exchange Ratio of 1.0345 shares of UPC Common Stock
for each outstanding share of Merchants Common Stock. The Merger and each of the
Other Pending Acquisitions (with the exception of the acquisitions of Duck Hill
Bank, the Charter Acquisition, and the CalFed Branch Purchase) are expected to
be, and the Recently Completed Acquisition of Security Bancshares, Inc. was
accounted for using the pooling of interests method of accounting. The Recently
Completed Acquisitions of Sho-Me Financial Corp. and the Charter Acquisition
were, and the Other Pending Acquisitions of Duck Hill Bank and the CalFed Branch
Purchase are expected to be accounted for using the purchase method of
accounting. The pro forma information as of March 31, 1998 and for the three
months then ended and for 1997 reflect the acquisition of Merchants and the
Other Acquisitions as of January 1, 1997. The pro forma information for 1996 and
1995 reflect only the acquisitions of MGR, Peoples First Corporation ("Peoples")
Ambanc Corp. ("AMBANC") and Merchants because the Other Acquisitions (other than
MGR, Peoples and AMBANC) are not considered material to UPC, individually or in
the

7
<PAGE> 17

aggregate, from a financial statement presentation standpoint. Furthermore the
pro forma impact of the CalFed Branch Purchase on the proforma statement of
earnings for each of the periods presented has been excluded due to the lack of
information available for operation of the branches on a historical basis. The
pro forma data are presented for informational purposes only and are not
necessarily indicative of the results of operations or combined financial
position that would have resulted had the Merger or the Other Acquisitions been
consummated at the dates or during the periods indicated, nor are they
necessarily indicative of future results of operations or combined financial
position. The pro forma book value per share data reflects preliminary estimates
by UPC of acquisition-related charges to be incurred in connection with
consummation of the Merger and the Other Acquisitions; however, the earnings per
share amounts do not reflect the estimated acquisition-related charges. For
additional information with respect to the estimated charges UPC anticipates it
would incur in connection with the Merger and the Other Acquisitions, see
"BUSINESS OF UPC -- Recent Developments." For a discussion of UPC's acquisition
program, including a discussion of the significant charges UPC has incurred
incidental to its acquisition program over the past three fiscal years, see the
caption "Acquisitions" (on page 10) in UPC's 1997 Annual Report to Shareholders
and Note 2 to UPC's audited consolidated financial statements for the years
ended December 31, 1997, 1996, and 1995 (on pages 49 and 50) contained in such
UPC 1997 Annual Report to Shareholders. UPC's 1997 Annual Report to Shareholders
is included as Exhibit 13 to the UPC 1997 Form 10-K, and Exhibit 13 is
incorporated by reference herein to the extent indicated herein. See "DOCUMENTS
INCORPORATED BY REFERENCE."

The information shown below should be read in conjunction with, and is
qualified in its entirety by, the historical consolidated financial statements
of UPC and Merchants, including the respective notes thereto. See "DOCUMENTS
INCORPORATED BY REFERENCE," "-- Selected Financial Data," " BUSINESS OF UPC --
Recent Developments, "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION"
and the Merchants 1997 Form 10-K and the Merchants March 1998 Form 10-Q, copies
of which are attached hereto as Appendix E and F respectively.

8
<PAGE> 18

UNION PLANTERS CORPORATION AND MERCHANTS
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA

<TABLE>
<CAPTION>
Three Months
Ended Years Ended December 31, (1)
March 31, ----------------------------
1998 1997 1996 1995
------------ ----------------------------
<S> <C> <C> <C> <C>
EARNINGS BEFORE EXTRAORDINARY ITEMS
AND ACCOUNTING CHANGES

UPC
Basic $0.89 $ 2.54 $2.13 $2.79
Diluted 0.86 2.45 2.05 2.66

UPC pro forma (Merchants only)
Basic 0.89 2.55 2.16 2.81
Diluted 0.86 2.47 2.08 2.68

UPC pro forma (all Other Acquisitions, including Merchants)
Basic 0.80 2.52 2.24 2.56
Diluted 0.78 2.45 2.17 2.46

Merchants
Basic 0.97 3.27 3.28 3.44
Diluted 0.97 3.27 3.28 3.44

Merchants equivalent pro forma (Merchants only) (1)
Basic 0.92 2.64 2.23 2.91
Diluted 0.89 2.56 2.15 2.77

Merchants equivalent pro forma (all Other Acquisitions,
including Merchants) (1)
Basic 0.83 2.61 2.32 2.65
Diluted 0.81 2.53 2.24 2.54

CASH DIVIDENDS PER SHARE

UPC 0.50 1.495 1.08 0.98
Merchants 0.35 1.15 0.82 0.41
Merchants equivalent pro forma (1) 0.52 1.55 1.12 1.01
</TABLE>

<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
BOOK VALUE PER COMMON SHARE

UPC $21.13 $20.72

UPC pro forma (Merchants only) 21.30 20.93

UPC pro forma (all Other Acquisitions, including Merchants) 20.82 21.73

Merchants 30.36 29.71

Merchants equivalent pro forma (Merchants only) (1) 22.03 21.65

Merchants equivalent pro forma (all Other Acquisitions,
including Merchants) (1) 21.54 22.48
</TABLE>

- --------------------------

(1) The equivalent pro forma per share data for Merchants is computed by
multiplying UPC's pro forma information by 1.0345, the Exchange Ratio.

9
<PAGE> 19

SELECTED FINANCIAL DATA

The following tables present selected consolidated financial data for
UPC and Merchants for the three months ended March 31, 1998 and 1997 and for the
five-year period ended December 31, 1997. The information for UPC has been
derived from the consolidated financial statements of UPC, including the
unaudited consolidated financial statements of UPC incorporated in this Proxy
Statement by reference to the UPC March 31, 1998 Form 10-Q, and the audited
consolidated financial statements of UPC incorporated into this Proxy Statement
by reference to the UPC 1997 Form 10-K, and should be read in conjunction
therewith and with the notes thereto. See "DOCUMENTS INCORPORATED BY REFERENCE."
The information for Merchants has been derived from the consolidated financial
statements of Merchants, including the unaudited consolidated financial
statements of Merchants incorporated in this Proxy Statement by reference to the
Merchants 1998 Form 10-Q, and the audited consolidated financial statements of
Merchants incorporated into this Proxy Statement by reference to the Merchants
1997 Form 10-K, copies of which are attached to this Proxy Statement
collectively as Appendices E and F, and should be read in conjunction therewith
and with the notes thereto. Historical results are not necessarily indicative of
results to be expected for any future period. In the opinion of the respective
management's of UPC and Merchants, all adjustments (which include only normal
recurring adjustments and those related to the adoption of new accounting
principles) necessary to arrive at a fair statement of interim results of
operations of UPC and Merchants, have been included. With respect to UPC and
Merchants, results for the three months ended March 31, 1998 are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. For additional information concerning UPC's Other
Acquisitions, see "BUSINESS OF UPC -- Recent Developments" and "PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION."

10
<PAGE> 20
UPC SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,(1) YEARS ENDED DECEMBER 31,(2)
------------------ --------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net interest income........ $ 190,707 $ 190,590 $ 770,385 $ 744,852 $ 669,451 $ 627,439 $ 558,036
Provision for losses on
loans.................... 17,909 22,004 113,633 68,948 33,917 15,989 35,235
Investment securities gains
(losses)................. 5,215 173 2,104 4,099 1,433 (21,302) 6,686
Other noninterest income... 90,503 82,811 359,506 316,403 292,277 237,129 228,996
Noninterest expense........ 153,624 148,646 697,704 731,817 607,189 634,965 550,045
----------- ----------- ----------- ----------- ----------- ------------ -----------
Earnings before income
taxes, extraordinary
item, and accounting
changes.................. 114,892 102,924 320,658 264,589 322,055 192,312 208,438
Applicable income taxes.... 40,320 36,479 111,897 93,115 110,799 63,058 66,570
----------- ----------- ----------- ----------- ----------- ------------ -----------
Earnings before
extraordinary item and
accounting changes....... 74,572 66,445 208,761 171,474 211,256 129,254 141,868
Extraordinary item and
accounting changes, net
of taxes................. -- -- -- -- -- -- 4,505
----------- ----------- ----------- ----------- ----------- ------------ -----------
Net earnings............... $ 74,572 $ 66,445 $ 208,761 $ 171,474 $ 211,256 $ 129,254 $ 146,373
=========== =========== =========== =========== =========== ============ ===========
PER COMMON SHARE DATA(3)
Basic
Earnings before
extraordinary item
and accounting
changes.............. $ .89 $ .82 $ 2.54 $ 2.13 $ 2.79 $ 1.67 $ 2.19
Net earnings........... .89 .82 2.54 2.13 2.79 1.67 2.27
Diluted
Earnings before
extraordinary item
and accounting
changes.............. .86 .79 2.45 2.05 2.66 1.63 2.13
Net earnings........... .86 .79 2.45 2.05 2.66 1.63 2.21
Cash dividends............. .50 .32 1.495 1.08 .98 .88 .72
Book value................. 21.13 20.00 20.72 19.57 18.34 15.28 14.50
</TABLE>

(continued on following page)

11
<PAGE> 21

UPC SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,(1) YEARS ENDED DECEMBER 31,(2)
------------------ --------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD
END)
Total assets............... $18,413,614 $18,054,916 $18,105,079 $18,330,588 $17,182,861 $ 15,893,162 $14,180,524
Loans, net of unearned
income................... 12,727,659 12,560,838 12,658,564 12,578,571 10,917,307 10,074,458 8,077,152
Allowance for losses on
loans.................... 223,837 192,943 225,389 189,118 179,968 174,604 172,330
Investment securities...... 3,287,664 3,449,824 3,247,680 3,387,217 3,970,036 4,016,506 4,124,679
Total Deposits............. 13,581,227 13,386,397 13,440,269 13,514,144 13,047,488 12,506,212 11,732,707
Short-term borrowings...... 442,051 611,757 831,627 961,051 974,416 887,074 392,980
Long-term debt(4)
Parent company......... 373,242 373,468 373,746 373,459 214,758 114,790 114,729
Subsidiary banks....... 1,630,693 1,473,599 1,176,158 1,332,534 1,087,273 819,982 481,193
Total shareholders'
equity................... 1,809,442 1,663,363 1,746,866 1,618,883 1,450,546 1,202,686 1,111,158
Average assets............. 18,005,794 18,031,648 17,991,160 18,202,355 16,263,164 15,472,568 13,823,185
Average shareholders'
equity................... 1,760,458 1,615,979 1,690,992 1,533,348 1,334,995 1,226,852 973,087
Average shares outstanding
(in thousands)(3)
Basic.................. 83,379 78,904 80,336 77,240 72,512 71,678 56,169
Diluted................ 86,974 84,465 85,195 83,542 78,798 77,579 60,832
PROFITABILITY AND CAPITAL
RATIOS
Return on average assets... 1.68% 1.49% 1.16% .94% 1.30% .84% 1.06%
Return on average common
equity................... 17.50 17.16 12.54 11.38 16.56 10.74 15.88
Net interest income
(taxable-
equivalent)/average
earning assets(5)........ 4.80 4.80 4.79 4.56 4.60 4.56 4.58
Loans/deposits............. 93.72 93.83 94.18 93.08 83.67 80.56 68.84
Common and preferred
dividend payout ratio.... 57.03 37.71 54.96 44.57 29.25 35.03 24.42
Equity/assets (period
end)..................... 9.83 9.21 9.65 8.83 8.44 7.57 7.84
Average shareholders'
equity/average total
assets................... 9.78 8.96 9.40 8.42 8.21 7.93 7.04
Leverage ratio............. 10.72 10.05 10.48 9.50 8.11 7.56 7.73
Tier 1
capital/risk-weighted
assets................... 15.66 14.88 15.51 14.92 13.28 12.58 13.65
Total capital/risk-weighted
assets................... 20.71 17.55 18.12 17.60 16.21 14.67 15.92
CREDIT QUALITY RATIOS(6)
Allowance/period-end
loans.................... 1.95% 1.76% 1.99% 1.72% 1.82% 1.87% 2.27%
Nonperforming loans/total
loans.................... .81 .85 .92 .91 .85 .74 1.18
Allowance/nonperforming
loans.................... 240 207 215 188 213 252 193
Nonperforming assets/loans
and foreclosed
properties............... 1.01 1.14 1.13 1.21 1.09 1.08 1.76
Provision/average loans.... .62 .81 1.01 .65 .35 .19 .47
Net charge-offs/average
loans.................... .79 .67 .72 .61 .32 .27 .34
</TABLE>

- ---------------
(1) Interim period ratios have been annualized were applicable.

(2) Reference is made to "Basis of Presentation" in Note 1 to UPC's consolidated
financial statements contained in UPC's 1997 Annual Report to Shareholders.

(3) Share and per share amounts have been retroactively restated for significant
acquisitions accounted for as poolings of interests and to reflect the
change in presentation of EPS as discussed in Notes 2 and 16 to the
consolidated financial statements contained in UPC's 1997 Annual Report to
Shareholders.

(4) Long-term debt includes Medium-Term Bank Notes, Federal Home Loan Bank
(FHLB) advances, Trust Preferred Securities, variable rate asset-backed
certificates, subordinated notes and debentures, obligations under capital
leases, mortgage indebtedness, and notes payable with maturities greater
than one year.

(5) Average balances and calculations do not include the impact of the net
unrealized gain or loss on available for sale securities.

(6) FHA/VA government-insured/guaranteed loans have been excluded, since they
represent minimal credit risk to UPC.

12
<PAGE> 22

MERCHANTS SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Three Month Ended
March 31, Years Ended December 31,
----------------------- --------------------------------------------------------------
1998 1997 1997(1) 1996(1) 1995(1) 1994 1993
----------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION (1):
Loans $ 338,984 $ 308,554 $ 342,566 $ 294,524 $ 237,564 $ 144,459 $ 127,452
Allowance for loan losses 4,017 2,972 3,687 2,713 2,411 2,063 1,986
Investment securities 127,211 139,307 130,629 143,272 152,033 56,852 52,329
Total assets 551,619 506,075 545,951 494,570 486,649 253,027 242,005
Deposits 488,619 449,546 484,357 439,043 431,381 226,064 218,942
Long-term debt 0 0 0 0 3,083 0 0
Stockholders' equity 59,258 54,153 57,987 53,511 49,322 25,539 21,932

INCOME INFORMATION:
Interest income $ 10,217 $ 9,205 $ 39,288 $ 35,339 $ 29,174 $ 16,965 $ 15,801
Interest expense 3,139 2,933 12,196 11,169 9,577 4,796 4,943
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 7,078 6,272 27,032 24,170 19,597 12,169 10,858
Provision for loan losses 435 435 1,740 940 135 50 410
Noninterest income 1,448 1,475 6,253 5,677 4,655 3,238 2,979
Noninterest expense 5,346 5,204 22,320 19,888 15,878 10,393 10,494
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 2,745 2,108 9,225 9,019 8,239 4,964 2,933
Income tax expense 851 645 2,837 2,634 2,332 999 512
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1,894 $ 1,463 $ 6,388 6,385 $ 5,907 $ 3,965 $ 2,421
========== ========== ========== ========== ========== ========== ==========

PER SHARE DATA:
Weighted average number of shares
of common stock outstanding 1,951,839 1,943,970 1,952,883 1,945,178 1,718,211 1,258,636 1,261,731
Net income per common share $ .97 $ .75 $ 3.27 $ 3.28 $ 3.44 $ 3.15 $ 1.92
Dividends per common share .35 .25 1.15 .82 .41 .20 .10
Book value per common share 30.36 27.70 29.71 27.37 25.38 20.29 17.39
Return on average assets 1.38% 1.17% 1.23% 1.32% 1.47% 1.61% 1.03%
Return on average shareholders' equity 12.92 10.37 11.35 12.42 14.61 16.93 11.56
Dividend payout ratio 36.08 33.33 35.17 25.00 11.92 6.35 5.21
Average equity to average assets 10.68 10.76 10.83 10.60 10.04 9.52 8.89
Allowance for loan losses as a
percentage of nonperforming loans 181.19 108.20 143.74 88.03 60.65 153.6 122.4
</TABLE>

(1) Merchants' financial statements for the fiscal year ended December 31, 1995
and following reflect the acquisition of Texas Gulf Coast Bancorp, Inc., which
occurred May 1, 1995. See Note 2 to the Company's Consolidated Financial
Statements contained in the Merchants 1997 Form 10-K, a copy of which is
attached hereto as Appendix E.

13
<PAGE> 23

SPECIAL MEETING OF MERCHANTS SHAREHOLDERS

DATE, PLACE, TIME, AND PURPOSE

This Proxy Statement is being furnished to the holders of Merchants
Common Stock in connection with the solicitation by the Merchants Board of
proxies for use at the Special Meeting and at any adjournments or postponements
thereof at which Merchants shareholders will be asked to vote upon a proposal to
approve the Agreement and the Plan of Merger. The Special Meeting will be held
at Merchants Bank - Tanglewood located at 5005 Woodway, Houston, Texas 77056, at
10:00 a.m., local time, on July 30, 1998. See "DESCRIPTION OF Transaction."

RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES

The close of business on June 1, 1998, has been fixed as the Merchants
Record Date for determining holders of outstanding shares of Merchants Common
Stock entitled to notice of and to vote at the Special Meeting. Only holders of
Merchants Common Stock of record on the books of Merchants at the close of
business on the Merchants Record Date are entitled to notice of and to vote at
the Special Meeting. As of the Merchants Record Date, there were 1,952,465
shares of Merchants Common Stock issued and outstanding held by approximately
959 holders of record.

Each holder of record of shares of Merchants Common Stock on the
Merchants Record Date is entitled to cast one vote per share on the proposal to
approve the Agreement and the Plan of Merger, and on any other matter properly
submitted for the vote of the Merchants shareholders at the Special Meeting. The
presence, either in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Merchants Common Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum at the Special Meeting.

Merchants intends to count shares of Merchants Common Stock present in
person at the Special Meeting but not voting, and shares of Merchants Common
Stock for which it has received proxies but with respect to which holders of
shares have abstained on any matter, as present at the Special Meeting for
purposes of determining the presence or absence of a quorum for the transaction
of business. Approval of the Agreement and the Plan of Merger requires the
affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of Merchants Common Stock entitled to vote at the Special
Meeting. Brokers who hold shares in street name for customers who are the
beneficial owners of such shares are prohibited from giving a proxy to vote
shares held for such customers on the approval of the Agreement and the Plan of
Merger without specific instructions from such customers. Given that the
approval of the Agreement and the Plan of Merger requires the affirmative vote
of the holders of at least two-thirds of the outstanding shares of Merchants
Common Stock entitled to vote thereon, any abstention, non-voting share or
"broker non-vote" with respect to such shares of Merchants Common Stock will
have the same effect as a vote AGAINST the approval of the Agreement and the
Plan of Merger.

Shares of Merchants Common Stock represented by properly executed
proxies, if such proxies are received prior to or at the Special Meeting and not
revoked, will be voted in accordance with the instructions indicated on the
proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR THE
PROPOSAL TO APPROVE THE AGREEMENT AND THE PLAN OF MERGER AND IN THE DISCRETION
OF THE PROXYHOLDER AS TO ANY OTHER MATTER WHICH MAY COME PROPERLY BEFORE THE
SPECIAL MEETING. IF NECESSARY, THE PROXYHOLDER MAY VOTE IN FAVOR OF A PROPOSAL
TO ADJOURN THE SPECIAL MEETING IN ORDER TO PERMIT FURTHER SOLICITATION OF
PROXIES IN THE EVENT THERE ARE NOT SUFFICIENT VOTES TO APPROVE THE FOREGOING
PROPOSAL AT THE TIME OF THE SPECIAL MEETING. HOWEVER, NO PROXYHOLDER WILL VOTE
ANY PROXIES VOTED AGAINST APPROVAL OF THE AGREEMENT AND THE PLAN OF MERGER FOR A
PROPOSAL TO ADJOURN THE SPECIAL MEETING.

A Merchants shareholder who has given a proxy solicited by the
Merchants Board may revoke it at any time prior to its exercise at the Special
Meeting by either (i) giving written notice of revocation to the Corporate
Secretary of Merchants, (ii) properly submitting to Merchants a duly executed
proxy bearing a later date, or

14
<PAGE> 24

(iii) attending the Special Meeting and voting in person. All written notices of
revocation and other communications with respect to revocation of proxies should
be addressed as follows: Merchants Bancshares, Inc., 5005 Woodway, Suite 300,
Houston, Texas 77056; Attention: J.W. Lander, III., President.

The directors and executive officers of Merchants (including immediate
family members and affiliated entities) owned, as of May 15, 1998, 413,699
shares, or approximately 21.2% of the outstanding shares of Merchants Common
Stock. The directors and executive officers of Merchants have indicated their
intent to vote FOR approval of the Agreement and the Plan of Merger. Assuming
that occurs then 57.6965% of the remaining 1,538,766 outstanding shares of
Merchants Common Stock must be voted FOR the approval of the Agreement and the
Plan of Merger in order to obtain the requisite shareholder approval.

For information with respect to beneficial owners of 5% or more of the
outstanding shares of Merchants Common Stock, and information with respect to
the number and percentage of outstanding shares of Merchants Common Stock
beneficially owned by the directors and executive officers of Merchants, see
"BUSINESS OF MERCHANTS --Beneficial Ownership of Merchants Common Stock."

SOLICITATION OF PROXIES

Proxies may be solicited by the directors, officers, and employees of
Merchants by mail, in person, or by telephone or telegraph. Such persons will
receive no additional compensation for such services. Merchants may make
arrangements with brokerage firms and other custodians, nominees, and
fiduciaries, if any, for the forwarding of solicitation materials to the
beneficial owners of Merchants Common Stock held of record by such persons. Any
such brokers, custodians, nominees, and fiduciaries will be reimbursed for the
reasonable out-of-pocket expenses incurred by them for such services. All
expenses associated with the solicitation of proxies, other expenses associated
with the Special Meeting and expenses related to the printing and mailing of
this Proxy Statement will be shared by UPC and Merchants as provided in the
Agreement. See "DESCRIPTION OF TRANSACTION -- Expenses and Fees."

DISSENTERS' RIGHTS

Holders of Merchants Common Stock have the right to dissent from the
Merger and, assuming the Merger is consummated, to receive in cash an amount
determined to be the "fair value" of their shares of Merchants Common Stock. In
order to be entitled to fully exercise dissenters' rights, a Merchants
shareholder choosing to dissent (a "Dissenting Shareholder") must NOT vote FOR
the approval of the Agreement and the Plan of Merger and must take certain other
procedural steps to "perfect" such Dissenting Shareholder's rights under Article
5.12 of the Texas BCA. See "DESCRIPTION OF TRANSACTION - Dissenters' Rights" and
Appendix D hereto, which is a copy of Articles 5.11, 5.12 and 5.13 of the Texas
BCA governing statutory dissenters' rights.

It is not necessary for a Merchants shareholder to vote against
consummation of the Merger in order to perfect his or her right to dissent and
demand appraisal. However, no such shareholder may vote for approval and
adoption of the Agreement and the Plan of Merger and thereafter demand his or
her appraisal rights. Because all proxies submitted which do not specify how
such proxy is to be voted will be voted in favor of the adoption and approval of
the Agreement and the Plan of Merger, a Merchants shareholder who desires to
dissent from approval of the Merger should not submit such a proxy. A Merchants
shareholder who votes for approval and adoption of the Agreement and the Plan of
Merger or who submits a proxy which does not specify how such proxy is to be
voted will waive any rights of dissent and appraisal. A vote against
consummation of the Merger will not satisfy the statutory requirement that a
Dissenting Shareholder give notice of his or her intention to dissent and make
demand for payment of his or her shares of Merchants Common Stock.

15
<PAGE> 25

RECOMMENDATION

THE MERCHANTS BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT, THE PLAN OF
MERGER, AND THE MERGER CONTEMPLATED THEREBY, BELIEVES THAT THE PROPOSAL TO
APPROVE THE AGREEMENT AND THE PLAN OF MERGER IS IN THE BEST INTERESTS OF
MERCHANTS AND ITS SHAREHOLDERS, AND RECOMMENDS THAT THE MERCHANTS SHAREHOLDERS
VOTE FOR APPROVAL OF THE AGREEMENT AND THE PLAN OF MERGER.

DESCRIPTION OF TRANSACTION

The following information describes material aspects of the Merger.
This description does not purport to be complete and is qualified in its
entirety by reference to the Appendices hereto, including the Agreement and the
Plan of Merger, which are attached as Appendices A and B, respectively, to this
Proxy Statement and incorporated herein by reference. All shareholders are urged
to read the Appendices in their entirety.

GENERAL

The Agreement provides for the acquisition of Merchants by UPC pursuant
to the merger of Merchants with and into UP Holding, a wholly-owned subsidiary
of UPC organized under the laws of the State of Tennessee, with the effect that
UP Holding will be the surviving corporation resulting from the Merger. At the
Effective Time, each share of Merchants Common Stock then issued and outstanding
(excluding shares held by Merchants, UPC, or their respective subsidiaries, in
each case other than shares held in a fiduciary capacity or as a result of debts
previously contracted, and excluding shares held by Dissenting Shareholders)
will be converted into and exchanged for the right to receive 1.0345 shares of
UPC Common Stock, subject to possible adjustment as described below (the
"Exchange Ratio").

No fractional shares of UPC Common Stock will be issued. Rather, cash
(without interest) will be paid in lieu of any fractional share to which any
Merchants shareholder would be entitled upon consummation of the Merger, in an
amount equal to such fractional part of a share of UPC Common Stock multiplied
by the closing price of such UPC Common Stock on the NYSE (as reported by The
Wall Street Journal or, if not reported thereby, another authoritative source as
reasonably selected by UPC) on the last trading day preceding the Effective
Time.

As of the Merchants Record Date, Merchants had 1,952,465 shares of
Merchants Common Stock outstanding. Based upon the Exchange Ratio, and assuming
there are no Dissenting Shareholders, upon consummation of the Merger, UPC will
issue approximately 2,019,825 shares of UPC Common Stock.

POSSIBLE ADJUSTMENT OF EXCHANGE RATIO

Under certain circumstances described below, the Exchange Ratio could
be adjusted pursuant to certain provisions of the Agreement. UNDER NO
CIRCUMSTANCES WOULD THE EXCHANGE RATIO BE LESS THAN 1.0345 SHARES OF UPC COMMON
STOCK FOR EACH SHARE OF MERCHANTS COMMON STOCK. An adjustment could occur if the
Merchants Board elects to terminate the Agreement pursuant to the provisions of
the Agreement described below, and if UPC then elects to avoid termination of
the Agreement by increasing the Exchange Ratio.

Merchants is not obligated to consummate the Merger with UPC if both:

(a) the average of the daily last sales prices (the "Average
Closing Price") of UPC Common Stock (as reported on the NYSE
Composite Transactions List) for the 20 consecutive full
trading days ending on the later of the date on which the
Special Meeting is held and the date on which the last
required consent of the regulatory authorities is received,
and all required waiting periods have expired (the
"Determination Date") is less than $49.61, which represents a
15% decline from $58.375 (the "Starting Price"), the price per
share of UPC Common Stock at the

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close of business on January 23, 1998, the fourth full trading
day after the announcement by press release of the Merger (the
"Starting Date");

and

(b) (i) the number (the "UPC Ratio") obtained by dividing the
Average Closing Price by $58.375, the Starting Price, is less
than (ii) the number (the "Index Ratio") obtained by dividing
the weighted average of the closing prices of the common stock
of the bank holding companies defined as the "Index Group" in
the Agreement (the "Index Price") on the Determination Date by
the Index Price on January 23, 1998, the Starting Date,
multiplied by .85.

In such case, Merchants has the right to terminate the Agreement during
the ten-day period commencing two days after the Determination Date by giving
UPC prompt notice of that decision. Merchants may withdraw its termination
notice at any time during that ten-day period. During the five-day period after
receipt of such notice, UPC has the option to increase the consideration payable
to Merchants shareholders by adjusting the Exchange Ratio in the manner
described below. UPC IS UNDER NO OBLIGATION TO ADJUST THE EXCHANGE RATIO. Should
UPC elect to adjust the Exchange Ratio, it must give Merchants prompt notice of
that election and of the adjusted Exchange Ratio, in which case no termination
shall have occurred pursuant to such right of termination.

These conditions reflect the parties' agreement that Merchants'
shareholders will assume the risk of declines in the value of UPC Common Stock
to $49.62. Any adjustment of the Exchange Ratio below a decline in the price of
UPC Common Stock to $49.62 would be dependent on whether the Average Closing
Price of UPC Common Stock lags behind the relative performance of the common
stocks of the Index Group by more than 15%.

If the Average Closing Price is less than $49.62 per share and the UPC
Ratio is less than the Index Ratio, the Merchants Board would likely elect to
terminate the Agreement so as to require UPC to consider increasing the Exchange
Ratio. If the Merchants Board elects to terminate the Agreement, UPC would then
determine whether to proceed with the Merger at the higher Exchange Ratio. In
making this determination, the principal factors UPC will consider include the
projected effect of the Merger on UPC's pro forma earnings per share and whether
UPC's assessment of Merchants' earning potential as part of UPC justifies the
issuance of an increased number of shares of UPC Common Stock. If UPC declines
to adjust the Exchange Ratio, Merchants may elect to proceed without the
adjustment, provided it does so within twelve (12) days of the Determination
Date, although it has no current intention to so elect without resoliciting the
approval of the Merchants shareholders. In making such determination, the
Merchants Board will take into account, consistent with its fiduciary duties,
all relevant facts and circumstances that exist at such time, including, without
limitation, information concerning the business, financial condition, results of
operations and prospects of UPC (including the recent performance of UPC Common
Stock, the historical financial data of UPC, customary statistical measurements
of UPC's financial performance and the future prospects for UPC Common Stock
following the Merger), the business, financial condition, results of operations
and prospects of Merchants, developments in the banking industry and the advice
of its financial advisor and legal counsel. UPC IS UNDER NO OBLIGATION TO ADJUST
THE EXCHANGE RATIO.

The operation of the adjustment mechanism can be illustrated by three
scenarios. (For purposes of the scenarios, it has been assumed that the initial
Exchange Ratio is 1.0345 shares of UPC Common Stock for each share of Merchants
Common Stock, the Starting Price of UPC Common Stock is $58.375, and the Index
Price, as of the Starting Date, is $100).

(1) The first scenario occurs if the Average Closing Price is not
less than $49.62. Under this scenario, regardless of any
comparison between the UPC Ratio and the Index Ratio, there
would be no possible adjustment to the Exchange Ratio, even
though the value of the consideration to be received by
Merchants shareholders could have fallen from a pro forma
$60.38 ($53.375 x 1.0345) per share, as of the Starting Date,
to as low as $51.33 ($49.62 x 1.0345) per share, as of the
Determination Date.

(2) The second scenario occurs if the Average Closing Price is
less than $49.62, but does not represent a decline from the
Starting Price of significantly more (i.e. more than 15%) than
the decline of the

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<PAGE> 27

common stock prices of the Index Group. Under this scenario,
there also would be no possible adjustment to the Exchange
Ratio, even though the value of the consideration to be
received by Merchants shareholders would have fallen from a
pro forma $60.38 per share, as of the Starting Date, to an
amount based on the then lower Average Closing Price of UPC
Common Stock, as of the Determination Date.

(3) The third scenario occurs if both the Average Closing Price
declines below $49.62 and the UPC Ratio is below the Index
Ratio (i.e., UPC's stock price has declined by more than 15%
relative to the price of shares of the Index Group). Under
this scenario, the adjustment in the Exchange Ratio is
designed to ensure that the Merchants shareholders receive
shares of UPC Common Stock having a value (based upon the
Average Closing Price) that corresponds to at least $51.33 or
a 15% decline from the stock price performance reflected by
the Index Group, whichever is less.

For example, if the Average Closing Price were $45.00, and the
ending Index Price, as of the Determination Date, were $95,
the UPC Ratio (.7709) would be below the Index Ratio (.8075 or
.95 times .85), Merchants could terminate the Agreement unless
UPC elected within five days after receipt from Merchants of
notice of intent to terminate to increase the Exchange Ratio
to equal 1.0837, which represents the lesser of (a) 1.1407
[the result of dividing $51.33 (the product of $49.62 and the
original Exchange Ratio) by the Average Closing Price
($45.00), rounded to the nearest thousandth] and (b) 1.0837
[the result of dividing the Index Ratio (.8075) times 1.0345
by the UPC Ratio (.7709), rounded to the nearest thousandth].
Based upon the assumed $45.00 Average Closing Price, the new
Exchange Ratio would represent a value to the Merchants
shareholders of $48.77 per share.

If the Average Closing Price were $45.00, and the ending Index
Price, as of the Determination Date, were $100, the UPC Ratio
(.7709) would be below the Index Ratio (.85, or 1.00 times
.85). Merchants could terminate the Agreement unless UPC
elected within five days after its receipt from Merchants of
notice of intent to terminate, to increase the Exchange Ratio
to equal 1.1406, which represents the lesser of (a) 1.1407
[the result of dividing $51.33 (the product of $49.62 and the
original Exchange Ratio) by the Average Closing Price
($45.00), rounded to the nearest thousandth] and (b) 1.1406
[the result of dividing the Index Ratio (.85) times 1.0345 by
the UPC Ratio (.7709), rounded to the nearest thousandth].
Based upon the assumed $45.00 Average Closing Price, the new
Exchange Ratio would represent a value to the Merchants
shareholders of $51.33 per share.

The actual market value of a share of UPC Common Stock at the Effective
Time, at the time certificates for those shares are delivered following
surrender and exchange of Certificates for shares of Merchants Common Stock and
at any time thereafter, may be more or less than the Average Closing Price.
Merchants shareholders are urged to obtain current market quotations for UPC
Common Stock. See "COMPARATIVE MARKET PRICES AND DIVIDENDS."

RIGHT TO RESTRUCTURE TRANSACTION

UPC has reserved the right to revise the structure of the Merger in
order to achieve tax benefits or for any other reason it deems advisable.
However, UPC may not, without the approval of the Merchants Board and, if
required by the Texas BCA, the Merchants shareholders, make any revision to the
structure of the Merger which would (i) change the amount of consideration
Merchants shareholders are entitled to receive, (ii) change the intended
tax-free effects of the Merger to UPC, Merchants or the Merchants shareholders,
(iii) permit UPC to pay the consideration for the Merger other than by delivery
of UPC Common Stock registered with the SEC, (iv) be materially adverse to the
interest of Merchants or adverse to the Merchants shareholders, (v) materially
impede or delay consummation of the Merger, or (vi) require a vote of UPC
shareholders under relevant state law.

BACKGROUND OF AND REASONS FOR THE MERGER.

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<PAGE> 28

In August, 1997, Merchants engaged Price Waterhouse LLP Corporate
Finance Group ("PWCF") to advise the Merchants Board with respect to available
strategic alternatives. The Merchants Board recognized the increasing
competition from other providers of financial services and the consequent
consolidation occurring in the banking industry. PWCF was selected based on its
knowledge of the banking industry and experience in working with similarly-sized
financial institutions.

On July 29, 1997, PWCF presented and distributed analytical materials
to the President and Chief Financial Officer of Merchants, who also serves as a
Senior Vice President of Merchants Bank, in preparation for a meeting of the
Merchants Board. On September 26, 1997, the Merchants Board met to consider
strategic alternatives open to Merchants. At this meeting, PWCF presented to the
Merchants Board, among other things, information concerning the outlook for the
banking industry, the historical operating performance of Merchants Bank
compared to selected Texas banks, the competitive market position of Merchants
and the merger and acquisition environment for Texas banks (including the
pricing of recent transactions). PWCF also outlined various strategic
alternatives available to Merchants, including the sale of Merchants, the
acquisition by Merchants of other financial institutions, redefining Merchants'
target market, the possibility of building a regional coalition of financial
institutions to achieve certain cost savings and maintenance of the status quo.
At the conclusion of this meeting, after review of the foregoing alternatives,
the Merchants Board determined to explore the possible sale of Merchants. The
Merchants Board authorized PWCF to contact certain financial institutions to
explore their interest in a potential acquisition of Merchants.

Commencing on October 3, 1997, six institutions were contacted
regarding their interest in pursuing an acquisition of Merchants, and four of
these institutions expressed an interest in pursuing further discussions. Eight
additional financial institutions were contacted regarding their interest in
pursing an acquisition of a community bank in Texas with characteristics similar
to those of Merchants Bank. None of the eight institutions expressed an interest
in pursuing further discussions. On or about October 20, 1997, UPC was contacted
regarding its level of interest in acquiring a community bank in Texas.

During the weeks of October 13 and October 22, 1997, UPC and four other
financial institutions executed confidentiality agreements and were subsequently
provided with certain confidential information regarding Merchants and Merchants
Bank. Between October 23 and November 3, UPC and three other financial
institutions delivered letters expressing preliminary indications of interest in
connection with the acquisition of Merchants. Three of the four institutions
were invited to conduct due diligence investigations.

Between November 10 and December 6, 1997, UPC and two other financial
institutions performed on-site due diligence reviews of Merchants and Merchants
Bank. On or about December 17, 1997, UPC submitted a written offer to acquire
Merchants for $124 million in UPC Common Stock, based on the average of the
closing prices of UPC Common Stock on the NYSE for the 20 trading days preceding
the date the merger agreement was executed. One other financial institution
communicated a verbal offer to acquire Merchants at a lower price. No formal
written offer was provided by any other financial institution.

The Merchants Board met on December 19, 1997, to discuss the written
offer from UPC and the verbal offer from the other financial institution. At
that meeting, PWCF reviewed the terms of the offers with the Merchants Board.
The Merchants Board then decided to negotiate a definitive merger agreement with
UPC.

Meetings and negotiations regarding a definitive agreement for the
acquisition of Merchants continued between December 20, 1997 and January 16,
1998. On January 12, 1998, a draft of the Agreement and the Plan of Merger was
distributed to each Merchants Board member. On January 16, 1998, the Merchants
Board met to consider the final terms of the proposed transaction and the
proposed form of the Agreement and the Plan of Merger. PWCF reviewed the
chronology of events leading to the consideration of the Agreement, the
principal financial terms of the transaction, certain financial and stock market
data of UPC and the methods PWCF used to evaluate the fairness of the
consideration to be received by Merchants' shareholders in the Merger.

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<PAGE> 29

Counsel to Merchants also reviewed in detail for the Merchants Board
the terms of the proposed form of Agreement and Plan of Merger. The Merchants
Board received from PWCF its verbal opinion, subsequently confirmed in writing,
that the aggregate consideration to be paid to Merchants' shareholders as a
result of the Merger was fair, as of January 16, 1998, from a financial point of
view. See "--- Opinion of Merchants' Financial Advisor." The Merchants Board
then unanimously approved the Agreement, the Plan of Merger and the transactions
contemplated thereby.

The Agreement originally contemplated that PWCF would update
(immediately prior to the mailing of this Proxy Statement) its fairness opinion
delivered to the Merchants Board on January 16, 1998. To resolve certain timing
issues and to ensure that PWCF would be able to deliver its updated fairness
opinion, on May 26, 1998, the parties agreed to amend the Agreement to require
that the updated opinion be delivered as of a date prior to the Proxy Statement
and to increase the Exchange Ratio from one share of UPC Common Stock for each
share of Merchants Common Stock to 1.0345 shares of UPC Common Stock for each
share of Merchants Common Stock. Amendment No. 1 to the Agreement is attached
hereto with the Agreement as Appendix A. The Plan of Merger was also amended and
restated to reflect the change to the Exchange Ratio, and a copy of the Amended
and Restated Plan of Merger is attached hereto as Appendix B.

RECOMMENDATION OF THE MERCHANTS BOARD.

The Merchants Board believes that the Merger is fair to, and in the
best interests of, Merchants and its shareholders. If the Merger is consummated,
the shareholders of Merchants will acquire an equity interest in a much larger
and more diversified enterprise. The UPC Common Stock is traded on the NYSE,
and, accordingly, is more readily marketable than the Merchants Common Stock.
The Merchants Board believes that the Merger will result in a company with
expanded opportunities for profitable growth and that the combined resources of
Merchants and UPC will provide an enhanced ability to compete in the changing
and competitive financial services industry. ACCORDINGLY, THE MERCHANTS BOARD
HAS UNANIMOUSLY APPROVED THE AGREEMENT AND THE PLAN OF MERGER AND UNANIMOUSLY
RECOMMENDS THAT THE HOLDERS OF MERCHANTS COMMON STOCK VOTE FOR THE APPROVAL OF
THE AGREEMENT AND THE PLAN OF MERGER AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY. See "-- Background of and Reasons for the Merger --
Background of the Merger" and "-- Opinion of Merchants' Financial Advisor".

The terms of the Merger, including the Exchange Ratio, are the result
of arm's-length negotiations between representatives of Merchants and UPC. In
reaching its decision to approve the Agreement, the Merchants Board consulted
with its legal advisors regarding the terms of the transaction, with its
financial advisor regarding the financial aspects of the proposed transaction
and the fairness, (from a financial point of view) of the consideration to be
received by the shareholders of Merchants, and with management of Merchants,
and, without assigning any relative or specific weights, considered a number of
factors, both from a short-term and long-term perspective, including, without
limitation, those set forth in "-- Background of and Reasons for the Merger --
Background of the Merger," and the following:

(a) the Merchants Board's familiarity with and review of
Merchants' business, financial condition, results of operations, and
prospects, including, without limitation, its potential growth and
profitability and the business risks associated therewith;

(b) the current and prospective environment in which Merchants
operates, including national and local economic conditions, the
competitive environment for commercial banks and other financial
institutions generally and the increasing consolidation in the
financial services industry and the competitive effects of such
increased consolidation on smaller financial institutions such as
Merchants;

(c) information concerning the business, financial condition,
results of operations and prospects of UPC, including the recent
performance of UPC Common Stock, the historical financial data of UPC,
customary statistical measurements of UPC financial performance, and
the future prospects for UPC Common Stock following the Merger;

(d) the value to be received by holders of Merchants Common
Stock pursuant to the Agreement;

(e) the lack of an established trading market for shares of
Merchants Common Stock;

(f) the information presented by PWCF to the Merchants Board
with respect to the Merger and the opinion of PWCF that, as of the date
of such opinion, the consideration to be received by the

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<PAGE> 30

shareholders of Merchants was fair to the holders of Merchants Common
Stock from a financial point of view (see "-- Opinion of Merchants'
Financial Advisor");

(g) the financial and other significant terms of the proposed
Merger with UPC, and the review by Merchants with its legal and
financial advisors of the provisions of the Agreement;

(h) the Merchants Board's belief that the receipt of UPC
Common Stock in the Merger generally will permit holders of Merchants
Common Stock to defer any federal income tax liability associated with
the increase in the value of their stock as a result of the Merger (see
"-- Certain Federal Income Tax Consequences of the Merger") and to
become shareholders of UPC, an institution with a strong history of
operations, earnings performance, dividend payments, and share
liquidity; and

(i) the alternative strategic courses available to Merchants,
including remaining independent and exploring other potential business
combination transactions, including, in particular, the potential
values that could be derived therefrom (see "--Background of and
Reasons for the Merger-- Background of the Merger").

The foregoing factors are all of the material factors considered by the
Board of Directors of Merchants in reaching its decision to recommend approval
of the Merger.

To ensure that PWCF would be able to deliver the May Fairness Opinion
(as hereinafter defined) UPC agreed on May 26, 1998 to increase the Exchange
Ratio from (i) one share of UPC Common Stock for each share of Merchants Common
Stock (as orginally set forth in the Agreement) to (ii) 1.0345 shares of UPC
Common Stock for each share of Merchants Common Stock. Based on the closing
price of UPC Common Stock on May 26, 1998, the adjustment to the Exchange Ratio
resulted in the aggregate consideration to be paid by UPC for all shares of
Merchants Common Stock to be approximately $117,000,000. Depending upon the
closing price for UPC Common Stock on the date of the Effective Time of the
Merger, the aggregate consideration to be paid by UPC for all shares of
Merchants Common Stock may be more or less than $117,000,000.

UPC'S REASONS FOR THE MERGER.

In adopting the Agreement, the Plan of Merger, and the Merger, the UPC
Board considered a number of additional factors concerning the benefits of the
Merger. Without assigning any relative or specific weights to the factors, the
UPC Board considered the following additional material factors:

(a) a review, based in part on a presentation by UPC's
management, of (i) the business, operations, earnings, and financial
condition, including the capital levels and asset quality, of Merchants
on a historical, prospective, and pro forma basis and in comparison to
other financial institutions in the area, (ii) the demographic,
economic, and financial characteristics of the markets in which
Merchants operates, including existing competition, history of the
market areas with respect to financial institutions, and average demand
for credit, on a historical and prospective basis, and (iii) the
results of UPC's due diligence review of Merchants; and

(b) a variety of factors affecting and relating to the overall
strategic focus of UPC, including UPC's desire to expand into markets
in Texas and the business lines pursued by Merchants.

OPINION OF MERCHANTS' FINANCIAL ADVISOR

Merchants retained PWCF to, among other things, assist the Merchants
Board in an analysis of the various strategic alternatives available to
Merchants and, ultimately, to act as independent financial advisor to Merchants
in connection with the Merger. Price Waterhouse LLP is a nationally-recognized
accounting firm and its Corporate Finance Group is regularly engaged in the
valuation of such businesses and their securities in connection with mergers and
acquisitions and other corporate transactions.

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PWCF has delivered its written opinion to the Merchants Board that, as
of January 16, 1998 and as of May 26, 1998, the aggregate consideration
("Aggregate Consideration") to be received by the holders of Merchants Common
Stock pursuant to the Agreement is fair from a financial point of view. PWCF was
engaged to act as financial advisor and to render its opinion in connection with
the Agreement pursuant to an engagement letter dated as of August 21, 1997 (the
"Engagement Letter"). No limitations were imposed by the Merchants Board with
respect to the investigations made or procedures followed in rendering its
opinion.

PWCF updated its fairness opinion analysis in May, 1998. The full text
of the updated opinion dated as of May 26, 1998 (the "May Fairness Opinion"),
which sets forth assumptions made, matters considered and limits on the review
undertaken, is attached hereto as Appendix C to this Proxy Statement. Merchants
shareholders are urged to read the May Fairness Opinion in its entirety. PWCF's
May Fairness Opinion, which is addressed to the Merchants Board, is directed
only to the Aggregate Consideration to be received by the Merchants shareholders
in the Merger and does not constitute a recommendation to Merchants'
shareholders as to how they should vote at the Special Meeting or as to any
other matter. The summary of the May Fairness Opinion set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such May
Fairness Opinion. The contents and conclusions presented in the January 16, 1998
verbal opinion are included in the written Fairness Opinion rendered.

In evaluating the May Fairness Opinion, shareholders of Merchants
should be aware that Price Waterhouse LLP is the independent accountant for UPC.
The PWCF team representing Merchants was separate and distinct from the Price
Waterhouse LLP team responsible for the audit of UPC. Price Waterhouse also is
the independent accountant for UPC and provided due diligence and services to
UPC in connection with the Agreement and the Merger. The PWCF team engaged to
assist Merchants and provide the May Fairness Opinion was separate and distinct
from the Price Waterhouse team responsible for the audit of UPC's financial
statements and the Price Waterhouse team engaged by UPC to provide due diligence
services in connection with the Agreement and the Merger. No unauthorized
communication was permitted between the PWCF team serving Merchants and the
Price Waterhouse LLP team serving UPC. Merchants and UPC each consented to this
arrangement.

As Merchants' financial advisor, PWCF performed due diligence on the
potential acquirors, evaluated preliminary offers and evaluated the current and
future prospects of the institutions' stock, all in connection with a possible
merger or sale of all or a portion of Merchants. At the January 16, 1998 meeting
of the Merchants Board, PWCF made a presentation on financial aspects of the
Merger and delivered to the Merchants Board its verbal opinion (which opinion
was subsequently delivered to the Merchants Board in written form dated February
28, 1998) as to the fairness from a financial point of view of the Aggregate
Consideration.

In arriving at its opinion, PWCF reviewed certain publicly available
business and financial information relating to Merchants, including the
Agreement. PWCF also reviewed certain other information provided to it by
Merchants, including financial forecasts of Merchants, and it discussed with the
management of Merchants the business and prospects of Merchants. Such
information included Merchants' audited financial statements from 1995, 1996 and
1997, interim financial statements from 1998, audited financial statements from
Texas Gulf Coast Bancorp, Inc. (which was acquired by Merchants in 1995 in a
merger accounted for as a "purchase"), and certain other publicly available
information, including but not limited to, filings with the SEC and other
regulatory bodies. In addition, PWCF reviewed UPC's daily stock prices and
trading volume in analyzing the liquidity of the UPC Common Stock and its price
volatility relative to a set of institutions deemed to be peers of UPC.

PWCF assumed that the Merger would have the tax consequences described
in the Agreement, and that the other transactions contemplated by the Agreement
would be consummated as described therein. PWCF relied as to all legal matters
relevant to its May Fairness Opinion upon the advice of its legal counsel.

For purposes of the May Fairness Opinion, PWCF relied upon and assumed
the accuracy, completeness, and fairness of the financial and other information
made available to it and did not attempt to independently verify such
information. PWCF relied upon the assurances of Merchants that the information
provided by Merchants'

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<PAGE> 32

management did not contain any material misstatement and/or omissions and, with
respect to financial planning data and other business outlook information
prepared by Merchants' management, reflected management's best available
estimates and that Merchants' management was not aware of any information or
fact that would make the information provided to PWCF inaccurate or misleading.
In addition, PWCF has assumed the market value of a share of UPC Common Stock is
adequately and best represented by prices reported on the New York Stock
Exchange on which the shares of UPC Common Stock freely trade.

PWCF based its analysis upon assumptions with respect to industry
performance, general business and economic conditions and other matters it
considers reasonable. In addition, this analysis contains estimates of future
financial performance of Merchants, which appeared and continue to appear (as of
May 26, 1998) reasonable to PWCF and Merchants' management. However, such
information, estimates, or opinions are not offered as predictions or as
assurances that a particular level of earnings or profit will be achieved if the
Merger does not occurr. Actual results achieved during the period covered by the
prospective financial analysis will vary from those employed in PWCF's analysis,
irrespective of the Merger, and the variation may be material.

In connection with rendering the May Fairness Opinion and preparing its
various written and verbal presentations to the Merchants Board, PWCF performed
a variety of financial analyses. Set forth below is a brief summary of the
valuation methods employed by PWCF in connection with the May Fairness Opinion.
The summary set forth below does not purport to be a complete description of the
analyses or data presented by PWCF, but it does discuss all material analyses
performed by PWCF. The preparation of a fairness opinion is a complex process
and is not readily susceptible to partial analysis or summary description.
Accordingly, notwithstanding the separate factors summarized below, PWCF
believes that its analyses must be considered as a whole and that selecting
portions of its analyses or certain of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
process underlying its analyses and the May Fairness Opinion.

Subsequent developments including, but not limited to, changes in
prevailing interest rates and other factors which generally influence the price
of securities, adverse changes in the current capital markets, the occurrence of
adverse changes in the financial condition, business, assets, results of
operations or prospects of Merchants or UPC, and any necessary actions by or
restriction of federal, state or other governmental agencies or regulatory
authorities may affect the May Fairness Opinion.

COMPARABLE TRANSACTIONS ANALYSIS. The primary method for assessing the
fairness of the Merger is to analyze transaction prices for institutions similar
to Merchants. PWCF reviewed selected acquisitions of comparably sized financial
institutions in Texas, those institutions acquired by UPC in the last three
years and national average transaction prices of comparably sized financial
institutions over the last four years.

PWCF identified 18 acquisitions of comparably sized financial
institutions in Texas. These acquisitions had average and median multiples of
price-to-book value of 2.6x and 2.5x respectively within a range of 1.3x and
4.9x. These multiples were compared with Merchants' Aggregate Consideration of
2.1x book value and its 2.5x adjusted book value where Merchants' book value was
adjusted to reflect the equity to assets ratio of each identified comparable
institution. The comparable transaction group yielded an average and median
multiple of purchase price to latest 12 months earnings of 18.1x and 17.4x
respectively within a range of 8.3x to 28.2x range. These multiples were
compared with Merchants' Aggregate Consideration of 15.9x normalized earnings
for Merchants (normalized earnings based on Merchants' 3-year average return on
average assets of 1.4%).

PWCF reviewed the thirteen acquisitions made by UPC between June 20,
1995 and April 1, 1998. This analysis was based on publicly available
information obtained from filings with the SEC, public company disclosures,
press releases, industry and popular press reports, data bases and other
sources. These acquisitions had an average and median multiple of purchase
price-to-book value of 2.2x within a range of 1.3x and 3.3x. These multiples
were compared with Merchants' average and median multiple of 2.1x Aggregate
Consideration to book value and 2.2x Aggregate Consideration to adjusted book
value where Merchants' book value was adjusted to reflect the median equity to
assets ratio of the identified comparable institutions. The comparable
transaction group yielded an average and median multiple of purchase price to
latest 12 months earnings of 18.7x and 18.9x, respectively, within a range of
12.7x to 30.2x. These multiples were compared with Merchants' 15.9x multiple of

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Aggregate Consideration to normalized earnings (normalized earnings based on
Merchants' 3-year average return on average assets of 1.4%).

MARKET COMPARABLE ANALYSIS. Because of the illiquid nature of the
identified publicly traded institutions of similar size to Merchants, and
because larger institutions trade at significantly different multiples than do
institutions of similar size to Merchants, PWCF found the Market Comparable
Analysis to be a less reliable indicator of the fair value of Merchants than the
Comparable Transaction and the Discounted Cash Flow Analyses. As a result, PWCF
did not rely on this method for its analysis of fairness.

DISCOUNTED CASH FLOW ANALYSIS. The Discounted Cash Flow Analysis
indicates the fair market value of the common stock of a business based on the
value of the cash flows that the business can be expected to generate in the
future. The Discounted Cash Flow Analysis is comprised of four steps: (i)
estimate the future income available for dividends for a projection period; (ii)
discount these cash flows to present value at a rate of return that considers
the relative risk of achieving the cash flows and the time value of money; (iii)
estimate the residual value of cash flows subsequent to the projection period;
and (iv) combine the present value of the residual cash flows with the
projection period cash flows to indicate the fair market value of Merchants.

Using this analysis, PWCF estimated the present value of the future
earnings that Merchants could produce over a five-year period, under various
assumptions, if Merchants performed in accordance with management's forecast and
certain variants thereof. The Discounted Cash Flow Analysis yielded an equity
value range for Merchants between $78 and $141 million.

PWCF did not express any opinion regarding the prices at which shares
of UPC Common Stock will trade if and when issued or at any time in the future.
The May Fairness Opinion was provided solely for the benefit of the Merchants
Board and was not on behalf of and was not intended to confer rights or remedies
upon any shareholder of Merchants or any other person or entity other than the
Merchants Board.

Pursuant to the terms of the Engagement Letter, for PWCF's financial
advisory services in connection with the Merger, including the rendering of its
Fairness Opinion, Merchants (i) has paid PWCF a $75,000 retainer ("Initial
Retainer"), in addition to $200,000 paid at the time PWCF rendered the verbal
fairness opinion relating to the Merger and (ii) has agreed to pay PWCF a fee
equal to (a) 1.00% of the total transaction value, as defined in the Engagement
Letter (the "Total Transaction Value"), received by Merchants or its
shareholders pursuant to a sale of Merchants, and (b) in the event that the
Total Transaction Value exceeds $130.0 million, Merchants shall pay PWCF a fee
of 3.00% of the Total Transaction Value above $130.0 million. The Initial
Retainer will be credited against the transaction fee. Merchants has also agreed
to reimburse PWCF for its reasonable out-of-pocket expenses and to indemnify it
against certain liabilities, including liabilities under the federal securities
laws. On June 18, 1998, the closing price of UPC Common Stock on the NYSE was
$54.75. Assuming no adjustment to the Exchange Ratio and that the closing price
of UPC Common Stock is $54.75 at the Effective Time, Merchants will pay to PWCF
aggregate fees of approximately $1,105,000, plus expenses.

In considering the May Fairness Opinion shareholders should be aware
that it addresses factual situations in existence on May 26, 1998 and was not
and will not be updated to reflect subsequent events.

EFFECTIVE TIME OF THE MERGER

Subject to the conditions to the obligations of the parties to effect
the Merger, the Effective Time will occur on the date and at the time that the
Texas Articles of Merger reflecting the Merger become effective with the
Secretary of State of the State of Texas and the Tennessee Articles of Merger
become effective with the Secretary of State of the State of Tennessee. Subject
to the terms and conditions of the Agreement, unless otherwise agreed upon in
writing by UPC and Merchants, the Agreement provides that the parties will use
their reasonable efforts to cause the Effective Time to occur on such date as
may be designated by UPC within 30 days following the last to occur of (i) the
effective date of the last required consent of any regulatory authority having
authority over and approving or exempting the Merger (including any requisite
waiting period in respect thereof), (ii) the date on which the shareholders of
Merchants approve the Agreement and the Plan of Merger, and (iii) the date on
which all other conditions precedent (other than those conditions which relate
to actions to be taken at the Closing) to each party's obligations under the
Agreement have been satisfied or waived (to the extent waivable by such party).
It is anticipated that the Effective Time will occur on July 31, 1998.

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<PAGE> 34

No assurance can be provided that the necessary shareholder and
regulatory approvals can be obtained or that other conditions precedent to the
Merger can or will be satisfied. Merchants and UPC anticipate that all
conditions to consummation of the Merger will be satisfied so that the Merger
can be consummated on or about July 31, 1998. However, delays in the
consummation of the Merger could occur.

The Board of Directors of either Merchants or UPC generally may
terminate the Agreement and the Plan of Merger if the Merger is not consummated
by September 30, 1998, unless the failure to consummate the transactions
contemplated by the Agreement on or before such date is caused by any willful
breach of the Agreement by the party seeking termination or certain other
specific conditions exist. See "-- Conditions to Consummation of the Merger" and
"-- Waiver, Amendment, and Termination."

DISSENTERS' RIGHTS

Any owner of Merchants Common Stock may dissent from approval of the
Agreement, the Plan of Merger and the Merger by complying with procedures
described in this section. Such a person is sometimes refered to as a
"Dissenting Shareholder" herein. The following summary does not purport to be a
complete statement of dissenters' rights of appraisal, and such summary is
qualified in its entirety by reference to Articles 5.11, 5.12 and 5.13 of the
Texas BCA, which are reproduced in full as Appendix D to this Proxy Statement.

Under the Texas BCA, any shareholder of Merchants may object to the
Merger and demand payment of the fair value of his or her shares of Merchants
Common Stock after filing with Merchants, at 5005 Woodway, Suite 300, Houston,
Texas, 77052, Attention: President, prior to the Special Meeting, a written
objection to the Merger, setting out that his or her right of dissent will be
exercised and giving his or her address to which notice is to be delivered or
mailed.

If the Merger is effected and a Merchants shareholder having made
demand did not vote in favor thereof, written notice of the consummation of the
Merger will be sent, within ten (10) days of such event, to such shareholder,
and such shareholder may, within ten (10) days thereafter, make written demand
to Merchants, at 5005 Woodway, Suite 300, Houston, Texas, 77052, Attention:
President, for payment of the fair value of his or her shares of Merchants
Common Stock. Such demand must state the number and class of shares of Merchants
Common Stock held by the shareholder and his or her estimate of the fair value
of such shares.

It is not necessary for a Merchants shareholder to vote against
consummation of the Merger in order to perfect his or her right to dissent and
demand appraisal. However, no Dissenting Shareholder may vote for approval and
adoption of the Agreement and the Plan of Merger and thereafter demand his or
her appraisal rights. Because all proxies submitted which do not specify how
such proxy is to be voted will be voted in favor of the adoption and approval of
the Agreement and the Plan of Merger, a Merchants shareholder who desires to
dissent from approval of the Merger should not submit such a proxy.

Unless demand for payment is made by a Dissenting Shareholder within
the ten-day period specified in the statute, he or she will be bound by the
Merger and his or her rights of appraisal will be terminated. A vote against
consummation of the Merger will not satisfy the statutory requirement that a
shareholder give notice of his or her intention to dissent and make demand for
payment of his or her shares of Merchants Common Stock. Upon making such demand
(and satisfying the other conditions described above), such Dissenting
Shareholder will cease to be a shareholder of Merchants and will become a
creditor of UP Holding.

Within twenty (20) days of making written demand for payment of the
fair value of his or her shares of Merchants Common Stock, a Dissenting
Shareholder must submit his or her Certificate(s) formerly representing shares
of Merchants Common Stock to UP Holding for notation on the Certificates that
such a demand has been made. Failure to submit the Certificates for notation
will, at the option of UP Holding, terminate the sDissenting Shareholder's
appraisal rights and he or she will be conclusively presumed to have approved
the Merger and his or her right to be paid the fair value of his or her shares
of Merchants Common Stock will terminate. Such a shareholder then will only be
entitled to receive shares of UPC Common Stock, and cash in lieu of fractional
shares, in exchange for his or her Merchants Common Stock.

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<PAGE> 35

Within twenty (20) days after receiving any demand for payment, UP
Holding will send each of the Dissenting Shareholders written notice to the
effect that either it will pay the amount claimed, or that it will pay some
other amount as the fair value.

If, within sixty (60) days after the date the Merger is effected, UP
Holding and the Dissenting Shareholder can agree upon the fair value, such value
will be paid and all rights of the Dissenting Shareholder will cease. If
agreement as to the fair value cannot be reached within such 60-day period,
either the Dissenting Shareholder or UP Holding may, within sixty (60) days
after the expiration of the 60-day period, file an action in a court of
competent jurisdiction, asking for a finding and determination of the fair value
of such shares. Court costs will be allocated between the parties in such manner
as the court may determine.

DISTRIBUTION OF UPC STOCK CERTIFICATES

Promptly after the Effective Time, UPC and Merchants will cause UPB,
acting in its capacity as Exchange Agent, to mail to the former shareholders of
Merchants, other than Dissenting Shareholders, a letter of transmittal, together
with instructions for the exchange of the Certificates representing shares of
Merchants Common Stock for certificates representing shares of UPC Common Stock.

MERCHANTS SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS.

Upon surrender to the Exchange Agent of Certificates for Merchants
Common Stock, together with a properly completed letter of transmittal, there
will be issued and mailed to each holder of Merchants Common Stock surrendering
such items a certificate or certificates representing the number of shares of
UPC Common Stock to which such holder is entitled and a check for the amount to
be paid in lieu of any fractional share (without interest), if any, together
with all undelivered dividends or distributions in respect of such shares
(without interest thereon), if any. UPC will not be obligated to deliver the
consideration to which any former holder of Merchants Common Stock is entitled
as a result of the Merger until the holder surrenders such holder's Certificates
representing the shares of Merchants Common Stock. Whenever a dividend or other
distribution is declared by UPC on UPC Common Stock, the record date for which
is at or after the Effective Time, the declaration will include dividends or
other distributions on all shares issuable pursuant to the Agreement, but
beginning 30 days after the Effective Time, no dividend or other distribution
payable after the Effective Time with respect to UPC Common Stock will be paid
to the holder of any unsurrendered Merchants Common Stock Certificate until the
holder duly surrenders such Certificate. Upon surrender of such Merchants Common
Stock Certificate, however, both the UPC Common Stock certificate, together with
all undelivered dividends or other distributions (without interest) and any
undelivered cash payment to be paid in lieu of a fractional share (without
interest), will be delivered and paid with respect to the shares represented by
such Certificate. In the event any Merchants Common Stock Certificate has been
lost, stolen, or destroyed, upon the making of an affidavit of that fact by the
person claiming the Certificate to be lost, stolen, or destroyed and, if
required by UPC, the posting by such person of a bond in such amount as UPC may
reasonably direct 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 UPC Common Stock and
cash in lieu of fractional shares deliverable in respect thereof pursuant to the
Agreement.

At the Effective Time, other than with respect to holders of shares of
Merchants Common Stock who dissent from the Merger pursuant to Section 5.12 of
the Texas BCA, the stock transfer books of Merchants will be closed to holders
of Merchants Common Stock and no transfer of shares of Merchants Common Stock by
any such holder will thereafter be made or recognized. If Certificates
representing shares of Merchants Common Stock are presented for transfer after
the Effective Time, other than with respect to holders of shares of Merchants
Common Stock who dissent from the Merger pursuant to Section 5.12 of the Texas
BCA they will be canceled and exchanged for shares of UPC Common Stock and a
check for the amount due in lieu of fractional shares and undelivered dividends,
if any, deliverable in respect thereof.

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LIMITATION ON NEGOTIATIONS

Section 8.8 of the Agreement provides that Merchants shall not solicit
or support any Acquisition Proposal by any person. Furthermore, except to the
extent necessary to comply with the fiduciary duties of the Merchants Board, as
advised by legal counsel, Merchants is prohibited from furnishing any non-public
information that it is not legally obligated to furnish, negotiating with
respect to or entering into any agreement with respect to, any Acquisition
Proposal. Merchants must promptly notify UPC immediately following receipt of
any Acquisition Proposal. As protection against possible violation of this
limitation, Merchants has agreed, under certain circumstances, to pay to UPC the
sum of $6,200,000 in immediately available funds in the event and at the time
that Merchants enters into a letter of intent or agreement with respect to an
Acquisisiton Proposal or supports or indicates an intent to support an
Acquisition Proposal other than pursuant to the Agreement. The limitation would
survive termination of the Agreement in certain circumstances. This provision
may have, or may have had, the effect of discouraging competing offers to
acquire or merge with Merchants.

CONDITIONS TO CONSUMMATION OF THE MERGER

Consummation of the Merger is subject to various conditions, including
(i) receipt of the approval of the shareholders of Merchants of the Agreement
and the Plan of Merger, and the consummation of the transactions contemplated
thereby, including the Merger, (ii) receipt of certain regulatory approvals
required for consummation of the Merger, (iii) receipt by UPC of a written
opinion of counsel from Wyatt, Tarrant & Combs and by Merchants of a written
opinion of counsel from Winstead Sechrest & Minick P.C. as to the tax-free
nature of the Merger (except to the extent of cash received), (iv) receipt of
approval of the shares of UPC Common Stock issuable pursuant to the Merger for
listing on the NYSE, subject to official notice of issuance, (v) the
Registration Statement being declared effective under the Securities Act, (vi)
the accuracy, as of the date of the Agreement and as of the Effective Time, of
the representations and warranties of Merchants and UPC as set forth in the
Agreement, (vii) the performance of all agreements and the compliance with all
covenants of Merchants and UPC as set forth in the Agreement, (viii) receipt of
all consents required for consummation of the Merger or for the preventing of
any default under any contract or permit which, if not obtained or made, is
reasonably likely to have, individually or in the aggregate, a material adverse
effect on Merchants or UPC, (ix) receipt by UPC of a letter from Price
Waterhouse LLP, its independent accountants, to the effect that the Merger will
qualify for pooling-of-interests accounting treatment, (x) the absence of any
law or order or any action taken by any court, governmental, or regulatory
authority of competent jurisdiction prohibiting, restricting, or making illegal
the consummation of the transactions contemplated by the Agreement, (xi) receipt
by UPC of agreements from each affiliate of Merchants, and (xii) satisfaction of
certain other conditions, including the receipt of various certificates from the
officers of Merchants and UPC. See "-- Regulatory Approval" and "-- Waiver,
Amendment, and Termination."

No assurance can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the party
permitted to do so. Except in limited circumstances, in the event the Merger is
not effected on or before September 30, 1998, the Agreement may be terminated
and the Merger abandoned by the Board of Directors of either Merchants or UPC.
See "-- Waiver, Amendment, and Termination."

REGULATORY APPROVAL

THE MERGER MAY NOT PROCEED IN THE ABSENCE OF RECEIPT OF THE REQUISITE
REGULATORY APPROVAL. IT IS A CONDITION TO THE CONSUMMATION OF THE MERGER THAT
UPC AND MERCHANTS SHALL HAVE RECEIVED ALL APPLICABLE REGULATORY APPROVALS TO
CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT. BY LETTER DATED MARCH
18, 1998, THE FEDERAL RESERVE ADVISED UPC THAT THE MERGER HAD BEEN APPROVED. THE
TEXAS DEPARTMENT HAS ELECTED NOT TO DISAPPROVE THE MERGER.

WAIVER, AMENDMENT, AND TERMINATION

To the extent permitted by law, the Agreement may be amended by a
subsequent writing signed by each of the parties upon the approval of the Board
of Directors of each of the parties before approval of the Agreement and the
Plan of Merger by Merchants shareholders, and the Merger may be abandoned
without the approval of

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Merchants' shareholders, whether before or after approval of the Agreement and
the Plan of Merger by Merchants' shareholders. In addition, prior to or at the
Effective Time, either Merchants or UPC, or both, acting through their
respective Boards of Directors, chief executive officers, or other authorized
officers, may waive any default in the performance of any term of the Agreement
by the other party, may waive or extend the time for the compliance or
fulfillment by the other party of any and all of its obligations under the
Agreement, and may waive any of the conditions precedent to the obligations of
such party under the Agreement, except any condition that, if not satisfied,
would result in the violation of any applicable law or governmental regulation.
No such waiver will be effective unless written and unless executed by a duly
authorized officer of Merchants or UPC, as the case may be.

The Agreement and the Plan of Merger may be terminated and the Merger
abandoned at any time prior to the Effective Time (i) by the mutual consent of
the Boards of Directors of Merchants and UPC; (ii) by the Merchants Board or the
UPC Board (a) in the event of any inaccuracy of any representation or warranty
of the other party contained in the Agreement which cannot be or has not been
cured within 30 days after giving written notice to the breaching party of such
inaccuracy and which inaccuracy would provide the terminating party the ability
to refuse to consummate the Merger under the applicable standards set forth in
the Agreement (provided that the terminating party is not then in breach of any
representation or warranty contained in the Agreement under the applicable
standards set forth in the Agreement or in material breach of any covenant or
other agreement contained in the Agreement), (b) in the event of a material
breach by the other party of any covenant or agreement contained in the
Agreement which cannot be or has not been cured within 30 days after the giving
of written notice to the breaching party of such breach (provided that the
terminating party is not then in breach of any representation or warranty
contained in the Agreement under the applicable standards set forth in the
Agreement or in material breach of any covenant or other agreement contained in
the Agreement), (c) if (1) any consent of any regulatory authority required for
consummation of the Merger and the other transactions contemplated by the
Agreement has been denied by final nonappealable action, or if any action taken
by such authority is not appealed within the time limit for appeal or (2) the
shareholders of Merchants fail to vote their approval of the Agreement and the
transactions contemplated thereby as required by the Texas BCA and the Agreement
at the Special Meeting, or (d) if the Merger is not consummated by September 30,
1998, provided that the failure to consummate is not caused by any willful
breach of the Agreement by the party electing to terminate, or certain other
events arise which prevent consummation by such date, such as litigation arising
in connection with an Acquisition Proposal by a third party; or (iii) by the
Board of Directors of UPC should the UPC shareholders fail to approve the UPC
Authorized Share Charter Amendment; or (iv) by the Merchants Board pursuant to
the relevant provisions of the Agreement described in " -- Possible Adjustment
of Exchange Ratio."

If the Merger is terminated as described above, the Agreement and the
Plan of Merger will become void and have no effect, except that certain
provisions of the Agreement, including those relating to the obligations to
share certain expenses, maintain the confidentiality of certain information
obtained, and return all documents obtained from the other party under the
Agreement, will survive. The obligation of Merchants to pay the $6,200,000
termination fee in the event Merchants enters into a letter of intent or
agreement with respect to an Acquisition Proposal will survive until the earlier
of (i) the Effective Time, (ii) March 31, 1999, and (iii) the date on which the
Agreement is terminated for specified reasons. Termination of the Agreement for
any reason other than those requiring payments of the $6,200,000 termination fee
will not relieve any breaching party from liability for any uncured willful
breach of a representation, warranty, covenant, or agreement giving rise to such
termination. See "-- Expenses and Fees".

CONDUCT OF BUSINESS PENDING THE MERGER

Pursuant to the Agreement, Merchants has agreed that unless the prior
written consent of UPC has been obtained, and except as otherwise expressly
contemplated in the Agreement, each of Merchants and its subsidiaries will (i)
operate its business only in the usual, regular, and ordinary course, (ii) use
reasonable efforts to preserve intact its business organization and assets and
maintain its rights and franchises, and (iii) take no action which would (a)
materially adversely affect the ability of any party to obtain any consents
required for the transactions contemplated by the Agreement or prevent the
transactions contemplated by the Agreement, including the Merger, from
qualifying for pooling-of-interests accounting treatment or as a reorganization
within the meaning of Section

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368(a) of the Code (see "-- Certain Federal Income Tax Consequences of the
Merger"), or (b) materially adversely affect the ability of any party to perform
its covenants and agreements under the Agreement.

In addition, Merchants has agreed that, except as specifically
permitted by the Agreement or other documents or instruments executed in
connection with the Agreement, prior to the earlier of the Effective Time or
termination of the Agreement, Merchants will not, except with the prior written
consent of the chief executive officer, president, or chief financial officer of
UPC (which consent shall not be unreasonably withheld), agree or commit to do,
or permit any of its subsidiaries to agree or commit to do, any of the
following: (i) amend the Charter, Bylaws, or other governing instruments of
Merchants or any Merchants subsidiary (each a "Merchants company" and together,
the "Merchants companies"); (ii) incur any additional debt obligation for
borrowed money (other than indebtedness of a Merchants company to another
Merchants company) in excess of an aggregate of $100,000 (for the Merchants
companies on a consolidated basis) except in the ordinary course of business of
the Merchants subsidiaries consistent with past practices (which shall include,
for Merchants Bank, the creation of deposit liabilities, purchases of federal
funds, advances from the Federal Reserve Bank or the Federal Home Loan Bank, and
entry into repurchase agreements fully secured by U.S. government or agency
securities), or impose, or suffer the imposition, on any material asset of any
Merchants company of any lien or permit any such lien to exist (other than in
connection with deposits, repurchase agreements, bankers acceptances, "treasury
tax and loan" accounts established in the ordinary course of business, the
satisfaction of legal requirements in the exercise of trust powers, and liens in
effect as of the date of the Agreement that were previously disclosed to UPC by
Merchants); (iii) repurchase, redeem, or otherwise acquire or exchange (other
than exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of the
capital stock of any Merchants company, or declare or pay any dividend or make
any other distribution in respect of any Merchants Common Stock, provided that
Merchants may (to the extent legally and contractually permitted to do so), but
shall not be obligated to, declare and pay regular quarterly cash dividends on
the shares of Merchants Common Stock at a rate not in excess of $.35 per share
for the first quarter of 1998 and $.40 per share for each quarter thereafter, in
any case with usual and regular record and payment dates in accordance with past
practice, provided that, notwithstanding the provisions of the Agreement, the
parties shall cooperate in selecting the Effective Time to ensure that, with
respect to the quarterly period in which the Effective Time occurs, the holders
of Merchants Common Stock do not become entitled to receive both a dividend in
respect of their Merchants Common Stock and a dividend in respect of UPC Common
Stock or fail to be entitled to receive any dividend; (iv) except for the
Agreement, issue, sell, pledge, encumber, authorize the issuance of, enter into
any contract to issue, sell, pledge, encumber, or authorize the issuance of, or
otherwise permit to become outstanding, any additional shares of Merchants
Common Stock, or any other capital stock, or any stock appreciation rights, or
any option, warrant, conversion, or other right to acquire any such stock, or
any security convertible into any such stock; (v) adjust, split, combine, or
reclassify any capital stock of any Merchants company or issue or authorize the
issuance of any other securities in respect of or in substitution for shares of
Merchants Common Stock, or sell, lease, mortgage, or otherwise dispose of or
otherwise encumber any shares of capital stock of any Merchants company (unless
any such shares of stock are sold or otherwise transferred to another Merchants
company) or any asset having a book value in excess of $50,000 other than in the
ordinary course of business for reasonable and adequate consideration; (vi)
except for purchases of investment securities acquired in the ordinary course of
business consistent with past practices, purchase any securities or make any
material investment, either by purchase of stock or securities, contributions to
capital, asset transfers, or purchase of any assets, in any person other than a
wholly-owned Merchants subsidiary, or otherwise acquire direct or indirect
control over any person, with certain exceptions; (vii) grant any increase in
compensation or benefits to the employees or officers of any Merchants company,
except in the ordinary course of business consistent with past practices as
previously disclosed to UPC by Merchants or as required by law; pay any
severance or termination pay or any bonus other than pursuant to written
policies or written contracts in effect on the date of the Agreement and
previously disclosed to UPC by Merchants; enter into or amend any severance
agreements with officers of any Merchants company; grant any material increase
in fees or other increases in compensation or other benefits to directors of any
Merchants company; or voluntarily accelerate the vesting of any stock options or
other stock-based compensation or employee benefits (other than the acceleration
of vesting which occurs under a benefit plan upon a change of control of
Merchants); (viii) enter into or amend any employment contract between any
Merchants company and any person (unless such amendment is required by law) that
the Merchants company does not have the unconditional right to terminate without
liability (other than liability for services already rendered), at any time on
or after the Effective

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Time; (ix) adopt any new employee benefit plan of any Merchants company or
terminate or withdraw from, or make any material change in or to, any existing
employee benefit plans of any Merchants company other than any such change that
is required by law or that, in the opinion of counsel, is necessary or advisable
to maintain the tax qualified status of any such plan, or make any distribution
from such employee benefit plans, except as required by law or the terms of the
plans, or in a manner consistent with past practices; (x) make any material
change in any tax or accounting methods or systems of internal accounting
controls, except as may be appropriate to conform to changes in tax laws or
regulatory accounting requirements or generally accepted accounting principles;
(xi) commence any litigation other than in accordance with past practice or
settle any litigation involving any liability of any Merchants company for
material money damages or restrictions upon the operations of any Merchants
company; or (xii) except in the ordinary course consistent with past practice,
enter into, modify, amend, or terminate any material contract (excluding any
loan contract) or waive, release, compromise, or assign any material rights or
claims.

Merchants has also agreed that, except with respect to the Agreement,
the Plan of Merger, and the transactions contemplated thereby, no Merchants
company or any representatives thereof shall directly or indirectly solicit any
Acquisition Proposal or, except to the extent necessary to comply with the
fiduciary duties of the Merchants Board as advised by counsel, furnish any
non-public information that it is not legally obligated to furnish, negotiate
with respect to, or enter into any contract with respect to, any Acquisition
Proposal, but Merchants may communicate information about such an Acquisition
Proposal to its shareholders if and to the extent that it is required to do so
in order to comply with its legal obligations as advised by counsel.

The Agreement also provides that from the date of the Agreement until
the earlier of the Effective Time or the termination of the Agreement, UPC
covenants and agrees that it will (i) continue to conduct its business and the
business of its subsidiaries in a manner designed, in its reasonable judgment,
to enhance the long-term value of the UPC Common Stock and the business
prospects of UPC and its subsidiaries and (ii) take no action which would (a)
materially adversely affect the ability of any party to obtain any consents
required for the transactions contemplated by the Agreement or prevent the
transactions contemplated by the Agreement, including the Merger, from
qualifying for pooling-of-interests accounting treatment or as a reorganization
within the meaning of Section 368(a) of the Code (see "-- Certain Federal Income
Tax Consequences of the Merger"), (b) materially adversely affect the ability of
any party to perform its covenants and agreements under the Agreement, or (c)
result in UPC entering into an agreement with respect to an Acquisition Proposal
with a third party which could be reasonably expected to result in the Merger
not being consummated or an agreement with respect to an Acquisition Proposal to
be consummated prior to the closing date of the Merger which would effect a
change in the number or kind of shares of UPC Common Stock held by UPC
shareholders immediately prior to such consummation, provided that the foregoing
shall not prevent UPC or any UPC subsidiary from acquiring any other assets or
businesses or from discontinuing or disposing of any of its assets or business
if such action is, in the reasonable judgment of UPC, desirable in the conduct
of the business of UPC and the UPC subsidiaries and would not, in the reasonable
judgment of UPC, likely delay the Effective Time to a date subsequent to
September 30, 1998.

MANAGEMENT AND OPERATIONS AFTER THE MERGER

Consummation of the Merger will not alter the present Board of
Directors or management team of UPC or UP Holding immediately after the Merger
is consummated. The current officers and directors of Merchants Bank will
continue to serve in their respective capacities on behalf of Merchants Bank. UP
Holding, as sole shareholder of Merchants Bank at that time may add persons to
or otherwise alter the composition of the Board of Directors of Merchants Bank.
Merchants Bank would continue to be separated as a direct bank subsidiary of UP
Holding. When and if Texas adopts legislation authorizing interstate branching
in Texas, it is possible that Merchants Bank would be merged with UPB or some
other bank subsidiary of UPC. Information concerning the management of UPC is
included in the documents incorporated herein by reference. See "DOCUMENTS
INCORPORATED BY REFERENCE." For additional information regarding the interests
of certain persons in the Merger, see "-- Interests of Certain Persons in the
Merger."

UP Holding will be the surviving corporation resulting from the Merger
and shall continue to be governed by the laws of the State of Tennessee and
operate in accordance with its Charter and Bylaws.

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INTERESTS OF CERTAIN PERSONS IN THE MERGER

GENERAL. Certain members of Merchants' management and the Merchants
Board may be deemed to have interests in the Merger that are in addition to
their interests as shareholders of Merchants generally. The Merchants Board was
aware of these interests and considered them, among other matters, in approving
the Agreement and the transactions contemplated thereby.

EMPLOYMENT AGREEMENTS. Merchants has entered into employment agreements
with J.W. Lander, Jr., J.W. Lander, III, Donald R. Harding and Norman H. Bird
(the "Executive Officers"). The employment agreements are for the period from
September 26, 1997 to the date that is the second anniversary of a Change in
Control (as defined in the employment agreements) (the first anniversary in the
case of Mr. Lander, Jr.), with automatic extensions for an additional one-year
period on each anniversary of the Change in Control unless at least 90 days
prior to such anniversary date Merchants or the employee gives notice that it or
he does not wish to have the term extended. The employment agreements provide
for annual base salaries, subject to adjustment in the discretion of the
Merchants Board. The employment agreements also provide for annual incentive
compensation pursuant to an incentive compensation plan adopted annually by the
Board of Directors of Merchants Bank (the "Merchants Bank Board"). The bonus
amounts payable pursuant to such plan are based on the achievement of (i) a
specific earnings goal by Merchants Bank set by the Merchants Bank Board, and
(ii) certain other individual goals related to such Executive Officer's job
responsibilities. Upon the termination of an Executive Officer's employment
without cause, such Executive Officer will be entitled to receive, among other
things, his base salary and incentive compensation through the stated term date
of termination of the employment agreement.

In the event of a Change in Control (which will occur upon consummation
of the Merger), if, within two years after the Change in Control, an Executive
Officer terminates his employment because of certain specified changes in his
employment situation or if he is terminated without cause, he shall be entitled
to receive (in addition to salary and incentive compensation earned prior to
termination) a single lump sum payment in an amount equal to (i) two times his
annual base salary, incentive compensation, and value of the annual fringe
benefits for the year immediately preceding the year in which his employment
terminates, plus (ii) the value of the portion of his benefits under any
savings, pension, profit sharing, or deferred compensation plans that are
forfeited under those plans by reason of the termination of employment. Such
Executive Officers would also receive a gross-up payment for any excise tax
payable under Section 4999 of the Code.

Although the Agreement does not provide for the termination of
employment of any of the Executive Officers, the Merger will constitute a Change
in Control under the terms of each of the Executive Officers' employment
agreements. Therefore, assuming that an Executive Officer is terminated without
cause or experiences certain specified changes in his employment situation, such
Executive Officer would be entitled to a lump sum severance payment pursuant to
his employment agreement. The estimated lump sum severance amounts payable under
the terms of the employment agreements (based on a termination date of June 30,
1998, and based on the achievement of incentive compensation goals) would be as
follows: J.W. Lander, Jr. ($288,000); J.W. Lander III ($325,000); Donald R.
Harding ($276,000); Norman H. Bird ($257,000). Because the severance payments
are based on elements which vary from year to year, if termination occurs after
June 30, 1998, such payments could be more or less than the estimated lump sum
payments set forth above.

In addition, pursuant to the terms of his employment agreement, upon
consummation of the Merger, J.W. Lander III is to be paid $400,000 for his
agreement not to compete with Merchants Bank (or its successor) during his
continued employment and for a period of three years after his termination of
employment. This payment will be made to J.W. Lander III if the Merger is
consummated.

INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE. The Agreement
provides that UPC will, subject to the conditions set forth therein, indemnify
the present and former directors, officers, employees, and agents of Merchants
and its subsidiaries against all Liabilities (as defined in the Agreement)
arising out of actions or omissions occurring at or prior to the Effective Time
(including the transactions contemplated by the Agreement) to the full extent
permitted under any of Tennessee law, Merchants' Charter and Bylaws, and any
indemnity

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<PAGE> 41

agreements previously entered into by Merchants or any of its subsidiaries and
any director, officer, employee, or agent of Merchants or any of its
subsidiaries. This provision of the Agreement is consistently included in UPC's
standard form merger agreement and is not intended to broaden in any manner the
scope of indemnification to which the present and former directors, officers,
employees, and agents of Merchants and its subsidiaries are entitled, but serves
to ratify the legal obligations of Merchants and its subsidiaries (to be assumed
by UP Holding upon consummation of the Merger) to provide indemnification in
accordance with Texas law, Merchants' Charter and Bylaws, and any
indemnification agreements to which Merchants or its subsidiaries is a party
with an indemnified person. The indemnification provided under the provisions of
such instruments will be subject to the same standards that are currently
applicable for determining whether indemnified parties are entitled to
indemnification under such instruments. The Agreement also provides that UPC
will maintain Merchants' existing directors' and officers' liability insurance
policy (or a comparable policy) in effect for a period of four years after the
Effective Time.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

THE FOLLOWING IS A SUMMARY OF THE MATERIAL ANTICIPATED FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER TO MERCHANTS SHAREHOLDERS WHO HOLD THEIR
MERCHANTS COMMON STOCK AS A CAPITAL ASSET (GENERALLY, PROPERTY HELD FOR
INVESTMENT). THIS SUMMARY IS BASED ON THE FEDERAL INCOME TAX LAWS AS NOW IN
EFFECT AND AS CURRENTLY INTERPRETED; IT DOES NOT TAKE INTO ACCOUNT POSSIBLE
CHANGES IN SUCH LAWS OR INTERPRETATIONS, INCLUDING AMENDMENTS TO APPLICABLE
STATUTES OR REGULATIONS OR CHANGES IN JUDICIAL OR ADMINISTRATIVE RULINGS, SOME
OF WHICH MAY HAVE RETROACTIVE EFFECT. THIS SUMMARY DOES NOT PURPORT TO ADDRESS
ALL ASPECTS OF THE POSSIBLE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND IS
NOT INTENDED AS TAX ADVICE TO ANY PERSON. IN PARTICULAR, AND WITHOUT LIMITING
THE FOREGOING, THIS SUMMARY DOES NOT ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER TO MERCHANTS SHAREHOLDERS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES OR STATUS (INCLUDING, FOR EXAMPLE, FOREIGN PERSONS, TAX-EXEMPT
ENTITIES, DEALERS IN SECURITIES, INSURANCE COMPANIES, CORPORATIONS, HOLDERS WHO
ACQUIRED MERCHANTS COMMON STOCK PURSUANT TO THE EXERCISE OF AN EMPLOYEE STOCK
OPTION OR RIGHT OR OTHERWISE AS COMPENSATION, AND HOLDERS WHO HOLD MERCHANTS
COMMON STOCK AS PART OF A HEDGE, STRADDLE, OR CONVERSION TRANSACTION). NOR DOES
THIS SUMMARY ADDRESS ANY CONSEQUENCES OF THE MERGER UNDER ANY STATE, LOCAL,
ESTATE, OR FOREIGN TAX LAWS. MERCHANTS SHAREHOLDERS, THEREFORE, ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICATION AND
EFFECT OF FEDERAL, FOREIGN, STATE, LOCAL, AND OTHER TAX LAWS, AND THE
IMPLICATIONS OF ANY PROPOSED CHANGES IN THE TAX LAWS.

As of the date of this Proxy Statement, Wyatt, Tarrant & Combs, counsel
for UPC, had advised UPC that in their opinion:

(a) Merchants, UPC and UP Holdings will each be a "party to a
reorganization" within the meaning of Section 368(b) of the
Code;

(b) No gain or loss will be recognized by the Merchants
shareholders who exchange all of their Merchants Common Stock
solely for UPC Common Stock pursuant to the Merger (except
with respect to cash received in lieu of a fractional share
interest in UPC Common Stock);

(c) The aggregate tax basis of the UPC Common Stock received by
Merchants shareholders who exchange all of their FNB Common
Stock solely for UPC Common Stock pursuant to the Merger will
be the same as the aggregate tax basis of the Merchants Common
Stock surrendered in exchange therefor (reduced by any amount
allocable to the fractional share interest in UPC Common Stock
for which cash is received);

(d) The holding period of UPC Common Stock received by Merchants
shareholders in the Merger will include the period during
which the shares of Merchants Common Stock surrendered in
exchange therefor were held, provided that the Merchants
Common Stock was held as a capital asset at the Effective
Time; and

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(e) Neither Merchants, UPC nor UP Holding will recognize gain or
loss as a consequence of the Merger.

In addition, each party's obligation to consummate the Merger is
conditioned upon the receipt by UPC of the opinion of Wyatt, Tarrant & Combs,
counsel to UPC, and upon the receipt by Merchants of the opinion of Winstead
Sechrest & Minick P.C., counsel to Merchants (collectively, the "Tax Opinions"),
each dated the Effective Time, substantially to the foregoing effect. The
conditions relating to the receipt of the Tax Opinions may be waived by both UPC
and Merchants. Neither UPC nor Merchants currently intends to waive the
conditions relating to the receipt of the Tax Opinions. If the conditions
relating to the receipt of the Tax Opinions were waived and the material federal
income tax consequences of the Merger were materially different from those
summarized above, Merchants would resolicit the approval of its shareholders
prior to consummating the Merger. The tax opinion summarized above and the Tax
Opinions to be delivered as of the Effective Time are, or will be, based on
facts, representations and assumptions set forth or referred to in such opinions
which are consistent with the state of facts existing at the Effective Time. In
rendering the tax opinion summarized above and in rendering the Tax Opinions,
counsel shall be entitled to require and to rely upon representations and
covenants contained in certificates of officers of Merchants, UPC, and others.
The Tax Opinions do not address any state, local, or other tax consequences of
the Merger. In addition, the Tax Opinions do not bind the Internal Revenue
Service (the "IRS") nor preclude the IRS from adopting a contrary position.

Based upon the current ruling position of the IRS, cash received by a
holder of Merchants Common Stock in lieu of a fractional share interest in UPC
Common Stock will be treated as received in exchange for such fractional share
interest, and gain or loss will be recognized for federal income tax purposes
measured by the difference between the amount of cash received and the portion
of the basis of the share of Merchants Common Stock allocable to such fractional
share interest. Such gain or loss will constitute capital gain or loss if the
Merchants Common Stock was held as a capital asset at the Effective Time, and
will be a long-term capital gain or loss if the holding period for such shares
was greater than one year at the Effective Time. Any capital gain recognized as
a result of the Merger will be taxed at rates applicable to capital gains. The
tax rate applicable to capital gains of an individual taxpayer varies depending
on the taxpayer's holding period for such shares. Pursuant to recently enacted
legislation, in the case of an individual, any such capital gain will be subject
to a maximum federal income tax rate of (A) 20% if the holder's holding period
in such stock was more than 18 months on the date of the Effective Time and (B)
28% if the holder's holding period was more than one year but not more than 18
months on the date of the Effective Time. The deductibility of capital losses is
subject to limitations for both individuals and corporations.

A Dissenting Shareholder who perfects his or her dissenters' rights
will recognize gain or loss measured by the difference between the value
received by such shareholder for his or her shares of Merchants Common Stock and
his or her tax basis in such stock.

ACCOUNTING TREATMENT

It is anticipated that the Merger will be accounted for as a pooling of
interests. Under the pooling-of-interests method of accounting, the recorded
amounts of the assets and liabilities of Merchants will be carried forward at
their previously recorded amounts, and current and prior period financial
statements will be restated for all periods as though Merchants and UPC had been
combined at the beginning of the earliest period presented.

In order for the Merger to qualify for pooling-of-interests accounting
treatment, substantially all (90% or more) of the outstanding Merchants Common
Stock must be exchanged for UPC Common Stock with substantially similar terms.
There are certain other criteria that must be satisfied in order for the Merger
to qualify as a pooling of interests, some of which criteria cannot be satisfied
until after the Effective Time. In addition, it is a condition to closing that
Price Waterhouse LLP deliver a letter to UPC to the effect the Merger will
qualify for pooling-of-interests accounting treatment. UPC will not consummate
the Merger if pooling-of-interests accounting treatment is not available.

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For information concerning certain conditions to be imposed on the
exchange of Merchants Common Stock for UPC Common Stock in the Merger by
affiliates of Merchants and certain restrictions to be imposed on the
transferability of the UPC Common Stock received by those affiliates in the
Merger in order, among other things, to ensure the availability of
pooling-of-interests accounting treatment, see "--Resales of UPC Common Stock."

EXPENSES AND FEES

The Agreement provides that each of the parties will bear and pay its
own expenses in connection with the transactions contemplated by the Agreement,
including fees and expenses of its own financial or other consultants,
investment bankers, accountants, and counsel, except that each of UPC and
Merchants will bear and pay the filing fees payable in connection with the
Registration Statement and this Proxy Statement and the printing costs and
certain other third-party costs in connection with the Registration Statement
and this Proxy Statement based on the relative asset sizes of the parties at
December 31, 1996.

RESALES OF UPC COMMON STOCK

UPC Common Stock to be issued to shareholders of Merchants in
connection with the Merger will be registered under the Securities Act. All
shares of UPC Common Stock received by holders of Merchants Common Stock and all
shares of UPC Common Stock issued and outstanding immediately prior to the
Effective Time will be freely transferable upon consummation of the Merger by
those shareholders of Merchants not deemed to be "Affiliates" of Merchants or
UPC. "Affiliates" generally are defined as persons or entities who control, are
controlled by, or are under common control with Merchants or UPC at the time of
the Special Meeting (generally, executive officers, directors, and 10% or
greater shareholders).

Rule 145 promulgated under the Securities Act restricts the sale of UPC
Common Stock received in the Merger by Affiliates and certain of their family
members and related interests. Under the rule, during the one-year period
following the Effective Time, Affiliates of Merchants or UPC may resell publicly
the UPC Common Stock received by them in the Merger within certain limitations
as to the amount of UPC Common Stock sold in any three-month period and as to
the manner of sale. After the one-year period, such Affiliates of Merchants who
are not Affiliates of UPC may resell their shares without restriction. The
ability of Affiliates to resell shares of UPC Common Stock received in the
Merger under Rule 145 will be subject to UPC having satisfied its Exchange Act
reporting requirements for specified periods prior to the time of sale.
Affiliates will receive additional information regarding the effect of Rule 145
on their ability to resell UPC Common Stock received in the Merger. Affiliates
also would be permitted to resell UPC Common Stock received in the Merger
pursuant to an effective registration statement under the Securities Act or an
available exemption from the Securities Act registration requirements. This
Proxy Statement does not cover any resales of UPC Common Stock received by
persons who may be deemed to be Affiliates of Merchants or UPC.

Each person who may be deemed to be an Affiliate of Merchants has
executed and delivered to UPC an agreement (each, an "Affiliate Agreement")
providing that such Affiliate will not sell, pledge, transfer, or otherwise
dispose of any Merchants Common Stock held by such Affiliate except as
contemplated by the Agreement or the Affiliate Agreement, and will not sell,
pledge, transfer or otherwise dispose of any UPC Common Stock received by such
Affiliate upon consummation of the Merger (i) except in compliance with the
Securities Act and the rules and regulations thereunder and (ii) until such time
as financial results covering 30 days of combined operations of UPC and
Merchants have been published. Shares of UPC Common Stock issued to such
Affiliates of Merchants in exchange for shares of Merchants Common Stock will
not be transferable until such time as financial results covering at least 30
days of combined operations of UPC and Merchants have been published, regardless
of whether each such Affiliate has provided an Affiliate Agreement (and UPC
shall be entitled to place restrictive legends upon certificates for shares of
UPC Common Stock issued to Affiliates of Merchants). Certificates representing
shares of Merchants Common Stock surrendered for exchange by any person who is
an Affiliate of Merchants for purposes of Rule 145(c) under the Securities Act
shall be exchanged for certificates representing shares of UPC Common Stock as
described under "--Distribution of UPC Stock Certificates," with the certificate
representing such shares of UPC Common Stock containing a legend

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summarizing the foregoing restrictions. Prior to publication of such results,
UPC will not transfer on its books any shares of UPC Common Stock received by an
Affiliate pursuant to the Merger. See "-- Conditions to Consummation of the
Merger."

EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS

As a result of the Merger, holders of Merchants Common Stock will be
exchanging their shares of a Texas corporation governed by the Texas BCA,
Merchants' Charter and Bylaws, for shares of UPC, a Tennessee corporation
governed by the TBCA and UPC's Charter and Bylaws. Certain significant
differences exist between the rights of Merchants shareholders and those of UPC
shareholders. In particular, UPC's Charter and Bylaws contain several provisions
that may be deemed to have an anti-takeover effect in that they could impede or
prevent an acquisition of UPC unless the potential acquirer has obtained the
approval of the UPC Board. The following discussion is necessarily general; it
is not intended to be a complete statement of all differences affecting the
rights of shareholders and their respective entities, and it is qualified in its
entirety by reference to the Texas BCA and the TBCA as well as to UPC's Charter
and Bylaws and Merchants' Charter and Bylaws.

ANTI-TAKEOVER PROVISIONS GENERALLY

The provisions of UPC's Charter and Bylaws described below under the
headings, "-- Authorized Capital Stock," "-- Amendment of Charter and Bylaws,"
"-- Classified Board of Directors and Absence of Cumulative Voting," "--
Director Removal and Vacancies," "-- Limitations on Director Liability," "--
Indemnification," "-- Special Meeting of Shareholders," "-- Actions by
Shareholders Without a Meeting," "-- Shareholder Nominations and Proposals" and
"-- Business Combinations" are referred to herein as the "Protective
Provisions." In general, one purpose of the Protective Provisions is to assist
the UPC Board in playing a role if any group or person attempts to acquire
control of UPC, so that the UPC Board can further protect the interests of UPC
and its shareholders as appropriate under the circumstances, including, if the
UPC Board determines that a sale of control is in the best interests of UPC's
shareholders, by enhancing the UPC Board's ability to maximize the value to be
received by the shareholders upon such a sale.

Although UPC's management believes the Protective Provisions are,
therefore, beneficial to UPC's shareholders, the Protective Provisions also may
tend to discourage some takeover bids. As a result, UPC's shareholders may be
deprived of opportunities to sell some or all of their shares at prices that
represent a premium over prevailing market prices. On the other hand, defeating
undesirable acquisition offers can be a very expensive and time-consuming
process. To the extent that the Protective Provisions discourage undesirable
proposals, UPC may be able to avoid those expenditures of time and money.

The Protective Provisions also may discourage open market purchases by
a potential acquirer. Such purchases may increase the market price of UPC Common
Stock temporarily, enabling shareholders to sell their shares at a price higher
than that which otherwise would prevail. In addition, the Protective Provisions
may decrease the market price of UPC Common Stock by making the stock less
attractive to persons who invest in securities in anticipation of price
increases from potential acquisition attempts. The Protective Provisions also
may make it more difficult and time consuming for a potential acquirer to obtain
control of UPC through replacing the Board of Directors and management.
Furthermore, the Protective Provisions may make it more difficult for UPC's
shareholders to replace the Board of Directors or management, even if a majority
of the shareholders believe such replacement is in the best interests of UPC. As
a result, the Protective Provisions may tend to perpetuate the incumbent Board
of Directors and management.

AUTHORIZED CAPITAL STOCK

UPC. UPC's Charter currently authorizes the issuance of up to (i)
300,000,000 shares of UPC Common Stock, of which 84,970,899 shares were
outstanding as of May 1, 1998, and (ii) 10,000,000 shares of no par value
preferred stock ("UPC Preferred Stock" and, together with the UPC Common Stock,
the "UPC Capital Stock"), of which no shares of UPC Series A Preferred Stock,
and 1,156,231 shares of UPC Series E Preferred Stock were

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<PAGE> 45

issued and outstanding as of May 1, 1998. At the 1998 annual meeting of
shareholders of UPC, the UPC shareholders approved an amendment to the UPC
Charter to increase the number of authorized shares of UPC Common Stock from
100,000,000 to 300,000,000 shares.

The UPC Board may authorize the issuance of additional authorized
shares of UPC capital stock without further action by UPC's shareholders, unless
such action is required in a particular case by applicable laws or regulations
or by any stock exchange upon which UPC's capital stock may be listed.

With certain exceptions, the UPC Board may issue, without any further
action by the shareholders, shares of UPC Preferred Stock, in one or more
classes or series, with the voting, conversion, dividend, and liquidation rights
specified in UPC's Charter. In providing for the issuance of such shares, the
UPC Board may determine, among other things, the distinctive designation and
number of shares comprising a series of preferred stock, the dividend rate or
rates on the shares of such series and the relation of such dividends to the
dividends payable on other classes of stock, whether the shares of such series
shall be convertible into or exchangeable for shares of any other class or
series of UPC Capital Stock, the voting powers if any of such series, and any
other preferences, privileges, and powers of such series.

In the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets, or winding up of UPC, the holders of any series of UPC
Preferred Stock will have priority over holders of UPC Common Stock.

The authority to issue additional authorized shares of UPC Common Stock
or UPC Preferred Stock provides UPC with the flexibility necessary to meet its
future needs without the delay resulting from seeking shareholder approval. The
authorized but unissued shares of UPC Common Stock and UPC Preferred Stock will
be issuable from time to time for any corporate purpose, including, without
limitation, stock splits, stock dividends, employee benefit and compensation
plans, acquisitions, and public or private sales for cash as a means of raising
capital. Such shares could be used to dilute the stock ownership of persons
seeking to obtain control of UPC. In addition, the sale of a substantial number
of shares of UPC voting stock to persons who have an understanding with UPC
concerning the voting of such shares, or the distribution or declaration of a
dividend of shares of UPC voting stock (or the right to receive UPC voting
stock) to UPC shareholders, may have the effect of discouraging or increasing
the cost of unsolicited attempts to acquire control of UPC.

In 1989, the UPC Board adopted a Share Purchase Rights Plan ("Preferred
Share Rights Plan") and distributed a dividend of one Preferred Share Unit
Purchase Right ("Preferred Share Right") for each outstanding share of UPC
Common Stock. In addition, under the Preferred Share Rights Plan, one Preferred
Share Right is to be automatically, and without further action by UPC,
distributed in respect to each share of UPC Common Stock issued after adoption
of the Preferred Share Rights Plan. The Preferred Share Rights are generally
designed to deter coercive takeover tactics and to encourage all persons
interested in potentially acquiring control of UPC to treat each shareholder on
a fair and equal basis. Each Preferred Share Right trades in tandem with the
share of UPC Common Stock to which it relates until the occurrence of certain
events indicating a potential change in control of UPC. Upon the occurrence of
such an event, the Preferred Share Rights would separate from UPC Common Stock
and each holder of a Preferred Share Right (other than the potential acquiror)
would be entitled to purchase certain equity securities of UPC at prices below
their market value. UPC has authorized 750,000 shares of Series A Preferred
Stock for issuance under the Preferred Share Rights Plan and no shares have been
issued as of the date of this Proxy Statement. Until a Preferred Share Right is
exercised, the holder thereof, as such, has no rights of a shareholder of UPC,
including the right to vote or receive dividends.

MERCHANTS. Merchants' Charter authorizes the issuance of up to
10,000,000 shares of Merchants Common Stock, of which not more than 1,952,465
shares were issued and outstanding as of the Merchants Record Date, and
2,000,000 shares of preferred stock, par value $20.00 per share ("Merchants
Preferred Stock" and, together with the Merchants Common Stock, the "Merchants
Capital Stock") of which none were issued and outstanding as of the Merchants
Record Date. The Merchants Board generally may authorize the issuance of
additional authorized shares of Merchants Capital Stock without further action
by Merchants' shareholders r(unless such action is required in a particular case
by applicable laws or regulation, upon receipt of valid consideration in

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exchange for such shares. The Merchants Board has not adopted any plan similar
to the Preferred Share Rights Plan.

PREEMPTIVE RIGHTS

UPC. The TBCA provides that, unless a Tennessee corporation's charter
expressly provides for preemptive rights, shareholders of a Tennessee
corporation do not have a preemptive right to acquire proportional amounts of
the corporation's unissued shares upon a decision of the board of directors to
issue shares. UPC's Charter denies preemptive rights to its shareholders.

MERCHANTS. Under the Texas BCA, the shareholders of a Texas corporation
have a preemptive right under certain circumstances to acquire proportional
amounts of the corporation's unissued shares upon a decision of the board of
directors to issue shares except to the extent limited or denied by the
corporation's articles of incorporation. Merchants' Charter expressly denies any
such preemptive right for its shareholders.

AMENDMENT OF CHARTER AND BYLAWS

UPC. The UPC Charter provides that amendments thereto may be adopted in
any manner permitted by the TBCA. The TBCA provides that a Tennessee
corporation's charter may be amended by a majority of votes entitled to be cast
on the amendment, subject to any condition the board of directors may place on
its submission of the amendment to the shareholders. The UPC Charter requires a
vote of two-thirds or more of the shares of capital stock entitled to vote in an
election of directors to amend the articles of the UPC Charter governing
directors and to remove a director from office whether with or without cause. A
two-thirds vote is also required to amend, alter, or repeal the article of the
UPC Charter relating to business combinations.

The UPC Board may adopt, amend or repeal the Bylaws by a majority vote
of the entire Board of Directors. The Bylaws may also be amended or repealed by
action of UPC's shareholders.

UPC's Charter provides that all corporate powers of UPC shall be
exercised by the Board of Directors except as otherwise provided by law. The
Board of Directors may designate an executive committee consisting of five or
more directors and may authorize such committee to exercise all of the authority
of the Board of Directors, including the authority to adopt, amend and repeal
the Bylaws, to submit any action to the shareholders, to fill vacancies on the
Board of Directors or any committee, to declare dividends or other corporate
distributions, and to issue or reissue any capital stock or any warrant, right
or option to acquire capital stock of the corporation.

MERCHANTS. The Texas BCA provides that an amendment to a Texas
corporation's articles of incorporation requires the adoption by the
corporation's board of directors of a resolution to so amend and approval of the
amendment by at least two-thirds of the outstanding shares of stock of the
corporation (or such lesser number as may be set forth in the corporation's
articles of incorporation). Merchants' Charter does not alter the statutorily
prescribed voting requirement.

The Merchants Bylaws may be altered, amended or repealed, or new Bylaws
may be adopted, by a majority vote of the Merchants Board at any duly held
meeting of the Merchants Board or by the holders of a majority of the shares of
stock represented at any duly held shareholders' meeting.

The Merchants Bylaws provide that all corporate powers of Merchants
shall be exercised by the Board of Directors except as otherwise provided by
law, Merchants' Charter or other provisions of the Bylaws. The Merchants Board
may designate an executive committee, or any other committee, consisting of two
or more directors and may authorize such committee(s) to exercise all of the
authority of the Merchants Board except as prohibited by law. To date, the
Merchants Board has not created any such committees.

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<PAGE> 47

CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING

UPC. The UPC Charter provides that the UPC Board is divided into three
classes, with each class to be as nearly equal in number as possible. The
directors in each class serve three-year terms of office. The effect of UPC's
having a classified Board of Directors is that only approximately one-third of
the members of the UPC Board are elected each year, which effectively requires
two annual meetings for UPC's shareholders to change a majority of the members
of the UPC Board. The purpose of dividing the UPC Board into classes is to
facilitate continuity and stability of leadership of UPC by ensuring that
experienced personnel familiar with UPC will be represented on the UPC Board at
all times, and to permit UPC's management to plan for the future for a
reasonable amount of time. However, by potentially delaying the time within
which an acquiror could obtain working control of the UPC Board, this provision
may discourage some potential mergers, tender offers, or takeover attempts.

Pursuant to the UPC Charter, each holder of UPC Common Stock is
entitled to one vote for each share of UPC Common Stock held in the election of
directors, and is not entitled to cumulative voting rights in the election of
directors. With cumulative voting, a shareholder has the right to cast a number
of votes equal to the total number of such holder's shares multiplied by the
number of directors to be elected. The shareholder has the right to distribute
all of his or her votes in any manner among any number of candidates or to
accumulate such shares in favor of one candidate. Directors are elected by a
plurality of the total votes cast by all shareholders. With cumulative voting,
it may be possible for minority shareholders to obtain representation on the
Board of Directors. Without cumulative voting, the holders of more than 50% of
the shares of UPC Common Stock generally have the ability to elect 100% of the
UPC directors. As a result, the holders of the remaining UPC Common Stock
effectively may not be able to elect any person to the UPC Board. The absence of
cumulative voting thus could make it more difficult for a shareholder who
acquires less than a majority of the shares of UPC Common Stock to obtain
representation on the UPC Board.

MERCHANTS. Merchants' Bylaws provide for an unclassified Board of
Directors with no less than three nor more than fifteen members. Each holder of
Merchants Common Stock is entitled to one vote for each share held and is not
entitled to cumulative voting in the election of directors.

DIRECTOR REMOVAL AND VACANCIES

UPC. UPC's Charter provides that a director may be removed by the UPC
shareholders only upon the affirmative vote of the holders of at least
two-thirds of the voting power of all shares of UPC Common Stock entitled to
vote generally in the election of directors. The purpose of this provision is to
prevent a majority shareholder from circumventing the classified board system by
removing directors and filling the vacancies with new individuals selected by
that shareholder. Accordingly, the provision may have the effect of impeding
efforts to gain control of the Board of Directors by anyone who obtains a
controlling interest in UPC Common Stock. Vacancies on the UPC Board may be
filled by the members of the UPC Board or by UPC shareholders, as provided under
the UPC Bylaws and the TBCA. The term of a director appointed to fill a vacancy
expires at the next meeting of shareholders at which directors are elected.

MERCHANTS. Merchants' Bylaws provide that the affirmative vote of a
majority of the shares of the shareholders present in person or by proxy and
entitled to vote at a special meeting of the shareholders is required to remove
a director, or the entire Merchants Board, with or without cause. Vacancies on
the Merchants Board may be filled by majority vote of the Merchants Board, as
provided under the Merchants Bylaws and the Texas BCA. Under the Texas BCA, the
Merchants Board may fill not more than two vancancies created by an increase in
the number of directors during the period between any two successive annual
meetings. The term of a director appointed to fill a vacancy expires at the
expiration of the term of the director's predecessor in office.

LIMITATIONS ON DIRECTOR LIABILITY

UPC. UPC's Charter does not address the issue of director liability to
the corporation.

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<PAGE> 48

MERCHANTS. Merchants' Charter provides that no director of Merchants
shall be liable to Merchants or its shareholders for monetary damages for an act
or omission in the director's capacity as director, except (i) a breach of the
director's duty of loyalty, (ii) an act or omission not in good faith or that
involves intentional misconduct or a knowing violation of the law, (iii) a
transaction from which the director received an improper benefit, (iv) an act or
omission for which the liability of a director is expressly provided by statute
or (v) an act related to an unlawful stock repurchase or payment of a dividend.

INDEMNIFICATION

UPC. Under the TBCA, subject to certain exceptions, a Tennessee
corporation may indemnify an individual made a party to a proceeding, because he
or she is or was a director, against liability incurred in the proceeding if (i)
he or she conducted himself or herself in good faith; (ii) he or she reasonably
believed (a) in the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in the best interests of the
corporation, and (b) in all other cases, that his or her conduct was at least
not opposed to the corporation's best interests; and (iii) in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful (the "Standard of Conduct"). Moreover, unless limited by
its charter of incorporation, a Tennessee corporation must indemnify a director
who was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he or she was a party because he or she is or was a director
of the corporation against reasonable expenses incurred by him or her in
connection with the proceeding. Expenses incurred by a director in defending a
proceeding may be paid by the corporation in advance of the final disposition of
such proceeding upon receipt of a written affirmation by the director of his or
her good faith belief that he or she has met the Standard of Conduct and a
written undertaking by or on behalf of a director to repay such amount if it
shall ultimately be determined that he or she is entitled to be indemnified by
the corporation against such expenses and a determination is made that the facts
known to those making the determination would preclude indemnification. Before
any such indemnification is made, it must be determined that such
indemnification would not be precluded by the TBCA.

A director of a Tennessee corporation may also apply for court-ordered
indemnification under certain circumstances. Unless a Tennessee corporation's
charter of incorporation provide otherwise, (i) an officer of a corporation is
entitled to mandatory indemnification and is entitled to apply for court-ordered
indemnification to the same extent as a director; (ii) the corporation may
indemnify and advance expenses to an officer, employee, or agent of the
corporation to the same extent as to a director; and (iii) a corporation may
also indemnify and advance expenses to an officer, employee, or agent who is not
a director to the extent, consistent with public policy, that may be provided by
its charter of incorporation, bylaws, general or specific action of its board of
directors, or contract.

UPC's Charter and Bylaws provide for the indemnification of its
directors and officers to the fullest extent permitted by Tennessee law.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling UPC pursuant
to the foregoing provisions, UPC has been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.

MERCHANTS. Under the Texas BCA, a Texas corporation has the power to
indemnify any person who was, is or is threatened to be made a named defendant
or respondent in any proceeding by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
corporation, employee benefit plan, other enterprise or other entity (an
"Indemnified Person"). Indemnification is authorized against liabilities
incurred in connection with a proceeding, including any appeal thereof, if the
Indemnified Person acted in accordance with the Standard of Conduct. However, if
an Indemnified Person is found liable to the corporation or is found liable on
the basis that a personal benefit was improperly received by such Indemnified
Person, whether or not the benefit resulted from an action taken in the
Indemnified Person's official capacity, then indemnification (i) is limited to
reasonable expenses actually incurred by the Indemnified Person in connection
with the proceeding and (ii) shall not be made in

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<PAGE> 49

connection with any proceeding in which the Indemnified Person has been found
liable for willful or intentional misconduct in the performance of his or her
duty to the corporation.

The board of directors, special legal counsel or the shareholders may
determine whether a person has met the Standard of Conduct and the dollar amount
of any indemnification. The termination of any proceeding by judgment, order,
settlement or conviction, or on a plea of nolo contendere or its equivalent, is
not of itself determinative that the person did not meet the Standard of
Conduct. In addition, a corporation must indemnify an Indemnified Person for
reasonable expenses incurred by the Indemnified Person if he or she has been
wholly successful, on the merits or otherwise, in the defense of the proceeding.

Expenses incurred by an Indemnified Person in defending a proceeding
may be paid by the corporation in advance of the final disposition of such
proceeding if the Indemnified Person provides to the corporation a written
affirmation of his or her good faith belief that he or she has met the Standard
of Conduct and a written undertaking by or on behalf of the Indemnified Person
to repay any amounts advanced if it is ultimately determined that he or she has
not met the Standard of Conduct, is found liable to the corporation or is found
liable based on a personal benefit improperly received by such person.

Notwithstanding any findings by the board of directors, special legal
counsel or the shareholders, and despite any adjudication of liability, any
court of competent jurisdiction may, upon application of an Indemnified Person,
determine that the Indemnified Person is entitled to indemnification in view of
all the relevant circumstances. However, if the Indemnified Person is found
liable to the corporation or is found liable to the corporation based on a
personal benefit improperly received by the Indemnified Person, then
indemnification is limited to reasonable expenses actually incurred by the
Indemnified Person in connection with the proceeding.

Merchants' Bylaws provide for indemnification of directors and officers
to the fullest extent permitted by applicable law and public policy. In
addition, certain of Merchants' and Merchants Bank's executive officers and
directors have entered into indemnification agreements with Merchants which
provide such persons with broader rights of indemnification and advancement of
expenses than the statutory standard. See "DESCRIPTION OF TRANSACTION --
Interests of Certain Persons in the Merger -- Indemnification; Directors and
Officers Insurance."

SPECIAL MEETINGS OF SHAREHOLDERS

UPC. UPC's Bylaws provide that special meetings of UPC shareholders may
be called, unless otherwise prescribed by law, for any purpose or purposes
whatever at any time by the Chairman of the Board, the President, the Secretary,
or the holders of not less than one-tenth of the shares entitled to vote at such
meeting.

MERCHANTS. Merchants' Bylaws provide that special meetings of
shareholders may be called, unless otherwise provided by law, for any purpose at
any time by the Chairman of the Board, the President, any one of the directors
or the holders of not less than one-tenth of Merchants shares of stock having
power to vote at such meeting.

ACTIONS BY SHAREHOLDERS WITHOUT A MEETING

UPC. UPC's Charter and Bylaws provide that any action required or
permitted to be taken by UPC shareholders at a duly called meeting of Merchants
shareholders may be effected by the unanimous written consent of the
shareholders entitled to vote on such action.

MERCHANTS. Merchants' Bylaws state that any action required or
permitted to be taken by the shareholders at a meeting of the shareholders may
be taken without a meeting, upon unanimous written consent of the shareholders
entitled to vote on such action.

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<PAGE> 50

SHAREHOLDER NOMINATIONS AND PROPOSALS

UPC. UPC's Charter and Bylaws do not address whether a shareholder may
nominate members of the UPC Board.

Holders of UPC Common Stock are entitled to submit proposals to be
presented at an annual meeting of shareholders. UPC's Bylaws provide that any
proposal of a shareholder which is to be presented at any annual meeting of
shareholders shall be sent so as to be received by UPC not less than 120 days in
advance of the date of the proxy statement issued inconnection with the previous
year's annual meeting.

MERCHANTS. Charter and Bylaws do not address whether a shareholder may
nominate members of the Merchants Board.

BUSINESS COMBINATIONS

UPC. UPC's Charter requires the affirmative vote of the holders of
two-thirds or more of the outstanding shares of UPC Common Stock for approval of
a merger, consolidation, or a sale or lease of all or substantially all of the
assets of UPC if the other party to the transaction is a beneficial owner of 10%
or more of the outstanding shares of UPC Common Stock. A two-thirds vote is not
required for any merger or consolidation of UPC with or into any corporation or
entity of which a majority of the outstanding shares of all classes of capital
stock entitled to vote in the election of directors is owned by UPC or any UPC
subsidiary.

The requirement of a supermajority vote of UPC's shareholders to
approve certain business transactions, as described above, may discourage a
change in control of UPC by allowing a minority of UPC's shareholders to prevent
a transaction favored by the majority of the shareholders. Also, in some
circumstances, the UPC Board could cause a majority vote to be required to
approve a transaction thereby enabling management to retain control over the
affairs of UPC and their positions with UPC. The primary purpose of the
supermajority vote requirement, however, is to encourage negotiations with UPC's
management by groups or corporations interested in acquiring control of UPC and
to reduce the danger of a forced merger or sale of assets.

As a Tennessee corporation, UPC is or could be subject to various
legislative acts set forth in Chapter 35 of Title 48 of the Tennessee Code,
which impose certain restrictions on business combinations, including, but not
limited to, combinations with interested shareholders similar to those described
above.

The TBCA generally prohibits a "business combination" (generally
defined to include mergers, share exchanges, sales and leases of assets,
issuances of securities, and similar transactions) by UPC or a subsidiary with
an "interested shareholder" (generally defined as any person or entity which
beneficially owns 10% or more of the voting power of any class or series of
UPC's stock then outstanding) within five years after the person or entity
becomes an interested shareholder, unless the business combination or the
transaction pursuant to which the interested shareholder became such was
approved by the UPC Board before the interested shareholder became such, and the
business combination satisfies any other applicable requirements imposed by law
or by UPC's Charter or Bylaws. The TBCA also severely limits the extent to which
UPC or any of its officers or directors could be held liable for resisting any
business combination.

The Tennessee Control Share Acquisition Act (the "Tennessee CSAA")
generally provides that any person or group of persons that acquires the power
to vote more than specified levels (one-fifth, one-third, or a majority) of the
shares of certain Tennessee corporations will not have the right to vote such
shares unless granted voting rights by the holders of a majority of the votes
entitled to be cast, excluding "interested shares." Interested shares are those
shares held by the acquiring person, officers of the corporation, and employees
of the corporation who are also directors of the corporation. If approval of
voting power for the shares is obtained at one of the specified levels,
additional shareholder approval is required when a shareholder seeks to acquire
the power to vote shares at the next level. In the absence of such approval, the
additional shares acquired by the shareholder may not be voted until they are
transferred to another person in a transaction other than a control share
acquisition. The Tennessee

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<PAGE> 51

CSAA applies only to those Tennessee corporations whose charters or bylaws
contain an express declaration that control share acquisitions in respect of the
shares of such corporations are governed by and subject to the provisions of
such act. UPC's Charter and Bylaws do not currently contain such an express
declaration.

The Tennessee Greenmail Act ("Tennessee GA") prohibits a Tennessee
corporation having a class of voting stock registered or traded on a national
securities exchange or registered with the SEC pursuant to Section 12(g) of the
Exchange Act from purchasing, directly or indirectly, any of its shares at a
price above the market value of such shares (defined as the average of the
highest and lowest closing market price of such shares during the 30 trading
days preceding the purchase or preceding the commencement or announcement of a
tender offer if the seller of such shares has commenced a tender offer or
announced an intention to seek control of the corporation) from any person who
holds more than 3% of the class of securities to be purchased if such person has
held such shares for less than two years, unless the purchase has been approved
by the affirmative vote of a majority of the outstanding shares of each class of
voting stock issued by such corporation or the corporation makes an offer, of at
least equal value per share, to all holders of shares of such class.

The TBCA provides that no Tennessee corporation having any class of
voting stock registered or traded on a national securities exchange or
registered with the SEC pursuant to Section 12(g) of the Exchange Act or any of
its officers or directors may be held liable at law or in equity for either
having failed to approve the acquisition of shares by an interested shareholder
on or before such interested shareholder's share acquisition date, or for
seeking to enforce or implement the provisions of the TBCA or the Tennessee
CSAA, or for failing to adopt or recommend any charter or bylaw amendment or
provision in respect of any one or more of these acts or the Tennessee GA, or
for opposing any merger, exchange, tender offer, or significant disposition of
the assets of the resident domestic corporation or any subsidiary of such
corporation because of a good faith belief that such merger, exchange, tender
offer, or significant disposition of assets would adversely affect the
corporation's employees, customers, suppliers, the communities in which the
corporation or its subsidiaries operate or are located or any other relevant
factor if such factors are permitted to be considered by the board of directors
under the corporation's charter in connection with the merger, exchange, tender
offer or significant disposition of assets.

The acts described above along with the provisions of UPC's Charter
regarding business combinations might be deemed to make UPC less attractive as a
candidate for acquisition by another company than would otherwise be the case in
the absence of such provisions. For example, if another company should seek to
acquire a controlling interest of less than 66-2/3% of the outstanding shares of
UPC Common Stock, the acquiror would not thereby obtain the ability to replace a
majority of the UPC Board until at least the second annual meeting of
shareholders following the acquisition, and furthermore the acquiror would not
obtain the ability immediately to effect a merger, consolidation, or other
similar business combination unless the described conditions were met.

As a result, UPC's shareholders may be deprived of opportunities to
sell some or all of their shares at prices that represent a premium over
prevailing market prices in a takeover context. The provisions described above
also may make it more difficult for UPC's shareholders to replace the UPC Board
or management, even if the holders of a majority of the UPC Common Stock should
believe that such replacement is in the interests of UPC. As a result, such
provisions may tend to perpetuate the incumbent UPC Board and management.

MERCHANTS. Merchants' Charter and Bylaws do not address the voting
requirements for business combinations. The Texas BCA, however, requires the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of a Texas corporation for approval of a merger, share exchange or acquisition,
or sale, lease, exchange or other disposition of all or substantially all of the
corporation's property and assets other than in the usual and regular course of
business.

The Texas BCA generally prohibits a "business combination" (defined
below) with an "affiliated shareholder" (defined as any person who beneficially
owns, or within the preceding three-year period was the beneficial owner of, 20%
or more of the outstanding voting shares of the corporation), or any affiliate
or associate of the affiliated shareholder (together with the affiliated
shareholder, an "Affiliated Person"), within three years after the affiliated
shareholder first becomes an affiliated shareholder. Exceptions to this
prohibition are discussed below.

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A "business combination" includes (i) a merger, share exchange or
conversion with an Affiliated Person; (ii) a sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with an Affiliated Person of assets
of the corporation or any subsidiary that (a) have a value equal to 10% or more
of the value of all of the corporation's assets, (b) have a value equal to 10%
or more of the value of the corporation's outstanding common stock or (c)
represent 10% or more of the earning power or net income of the corporation;
(iii) the issuance or transfer by the corporation or a subsidiary to an
Affiliated Person of shares of stock of the corporation or a subsidiary, except
through the exercise of warrants or a share dividend paid pro rata to all of the
corporation's shareholders; (iv) the adoption of a plan or proposal for the
liquidation or dissolution of the corporation proposed by or pursuant to any
agreement with an Affiliated Person; (v) a reclassification of securities,
recapitalization, merger of the corporation with a subsidiary or pursuant to
which the assets and liabilities of the corporation are allocated among two or
more surviving corporations or other entities, or any other transaction,
proposed by or pursuant to any agreement with an Affiliated Person, that
increases the proportionate ownership percentage of the outstanding shares of
any class or series of voting shares or securities convertible into voting
shares that is beneficially owned by an Affiliated Person; and (vi) the receipt
by an Affiliated Person of the benefit of a loan, advance, guarantee, pledge or
other financial assistance, or any tax advantage provided by or through the
corporation, except receipt that is proportional as a shareholder of the
corporation.

The prohibition against business combinations with an Affiliated Person
does not apply if (i) the business combination or the acquisition of shares made
by the affiliated shareholder on the date such person becomes an affiliated
shareholder is approved by the corporation's board of directors before the date
such person becomes an affiliated shareholder or (ii) the business combination
is approved by the affirmative vote of the holders of at least two-thirds of the
corporation's outstanding voting shares not beneficially owned by an Affiliated
Person at a shareholders' meeting called for that purpose at least six (6)
months after the affiliated shareholder became an affiliated shareholder.

LIMITATIONS ON ABILITY TO VOTE STOCK

UPC. UPC's Charter and Bylaws do not contain any provision restricting
a shareholder's ability to vote shares of UPC voting stock.

MERCHANTS. Merchants' Charter and Bylaws also do not contain any
provision restricting a shareholder's ability to vote shares of Merchants voting
stock.

DISSENTERS' RIGHTS OF APPRAISAL

UPC. Under the TBCA, a shareholder of a Tennessee corporation is
generally entitled to dissent from certain corporate actions, and obtain payment
of the fair value of his or her shares in the event of: (i) consummation of a
plan of merger to which the corporation is a party, unless shareholder approval
is not required by the TBCA; (ii) consummation of a plan of share exchange to
which the corporation is a party as the corporation whose shares will be
acquired if the shareholder is entitled to vote on the plan; (iii) consummation
of a sale or exchange of substantially all of the corporation's property other
than in the usual and regular course of business, if the shareholder is entitled
to vote on the sale or exchange, including a sale in dissolution, but not
including a sale pursuant to court order or to a plan by which substantially all
of the net proceeds of the sale will be distributed in cash to the shareholders
within one year after the date of sale; (iv) an amendment of the charter that
materially and adversely affects rights in respect of a dissenter's shares
because it (a) alters or abolishes a preferential right of the shares, (b)
creates, alters, or abolishes a right in respect of redemption of the shares,
including a provision respecting a sinking fund for the redemption or repurchase
of the shares, (c) alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities, (d) excludes or limits the right
of the shares to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other securities with
similar voting rights, or (e) reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share so created is to be
acquired for cash under the TBCA; or (v) any corporate action taken pursuant to
a shareholder vote, to the extent the charter, bylaws, or a resolution of the
board of directors provide that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares. UPC's Charter and Bylaws do not
provide for any such additional dissenters' rights.

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MERCHANTS. The rights of appraisal of dissenting shareholders of
Merchants are governed by the Texas BCA. Under the Texas BCA, a shareholder is
generally entitled to dissent from specified corporate actions, and obtain
payment of the fair value of his or her shares in the event of (i) consummation
of a plan of merger to which the corporation is a party, unless shareholder
approval is not required by the Texas BCA; (ii) consummation of a sale, lease,
exchange or disposition of all, or substantially all, of the property and assets
of the corporation, unless shareholder approval is not required by the Texas
BCA; or (iii) consummation of a plan of share exchange in which the corporation
is the party whose shares are being acquired. However the Texas BCA further
provides that appraisal rights are not available for any plan of merger or
exchange if (i) the shares of any class or series of stock that is, as of the
record date of the meeting of the shareholders at which a proposal to approve a
plan of merger is to be considered, either listed on a national securities
exchange, listed on the Nasdaq National Market or designated as a national
market security on an interdealer quotation system by the National Association
of Securities Dealers, Inc., or held of record by not less than 2,000
shareholders, (ii) the shareholder is not required to accept for his or her
shares any consideration that is different from the consideration (other than
cash in lieu of fractional shares) to be provided to any other holder of shares
of the same class or series of shares held by such shareholder, and (iii) the
shareholder is not required to accept for his or her shares any consideration
other than (a) shares of a corporation that, immediately after the effective
time of the merger or exchange, will be part of a class or series which is
either listed or authorized for listing on a national securities exchange,
approved for quotation as a national market security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or held of
record by not less than 2,000 shareholders, (b) cash in lieu of fractional
shares, or (c) any combination of the securities and cash described in (a) and
(b). Merchants' Charter and Bylaws do not provide for any additional dissenters'
rights.

SHAREHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS

UPC. The TBCA provides that a shareholder of a Tennesse corporation may
inspect and copy books and records of the corporation during regular business
hours, if he or she gives the corporation written notice of his or her demand at
least five business days before the date of the inspection. In order to inspect
certain records, written demand must also be made in good faith and for a proper
purpose and must describe with reasonable particularity the purpose of the
request and the records the shareholder desires to inspect.

MERCHANTS. The Texas BCA provides that certain shareholders of a Texas
corporation may examine and copy certain books and records of the corporation at
any reasonable time and for any proper purpose if he or she gives the
corporation written demand stating the purpose of such examination. A
shareholder has this examination right if he or she (i) has been a shareholder
of the corporation for at least six months immediately preceding his or her
demand or (ii) is the holder of at least 5% of all the outstanding shares of the
corporation. A holder of a beneficial interest in certain voting trusts is
deemed a holder of shares represented by such beneficial interest for the
purpose of meeting examination requirements. Notwithstanding the foregoing, any
court of competent jurisdiction may compel the production of books and records
for examination by a shareholder upon proof of proper purpose by a beneficial or
record holder of shares, irrespective of the usual holding-period and
percentage-ownership requirements set forth above.

DIVIDENDS

UPC. UPC's ability to pay dividends on UPC Capital Stock is governed by
Tennessee corporate law. Under Tennessee corporate law, dividends may be paid so
long as the corporation would be able to pay its debts as they become due in the
ordinary course of business and the corporation's total assets would not be less
than the sum of its total liabilities plus the amount that would be needed, if
the corporation were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution to shareholders whose preferential
rights are superior to those receiving the distribution.

There are various statutory limitations on the ability of the UPC
Banking Subsidiaries to pay dividends to UPC. See "CERTAIN REGULATORY
CONSIDERATIONS -- Payment of Dividends."

MERCHANTS. The Texas BCA provides that, subject to any restrictions in
the corporation's articles of incorporation, a Texas corporation may make
distributions to its shareholders unless (i) after the distribution the

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corporation would be insolvent or (ii) the distribution exceeds the surplus of
the corporation. Merchants' Charter provides that payment of dividends to
holders of Merchants Common Stock is subject to all rights of the Merchants
Preferred Stock. Substantially all of the funds available for the payment of
dividends by Merchants are derived from Merchants Bank. There are various
statutory limitations on the ability of Merchant Bank to pay dividends to
Merchants.

COMPARATIVE MARKET PRICES AND DIVIDENDS

UPC Common Stock is traded on the NYSE under the symbol "UPC."
Merchants Common Stock is not traded on any exchange or quoted on any market
system. The following table sets forth, for the indicated periods, the high and
low closing sale prices for the UPC Common Stock as reported by the NYSE, and
the cash dividends declared per share of UPC Common Stock for the indicated
periods. The stock prices do not include retail mark-ups, mark-downs or
commissions.

<TABLE>
<CAPTION>
UPC
-----------------------------------------
Cash
Price Range Dividends
-------------------------- Declared
1998 High Low Per Share
- --------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
First Quarter $ 67.31 $ 58.38 .50
Second Quarter
(through June 18, 1998) 62.56 54.75 .50

------------
Total $ 1.00
============

1997
- ---------------------------
First Quarter $ 47.75 $ 38.38 .320
Second Quarter 52.13 41.25 .375
Third Quarter 56.50 49.25 .400
Fourth Quarter 67.88 57.00 .400
------------

Total 1.495
============

1996
- ---------------------------
First Quarter $ 31.75 $ 29.00 $ 0.27
Second Quarter 31.25 29.63 0.27
Third Quarter 36.25 28.63 0.27
Fourth Quarter 41.38 34.63 ------------

Total $ 1.08
============
</TABLE>

On June 18, 1998, the last sale price of UPC Common Stock as reported
on the NYSE was $54.75 per share. On January 16, 1998, the last business day
prior to public announcement of the Merger, the last sale price of the UPC
Common Stock as reported by the NYSE was $60.0625.

The holders of UPC Common Stock are entitled to receive dividends when
and if declared by the Board of Directors out of funds legally available
therefor. Although UPC currently intends to continue to pay quarterly cash
dividends on the UPC Common Stock, there can be no assurance that UPC's dividend
policy will remain unchanged after completion of the Merger. The declaration and
payment of dividends thereafter will depend upon business conditions, operating
results, capital and reserve requirements, and the UPC Board's consideration of
other relevant factors. The Agreement provides that Merchants may not declare
and pay cash dividends, other

45
<PAGE> 55

than regular quarterly cash dividends on the shares of Merchants Common Stock in
an amount not to exceed 35 cents per share for the first quarter of 1998, and 40
cents per share for any quarter thereafter prior to the Effective Time or the
termination of the Agreement. There is no assurance that Merchants will pay any
dividends at any time, or if it does, the amount of dividends it would declare.

Management of Merchants is aware of only a few transfers of Merchants
Common Stock since January 1, 1996. Generally, it is believed that transfers of
Merchants Common Stock immediately preceeding the announcement of the Merger
were effected at purchase prices in the range of between $15 and $20 per share.
Merchants has paid quarterly cash dividends of $.30 per share since June 10,
1997.

UPC and Merchants are each legal entities separate and distinct from
their subsidiaries and their revenues depend in significant part on the payment
of dividends from their respective subsidiary depository institutions. UPC's and
Merchants' subsidiary depository institutions are subject to certain legal
restrictions on the amount of dividends they are permitted to pay. See "CERTAIN
REGULATORY CONSIDERATIONS -- Payment of Dividends."

BUSINESS OF MERCHANTS

GENERAL

Merchants, a Texas corporation, is a bank holding company registered
with the Federal Reserve under the BHC Act. As of March 31, 1998, Merchants had
total consolidated assets of approximately $552 million, total consolidated
loans of approximately $335 million, total consolidated deposits of
approximately $489 million, and total consolidated shareholders' equity of
approximately $59 million.

Merchants conducts its business activities through its indirect
wholly-owned bank subsidiary, Merchants Bank, which was organized in 1970 as a
commercial bank chartered under the laws of the State of Texas. Merchants Bank
operates from its main office in Houston, Texas and at 13 branch offices located
in the Texas counties of Harris, Brazoria and Galveston. The domestic lending
activities primarily involve small-and middle-market commercial borrowers,
builders of residential real estate, owners of commercial or income-producing
real estate and consumers. Merchants Bank also provides long-term financing for
owner-occupied residential real estate.

BENEFICIAL OWNERSHIP OF MERCHANTS COMMON STOCK

The following table contains information regarding the beneficial
ownership of Merchants Common Stock, as of May 15, 1998, by each current
director of Merchants, each executive officer of Merchants, all directors and
officers of Merchants as a group, and by each holder of record of Merchants
Common Stock who has filed with Merchants a copy of a Schedule 13D or a Schedule
13G, indicating that the filers individually, or with a group, are, or may be
deemed to be, a beneficial owner of 5% or more of the outstanding shares of
Merchants Common Stock.

46
<PAGE> 56

<TABLE>
<CAPTION>
Amount and Nature of
Percentage of Beneficial
Name and Address Ownership Percentage of Class(1)
------------------------------------------------- ------------------------ ----------------------
<S> <C> <C>
Norman H. Bird 820 *
Donald R. Harding 4,379(2) *
JWL/GSW, Ltd. 400,000(3) 20.5%
J.W. Lander, Jr 400,000(4) *
J.W. Lander, III 8,500 *
Vanco Trusts (5) 453,995 23.3%
All directors and officers as a group (4 persons) 413,699 21.2%
</TABLE>

* Less than one(1) percent

-------------------------------------------

(1) Unless otherwise indicated, each person has sole voting and investing
power over the shares listed.

(2) Shares are owned jointly be Mr. Harding and his wife. Mr. Harding has
sole voting and investment power over the shares.

(3) JWL/GSW, Ltd. is a family limited partnership, for which Mr. Lander,
Jr. and Mr. Lander, III are general partners with voting and investment
power over the shares listed. Approximately 98% of JWL/GSW, Ltd. is
owned by the Lander Children's Trust for which Mr. Lander, III is
Trustee. The address for Messrs. Lander, Jr. and Lander, III and
JWL/GSW, Ltd. is 5005 Woodway, Suite 300, Houston, Texas 77056.

(4) The shares shown as beneficially owned by Mr. Lander are owned of
record by JWL/GSW, Ltd. (see footnote (3) above for additional
information).

(5) P.O. Box 1239, McAllen, Texas 78502.

BUSINESS OF UPC

GENERAL

UPC, a Tennessee corporation, is a bank holding company registered with
the Federal Reserve under the BHC Act. As of March 31, 1998, UPC had total
consolidated assets of approximately $18.4 billion, total consolidated loans of
approximately $12.7 billion, total consolidated deposits of approximately $13.6
billion, and total consolidated shareholders' equity of approximately $1.8
billion.

UPC conducts its business activities through its principal bank
subsidiary, the $15.7 billion asset UPB, founded in 1869, headquartered in
Memphis, Tennessee, with branches in Tennessee, Mississippi, Missouri, Arkansas,
Louisiana, Alabama, and Kentucky. UPC also had, as of January 1, 1998, four
other financial institution subsidiaries, the largest of which being Union
Planters Bank of Florida, Miami, Florida, which had total consolidated assets as
of March 31, 1998 of approximately $2.2 billion. UPC undertook a corporate
reorganization plan in the fourth quarter of 1997, the primary purpose of which
was to consolidate the majority of its bank subsidiaries into UPB. This
corporate reorganization was completed January 1, 1998. It is likely that UPC
will continue to consolidate its various bank subsidiaries into UPB in the
future, to the extent allowed by law. Through the UPC Banking Subsidiaries, UPC
provides a diversified range of financial services in the communities in which
it operates and maintains approximately 518 banking offices and 626 ATMs. UPC's
total deposits at March 31, 1998 are allocable by state to its banking offices
(before consolidating adjustments) approximately as follows: $6.7 billion in
Tennessee; $2.9 billion in Mississippi; $1.3 billion in Florida; $1.2 billion in
Missouri; $596 million in Arkansas; $598 million in Louisiana; $412 million in
Alabama; and $103 million in Kentucky.

Acquisitions have been, and are expected to continue to be, an
important part of the expansion of UPC's business. UPC completed three
acquisitions in 1995, seven in 1996 and six in 1997, adding approximately $1.3
billion in total assets in 1995, $4.2 billion in 1996 and $3.6 in 1997. As of
June 1, 1998, UPC has completed the acquisition of two financial institutions
with approximately $520 million in aggregate total assets as of March 31, 1998
(the "Recently Completed Acquisitions"). As of June 1, 1998, UPC is a party to
definitive agreements to acquire ten

47
<PAGE> 57

financial institutions, not including Merchants, and the proposed purchase of 24
branch locations and assumption of $1.5 billion of deposits of California
Federal Bank, a Federal Savings Bank, located in Florida (the "CalFed Branch
Purchase") (collectively referred to herein as the "Other Pending
Acquisitions"). The Other Pending Acquisitions had aggregate total assets of
approximately $12.6 billion at March 31, 1998. The terms Recently Completed
Acquisitions and Other Pending Acquisitions are sometimes collectively referred
to herein as the "Other Acquisitions". The largest of the Other Pending
Acquisitions is UPC's proposed acquisition of Magna Group, Inc. ("MGR"), St.
Louis, Missouri, which had total consolidated assets of approximately $7.3
billion at March 31, 1998. MGR acquired Charter Financial, Inc., and its
subsidiary, Charter Bank, S.B. (the "Charter Acquisition") on May 1, 1998.
Charter is located in Sparta, Illinois and at the time of consummation had total
assets of approximately $406 million, total deposits of approximately $309
million, and total stockholders' equity of approximately $67 million. The
Charter Acquisition was accounted for as a purchase. For purposes of this Proxy
Statement, including the historical and equivalent pro forma data, the terms
"Other Acquisitions" and "Other Pending Acquisitions" include the Charter
Acquisition. For a description of the Other Acquisitions in addition to the
Merger, see "BUSINESS OF UPC - Recent Developments" and "PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION."

UPC expects to continue to take advantage of the consolidation of the
financial services industry by further developing its franchise through the
acquisition of financial institutions and other entities engaged in lines of
business permissible for banks and bank holding companies. Future acquisitions
may entail the payment by UPC of consideration in excess of the book value of
the underlying net assets acquired, may result in the issuance of additional
shares of UPC capital stock or the incurring of additional indebtedness by UPC,
and could have a dilutive effect on the earnings or book value per share of UPC
Common Stock. Moreover, significant charges against earnings are sometimes
required incidental to acquisitions. For a discussion of UPC's acquisition
program, including a discussion of the significant charges UPC has incurred over
the past three fiscal years incidental to acquisitions, see the caption
"Acquisitions" (on page 12) in UPC's Annual Report to Shareholders and Note 2 to
UPC's audited consolidated financial statements for the years ended December 31,
1997, 1996, and 1995 (on pages 49 and 50) contained in such Annual Report to
Shareholders. UPC's Annual Report to Shareholders is included as Exhibit 13 to
the UPC 1997 Form 10-K and Exhibit 13 is incorporated by reference herein to the
extent indicated herein.

The principal executive offices of UPC are located at 7130 Goodlett
Farms Parkway, Memphis, Tennessee 38018, and its telephone number at such
address is (901) 580-6000. Additional information with respect to UPC and its
subsidiaries is included in documents incorporated by reference in this Proxy
Statement. See "AVAILABLE INFORMATION" and "DOCUMENTS INCORPORATED BY
REFERENCE."

RECENT DEVELOPMENTS

RECENTLY COMPLETED ACQUISITION. Since December 31, 1997, UPC has
completed the acquisition of two institutions (the "Recently Completed
Acquisition").

<TABLE>
<CAPTION>
Asset Size
Institution (In Millions Type of Consideration Accounting
----------- ------------ --------------------- ----------
<S> <C> <C> <C>
Sho-Me Financial Corp, Mt. Vernon, Missouri, $374 Approximately 1,153,450 Purchase
and its subsidiary, 1st Savings Bank, f.s.b. shares of UPC Common Stock

Security Bancshares, Inc., Des Arc, 146 Approximately 490,858 shares Pooling
Arkansas, and its subsidiaries, Farmers & of UPC Common Stock
Merchants Bank, Des Arc, Arkansas and
Merchants & Farmers Bank, West Helena,
Arkansas
--------------
TOTAL $520
==============
</TABLE>

48
<PAGE> 58

OTHER PENDING ACQUISITIONS. As of the date of this Proxy Statement, UPC
has entered into definitive agreements to acquire the following financial
institutions in addition to Merchants, which UPC's management considers probable
of consummation and which are expected to close in 1998.

<TABLE>
<CAPTION>
Asset Size Projected
Institution (In Millions)(1 Type of Consideration(2) Closing Date
--------------------------------------- --------------- ------------------------------ ------------
<S> <C> <C> <C>
Magna Group, Inc., St. Louis, Missouri, $7,657 Approximately 35,446,000 3rd Quarter
and its subsidiaries, including Magna shares of UPC Common Stock 1998
Bank, N.A., St. Louis, Missiouri (3)

Peoples First Corporation, Paducah, 1,493 Approximately 6,338,000 3rd Quarter
Kentucky and its subsidiaries, including shares of UPC Common Stock 1998
Peoples First National Bank, Paducah,
Kentucky
1,465 $110 million deposit premium 3rd Quartrt
Purchase of 24 branches and assumptions in cash 1998
of $1.5 billion of deposits of California
Federal Bank in Florida ("CalFed Branch
Purchase")

AMBANC Corp., Vincennes, Indiana, and its 734 Approximately 3,398,000 3rd Quarter
subsidiaties, AMBANC Illinois, N.A., shares of UPC Common Stock 1998
AMBANC Indiana and American National
Realty Corp.

TransFlorida Bank, Boca Raton, Florida 318 Approximately 1,655,000 3rd Quarter
shares of UPC Common Stock 1998

CB & T, Inc., McMinnville, Tennessee, and 271 Approximately 1,450,000 3rd Quarter
its subsidiary, City Bank & Trust shares of UPC Common Stock 1998
Company, McMinnville, Tennessee

Capital Savings Bancorp, Inc., Jefferson 232 Approximately 801,000 shares 3rd Quarter
City, Missouri, and its subsidiary, of UPC Common Stock 1998
Capital Savings Bank, FSB, Jefferson
City, Missouri

First National Bancshares of Wetumpka, 217 Approximately 836,000 shares 3rd Quarter
Inc., Wetumpka, Alabama, and its of UPC Common Stock 1998
subsidiary, First National Bank,
Wetumpka, Alabama

Alvin Bancshares, Inc., Alvin, Texas, and 121 Approximately 424,000 shares 3rd Quarter
its subsidiaries, including Alvin State of UPC Common Stock 1998
Bank

First Community Bancshares, Inc., 41 Approximately 126,000 shares 3rd Quarter
Middleton, TN, and its subsidiary, Bank of of UPC Common Stock 1998
Middleton, Middleton, Tennessee

Duck Hill Bank, Duck Hill, Mississippi 20 Approximately 42,000 shares 3rd Quarter
of UPC Common Stock 1998
-------
TOTALS $12,569
=======
</TABLE>

- -------------------------------------------

(1) Approximate total assets at March 31, 1997.

(2) Assumes no adjustment to shares pursuant to exchange ratio adjustment
mechanisms.

(3) Includes the pro forma impact of the Charter Acquisition.

EARNINGS CONSIDERATIONS RELATED TO THE MERGER AND THE OTHER
ACQUISITIONS. It is expected that either UPC or the institutions acquired or to
be acquired in connection with the Merger and the Other Acquisitions will incur
charges arising from such acquisitions and from the assimilation of those
institutions into the UPC organization. Most of the charges are expected to
relate to the MGR and the Peoples acquisitions. Anticipated charges would
normally arise from matters such as, but not limited to, legal and accounting
fees, financial advisory fees, consulting fees, payment of contractual benefits
triggered by a change of control, early retirement and

49
<PAGE> 59

involuntary separation and related benefits, costs associated with elimination
of duplicate facilities and branch consolidations, data processing charges,
cancellation of vendor contracts, and similar costs which normally arise from
the consolidation of operational activities.

For a discussion of the significant charges UPC has incurred over the
past three years incidental to its acquisition program, see the caption
"Acquisitions" (on page 10) in UPC's Annual Report to Shareholders and Note 2 to
UPC's audited consolidated financial statements for the years ended December 31,
1997, 1996 and 1995 (on pages 49 and 50) contained in such Annual Report to
Shareholders. UPC's Annual Report to Shareholders is included as Exhibit 13 to
the UPC 1997 Form 10-K and Exhibit 13 is incorporated by reference herein to the
extent indicated herein.

The Merger and each of the Other Pending Acquisitions (with the
exception of the acquisitions of Duck Hill Bank, the Charter Acquisition and the
CalFed Branch Purchase) are expected to be, and the Recently Completed
Acquisition of Security Bancshares, Inc. was accounted for as a pooling of
interests. The Recently Completed Acquisitions of Sho-Me Financial Corp. and the
Charter Acquisition were, and the Other Pending Acquisitions of Duck Hill Bank
and the CalFed Branch Purchase are expected to be accounted for as purchases.
UPC currently estimates incurring aggregate charges in the range of $100 million
to $115 million (approximately $91 million related to MGR) before taxes in
connection with the consummation of the Merger and the Other Acquisitions. On an
after tax basis these anticipated charges are estimated to be in the range of
$75 to $80 million (approximately $61 million related to MGR). To the extent
that UPC's recognition of these acquisition-related charges is contingent upon
consummation of a particular transaction, those charges would be recognized in
the period in which such transaction closes. The pro forma impact of these
anticipated charges are included in the pro forma balance sheet information
included in this Proxy Statement. SEE "SUMMARY - HISTORICAL AND PRO FORMA PER
SHARE DATA" and "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION"

The range of anticipated charges to be incurred in connection with
consummating the Merger and the Other Acquisitions is a preliminary estimate of
the significant charges which may, in the aggregate, be required and should be
viewed accordingly. These charges are reflected in the pro forma consolidated
balance sheet included in this Proxy Statement. Moreover, this range has been
based on the due diligence that has been performed to date in connection with
the Merger and the Other Acquisitions and the range may be subject to change and
the actual charges incurred may be higher or lower than what is currently
contemplated, once those institutions are assimilated from an operational
perspective and various contingencies are either satisfied or eliminated.
Furthermore, the range of anticipated charges will change if additional entities
are acquired. UPC regularly evaluates the potential acquisition of, and holds
discussions with, various potential acquisition candidates. As a general rule,
UPC will publicly announce such acquisitions only after a definitive agreement
has been reached, and only then if UPC considers the acquisition to be of such
size as to be a significant acquisition. Since the range of anticipated
merger-related charges is likely to change with additional acquisitions, and
since UPC engages in acquisitions, such range could change, and Merchants'
shareholders should view such information accordingly.

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following tables contain unaudited pro forma condensed consolidated
financial statements including a balance sheet as of March 31, 1998 and
statements of earnings for the three months ended March 31, 1998 and the years
ended December 31, 1997, 1996, and 1995. These statements present on a pro forma
basis historical results for (i) UPC for all periods, (ii) UPC and MGR for all
periods, (iii) UPC, MGR and the Other Acquistions as of and for the three months
ended March 31, 1998 and for the year ended December 31, 1997; (iv) UPC, MGR,
Peoples, AMBANC and this Merger for the years ended December 31, 1996 and 1995
(see "Business of UPC -- Recent Developments").

The Merger and all but four of the Other Acquisitions are expected to
be accounted for using the pooling-of interests method of accounting. The pro
forma information as of March 31, 1998 and for the three months ended March 31,
1998, and for the years ended December 31, 1997, reflect the acquisitions of
MGR, Merchants

50
<PAGE> 60

and the Other Acquisitions as of January 1, 1997. The pro forma information for
the years ended December 31, 1996 and 1995, reflect only the acquisition of MGR,
Peoples, AMBANC and Merchants, because the Other Acquisitions (other than MGR,
Peoples, and AMBANC and Merchants) are not individually or in the aggregate,
considered significant to UPC from a financial statement presentation
standpoint. Furthermore, the pro forma impact of the CalFed Branch Purchase on
the pro forma statement of earnings for the periods presented has been executed
due to the lack of information available for operation of the branches on a
historical basis. Pro forma financial information are presented for information
purposes only and are not necessarily indicative of the results of operations or
combined financial position that would have resulted had the Merger or the Other
Acquisitions been consummated at the dates or during the periods indicated, nor
are they necessarily indicative of future results of operations or combined
financial position. The pro forma balance sheet reflects preliminary estimates
by UPC of acquisition-related charges to be incurred in connection with
consummation of the Merger and the Other Acquisitions; however, the statement of
earnings do not reflect these anticipated charges. For additional information
with respect to the estimated charges UPC anticipates it would incur in
connection with the Merger and the Other Acquisitions, see "BUSINESS OF UPC --
Recent Developments." For a discussion of UPC's acquisition program, including a
discussion of the significant charges UPC has incurred incidental to
acquisitions over the past three fiscal years, see the caption "Acquisitions"
(on page 10) in UPC's 1997 Annual Report to Shareholders and Note 2 to UPC's
audited consolidated financial statements for the years ended December 31, 1997,
1996, and 1995 (on pages 49 and 50) contained in UPC's 1997 Annual Report to
Shareholders. UPC's 1997 Annual Report to Shareholders is included as Exhibit 13
to UPC's 1997 Form 10-K, and Exhibit 13 is incorporated by reference herein to
the extent indicated herein. See "DOCUMENTS INCORPORATED BY REFERENCE."

The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the consolidated historical financial
statements of UPC and Merchants which are incorporated by reference herein. Pro
forma results are not necessarily indicative of future operating results. See
"DOCUMENTS INCORPORATED BY REFERENCE."

51
<PAGE> 61

UNION PLANTERS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998

<TABLE>
<CAPTION>
UPC,
MGR, FNB
UPC AND
PRO FORMA AND OTHER
UPC MGR ADJUSTMENTS MGR ACQUISITIONS
----------- ---------- ----------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.......................... $ 660,528 $ 220,317 $ 880,845 $ 1,008,839
Interest-bearing deposits at financial
institutions................................... 20,425 -- 20,425 49,640
Federal funds sold and securities purchased under
agreements to resell........................... 309,415 95,126 404,541 545,801
Trading account assets........................... 163,698 -- 163,698 163,698
Loans held for resale............................ 253,021 -- 253,021 259,017
Investment securities............................ 3,287,664 2,239,113 5,526,777 7,812,071
Loans............................................ 12,754,653 4,379,021 17,133,674 20,272,013
Less: Unearned income....................... (26,994) (93) (27,087) (34,152)
Allowance for losses on loans......... (223,837) (59,928) -- (283,765) (320,107)
----------- ---------- --------- ----------- -----------
Net loans.................................... 12,503,822 4,319,000 16,822,822 19,917,754
Premises and equipment 338,799 117,253 456,052 534,387
Accrued interest receivable...................... 196,595 46,523 243,118 279,665
FHA/VA claims receivable......................... 138,626 -- 138,626 138,626
Mortgage servicing rights........................ 98,089 1,237 99,326 99,832
Goodwill and other intangibles................... 78,927 120,951 199,878 375,339
Other assets..................................... 364,005 91,098 29,060(b) 484,163 519,252
----------- ---------- --------- ----------- -----------
Total assets............................. $18,413,614 $7,250,618 $ 29,060 $25,693,292 $31,703,921
=========== ========== ========= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing.......................... $ 2,290,776 $ 641,300 $ 2,932,076 $ 3,781,318
Certificates of deposit of $100,000 and
over....................................... 1,417,728 932,141 2,349,869 2,854,920
Other interest-bearing....................... 9,872,723 3,973,247 13,845,970 17,696,215
----------- ---------- --------- ----------- -----------
Total deposits........................... 13,581,227 5,546,688 -- 19,127,915 24,332,453
Short-term borrowings............................ 442,051 891,706 1,333,757 1,365,605
Short- and medium-term bank notes................ 135,000 -- 135,000 139,743
Federal Home Loan Bank advances.................. 846,291 106,370 952,661 1,215,073
Other long-term debt............................. 1,022,644 9,513 1,032,157 1,037,766
Accrued interest, expenses and taxes............. 182,422 76,604 90,511(b) 349,537 406,185
Other liabilities................................ 394,537 8,759 403,296 410,918
----------- ---------- --------- ----------- -----------
Total liabilities........................ 16,604,172 6,639,640 90,511 23,334,323 28,907,743
----------- ---------- --------- ----------- -----------
Shareholders' equity
Convertible preferred stock.................. 36,972 40 37,012 37,012
Common stock 419,326 68,075 89,631(a) 577,032 662,544
Additional paid-in capital................... 272,157 343,601 (150,257)(a) 457,905 580,938
(7,596)(b)
Retained earnings............................ 1,060,029 267,982 (61,451)(b) 1,266,560 1,489,763
Treasury stock............................... -- (60,626) 60,626(a) -- --
Unearned compensation........................ (9,550) (7,596) 7,596(b) (9,550) (10,021)
Net unrealized gain on available for sale
securities................................. 30,508 (498) -- 30,010 35,942
----------- ---------- --------- ----------- -----------
Total shareholders' equity............... 1,809,442 610,978 (61,451) 2,358,969 2,796,178
----------- ---------- --------- ----------- -----------
Total liabilities and shareholders'
equity................................. $18,413,614 $7,250,618 $ 29,060 $25,693,292 $31,703,921
=========== ========== ========= =========== ===========
</TABLE>

(a) Issuance of shares to acquire MGR (32,563,752 MGR shares outstanding
times the exchange ratio of .9686 equals 31,541,250 shares of UPC Common
Stock to be issued).

(b) Acquisition - related charges -- see "Business of UPC -- Recent
Developments -- Earnings Considerations Related to the Merger and the Other
Acquisitions."

52
<PAGE> 62

UNION PLANTERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998

UPC, MGR, FNB
UPC AND
AND OTHER
UPC MGR ACQUISITIONS
------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Interest and fees on loans.......................... $ 292,160 $ 388,325 $ 465,341
Interest on investment securities
Taxable.......................................... 41,475 69,870 83,000
Tax-exempt....................................... 7,066 10,836 13,777
Interest on deposits at financial institutions...... 424 470 735
Interest on federal funds sold and securities
purchased under agreements to resell............. 2,710 4,837 6,387
Interest on trading account assets.................. 3,020 3,020 3,020
Interest on loans held for resale................... 2,280 2,280 2,383
----------- ----------- -----------
Total interest income............................ 349,135 479,638 574,643
----------- ----------- -----------
Interest expense
Interest on deposits................................ 124,085 179,549 221,207
Interest on short-term borrowings................... 6,016 17,237 21,987
Interest on long-term debt.......................... 28,327 29,936 30,779
----------- ----------- -----------
Total interest expense........................... 158,428 226,722 273,973
----------- ----------- -----------
Net interest income.............................. 190,707 252,916 300,670
Provision for losses on loans......................... 17,909 21,459 24,775
----------- ----------- -----------
Net interest income after provision for losses on
loans.......................................... 172,798 231,457 275,895
Noninterest income
Service charges on deposit accounts................. 25,746 32,074 36,435
Mortgage servicing income........................... 16,191 16,453 16,890
Bank card income.................................... 7,498 9,426 9,641
Factoring commissions............................... 7,304 7,304 7,304
Trust service income................................ 2,407 5,723 6,381
Profits and commissions from trading activities..... 1,847 1,848 1,848
Investment securities gains......................... 5,215 5,811 6,552
Other income........................................ 29,510 41,058 43,559
----------- ----------- -----------
Total noninterest income......................... 95,718 119,697 128,610
Noninterest expense
Salaries and employee benefits...................... 73,230 96,595 113,940
Net occupancy expense............................... 10,644 15,473 18,137
Equipment expense................................... 10,997 13,694 16,052
Other expense....................................... 58,753 77,892 90,669
----------- ----------- -----------
Total noninterest expense........................ 153,624 203,654 238,798
----------- ----------- -----------
Earnings before income taxes..................... 114,892 147,500 165,707
Applicable income taxes............................. 40,320 52,417 59,139
----------- ----------- -----------
Net earnings..................................... $ 74,572 $ 95,083 $ 106,568
=========== =========== ===========
Earnings per common share
Basic............................................... $ .89 $ .82 $ .80
Diluted............................................. .86 .79 .78
Weighted average shares outstanding (in thousands)
Basic............................................... 83,379 114,868 131,931
Diluted............................................. 86,974 120,157 137,409
</TABLE>

53
<PAGE> 63

UNION PLANTERS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997

UPC, MGR, FNB
UPC AND
AND OTHER
UPC MGR ACQUISITIONS
------------- ------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Interest and fees on loans.......................... $1,165,925 $1,536,829 $1,839,742
Interest on investment securities
Taxable........................................ 187,221 290,351 343,598
Tax-exempt..................................... 29,032 40,516 52,133
Interest on deposits at financial institutions...... 2,627 2,627 3,179
Interest on federal funds sold and securities
purchased under agreements to resell.............. 9,114 13,760 18,554
Interest on trading account assets.................. 14,956 14,956 14,956
Interest on loans held for resale................... 7,819 7,819 7,982
---------- ---------- ----------
Total interest income..................... 1,416,694 1,906,858 2,280,144
---------- ---------- ----------
Interest expense
Interest on deposits................................ 494,517 698,778 860,526
Interest on short-term borrowings................... 41,280 81,980 104,620
Interest on long-term debt.......................... 110,512 116,687 120,184
---------- ---------- ----------
Total interest expense.................... 646,309 897,445 1,085,330
---------- ---------- ----------
Net interest income....................... 770,385 1,009,413 1,194,814
Provision for losses on loans............................ 113,633 142,580 154,163
---------- ---------- ----------
Net interest income after provision for
losses on loans......................... 656,752 866,833 1,040,651
Noninterest income
Service charges on deposit accounts................. 107,248 133,352 151,454
Mortgage servicing income........................... 57,265 57,265 58,051
Bank card income.................................... 31,317 38,544 39,239
Factoring commissions............................... 30,140 30,140 30,140
Trust service income................................ 9,020 21,663 24,355
Profits and commissions from trading activities..... 7,295 7,295 7,295
Investment securities gains......................... 2,104 4,688 5,481
Other income........................................ 117,221 139,945 153,075
---------- ---------- ----------
Total noninterest income.................. 361,610 432,892 469,090
---------- ---------- ----------
Noninterest expense
Salaries and employee benefits...................... 284,648 372,959 440,212
Net occupancy expense............................... 44,813 64,140 73,676
Equipment expense................................... 43,812 53,579 62,466
Other expense....................................... 324,431 379,663 430,225
---------- ---------- ----------
Total noninterest expense................. 697,704 870,341 1,006,579
---------- ---------- ----------
Earnings before income taxes.............. 320,658 429,384 503,162
Applicable income taxes.................................. 111,897 147,948 173,787
---------- ---------- ----------
Net earnings.............................. $ 208,761 $ 281,436 $ 329,375
========== ========== ==========
Earnings per common share
Basic............................................... $ 2.54 $ 2.48 $ 2.52
Diluted............................................. 2.45 2.40 2.45
Weighted average shares outstanding (in thousands)
Basic............................................... 80,336 111,418 128,555
Diluted............................................. 85,195 117,884 135,180
</TABLE>

54
<PAGE> 64

UNION PLANTERS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
UPC UPC, MGR,
AND PEOPLES, AMBANC,
UPC MGR AND MERCHANTS
----------- ----------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Interest and fees on loans...................... $1,095,148 $1,380,299 $1,535,342
Interest on investment securities
Taxable.................................... 247,716 340,745 372,233
Tax-exempt................................. 30,839 37,980 45,560
Interest on deposits at financial
institutions.................................. 1,593 1,593 1,910
Interest on federal funds sold and securities
purchased under agreements to resell.......... 16,948 19,462 21,664
Interest on trading account assets.............. 13,895 13,895 13,895
Interest on loans held for resale............... 6,852 6,852 7,241
---------- ---------- ----------
Total interest income................. 1,412,991 1,800,826 1,997,845
---------- ---------- ----------
Interest expense
Interest on deposits............................ 512,668 670,856 755,680
Interest on short-term borrowings............... 64,689 93,501 100,543
Interest on long-term debt...................... 90,782 97,530 97,680
---------- ---------- ----------
Total interest expense................ 668,139 861,887 953,903
---------- ---------- ----------
Net interest income................... 744,852 938,939 1,043,942
Provision for losses on loans........................ 68,948 79,228 84,198
---------- ---------- ----------
Net interest income after provision
for losses on loans................. 675,904 859,711 959,744
Noninterest income
Service charges on deposit accounts............. 107,535 130,978 141,119
Mortgage servicing income....................... 63,003 63,003 63,003
Bank card income................................ 24,975 30,988 31,636
Factoring commissions........................... 26,066 26,066 26,066
Trust service income............................ 10,130 19,512 21,496
Profits and commissions from trading
activities.................................... 5,765 5,765 5,765
Investment securities gains..................... 4,099 4,916 4,942
Other income.................................... 78,929 89,632 94,739
---------- ---------- ----------
Total noninterest income.............. 320,502 370,860 388,766
---------- ---------- ----------
Noninterest expense
Salaries and employee benefits.................. 282,726 351,868 388,972
Net occupancy expense........................... 47,215 65,195 70,142
Equipment expense............................... 44,418 53,149 60,704
Other expense................................... 357,458 399,991 422,915
---------- ---------- ----------
Total noninterest expense............. 731,817 870,203 942,733
---------- ---------- ----------
Earnings before income taxes.......... 264,589 360,368 405,777
Applicable income taxes.............................. 93,115 125,755 139,649
---------- ---------- ----------
Net earnings.......................... $ 171,474 $ 234,613 $ 266,128
========== ========== ==========
Earnings per common share
Basic........................................... $ 2.13 $ 2.18 $ 2.24
Diluted......................................... 2.05 2.11 2.17
Weighted average shares outstanding (in thousands)
Basic........................................... 77,240 104,539 115,726
Diluted......................................... 83,542 112,425 123,714
</TABLE>

55
<PAGE> 65

UNION PLANTERS CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
UPC UPC, MGR,
AND PEOPLES, AMBANC,
UPC MGR AND MERCHANTS
----------- ----------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Interest and fees on loans...................... $ 986,230 $1,252,376 $1,388,252
Interest on investment securities
Taxable.................................... 202,890 274,743 304,771
Tax-exempt................................. 32,400 39,666 47,200
Interest on deposits at financial
institutions.................................. 5,284 5,284 6,153
Interest on federal funds sold and securities
purchased under agreements to resell.......... 19,965 21,868 24,547
Interest on trading account assets.............. 14,191 14,191 14,191
Interest on loans held for resale............... 4,858 4,858 5,184
---------- ---------- ----------
Total interest income................. 1,265,818 1,612,986 1,790,298
---------- ---------- ----------
Interest expense
Interest on deposits............................ 478,641 616,666 695,224
Interest on short-term borrowings............... 44,492 64,725 70,706
Interest on long-term debt...................... 73,234 79,293 79,674
---------- ---------- ----------
Total interest expense................ 596,367 760,684 845,604
---------- ---------- ----------
Net interest income................... 669,451 852,302 944,694
Provision for losses on loans........................ 33,917 43,909 47,393
---------- ---------- ----------
Net interest income after provision
for losses on loans................. 635,534 808,393 897,301
Noninterest income
Service charges on deposit accounts............. 102,932 125,419 134,243
Mortgage servicing income....................... 55,903 55,903 55,903
Bank card income................................ 20,758 26,559 27,124
Factoring commissions........................... 19,519 19,519 19,519
Trust service income............................ 8,326 16,964 18,786
Profits and commissions from trading
activities.................................... 12,362 12,362 12,362
Investment securities gains..................... 1,433 1,789 2,008
Other income.................................... 72,477 83,058 87,381
---------- ---------- ----------
Total noninterest income.............. 293,710 341,573 357,326
---------- ---------- ----------
Noninterest expense
Salaries and employee benefits.................. 264,663 337,656 371,136
Net occupancy expense........................... 44,061 61,738 66,224
Equipment expense............................... 42,251 51,218 57,289
Other expense................................... 256,214 302,794 324,295
---------- ---------- ----------
Total noninterest expense............. 607,189 753,406 818,944
---------- ---------- ----------
Earnings before income taxes.......... 322,055 396,560 435,683
Applicable income taxes.............................. 110,799 134,082 145,486
---------- ---------- ----------
Net earnings.......................... $ 211,256 $ 262,478 $ 290,197
========== ========== ==========
Earnings per common share
Basic........................................... $ 2.79 $ 2.56 $ 2.56
Diluted......................................... 2.66 2.46 2.46
Weighted average shares outstanding (in thousands)
Basic........................................... 72,512 99,346 110,196
Diluted......................................... 78,798 106,632 117,604
</TABLE>

<PAGE> 66

CERTAIN REGULATORY CONSIDERATIONS

The following discussion sets forth certain of the material elements of
the regulatory framework applicable to banks and bank holding companies and
provides certain specific information related to UPC. A more complete discussion
is included in the UPC 1997 Form 10-K. Information relating to Merchants is
included in the Merchants 1997 Form 10-K. See "AVAILABLE INFORMATION,"
"DOCUMENTS INCORPORATED BY REFERENCE" and the Merchants 1997 Form 10-K, a copy
of which is attached hereto as Appendix E.

GENERAL

UPC is a bank holding company registered with the Federal Reserve under
the BHC Act. As such, UPC and its non-bank subsidiaries are subject to the
supervision, examination, and reporting requirements of the BHC Act and the
regulations of the Federal Reserve.

The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the voting shares of the bank; (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (iii) it may merge or consolidate with any other bank
holding company.

The BHC Act further provides that the Federal Reserve may not approve
any transaction that would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which
may be substantially to lessen competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy which is discussed below, and consideration of convenience and needs
issues includes the parties' performance under the Community Reinvestment Act of
1977.

The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate
Banking Act"), which became effective in September 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that UPC and any other bank holding company located in Tennessee
may now acquire a bank located in any other state, and any bank holding company
located outside Tennessee may lawfully acquire any Tennessee-based bank,
regardless of state law to the contrary, in either case subject to certain
deposit-percentage limitations, aging requirements, and other restrictions. The
Interstate Banking Act also generally provides that, after June 1, 1997,
national and state-chartered banks may branch interstate through acquisitions of
banks in other states. By adopting legislation prior to that date, a state has
the ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether. None of the states in which the banking subsidiaries of UPC are
currently located has either moved up the date after which interstate branching
will be permissible or "opted out." Texas did, however, elect to "opt out," in
legislation that expires September 2, 1999. UPC utilized the provisions of the
Interstate Banking Act at the end of 1997 to merge substantially all of UPC's
Banking Subsidiaries with and into UPB. As a result of such consolidation, UPBN
is now a multi-state national bank with branches in Tennessee, Alabama,
Mississippi, Louisana, Arkansas, Missouri and Kentucky.

The BHC Act generally prohibits UPC from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or

57
<PAGE> 67

unfair competition, conflicts of interest, or unsound banking practices. For
example, factoring accounts receivable, acquiring or servicing loans, leasing
personal property, conducting discount securities brokerage activities,
performing certain data processing services, acting as agent or broker in
selling credit life insurance and certain other types of insurance in connection
with credit transactions, and performing certain insurance underwriting
activities all have been determined by the Federal Reserve to be permissible
activities of bank holding companies. The BHC Act does not place territorial
limitations on permissible nonbanking activities of bank holding companies.
Despite prior approval, the Federal Reserve has the power to order a holding
company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness, or stability of any bank
subsidiary of that bank holding company.

Each of the UPC Banking Subsidiaries is a member of the Federal Deposit
Insurance Corporation ("FDIC"), and as such, its deposits are insured by the
FDIC to the extent provided by law. Each such subsidiary is also subject to
numerous state and federal statutes and regulations that affect is business,
activities, and operations, and each is supervised and examined by one or more
state or federal bank regulatory agencies.

The regulatory agencies having supervisory jurisdiction over the
respective subsidiary institutions of UPC and Merchants (the FDIC and the
applicable state authority in the case of state-chartered nonmember banks, the
Office of Thrift Supervision ("OTS") in the case of federally chartered thrift
institutions, the Federal Reserve in the case of state-chartered member banks,
and the Office of the Comptroller of the Currency ("OCC") in the case of
national banks) regularly examine the operations of such institutions and have
authority to approve or disapprove mergers, consolidations, the establishment of
branches, and similar corporate actions. The federal and state banking
regulators also have the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of law.

PAYMENT OF DIVIDENDS

UPC is a legal entity separate and distinct from its banking, thrift,
and other subsidiaries. The principal sources of cash flow of UPC, including
cash flow to pay dividends to its shareholders, are dividends from its
subsidiary depository institutions. There are statutory and regulatory
limitations on the payment of dividends by these subsidiary depository
institutions to UPC, as well as by UPC and Merchants to their shareholders.

As to the payment of dividends, each of UPC's state-chartered banking
subsidiaries is subject to the respective laws and regulations of the state in
which such bank is located, and to the regulations of the bank's primary federal
regulator. UPC's subsidiary that is a thrift institution is subject to the OTS'
dividend distributions regulation, and those that are national banks are subject
to the regulations of the OCC.

If, in the opinion of the federal banking regulator, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
depository institution, could include the payment of dividends), such agency may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "-- Prompt Corrective
Action." Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.

At March 31, 1998, under dividend restrictions imposed under federal
and state laws, the UPC Banking Subsidiaries, without obtaining governmental
approvals, could declare aggregate dividends to UPC of approximately $172.4
million.

The payment of dividends by UPC and the UPC Banking Subsidiaries may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.

58
<PAGE> 68

CAPITAL ADEQUACY

UPC and the UPC Banking Subsidiaries are required to comply with the
capital adequacy standards established by the Federal Reserve in the case of
UPC, and the appropriate federal banking regulator in the case of each of the
UPC Banking Subsidiary. There are two basic measures of capital adequacy for
bank holding companies and their subsidiary depository institutions that have
been promulgated by the Federal Reserve and each of the federal bank regulatory
agencies: a risk-based measure and a leverage measure. All applicable capital
standards must be satisfied for a bank holding company to be considered in
compliance.

The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among
depository institutions and bank holding companies, to account for
off-balance-sheet exposure, and to minimize disincentives for holding liquid
assets. Assets and off-balance-sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.

The minimum guideline for the ratio ("Total Capital Ratio") of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8.0%. At least
half of Total Capital must be composed of common equity, undivided profits,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").
At March 31, 1998, UPC's consolidated Total Capital Ratio and its Tier 1 Capital
Ratio (i.e., the ratio of Tier 1 Capital to risk-weighted assets) were 20.71%
and 15.66%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3.0% for bank holding companies that
meet certain specified criteria, including having the highest regulatory rating.
All other bank holding companies generally are required to maintain a Leverage
Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis points.
UPC's Leverage Ratio at March 31, 1998, was 10.72%. The guidelines also provide
that bank holding companies experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a "tangible
Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other indicia of
capital strength in evaluating proposals for expansion or new activities.

Each of the UPC Banking Subsidiaries is subject to risk-based and
leverage capital requirements adopted by its federal banking regulator which are
substantially similar to those adopted by the Federal Reserve for bank holding
companies. Each of the UPC Banking Subsidiaries was in compliance with
applicable minimum capital requirements as of March 31, 1998. Neither UPC nor
any of the UPC Banking Subsidiaries has been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it.

Failure to meet capital guidelines could subject a bank or thrift to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"-- Prompt Corrective Action."

The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve, the FDIC, and the OCC have,
pursuant to FDICIA, proposed an amendment to the risk-based capital standards
that would calculate the change in an institution's net economic value
attributable to increases and decreases in market interest rates and would
require banks with excessive interest rate risk exposure to hold additional
amounts of capital against such

59
<PAGE> 69

exposures. The OTS has already included an interest-rate risk component in its
risk-based capital guidelines for savings associations that it regulates.

SUPPORT OF SUBSIDIARY INSTITUTIONS

Under Federal Reserve policy, UPC is expected to act as a source of
financial strength for, and to commit resources to support, each of the UPC
Banking Subsidiaries. This support may be required at times when, absent such
Federal Reserve policy, UPC may not be inclined to provide it. In addition, any
capital loans by a bank holding company to any of its banking subsidiaries are
subordinate in right of payment to deposits and to certain other indebtedness of
such banks. In the event of a bank holding company's bankruptcy, any commitment
by the bank holding company to a federal bank regulatory agency to maintain the
capital of a banking subsidiary will be assumed by the bankruptcy trustee and
entitled to a priority of payment.

Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors, secured creditors, and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The UPC Banking Subsidiaries are subject to these cross-guarantee
provisions. As a result, any loss suffered by the FDIC in respect of any of
these subsidiaries would likely result in assertion of the cross-guarantee
provisions, the assessment of such estimated losses against the depository
institution's banking or thrift affiliates, and a potential loss of UPC's
respective investments in such other subsidiary depository institutions.

PROMPT CORRECTIVE ACTION

FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.

Under the final agency rules implementing the prompt corrective action
provisions, an institution that (i) has a Total Capital Ratio of 10% or greater,
a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or
greater and (ii) is not subject to any written agreement, order, capital
directive, or prompt corrective action directive issued by the appropriate
federal banking agency is deemed to be well capitalized. An institution with a
Total Capital Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or
greater, and a Leverage Ratio of 4.0% or greater is considered to be adequately
capitalized. A depository institution that has a Total Capital Ratio of less
than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of less
than 4.0% is considered to be undercapitalized. A depository institution that
has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than
3.0%, or a Leverage Ratio of less than 3.0% is considered to be significantly
undercapitalized, and an institution that has a tangible equity capital to
assets ratio equal to or less than 2.0% is deemed to be critically
undercapitalized. For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 Capital for purposes of the
risk-based capital standards, plus the amount of outstanding cumulative
perpetual preferred stock (including related surplus), minus all intangible
assets with certain exceptions. A depository institution may be deemed to be in
a capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.

60
<PAGE> 70

An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meet its capital restoration plan, subject to certain limitations.
The obligation of a controlling bank holding company under FDICIA to fund a
capital restoration plan is limited to the lesser of 5.0% of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.

For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions: (i) sell enough shares, including voting shares, to become
adequately capitalized; (ii) merge with (or be sold to) another institution (or
holding company), but only if grounds exist for appointing a conservator or
receiver; (iii) restrict certain transactions with banking affiliates as if the
"sister bank" exception to the requirements of Section 23A of the Federal
Reserve Act did not exist; (iv) otherwise restrict transactions with bank or
non-bank affiliates; (v) restrict interest rates that the institution pays on
deposits to "prevailing rates" in the institution's "region;" (vi) restrict
asset growth or reduce total assets; (vii) alter, reduce, or terminate
activities; (viii) hold a new election of directors; (ix) dismiss any director
or senior executive officer who held office for more than 180 days immediately
before the institution became undercapitalized, provided that in requiring
dismissal of a director or senior officer, the agency must comply with certain
procedural requirements, including the opportunity for an appeal in which the
director or officer will have the burden of proving his or her value to the
institution; (x) employ "qualified" senior executive officers; (xi) cease
accepting deposits from correspondent depository institutions; (xii) divest
certain nondepository affiliates which pose a danger to the institution; or
(xiii) be divested by a parent holding company. In addition, without the prior
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to any senior executive
officer or increase the rate of compensation for such an officer.

At March 31, 1998, all of the UPC Banking Subsidiaries had the
requisite capital levels to qualify as well capitalized. An institution's
capital category is determined solely for the purposes of applying the prompt
corrective action law and it may not constitute an accurate representation of an
institution's overall financial condition or prospects.

DESCRIPTION OF UPC CAPITAL STOCK

UPC's Charter currently authorizes the issuance of 300,000,000 shares
of UPC Common Stock and 10,000,000 shares of UPC Preferred Stock. As of May 1,
1998, 84,970,899 shares of UPC Common Stock were outstanding and approximately
7,792,332 shares were earmarked for issuance in connection with currently
outstanding UPC options, UPC's dividend reinvestment plan, and with respect to
conversion rights of the currently outstanding UPC Series E Preferred Stock
(defined next). In addition, as of May 1, 1998, 1,156,231 shares of UPC's 8%
Cumulative, Convertible Preferred Stock, Series E (the "Series E Preferred
Stock") were outstanding. As of May 1, 1998, none of UPC's 750,000 authorized
shares of Series A Preferred Stock were issued and outstanding and UPC
management is not currently aware of the existence of circumstances from which
it may be inferred that such issuance is imminent. THE CAPITAL STOCK OF UPC DOES
NOT REPRESENT OR CONSTITUTE A DEPOSIT ACCOUNT AND IS NOT INSURED BY THE FDIC,
THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, OR ANY
GOVERNMENTAL AGENCY.

61
<PAGE> 71

UPC COMMON STOCK

GENERAL. Shares of UPC Common Stock may be issued at such time or times
and for such consideration (not less than the par value thereof) as the UPC
Board may deem advisable, subject to such limitations as may be set forth in the
laws of the State of Tennessee, UPC's Charter or Bylaws or the rules of the
NYSE. Union Planters Bank National Association, a subsidiary of UPC, is the
Registrar, Transfer Agent and Dividend Disbursing Agent for shares of UPC Common
Stock. Its address is Union Planters Bank, National Association, Corporate Trust
Department, 6200 Poplar Avenue, Third Floor, Memphis, Tennessee 38119. Its
mailing address is P.O. Box 387, Memphis, Tennessee 38147.

DIVIDENDS. Subject to the preferential dividend rights applicable to
outstanding shares of the UPC Preferred Stock and subject to applicable
requirements, if any, with respect to the setting aside of sums for purchase,
retirement, or sinking funds, if any, for all outstanding UPC Preferred Stock,
the holders of the UPC Common Stock are entitled to receive, to the extent
permitted by law, only such dividends as may be declared from time to time by
the UPC Board.

UPC has the right to, and may from time to time, enter into borrowing
arrangements or issue other debt instruments, the provisions of which may
contain restrictions on payment of dividends and other distributions on UPC
Common Stock and UPC Preferred Stock. In December 1996, UPC caused to be issued
$200,000,000 in aggregate liquidation amount of 8.20% Capital Trust Pass -
through Securities ("UPC Capital Securities") through a Delaware trust
subsidiary. Pursuant to the terms of the governing instruments, UPC would be
prohibited from paying dividends on any UPC Capital Stock if all quarterly
payments on the UPC Capital Securities had not been paid in full. The UPC
Capital Securities mature in 2026 and may be redeemed under certain
circumstances prior to maturity.

LIQUIDATION RIGHTS. In the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets, or winding-up of UPC, after
distribution in full of the preferential amounts required to be distributed to
the holders of UPC Preferred Stock, holders of UPC Common Stock will be entitled
to receive all of the remaining assets of UPC, of whatever kind, available for
distribution to shareholders ratably in proportion to the number of shares of
UPC Common Stock held. The UPC Board may distribute in kind to the holders of
UPC Common Stock such remaining assets of UPC or may sell, transfer, or
otherwise dispose of all or any part of such remaining assets to any other
person or entity and receive payment therefor in cash, stock, or obligations of
such other person or entity, and may sell all or any part of the consideration
so received and distribute any balance thereof in kind to holders of UPC Common
Stock. Neither the merger or consolidation of UPC into or with any other
corporation, nor the merger of any other corporation into UPC, nor any purchase
or redemption of shares of stock of UPC of any class, shall be deemed to be a
dissolution, liquidation, or winding-up of UPC for purposes of this paragraph.

Because UPC is a holding company, its right and the rights of its
creditors and shareholders, including the holders of UPC Preferred Stock and UPC
Common Stock, to participate in the distribution of assets of a subsidiary on
its liquidation or recapitalization may be subject to prior claims of such
subsidiary's creditors except to the extent that UPC itself may be a creditor
having recognized claims against such subsidiary.

For a further description of UPC Common Stock, see "EFFECT OF THE
MERGER ON RIGHTS OF SHAREHOLDERS."

UPC PREFERRED STOCK

SERIES A PREFERRED STOCK. UPC's Charter provides for the issuance of up
to 750,000 shares (subject to adjustment by action of the UPC Board) of Series A
Preferred Stock under certain circumstances involving a potential change in
control of UPC. None of such shares are outstanding and management is aware of
no facts suggesting that issuance of such shares may be imminent. The Series A
Preferred Stock is described in more detail in UPC's Registration Statement on
Form 8-A, dated January 19, 1989, and filed February 1, 1989 (SEC File No.
0-6919) which is incorporated by reference herein.

62
<PAGE> 72

SERIES E PREFERRED STOCK. 1,156,231 shares of Series E Preferred Stock
were outstanding as of May 31, 1998. All shares of Series E Preferred Stock have
a stated value of $25.00 per share. Dividends are payable at the rate of $0.50
per share per quarter and are cumulative. The Series E Preferred Stock is
convertible at the rate of 1.25 shares of UPC Common Stock for each share of
Series E Preferred Stock. The Series E Preferred Stock is not subject to any
sinking fund provisions and has no preemptive rights. Such shares have a
liquidation preference of $25.00 per share plus unpaid dividends accrued thereon
and, at UPC's option and with the prior approval of the Federal Reserve, are
subject to redemption by UPC at any time at a redemption price of $25.00 per
share plus any unpaid dividends accrued thereon. Holders of Series E Preferred
Stock have no voting rights except as required by law and in certain other
limited circumstances. See "CERTAIN REGULATORY CONSIDERATIONS --Payment of
Dividends."

OTHER MATTERS

As of the date of this Proxy Statement, the Merchants Board knows of no
matters that will be presented for consideration at the Special Meeting other
than as described in this Proxy Statement. However, if any other matters shall
properly come before the Special Meeting or any adjournment or postponement
thereof and be voted upon, the enclosed proxy shall be deemed to confer
discretionary authority to the individuals named as proxies therein to vote the
shares represented by such proxy as to any such matters.

SHAREHOLDER PROPOSALS

UPC expects to hold its next annual meeting of shareholders after the
Merger in April 1999. Under SEC rules, proposals of UPC shareholders intended to
be presented at that meeting must be received by UPC at its principal executive
offices no later than the date specified in UPC's 1998 annual meeting proxy
statement. It is not currently anticipated that Merchants will hold its annual
meeting unless the Merger should not be consummated. In the event the Merger is
not consummated, Merchants will provide subsequent notice of such annual
meeting and proposals of Merchants shareholders intended to be presented at
that meeting must have been received by Merchants at its principal executive
offices within a reasonable period of time prior to such annual meeting.

EXPERTS

The consolidated financial statements of UPC and subsidiaries
incorporated in this Proxy Statement/Prospectus by reference to the UPC 1997
Form 10-K have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.

The consolidated financial statements incorporated in this Proxy
Statement by reference to the Merchants 1997 Form 10-K have been audited by
Hidalgo, Banfill, Zlotnik & Kermali, P.C., independent auditors, as stated in
its report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

OPINIONS

The legality of the shares of UPC Common Stock to be issued in the
Merger will be passed upon by E. James House, Jr., Secretary and Manager of the
Legal Department of UPC. E. James House, Jr. is an officer of, and receives
compensation from, UPC.

Certain tax consequences of the transaction have been passed upon by
Wyatt, Tarrant & Combs, Memphis, Tennessee for UPC.

63
<PAGE> 73
APPENDIX A - THE MERGER AGREEMENT

<PAGE> 74

AGREEMENT AND PLAN OF MERGER

BY AND BETWEEN

UNION PLANTERS CORPORATION,

UNION PLANTERS HOLDING CORPORATION

AND

MERCHANTS BANCSHARES, INC.

DATED AS OF JANUARY 16, 1998
<PAGE> 75

TABLE OF CONTENTS

ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER . . . . . . . . . . . . . . . . . . . . 1

1.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
------
1.2 Time and Place of Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
---- --- ----- -- -------
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
--------- ----
1.4 Restructure of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
----------- -- -----------

ARTICLE 2
TERMS OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
-------
2.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
------
2.3 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
--------- --- --------

ARTICLE 3
MANNER OF CONVERTING SHARES . . . . . . . . . . . . . . . . . . . . . 2
3.1 Conversion of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
---------- -- ------
3.2 Anti-Dilution Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
------------- ----------
3.3 Shares Held by Subject Company or Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
------ ---- -- ------- ------- -- ------
3.4 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
---------- ------

ARTICLE 4
EXCHANGE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . 3
4.1 Exchange Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-------- ----------
4.2 Rights of Former Subject Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
------ -- ------ ------- ------- ------------

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SUBJECT COMPANY . . . . . . . . . . . . . . . 4
5.1 Organization, Standing, and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
------------- --------- --- -----
5.2 Authority; No Breach by Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
---------- -- ------ -- ---------
5.3 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
------- -----
5.4 Subject Company Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
------- ------- ------------
5.5 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
--------- ----------
5.6 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
------- -- ----------- -----------
5.7 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
------- -- ------- ------- -- ------
5.8 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
--- -------
5.9 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
------
5.10 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
------------ --------
5.11 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
------------- -------
5.12 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
---------- ---- ----
5.13 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
----- ---------
5.14 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-------- ------- -----
5.15 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------- ---------
5.16 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
----- -----------
5.17 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-------
5.18 Statements True and Correct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
---------- ---- --- -------
5.19 Accounting, Tax, and Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
----------- ---- --- ---------- -------
5.20 Charter Provisions; Takeover Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
------- ----------- -------- ----
</TABLE>

i
<PAGE> 76

<TABLE>
<S> <C> <C>
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT . . . . . . . . . . . . . . . . . . 13
6.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
------------- -------- --- -----
6.2 Authority; No Breach by Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
---------- -- ------ -- ---------
6.3 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
------- -----
6.4 Parent Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
------ ------------
6.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
--------- ----------
6.6 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
------- -- ----------- -----------
6.7 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
------- -- ------- ------- -- ------
6.8 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
--- -------
6.9 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
------------- -------
6.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
---------- ---- ----
6.11 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-------- ---------
6.12 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
------
6.13 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
----- -----------
6.14 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-------
6.15 Statements True and Correct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
---------- ---- --- -------
6.16 Accounting, Tax, and Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
----------- ---- --- ---------- -------

ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION . . . . . . . . . . . . . . . . . . 19
7.1 Affirmative Covenants of Subject Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
----------- --------- -- ------- -------
7.2 Negative Covenants of Subject Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
-------- --------- -- ------- -------
7.3 Covenants of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
--------- -- ------
7.4 Adverse Changes in Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
------- ------- -- ---------
7.5 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-------

ARTICLE 8
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 22
8.1 Registration Statement; Proxy Statement; Shareholder Approval . . . . . . . . . . . . . . . . . . . 22
------------ ---------- ----- ---------- ----------- -------
8.2 Authorization of Shares; Exchange Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
------------- -- ------- -------- -------
8.3 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
------------
8.4 Filings With State Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
------- ---- ----- -------
8.5 Agreement as to Efforts to Consummate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
--------- -- -- ------- -- ----------
8.6 Investigation and Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
------------- --- ---------------
8.7 Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
----- --------
8.8 Certain Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
------- -------
8.9 Accounting and Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
---------- --- --- ---------
8.10 Agreement of Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
--------- -- ----------
8.11 Employee Benefits and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-------- -------- --- ---------
8.12 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
---------------

ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE . . . . . . . . . . . . . . . 27
9.1 Conditions to Obligations of Each Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
---------- -- ----------- -- ---- -----
9.2 Conditions to Obligations of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
---------- -- ----------- -- ------
9.3 Conditions to Obligations of Subject Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
---------- -- ----------- -- ------- -------
</TABLE>

ii
<PAGE> 77

<TABLE>
<S> <C> <C>
ARTICLE 10
TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-----------
10.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
------ -- -----------
10.3 Non-Survival of Representations and Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
------------ -- --------------- --- ---------

ARTICLE 11
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 34
11.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-----------
11.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
--------
11.3 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
------- --- -------
11.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
------ ---------
11.5 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
----------
11.6 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
-------
11.7 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
----------
11.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
-------
11.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
--------- ---
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
------------
11.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
--------
11.12 Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
---------------
11.13 Enforcement of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
----------- -- ---------
11.14 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
------------
</TABLE>

EXHIBITS

EXHIBIT 1 PLAN OF MERGER
EXHIBIT 2 AFFILIATE AGREEMENT

iii
<PAGE> 78

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and
entered into as of January 16, 1998, by and between Merchants Bancshares, Inc.,
a Texas corporation having its principal office located in Houston, Texas
("Subject Company"), Union Planters Holding Corporation, a Tennessee
corporation having its principal office located in Memphis, Tennessee ("Merger
Subsidiary"), and joined in by Union Planters Corporation, a Tennessee
corporation having its principal office located in Memphis, Tennessee
("Parent").

PREAMBLE

The Boards of Directors of Subject Company, Merger Subsidiary and
Parent are of the opinion that the transactions described herein are in the
best interests of the parties and their respective shareholders. This
Agreement and the Plan of Merger attached hereto at Exhibit 1 and incorporated
herein by reference provide for the acquisition of Subject Company by Parent
pursuant to the merger of Subject Company with and into Merger Subsidiary. At
the Effective Time, the outstanding shares of the common stock of Subject
Company shall be converted into the right to receive shares of the common stock
of Parent (except as provided in Sections 3.1, 3.3 and 3.4 of this Agreement).
As a result, shareholders of Subject Company shall become shareholders of
Parent, and Surviving Corporation shall continue to conduct its business and
operations as a wholly-owned subsidiary of Parent. The transactions described
in this Agreement are subject to the approvals of the shareholders of Subject
Company, the FRB, the Texas State Banking Department, and other applicable
federal and state regulatory authorities, and the satisfaction of certain other
conditions described in this Agreement. It is the intention of the parties to
this Agreement that (i) for federal income tax purposes this Agreement shall
constitute a plan of merger and the Merger shall qualify as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code and (ii) for
accounting purposes the Merger shall qualify for treatment as a
pooling-of-interests.

Certain terms used in this Agreement are defined in Section 11.1 of
this Agreement.

NOW, THEREFORE, in consideration of the above and the mutual
warranties, representations, covenants, and agreements set forth herein, the
parties agree as follows:

ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER

1.1 Merger. Subject to the terms and conditions of this Agreement
and the Plan of Merger, at the Effective Time, Subject Company shall be merged
with and into Merger Subsidiary in accordance with the provisions of Section
48-21-109 of the TBCA and Article 5.01 of the Texas BCA, and with the effect
provided in Section 48-21-108 of the TBCA and Article 5.06 of the Texas BCA
(the "Merger"). Merger Subsidiary shall be the Surviving Corporation resulting
from the Merger and shall continue to be governed by the Laws of the State of
Tennessee. The Merger shall be consummated pursuant to the terms of this
Agreement and the Plan of Merger, which have been approved and adopted by the
respective Boards of Directors of Subject Company, Parent and Merger
Subsidiary.

1.2 Time and Place of Closing. The Closing will take place at
9:00 A.M. on the date on which the Effective Time is to occur (or the
immediately preceding day if the Effective Time is to be earlier than 9:00
A.M.), or at such other time as the Parties, acting through their chief
executive officers or chief financial officers, may mutually agree. The
Closing shall be held at such place as may be mutually agreed upon by the
Parties.

1.3 Effective Time. The Merger and other transactions
contemplated by this Agreement shall become effective at the time the Articles
of Merger reflecting the Merger shall become effective with the Secretary of
State of the State of Tennessee and the Secretary of State of the State of
Texas (the "Effective Time"). Subject to the terms and conditions hereof,
unless otherwise mutually agreed upon in writing by the chief executive
officers or chief financial officers of each Party, the Parties shall use their
reasonable efforts to cause the Effective Time to occur as

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soon as is reasonably practicable, but in no event later than 30 days following
the last to occur of (i) the effective date of the last required Consent of any
Regulatory Authority having authority over and approving or exempting the
Merger (taking into account any requisite waiting period in respect thereof),
(ii) the date on which the shareholders of Subject Company approve this
Agreement, and (iii) the date on which all other conditions precedent (other
than those conditions which relate to actions to be taken at the Closing) to
each Party's obligations hereunder shall have been satisfied or waived (to the
extent waivable by such Party).

1.4 Restructure of Transaction. Parent shall, in its reasonable
discretion, have the unilateral right to revise the structure of the Merger
contemplated by this Agreement in order to achieve tax benefits or for any
other reason which Parent may deem advisable; provided, however, that Parent
shall not have the right, without the approval of the Board of Directors of
Subject Company and, if required by the Texas BCA, the holders of the Subject
Company Common Stock, to make any revision to the structure of the Merger
which: (i) changes the amount of the consideration which the holders of shares
of Subject Company Common Stock are entitled to receive (determined in the
manner provided in Section 3.1 of this Agreement); (ii) changes the intended
tax free effects of the Merger to Parent, Subject Company or the holders of
shares of Subject Company Common Stock; (iii) would permit Parent to pay the
consideration other than by delivery of Parent Common Stock registered with the
SEC (in the manner described in Section 4.1 of this Agreement); (iv) would be
materially adverse to the interests of Subject Company or adverse to the
holders of shares of Subject Company Common Stock; (v) would materially impede
or delay consummation of the Merger; or (vi) would require a vote of Parent's
shareholders under relevant state Law. Parent may exercise this right of
revision by giving written notice to Subject Company in the manner provided in
Section 11.8 of this Agreement which notice shall be in the form of an
amendment to this Agreement and the Plan of Merger or in the form of an Amended
and Restated Agreement and Plan of Merger.

ARTICLE 2
TERMS OF MERGER

2.1 Charter. The Charter of Merger Subsidiary in effect
immediately prior to the Effective Time shall be the Charter of the Surviving
Corporation until otherwise amended or repealed.

2.2 Bylaws. The Bylaws of Merger Subsidiary in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
until otherwise amended or repealed.

2.3 Directors and Officers. The directors of Merger Subsidiary in
office immediately prior to the Effective Time, together with such additional
persons as may thereafter be elected, shall serve as the directors of the
Surviving Corporation from and after the Effective Time in accordance with the
Bylaws of the Surviving Corporation. The officers of Merger Subsidiary in
office immediately prior to the Effective Time, together with such additional
persons as may thereafter be elected, shall serve as the officers of the
Surviving Corporation from the Effective Time in accordance with the Bylaws of
the Surviving Corporation.

ARTICLE 3
MANNER OF CONVERTING SHARES

3.1 Conversion of Shares. Subject to the provisions of this
Article 3 (and Article 3 of the Plan of Merger), at the Effective Time, by
virtue of the Merger and without any action on the part of Parent, Merger
Subsidiary, Subject Company, or the shareholders of any of the foregoing, the
shares of the constituent corporations shall be converted as follows:

(a) Each share of Parent Capital Stock, including any
associated Parent Rights, issued and outstanding immediately prior to the
Effective Time shall remain issued and outstanding from and after the Effective
Time.

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(b) Each share of Merger Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall represent one share of the Surviving Corporation from and
after the Effective Time.

(c) Except for Dissenting Shares, each share of Subject
Company Common Stock, (excluding shares held by Subject Company, any Subject
Company Subsidiary, Parent or any Parent Subsidiary, in each case other than in
a fiduciary capacity or as a result of debts previously contracted) issued and
outstanding at the Effective Time shall cease to be outstanding and shall be
converted into and exchanged for the right to receive one (1) share of Parent
Common Stock (subject to possible adjustment as set forth in Section 3.2 and
Section 10.1(f) of this Agreement, the "Exchange Ratio"). Pursuant to the
Parent Rights Agreement, each share of Parent Common Stock issued in connection
with the Merger upon conversion of Subject Company Common Stock shall be
accompanied by a Parent Right.

(d) Dissenting Shares shall not be converted pursuant to
Section 3.1(c) in the Merger but, at and after the Effective Time, shall
represent only the right to receive payment in accordance with Article 5.12 of
the Texas BCA. If a holder of Dissenting Shares becomes ineligible for payment
under Article 5.12 of the Texas BCA, then such holder's Dissenting Shares shall
cease to be Dissenting Shares and shall be converted in the manner set forth in
Section 3.1(c) effective as of the Effective Time.

3.2 Anti-Dilution Provisions. In the event Parent changes the
number of shares of Parent Common Stock issued and outstanding after the date
of this Agreement and prior to the Effective Time as a result of a stock split,
stock dividend, subdivision, reclassification, conversion or similar
recapitalization with respect to such stock and the record date therefor (in
the case of a stock dividend) or the effective date thereof (in the case of a
stock split, subdivision, reclassification, conversion or similar
recapitalization for which a record date is not established) shall be prior to
the Effective Time, the Exchange Ratio shall be proportionately adjusted.

3.3 Shares Held by Subject Company or Parent. Each of the shares
of Subject Company Common Stock held by Subject Company, any Subject Company
Subsidiary, Parent or any Parent Subsidiary, in each case other than in
fiduciary capacity or as a result of debts previously contracted, shall be
canceled and retired at the Effective Time and no consideration shall be issued
in exchange therefor.

3.4 Fractional Shares. Notwithstanding any other provision of
this Agreement, each holder of shares of Subject Company Common Stock exchanged
pursuant to the Merger who would otherwise have been entitled to receive a
fractional share of Parent Common Stock (after taking into account all
certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional share of Parent Common
Stock multiplied by the closing price of such common stock on the
NYSE-Composite Transactions List (as reported by The Wall Street Journal or, if
not reported thereby, any other authoritative source reasonably selected by
Parent) on the last trading day preceding the Effective Time. No such holder
will be entitled to dividends, voting rights, or any other rights as a
shareholder in respect of any fractional shares.

ARTICLE 4
EXCHANGE OF SHARES

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Dissenting Shares or shares to be canceled pursuant to Section 3.3 of this
Agreement) issued and outstanding at the Effective Time shall surrender the
certificate or certificates representing such shares to the Exchange Agent and
shall promptly upon surrender thereof receive in exchange therefor the
consideration provided in Section 3.1(c) of this Agreement, together with all
undelivered dividends and other distributions, if any, in respect of such
shares (without interest thereon) pursuant to Section 4.2 of this Agreement.
To the extent required by Section 3.4 of this Agreement, each holder of shares
of Subject Company Common Stock issued and outstanding at the Effective Time
also shall receive, upon surrender of the certificate or certificates
representing such shares, cash in lieu of any fractional share of Parent Common
Stock to which such holder may be otherwise entitled (without interest).
Parent shall not be obligated to deliver the consideration to which any former
holder of Subject Company Common Stock is entitled as a result of the Merger
until such holder surrenders such holder's certificate or certificates
representing the shares of Subject Company Common Stock for exchange as
provided in this Section 4.1. The certificate or certificates of Subject
Company Common Stock so surrendered shall be duly endorsed as the Exchange
Agent may reasonably require. Any other provision of this Agreement
notwithstanding, neither Parent, Merger Subsidiary nor the Exchange Agent shall
be liable to a holder of Subject Company Common Stock for any amounts paid or
property delivered in good faith to a public official pursuant to any
applicable abandoned property Law.

4.2 Rights of Former Subject Company Shareholders. At the
Effective Time, other than with respect to Dissenting Shares, the stock
transfer books of Subject Company shall be closed as to holders of Subject
Company Common Stock immediately prior to the Effective Time and no transfer of
Subject Company Common Stock by any such holder shall thereafter be made or
recognized. Until surrendered for exchange in accordance with the provisions
of Section 4.1 of this Agreement, each certificate theretofore representing
shares of Subject Company Common Stock (other than Dissenting Shares or shares
to be canceled pursuant to Section 3.3 of this Agreement) shall from and after
the Effective Time represent for all purposes only the right to receive the
consideration provided in Sections 3.1(c) and 3.4 of this Agreement in exchange
therefor, subject, however, to the Surviving Corporation's obligations to pay
any dividends or make any other distributions with a record date prior to the
Effective Time which have been declared or made by Subject Company in respect
of such shares of Subject Company Common Stock in accordance with the terms of
this Agreement and which remain unpaid at the Effective Time. In addition,
whenever a dividend or other distribution is declared by Parent on the Parent
Common Stock, the record date for which is at or after the Effective Time, the
declaration shall include dividends or other distributions on all shares of
Parent Common Stock issuable pursuant to this Agreement, but beginning 30 days
after the Effective Time no dividend or other distribution payable to the
holders of record of Parent Common Stock as of any time subsequent to the
Effective Time shall be delivered to the holder of any certificate representing
shares of Subject Company Common Stock issued and outstanding at the Effective
Time until such holder surrenders such certificate for exchange as provided in
Section 4.1 of this Agreement. However, upon surrender of such Subject Company
Common Stock certificate, both a Parent Common Stock certificate and any
undelivered dividends and other distributions payable hereunder (without
interest) shall be delivered and paid with respect to each share represented by
such certificate. In the event any Subject Company Common Stock 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 Parent, the posting by such person of
a bond in such amount as Parent may reasonably direct as indemnity against any
claim that may be made against it with respect to such certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
certificate the shares of Parent Common Stock and cash in lieu of fractional
shares and dividends and other distributions deliverable in respect thereof
pursuant to this Agreement.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SUBJECT COMPANY

Subject Company hereby represents and warrants to Parent, except as
set forth on the Subject Company Disclosure Memorandum, as follows:

5.1 Organization, Standing, and Power. Subject Company is a
corporation duly organized, validly existing, and in good standing under the
Laws of the State of Texas, and has the corporate power and authority to carry
on its business as now conducted and to own, lease, and operate its Assets.
Subject Company is duly qualified

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or licensed to transact business as a foreign corporation in good standing in
each of the States of the United States and in each foreign jurisdiction where
the character of its Assets or the nature or conduct of its business requires
it to be so qualified or licensed, except for such jurisdictions in which the
failure to be so qualified or licensed is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Subject Company.

5.2 Authority; No Breach by Agreement. (a) Subject Company has
the corporate power and authority necessary to execute, deliver, and perform
its obligations under this Agreement and the Plan of Merger and to consummate
the transactions contemplated hereby and thereby. The execution, delivery, and
performance of this Agreement and the Plan of Merger, and the consummation of
the transactions contemplated herein and therein, including the Merger, have
been duly and validly authorized by all necessary corporate action (including
valid authorization and adoption of this Agreement by Subject Company's duly
constituted Board of Directors) in respect thereof on the part of Subject
Company, subject to the approval of this Agreement and the Plan of Merger by
the holders of the outstanding shares of Subject Company Common Stock, which is
the only shareholder vote required for approval of this Agreement and
consummation of the Merger by Subject Company. Subject to such requisite
shareholder approval, the receipt of all Consents required from Regulatory
Authorities and the expiration of all mandatory waiting periods, and assuming
due authorization, execution and delivery of this Agreement and the Plan of
Merger by each of Parent and Merger Subsidiary, this Agreement and the Plan of
Merger each represents a legal, valid, and binding obligation of Subject
Company, enforceable against Subject Company in accordance with its terms
(except in all cases as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership, conservatorship,
moratorium, or similar Laws (including provisions of the U.S., Texas and
Tennessee Constitutions) affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies is subject to
the discretion of the court before which any proceeding may be brought).

(b) Neither the execution and delivery of this Agreement or
the Plan of Merger by Subject Company, nor the consummation by Subject Company
of the transactions contemplated hereby, nor compliance by Subject Company with
any of the provisions hereof or thereof, will (i) conflict with or result in a
breach of any provision of the Charter or Bylaws of Subject Company, or (ii)
constitute or result in a Default under, or require any Consent (excluding
Consents required by Law or Order) pursuant to, or result in the creation of
any Lien on any material Asset of Subject Company or any Subject Company
Subsidiary under, any Contract or Permit of Subject Company or any Subject
Company Subsidiary, except for such Defaults and Liens which are not, and for
such Consents, which, if not obtained are not, reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Subject Company,
or (iii) subject to receipt of the requisite Consents referred to in Section
9.1(b) of this Agreement, violate any Law or Order applicable to Subject
Company, its Subsidiaries or any of their respective material Assets.

(c) Other than in connection or compliance with the
provisions of the Securities Laws, applicable state corporate and securities
Laws, and other than Consents required from the FRB under Sections 3 and 4 of
the BHC Act and from the Texas Banking Commissioner under Sections 38.001 and
38.004 of the Texas Finance Code, and other than Consents, filings, or
notifications which, if not obtained or made, are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Subject
Company, no notice to, filing with, or Consent of, any public body or authority
is necessary for the consummation by Subject Company of the Merger and the
other transactions contemplated in this Agreement.

5.3 Capital Stock. (a) The authorized capital stock of Subject
Company consists solely of (i) 10,000,000 shares of Subject Company Common
Stock, of which not more than 1,952,465 shares are issued and outstanding as of
the date of this Agreement (exclusive of treasury shares) and not more than
1,952,465 shares of Subject Company Common Stock will be issued and outstanding
at the Effective Time, and (ii) 2,000,000 shares of Subject Company Preferred
Stock, none of which are issued and outstanding as of the date of this
Agreement and none of which will be issued and outstanding at the Effective
Time. All of the issued and outstanding shares of capital stock of Subject
Company are duly and validly issued and outstanding and are fully paid and
nonassessable under the Texas BCA and Subject Company's Charter and Bylaws.
None of the outstanding shares of capital stock

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of Subject Company has been issued in violation of any preemptive rights of the
current or past shareholders of Subject Company.

(b) Other than as set forth in Section 5.3(a) of this
Agreement, there are no shares of capital stock or other equity securities of
Subject Company outstanding and no outstanding Rights relating to the capital
stock of Subject Company.

5.4 Subject Company Subsidiaries. Subject Company has disclosed
in Section 5.4 of the Subject Company Disclosure Memorandum all of the Subject
Company Subsidiaries that are corporations (identifying its jurisdiction of
incorporation) and all of the Subject Company Subsidiaries that are general or
limited partnerships or other non-corporate entities (identifying the Law under
which such entity is organized, and the amount and nature of the ownership
interest therein of Subject Company Subsidiaries). Except as set forth in
Section 5.4 of the Subject Company Disclosure Memorandum, Subject Company or
one of its wholly-owned Subsidiaries owns all of the issued and outstanding
shares of capital stock (or other equity interests) of each of the Subject
Company Subsidiaries. Except as set forth in Section 5.4 of the Subject
Company Disclosure Memorandum, no capital stock (or other equity interest) of
any Subject Company Subsidiary is or may become required to be issued (other
than to another Subject Company Subsidiary) by reason of any Rights, and there
are no Contracts by which Subject Company or any of the Subject Company
Subsidiaries is bound to issue (other than to Subject Company or another of the
Subject Company Subsidiaries) additional shares of its capital stock (or other
equity interests) or Rights or by which Subject Company or any of the Subject
Company Subsidiaries is or may be bound to transfer any shares of the capital
stock (or other equity interests) of any of Subject Company or any of the
Subject Company Subsidiaries (other than to Subject Company or any of the
Subject Company Subsidiaries). Except as set forth in Section 5.4 of the
Subject Company Disclosure Memorandum, there are no Contracts relating to the
rights of Subject Company or any Subject Company Subsidiary to vote or to
dispose of any shares of the capital stock (or other equity interests) of
Subject Company or any Subject Company Subsidiary. All of the shares of
capital stock (or other equity interests) of each Subject Company Subsidiary
held by Subject Company or any Subject Company Subsidiary are fully paid and
nonassessable under the applicable corporation or similar Law of the
jurisdiction in which such Subsidiary is incorporated or organized and are
owned by Subject Company or a Subject Company Subsidiary free and clear of any
Liens. Each Subject Company Subsidiary is either a bank or a corporation, and
each such Subsidiary is duly organized, validly existing, and (as to
corporations) in good standing under the Laws of the jurisdiction in which it
is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease, and operate its Assets and to carry on its
business as now conducted. Each Subject Company Subsidiary is duly qualified or
licensed to transact business as a foreign corporation in good standing in each
of the States of the United States and in each foreign jurisdiction where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on Subject Company. The only
Subject Company Subsidiary that is a depository institution is Merchants Bank,
Houston, Texas (the "Bank"). The Bank is an "insured depository institution"
as defined in Section 3(c)(2) of the Federal Deposit Insurance Act and
applicable regulations thereunder, and the deposits in which are insured by the
Federal Deposit Insurance Corporation to the maximum extent permitted by the
Federal Deposit Insurance Act, as amended, and applicable regulations
thereunder. The Bank is a member of the Bank Insurance Fund. The minute book
and other organizational documents (and all amendments thereto) for Subject
Company and each Subject Company Subsidiary that is a "Significant Subsidiary"
(as such term is defined in Rule 1.02(w) of Regulation S-X promulgated under
the Securities Laws) have been or will be made available to Parent for its
review, and are true and complete in all material respects as in effect as of
the date of this Agreement.

5.5 Financial Statements. Each of the Subject Company Financial
Statements (including, in each case, any related notes) contained in the
Subject Company SEC Documents, including any Subject Company SEC Documents
filed after the date of this Agreement until the Effective Time, complied, or
will comply, as to form in all material respects with the applicable published
rules and regulations of the SEC with respect thereto, was prepared, or will be
prepared, in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited interim statements,

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as permitted by Regulation S-X promulgated under the Securities Laws), and
fairly presented, or will fairly present, in all material respects the
consolidated financial position of Subject Company as of the respective dates
and the consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount or effect.

5.6 Absence of Undisclosed Liabilities. Neither Subject Company
nor any of the Subject Company Subsidiaries has any Liabilities that are
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Subject Company, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of Subject Company as of September
30, 1997, included in the Subject Company Financial Statements made available
prior to the date of this Agreement or reflected in the notes thereto. Neither
Subject Company nor any of the Subject Company Subsidiaries has incurred or
paid any Liability since September 30, 1997, except for such Liabilities
incurred or paid (i) in the ordinary course of business consistent with past
business practice or which are not reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Subject Company or (ii) in
connection with the transactions contemplated by this Agreement.

5.7 Absence of Certain Changes or Events. Since December 31,
1996, except as disclosed in the Subject Company SEC Documents made available
prior to the date of this Agreement or disclosed in Section 5.7 of the Subject
Company Disclosure Memorandum, there have been no events, changes, or
occurrences which have had, or are reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Subject Company.

5.8 Tax Matters. Except as set forth in Section 5.8 of the
Subject Company Disclosure Memorandum:

(a) All material Tax Returns required to be filed by or on
behalf of Subject Company or any of the Subject Company Subsidiaries have been
timely filed or requests for extensions have been timely filed, granted, and
have not expired for periods ended on or before December 31, 1996, and on or
before the date of the most recent fiscal year end immediately preceding the
Effective Time, and all such Tax Returns filed are complete and accurate in all
material respects. All Taxes shown on filed Tax Returns have been paid. There
is no audit examination or refund Litigation with respect to any material
Taxes, except as reserved against in the Subject Company Financial Statements
made available prior to the date of this Agreement. All material Taxes and
other material Liabilities due with respect to completed and settled
examinations or concluded Litigation related to Tax Returns and/or Taxes of
Subject Company have been paid. There are no material Liens with respect to
Taxes upon any of the Assets of Subject Company or any of the Subject Company
Subsidiaries.

(b) Neither Subject Company nor any of the Subject Company
Subsidiaries has executed an extension or waiver of any statute of limitations
on the assessment or collection of any Tax due (excluding such statutes that
relate to years currently under examination by the Internal Revenue Service or
other applicable taxing authorities) that is currently in effect.

(c) Adequate provision for any material Taxes due or to
become due for Subject Company or the Subject Company Subsidiaries for the
period or periods through and including the date of the respective Subject
Company Financial Statements has been made and is reflected on such Subject
Company Financial Statements.

(d) Material deferred Taxes of Subject Company and the
Subject Company Subsidiaries have been provided for in accordance with GAAP.

(e) Subject Company and the Subject Company Subsidiaries are
in material compliance with, and the records of Subject Company and each of the
Subject Company Subsidiaries contain all information and documents (including
properly completed Internal Revenue Service Forms W-9) necessary to comply in
all material respects with, all applicable information reporting and Tax
withholding requirements under federal, state, and local

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Tax Laws, and such records identify with specificity all accounts subject to
backup withholding under Section 3406 of the Internal Revenue Code.

(f) Neither Subject Company nor any of the Subject Company
Subsidiaries has made any payments, is obligated to make any payments, or is a
party to any Contract that could obligate it to make any payments that would be
disallowed as a deduction under Section 280G or 162(m) of the Internal Revenue
Code.

(g) There has not been an ownership change, as defined in
Internal Revenue Code Section 382(g), of Subject Company or any of the Subject
Company Subsidiaries that occurred during or after any Taxable Period in which
Subject Company or any of the Subject Company Subsidiaries incurred a net
operating loss that carries over to any Taxable Period ending after December
31, 1996, except in connection with the transactions contemplated pursuant to
this Agreement.

(h) Neither Subject Company nor any of the Subject Company
Subsidiaries is a party to any tax allocation or sharing agreement and neither
Subject Company nor any of the Subject Company Subsidiaries has been a member
of an affiliated group filing a consolidated federal income tax return (other
than a group the common parent of which was Subject Company) or has any
material Liability for taxes of any Person (other than Subject Company and the
Subject Company Subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local, or foreign Law) as a transferee or
successor or by Contract or otherwise.

5.9 Assets. Except as disclosed or reserved against in the
Subject Company Financial Statements made available prior to the date of this
Agreement, Subject Company and the Subject Company Subsidiaries have good and
indefeasible title, free and clear of all Liens, to all of their respective
Assets. All tangible properties used in the businesses of Subject Company and
its Subsidiaries are in good condition, reasonable wear and tear excepted, and
are usable in the ordinary course of business of Subject Company and its
Subsidiaries, except for instances in which the failure to so be is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Subject Company. All Assets which are material to Subject Company's
business on a consolidated basis, held under leases or subleases by the Subject
Company or any of the Subject Company Subsidiaries, are held under valid
Contracts enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws (including provisions of the U.S.,
Texas and Tennessee Constitutions) affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies is
subject to the discretion of the court before which any proceedings may be
brought), and each such Contract is in full force and effect. Subject Company
and the Subject Company Subsidiaries currently maintain insurance in amounts,
scope, and coverage which, in the reasonable opinion of management of Subject
Company, are adequate for the operations of Subject Company and the Subject
Company Subsidiaries. Neither Subject Company nor any of the Subject Company
Subsidiaries has received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no claims pending under
any such policies of insurance and no notices have been given by Subject
Company or any of the Subject Company Subsidiaries under such policies.

5.10 Intellectual Property. All of the Intellectual Property
rights of Subject Company and the Subject Company Subsidiaries are in full
force and effect and, if applicable, constitute legal, valid, and binding
obligations of the respective parties thereto, and there have not been, and, to
the Knowledge of Subject Company, there currently are not, any material
Defaults thereunder by Subject Company or a Subject Company Subsidiary.
Subject Company or a Subject Company Subsidiary owns, is the valid licensee of,
or otherwise has the unrestricted right to use, all such Intellectual Property
rights free and clear of all Liens or claims of infringement. Neither Subject
Company nor any of the Subject Company Subsidiaries nor, to the Knowledge of
Subject Company, their respective predecessors has infringed the Intellectual
Property rights of others (except to the extent any such infringement will not
have a Material Adverse Effect on Subject Company) and, to the Knowledge of
Subject Company, none of the Intellectual Property rights as used in the
business conducted by Subject Company or the Subject Company Subsidiaries
infringes upon or otherwise violates the rights of any Person, nor has any
Person asserted a claim of such infringement.

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Except as set forth in Section 5.10 of the Subject Company Disclosure
Memorandum, neither Subject Company nor the Subject Company Subsidiaries is
obligated to pay any royalties to any Person with respect to any such
Intellectual Property. Subject Company or a Subject Company Subsidiary owns or
has the valid right to use all of the Intellectual Property rights which it is
presently using. To the Knowledge of Subject Company, no officer, director, or
employee of Subject Company or the Subject Company Subsidiaries is party to any
Contract which requires such officer, director, or employee to assign any
interest in any Intellectual Property or keep confidential any trade secrets,
proprietary data, customer information, or other business information or which
restricts or prohibits such officer, director, or employee from engaging in
activities competitive with any Person, including Subject Company or any of the
Subject Company Subsidiaries, except any such Contracts which are not
reasonably likely to have, individually in the aggregate, a Material Adverse
Effect on Subject Company.

5.11 Environmental Matters. Except as set forth in Section 5.11 of
the Subject Company Disclosure Memorandum:

(a) To the Knowledge of Subject Company, each of Subject
Company and the Subject Company Subsidiaries, its Participation Facilities, and
its Operating Properties are, and have been, in compliance with all
Environmental Laws, except for violations which are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Subject
Company.

(b) To the Knowledge of Subject Company, there is no
Litigation pending or threatened before any court, governmental agency, or
authority or other forum in which Subject Company, any of the Subject Company
Subsidiaries or any of their respective Operating Properties or Participation
Facilities (or Subject Company in respect of such Operating Property or
Participation Facility) has been or, with respect to threatened Litigation, may
be named as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the release into
the environment of any Hazardous Material, whether or not occurring at, on,
under, adjacent to, or affecting (or potentially affecting) a site owned,
leased, or operated by Subject Company or any of the Subject Company
Subsidiaries or any of their respective Operating Properties or Participation
Facilities, except for such Litigation pending or threatened that is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Subject Company, nor, to the Knowledge of Subject Company, is there
any reasonable basis for any Litigation of a type described in this sentence.

(c) During the period of (i) Subject Company's or any of the
Subject Company Subsidiaries' ownership or operation of any of their respective
current properties, (ii) Subject Company's or any of the Subject Company
Subsidiaries' participation in the management of any Participation Facility, or
(iii) Subject Company's or any of the Subject Company Subsidiaries' holding of
a security interest in an Operating Property, to the Knowledge of Subject
Company, there have been no releases of Hazardous Material in, on, under,
adjacent to, or affecting (or potentially affecting) such properties, except
such as are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Subject Company. Prior to the period of (i) Subject
Company's or any of the Subject Company Subsidiaries' ownership or operation of
any of their respective current properties, (ii) Subject Company's or any of
the Subject Company Subsidiaries' participation in the management of any
Participation Facility, or (iii) Subject Company's or any of the Subject
Company Subsidiaries' holding of a security interest in an Operating Property,
to the Knowledge of Subject Company, there were no releases of Hazardous
Material in, on, under, or affecting any such property, Participation Facility
or Operating Property, except such as are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Subject Company.

5.12 Compliance With Laws. Subject Company is duly registered as a
bank holding company under the BHC Act. Each of Subject Company and the
Subject Company Subsidiaries has in effect all Permits necessary for it to own,
lease, or operate its material Assets and to carry on its business as now
conducted, except where the failure to hold such Permits would not be
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Subject Company. Neither Subject Company nor any of the Subject
Company Subsidiaries:

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(a) is in violation of any Laws, Orders, or Permits
applicable to its business or employees conducting its business, except for
such violations which would not be reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Subject Company; or

(b) has received any notification or communication from any
agency or department of federal, state, or local government or any Regulatory
Authority or the staff thereof (i) asserting that Subject Company or any of the
Subject Company Subsidiaries is in violation of any of the Laws or Orders which
such governmental authority or Regulatory Authority enforces (excluding
violations which would not be reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Subject Company), (ii) threatening to
revoke any Permits, or (iii) requiring Subject Company or any of the Subject
Company Subsidiaries to enter into or consent to the issuance of a cease and
desist order, formal agreement, directive, commitment, or memorandum of
understanding, or to adopt any Board of Directors resolution or similar
undertaking, which restricts materially the conduct of its business, or in any
manner relates to its capital adequacy, its credit or reserve policies, its
management, or the payment of dividends.

5.13 Labor Relations. Neither Subject Company nor any of the
Subject Company Subsidiaries is the subject of any Litigation asserting that
Subject Company or any of the Subject Company Subsidiaries has committed an
unfair labor practice (within the meaning of the National Labor Relations Act
or comparable state Law) or seeking to compel Subject Company or any of the
Subject Company Subsidiaries to bargain with any labor organization as to wages
or conditions of employment, nor is there any strike or other labor dispute
involving Subject Company or any of the Subject Company Subsidiaries, pending
or, to the Knowledge of Subject Company, threatened, nor to the Knowledge of
Subject Company, is there any activity involving Subject Company's or any of
the Subject Company Subsidiaries' employees seeking to certify a collective
bargaining unit or engaging in any other collective bargaining organizational
activity.

5.14 Employee Benefit Plans. (a) Subject Company has disclosed in
Section 5.14(a) of the Subject Company Disclosure Memorandum, and has delivered
or made available to Parent prior to the execution of this Agreement copies of
all pension, retirement, profit sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus, or other material
incentive plans, all other written employee programs, arrangements, or
agreements, all medical, vision, dental, or other health plans, all life
insurance plans, and all other material employee benefit or fringe benefit
plans, including "employee benefit plans" as that term is defined in Section
3(3) of ERISA, currently adopted, maintained by, sponsored in whole or in part
by, or contributed to by Subject Company, the Subject Company Subsidiaries or
any ERISA Affiliate thereof for the benefit of employees, retirees, dependents,
spouses, directors, independent contractors, or other beneficiaries of Subject
Company or any Subject Company Subsidiary and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
of Subject Company or any Subject Company Subsidiary are eligible to
participate (collectively, the "Subject Company Benefit Plans"). Any of the
Subject Company Benefit Plans which is an "employee pension benefit plan," as
that term is defined in Section 3(2) of ERISA, is referred to herein as a
"Subject Company ERISA Plan." Neither Subject Company nor any Subject Company
Subsidiary maintains any "defined benefit plan" (as defined in Section 414(j)
of the Internal Revenue Code). No Subject Company ERISA Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.

(b) All Subject Company Benefit Plans are in material
compliance with the applicable terms of ERISA, the Internal Revenue Code, and
any other applicable Laws the breach or violation of which are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Subject Company. Each Subject Company ERISA Plan that is intended to be
qualified under Section 401(a) of the Internal Revenue Code has either received
a favorable determination letter from the Internal Revenue Service (and Subject
Company is not aware of any circumstances likely to result in revocation of any
such favorable determination letter) or timely application has been made
therefor. To the Knowledge of Subject Company, neither Subject Company nor any
of the Subject Company Subsidiaries is subject to a material Tax imposed by
Section 4975 of the Internal Revenue Code or a civil penalty imposed by Section
502(i) of ERISA.

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(c) No "defined benefit plan" (as defined in Section 414(j)
of the Internal Revenue Code) or any "single-employer plan," within the meaning
of Section 4001(a)(15) of ERISA, formerly maintained by Subject Company or any
of the Subject Company Subsidiaries, or the single-employer plan of any entity
which is considered one employer with Subject Company under Section 4001 of
ERISA or Section 414 of the Internal Revenue Code or Section 302 of ERISA
(whether or not waived) (an "ERISA Affiliate") has an "accumulated funding
deficiency" within the meaning of Section 412 of the Internal Revenue Code or
Section 302 of ERISA. Neither Subject Company nor any of the Subject Company
Subsidiaries has provided, or, to Subject Company's knowledge, is required to
provide, security to any single-employer plan of an ERISA Affiliate pursuant to
Section 401(a)(29) of the Internal Revenue Code.

(d) Within the six year period preceding the Effective Time,
no material Liability under Subtitle C or D of Title IV of ERISA has been
incurred by Subject Company or any of the Subject Company Subsidiaries with
respect to any current, frozen, or terminated single-employer plan or the
single-employer plan of any ERISA Affiliate. Neither Subject Company nor any
of the Subject Company Subsidiaries has incurred any material withdrawal
Liability with respect to a multiemployer plan under Subtitle E of Title IV of
ERISA (regardless of whether based on contributions of an ERISA Affiliate).
No notice of a "reportable event," within the meaning of Section 4043 of ERISA
for which the 30 day reporting requirement has not been waived, has been
required to be filed for any Subject Company Pension Plan or by any ERISA
Affiliate within the 12 month period ending on the date hereof.

(e) Neither Subject Company nor any of the Subject Company
Subsidiaries has any material Liability for retiree health and life benefits
under any of the Subject Company Benefit Plans.

(f) Except as set forth in Section 5.14(f) of the Subject
Company Disclosure Memorandum, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (i)
result in any payment (including severance, unemployment compensation or golden
parachute) becoming due to any director or any employee of Subject Company or
any of the Subject Company Subsidiaries from Subject Company or any of the
Subject Company Subsidiaries under any Subject Company Benefit Plan, (ii)
materially increase any benefits otherwise payable under any Subject Company
Benefit Plan, or (iii) result in any acceleration of the time of payment or
vesting of any such benefit.

(g) The actuarial present values of all accrued deferred
compensation entitlements (including entitlements under any executive
compensation, supplemental retirement, or employment agreement) of employees
and former employees of any Subject Company Subsidiary and their respective
beneficiaries, other than entitlements accrued pursuant to funded retirement
plans subject to the provisions of Section 412 of the Internal Revenue Code or
Section 302 of ERISA, have been fully reflected on the Subject Company
Financial Statements to the extent required by and in accordance with GAAP.

5.15 Material Contracts. Except as set forth in Section 5.15 of
the Subject Company Disclosure Memorandum, neither Subject Company, the Subject
Company Subsidiaries, nor any of their respective Assets, businesses or
operations is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting, or retirement
Contract, (ii) any Contract relating to the borrowing of money by Subject
Company or any of the Subject Company Subsidiaries or the guarantee by Subject
Company or any of the Subject Company Subsidiaries of any such obligation
(other than Contracts evidencing deposit liabilities, purchases of federal
funds, fully-secured repurchase agreements, trade payables, and Contracts
relating to borrowings or guarantees made in the ordinary course of business),
(iii) any Contracts which prohibit or restrict Subject Company or any of the
Subject Company Subsidiaries from engaging in any business activities in any
geographic area, line of business, or otherwise in competition with any other
Person, (iv) any Contracts between or among Subject Company and the Subject
Company Subsidiaries, (v) any exchange-traded or over-the-counter swap,
forward, future, option, cap, floor, or collar financial Contract, or any other
interest rate or foreign currency protection Contract (not disclosed in the
Subject Company Financial Statements delivered prior to the date of this
Agreement) which is a financial derivative Contract (including various
combinations thereof), and (vi) any other Contract or amendment

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thereto that would be required to be filed as an exhibit to a Subject Company
SEC Document filed by Subject Company prior to the date of this Agreement if
Subject Company was required to file SEC Documents (together with all Contracts
referred to in Sections 5.9 and 5.14(a) of this Agreement, the "Subject Company
Contracts"). With respect to each Subject Company Contract: (i) the Contract
is in full force and effect; (ii) neither Subject Company nor any Subject
Company Subsidiary is in material Default thereunder; (iii) neither Subject
Company nor any Subject Company Subsidiary has repudiated or waived any
material provision of any such Contract; and (iv) no other party to any such
Contract is, to the Knowledge of Subject Company, in Default in any respect or
has repudiated or waived any material provision thereunder.

5.16 Legal Proceedings. There is no Litigation instituted or
pending, or, to the Knowledge of Subject Company, threatened (or unasserted but
considered probable of assertion and which if asserted would have at least a
reasonable probability of an unfavorable outcome) against Subject Company or
any of the Subject Company Subsidiaries, or against any Asset, employee benefit
plan, interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Subject Company,
nor are there any Orders of any Regulatory Authorities, other governmental
authorities, or arbitrators outstanding against Subject Company or any of the
Subject Company Subsidiaries. Section 5.16 of the Subject Company Disclosure
Memorandum includes a summary report of all material Litigation as of the date
of this Agreement to which Subject Company or any Subject Company Subsidiary is
a party and which names Subject Company or a Subject Company Subsidiary as a
defendant or cross-defendant.

5.17 Reports. Since January 1, 1994, or the applicable date of
organization if later, Subject Company and each Subject Company Subsidiary has
timely filed all reports and statements, together with any amendments required
to be made with respect thereto, that it was required to file with (i) the SEC,
including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K, and proxy
statements, (ii) other Regulatory Authorities, and (iii) any applicable state
securities or banking authorities, except failures to file which are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Subject Company. As of its respective date (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing), each of such reports and documents, including the financial
statements, exhibits, and schedules thereto, complied in all material respects
with all applicable Laws. As of its respective date (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing), no Subject Company SEC Document contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. None of the Subject
Company Subsidiaries is required to file any SEC Documents.

5.18 Statements True and Correct. None of the information supplied
or to be supplied by Subject Company expressly for inclusion in the
Registration Statement to be filed by Parent with the SEC will, when the
Registration Statement becomes effective, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by Subject Company expressly for inclusion in the Subject Company
Proxy Statement to be mailed to Subject Company's shareholders in connection
with the Subject Company Shareholders' Meeting, and any other documents to be
filed by Subject Company with the SEC or any other Regulatory Authority in
connection with the transactions contemplated hereby, will, at the respective
time such documents are filed, and with respect to the Subject Company Proxy
Statement, when first mailed to the shareholders of Subject Company, be false
or misleading with respect to any material fact, or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or, in the case of the Subject
Company Proxy Statement or any amendment thereof or supplement thereto, at the
time of the Subject Company Shareholders' Meeting, be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
correct any statement made by Subject Company in any earlier communication with
respect to the solicitation of any proxy for the Subject Company Shareholders'
Meeting. All documents that Subject Company or any Subject Company Subsidiary
is responsible for filing with any Regulatory Authority in connection with the
transactions contemplated hereby will comply as to form in all material
respects with the provisions of applicable Law. None of the information
supplied or to be supplied by Subject Company expressly for inclusion in the
Parent Proxy

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Statement to be mailed to Parent shareholders in connection with the Parent
Shareholders' Meeting will, at the respective time such Parent Proxy Statement
is filed, or when such Parent Proxy Statement is first mailed to the
shareholders of Parent, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or, at the time of the Parent Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary to correct any statements made by Subject Company in any earlier
communication with respect to the Parent Shareholders' Meeting.

5.19 Accounting, Tax, and Regulatory Matters. Neither Subject
Company nor any of the Subject Company Subsidiaries has taken any action or has
any Knowledge of any fact or circumstance relating to Subject Company that is
reasonably likely to (i) prevent the transactions contemplated hereby,
including the Merger, from qualifying for pooling-of-interests accounting
treatment or as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) of this
Agreement.

5.20 Charter Provisions; Takeover Laws. Subject Company has taken
all action so that the entering into of this Agreement and the consummation of
the Merger and the other transactions contemplated by this Agreement do not and
will not result in the grant of any rights to any Person under the Charter,
Bylaws or other governing instruments of Subject Company or any Subject Company
Subsidiary or restrict or impair the ability of Parent or any of the Parent
Subsidiaries to vote, or otherwise to exercise the rights of a shareholder with
respect to, shares of Subject Company or any Subject Company Subsidiary.
Subject Company has taken all necessary action to exempt this Agreement and the
Plan of Merger from, and the transactions contemplated hereby and thereby are
exempt from, any "super-majority" voting requirements or the requirements of
any "moratorium," "fair price," "business combination," "control share," or
other anti-takeover provisions under applicable Laws, or the Charter or Bylaws
of the Subject Company or any Subject Company Subsidiary (collectively,
"Takeover Laws").

ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT

Parent hereby represents and warrants to Subject Company,
except as set forth on Parent's Disclosure Memorandum, as follows:

6.1 Organization, Standing and Power. Parent is a corporation
duly organized, validly existing, and in good standing under the Laws of the
State of Tennessee, and has the corporate power and authority to carry on its
business as now conducted and to own, lease and operate its Assets. Parent is
duly qualified or licensed to transact business as a foreign corporation in
good standing in each of the States of the United States and in each foreign
jurisdiction where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Parent.

6.2 Authority; No Breach by Agreement. (a) Subject to the
adoption of an amendment to the Restated Charter of Incorporation of Parent to
increase the number of authorized shares of Parent Common Stock, Parent and
Merger Subsidiary each have the corporate power and authority necessary to
execute, deliver and perform its respective obligations under this Agreement
and the Plan of Merger and to consummate the transactions contemplated hereby
and thereby. The execution, delivery and performance of this Agreement and the
Plan of Merger by Parent and Merger Subsidiary and the consummation of the
transactions contemplated herein and therein, including the Merger, have been
duly and validly authorized by all necessary corporate action in respect
thereof on the part of Parent and Merger Subsidiary, subject to the adoption of
an amendment to the Restated Charter of Incorporation of Parent to increase the
number of authorized shares of Parent Common Stock. Subject to the receipt of
all Consents required from Regulatory Authorities and the expiration of all
mandatory waiting periods, assuming the due authorization, execution and
delivery of this Agreement and the Plan of Merger by Subject Company, this
Agreement and the Plan of Merger each represents a legal, valid, and binding
obligation of each of Parent and Merger

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Subsidiary, enforceable against each of them in accordance with its terms
(except in all cases as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar Laws (including
provisions of the U.S., Texas and Tennessee Constitutions) affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies is subject to the discretion of the court before which any
proceeding may be brought).

(b) Neither the execution and delivery of this Agreement or
the Plan of Merger by Parent and/or Merger Subsidiary, nor the consummation by
Parent and Merger Subsidiary, of the transactions contemplated hereby or
thereby, nor compliance by Parent and Merger Subsidiary with any of the
provisions hereof or thereof will (i) conflict with or result in a breach of
any provision of Parent's Restated Charter of Incorporation or Bylaws (subject
to the amendment of the Parent's Restated Charter of Incorporation to increase
the number of authorized shares of Parent Common Stock) or of Merger
Subsidiary's Charter of Incorporation or Bylaws, or (ii) constitute or result
in a Default under, or require any Consent (excluding Consents required by Law
or Order) pursuant to, or result in the creation of any Lien on any material
Asset of Parent or any Parent Subsidiary under, any Contract or Permit of
Parent or any Parent Subsidiary, except for such Defaults and Liens which are
not, and for such Consents which, if not obtained, are not, reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on Parent
or Merger Subsidiary, or (iii) subject to receipt of the requisite Consents
referred to in Section 9.1(b) of this Agreement, violate any Law or Order
applicable to Parent or any Parent Subsidiary or any of their respective
material Assets.

(c) Other than in connection or compliance with the
provisions of the Securities Laws, applicable state corporate and securities
Laws, and rules of the NYSE, and other than Consents required from the FRB
under Sections 3 and 4 of the BHC Act and from the Texas Banking Commissioner
under Sections 38.001 and 38.006 of the Texas Finance Code, and other than
Consents, filings, or notifications which, if not obtained or made, are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Parent, no notice to, filing with, or Consent of, any public body or
authority is necessary for the consummation by Parent of the Merger and the
other transactions contemplated in this Agreement.

6.3 Capital Stock. (a) The authorized capital stock of Parent
consists solely of (i) 100,000,000 shares of Parent Common Stock, of which
81,650,946 shares were issued and outstanding as of December 31, 1997, and (ii)
10,000,000 shares of Parent Preferred Stock, of which 2,188,358 shares of
Parent Series E Preferred Stock were issued and outstanding as of December 31,
1997. All of the issued and outstanding shares of Parent Capital Stock are,
and, subject to the amendment of Parent's Restated Charter of Incorporation to
increase the number of authorized shares of Parent Common Stock, all of the
shares of Parent Common Stock to be issued in exchange for shares of Subject
Company Common Stock upon consummation of the Merger, when issued in exchange
for shares of Subject Company Common Stock upon consummation of the Merger and
in accordance with the terms of this Agreement, will be, duly and validly
authorized, issued and outstanding, and fully paid and nonassessable under the
TBCA and Parent's Restated Charter of Incorporation and Bylaws. None of the
outstanding shares of Parent Capital Stock has been, and none of the shares of
Parent Common Stock to be issued in exchange for shares of Subject Company
Common Stock upon consummation of the Merger will be, issued in violation of
any preemptive rights of any Person. As of the date hereof and as of the
Closing Date, none of the issued and outstanding shares of Parent Capital Stock
has been or will have been issued in violation of the Securities Laws or any
other applicable securities Laws. To the Knowledge of Parent, there are no
facts or circumstances that would preclude the Parent Common Stock to be issued
in the Merger from being approved for listing on the NYSE.

(b) Except as set forth in the Parent Disclosure Memorandum,
or except for any matter under this Section 6.3(b) that would not be reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Parent, (i) all issued and outstanding shares of the capital stock of, or other
equity interests in, any Parent Subsidiary owned by Parent or by a Parent
Subsidiary are so owned free and clear of all Liens; (ii) no shares of capital
stock of, or other equity interests in, any Parent Subsidiary are reserved for
issuance, and there are no contracts, agreements, commitments or arrangements
obligating Parent or any Parent Subsidiary (A) to offer, sell, issue, grant,
pledge, dispose of or encumber any shares of capital stock of, or other equity
interests in, or any options,

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warrants or rights of any kind to acquire any shares of capital stock of, or
other equity interests in, or any securities that are convertible into or
exchangeable for any shares of capital stock of, or other equity interests in
any Parent Subsidiary or (B) to redeem, purchase or acquire, or offer to
purchase or acquire, any outstanding shares of capital stock of, or other
equity interests in, or any outstanding options, warrants or rights of any kind
to acquire any shares of capital stock of or other equity interest in, or any
outstanding securities that are convertible into or exchangeable for, any
shares of capital stock of, or other equity interests in any Parent Subsidiary
or (C) to grant any Lien on any outstanding shares of capital stock of, or
other equity interest in any Parent Subsidiary.

6.4 Parent Subsidiaries. Except as set forth in Section 6.4 of
the Parent Disclosure Memorandum, Parent owns all of the issued and outstanding
capital stock of Merger Subsidiary, and Parent or one of its wholly-owned
Subsidiaries owns all of the issued and outstanding shares of capital stock (or
other equity interests) of each of the other Parent Subsidiaries which would
qualify as a "Significant Subsidiary" (as such term is defined in Rule 1.02(w)
of Regulation S-X promulgated under the Securities Laws) of Parent. No capital
stock (or other equity interest) of any Parent Subsidiary which is wholly-owned
by Parent or which would qualify as a Significant Subsidiary of Parent, is or
may become required to be issued (other than to another Parent Subsidiary) by
reason of any Rights, and there are no Contracts by which Parent or any of the
Parent Subsidiaries which are wholly-owned by parent or which is a Significant
Subsidiary of Parent, is bound to issue (other than to Parent or any of the
Parent Subsidiaries) additional shares of its capital stock (or other equity
interests) or Rights or by which Parent or any of the Parent Subsidiaries is or
may be bound to transfer any shares of the capital stock (or other equity
interests) of any of Parent or any of the Parent Subsidiaries (other than to
Parent or any of the Parent Subsidiaries). There are no Contracts relating to
the rights of Parent or any Parent Subsidiary which is wholly-owned by Parent
or which would qualify as a Significant Subsidiary of Parent, to vote or to
dispose of any shares of the capital stock (or other equity interests) of any
of the Parent Subsidiaries. All of the shares of capital stock (or other
equity interests) of each Parent Subsidiary which would qualify as a
Significant Subsidiary of Parent and held by Parent or any Parent Subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable (except pursuant to 12 U.S.C. Section 55 in the case of national
banks and comparable, applicable state Law, if any, in the case of state
depository institutions) under the applicable corporation or similar Law of the
jurisdiction in which such Subsidiary is incorporated or organized and are
owned by Parent or a Parent Subsidiary free and clear of any Liens. None of
the issued and outstanding shares of capital stock of Merger Subsidiary, and
none of the issued and outstanding stock of any other Parent Subsidiary which
qualifies as a Significant Subsidiary of Parent, has been issued in violation
of any preemptive rights of any Person. Each Parent Subsidiary is either a
bank, federal savings bank, or a savings association, partnership, limited
liability company or a corporation, and each such Parent Subsidiary which
qualifies as a Significant Subsidiary of Parent is duly organized, validly
existing and (as to corporations) in good standing under the Laws of the
jurisdiction in which it is incorporated or organized, and has the corporate
power and authority necessary for it to own, lease, and operate its Assets and
to carry on its business as now conducted. Each Parent Subsidiary which
qualifies as a Significant Subsidiary of Parent is duly qualified or licensed
to transact business as a foreign corporation in good standing in each of the
States of the United States and in each foreign jurisdiction where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on Parent. The minute book and
other organizational documents (and all amendments thereto) for each of Parent,
Merger Subsidiary and each Parent Subsidiary that qualifies as a Significant
Subsidiary of Parent, have been made available to Subject Company for its
review, and are true and complete in all material respects as in effect as of
the date of this Agreement. A true, accurate and complete list of each Parent
Subsidiary is included in Section 6.4 of the Parent Disclosure Memorandum.

6.5 Financial Statements. Each of the Parent Financial Statements
(including, in each case, any related notes) contained in the Parent SEC
Documents, including any Parent SEC Document filed after the date of this
Agreement until the Effective Time, complied, or will comply, as to form in all
material respects with the applicable published rules and regulations of the
SEC with respect thereto, was prepared, or will be prepared, in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited interim statements, as permitted by Regulation S-X

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promulgated under the Securities Laws), and fairly presented, or will fairly
present, in all material respects the consolidated financial position of Parent
and the Parent Subsidiaries as at the respective dates and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount or effect.

6.6 Absence of Undisclosed Liabilities. Neither Parent nor any of
the Parent Subsidiaries has any Liabilities that are reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Parent, except
Liabilities which are accrued or reserved against in the consolidated balance
sheets of Parent as of September 30, 1997, included in the Parent Financial
Statements made available prior to the date of this Agreement, or reflected in
the notes thereto. Neither Parent nor any of the Parent Subsidiaries has
incurred or paid any Liability since September 30, 1997, except for such
Liabilities incurred or paid (i) which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Parent or (ii)
in connection with the transaction contemplated by this Agreement.

6.7 Absence of Certain Changes or Events. Since December 31,
1996, except as disclosed in the Parent SEC Documents made available prior to
the date of this Agreement, there have been no events, changes, or occurrences
which have had, or are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Parent.

6.8 Tax Matters. (a) All material Tax Returns required to be
filed by or on behalf of Parent or any of the Parent Subsidiaries have been
timely filed or requests for extensions have been timely filed, granted, and
have not expired for periods ended on or before December 31, 1996, and on or
before the date of the most recent fiscal year end immediately preceding the
Effective Time, and all such Tax Returns filed are complete and accurate in all
material respects. All Taxes shown on filed Tax Returns have been paid. There
is no audit examination, or refund Litigation with respect to any material
Taxes, except as reserved against in the Parent Financial Statements delivered
prior to the date of this Agreement. All material Taxes and other material
Liabilities due with respect to completed and settled examinations or concluded
Litigation related to Tax Returns and/or Taxes of Parent have been paid. There
are no material Liens with respect to Taxes upon any of the Assets of Parent or
any of the Parent Subsidiaries.

(b) Adequate provision for any material Taxes due or to
become due for Parent or any of the Parent Subsidiaries for the period or
periods through and including the date of the respective Parent Financial
Statements has been made and is reflected on such Parent Financial Statements.

6.9 Environmental Matters. (a) To the Knowledge of Parent, each
of Parent and the Parent Subsidiaries, its Participation Facilities, and its
Operating Properties are, and have been, in compliance with all Environmental
Laws, except for violations which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Parent.

(b) To the Knowledge of Parent, there is no Litigation
pending or threatened before any court, governmental agency, or authority or
other forum in which Parent or any of the Parent Subsidiaries or any of their
respective Operating Properties or Participation Facilities (or Parent in
respect of such Operating Property or Participation Facility) has been or, with
respect to threatened Litigation, may be named as a defendant (i) for alleged
noncompliance (including by any predecessor) with any Environmental Law or (ii)
relating to the release into the environment of any Hazardous Material, whether
or not occurring at, on, under, adjacent to, or affecting (or potentially
affecting) a site owned, leased, or operated by Parent or any of the Parent
Subsidiaries or any of their respective Operating Properties or Participation
Facilities, except for such Litigation pending or threatened that is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Parent, nor, to the Knowledge of Parent, is there any reasonable
basis for any Litigation of a type described in this sentence.

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(c) During the period of (i) Parent's or any of the Parent
Subsidiaries' ownership or operation of any of their respective current
properties, (ii) Parent's or any of the Parent Subsidiaries' participation in
the management of any Participation Facility, or (iii) Parent's or any of the
Parent Subsidiaries' holding of a security interest in an Operating Property,
to the Knowledge of Parent, there have been no releases of Hazardous Material
in, on, under, adjacent to, or affecting (or potentially affecting) such
properties, except such as are not reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Parent. Prior to the period of
(i) Parent's or any of Parent Subsidiaries' ownership or operation of any of
their respective current properties, (ii) Parent's or any of Parent
Subsidiaries' participation in the management of any Participation Facility,
or (iii) Parent's or any of Parent Subsidiaries' holding of a security interest
in an Operating Property, to the Knowledge of Parent,there were no releases of
Hazardous Material in, on, under, or affecting any such property, Participation
Facility or Operating Property, except such as are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Parent.

6.10 Compliance With Laws. Parent is duly registered as a bank
holding company under the BHC Act. Each of Parent and the Parent Subsidiaries
has in effect all Permits necessary for it to own, lease, or operate its
material Assets and to carry on its business as now conducted, except where the
failure to hold such permits would not be reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Parent. Neither
Parent nor any of the Parent Subsidiaries:

(b) has received any notification or communication from any
agency or department of federal, state, or local government or any Regulatory
Authority or the staff thereof (i) asserting that Parent or any Parent
Subsidiary is in violation of with any of the Laws or Orders which such
governmental authority or Regulatory Authority enforces (excluding violations
which would not be reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on Parent), (ii) threatening to revoke any Permits,
or (iii) requiring Parent or any Parent Subsidiary to enter into or consent to
the issuance of a cease and desist order, formal agreement, directive,
commitment or memorandum of understanding, or to adopt any Board resolution or
similar undertaking, which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy, its credit or reserve policies,
its management, or the payment of dividends.

6.11 Material Contracts. Except as set forth in Section 6.11 of
the Parent Disclosure Memorandum, neither Parent, the Parent Subsidiaries, nor
any of their respective Assets, businesses or operations is a party to, or is
bound or affected by, or receives benefits under, any Contract or amendment
thereto that falls within the definition of a "Material Contract" contained in
Item 601 of Regulation S-K promulgated under the Securities Laws (the "Parent
Material Contracts") that has not been filed as an exhibit to a Parent SEC
Document filed by Parent prior to the date of this Agreement. With respect to
each Parent Material Contract: (i) the Contract is in full force and effect;
(ii) neither Parent nor any Parent Subsidiary is in material Default
thereunder; (iii) neither Parent nor any Parent Subsidiary has repudiated or
waived any material provision of any such Contract; and (iv) no other party to
any such Contract is, to the Knowledge of Parent, in Default in any respect or
has repudiated or waived any material provision thereunder.

6.12 Assets. Except as disclosed or reserved against in the Parent
Financial Statements made available prior to the date of this Agreement, Parent
and the Parent Subsidiaries have good and indefeasible title, free and clear of
all Liens, to all of their respective material Assets. All Assets which are
material to Parent's business on a consolidated basis, held under leases or
subleases by Parent or any of the Parent Subsidiaries, are held under valid
Contracts enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws (including provisions of the U.S.,
Texas and Tennessee Constitutions) affecting the enforcement of creditors'
rights generally and except that the availability of

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equitable remedies is subject to the discretion of the court before which any
proceedings may be brought), and each such Contract is in full force and
effect.

6.13 Legal Proceedings. There is no Litigation instituted or
pending, or, to the Knowledge of Parent, threatened (or unasserted but
considered probable of assertion and which if asserted would have at least a
reasonable probability of an unfavorable outcome) against Parent or any Parent
Subsidiary, or against any Asset, employee benefit plan, interest, or right of
any of them, that is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Parent, nor are there any Orders of any
Regulatory Authorities, other governmental authorities, or arbitrators
outstanding against Parent or any Parent Subsidiary.

6.14 Reports. Since January 1, 1994, or the applicable date of
organization if later, Parent and each Parent Subsidiary has filed all reports
and statements, together with any amendments required to be made with respect
thereto, that it was required to file with (i) the SEC, including, but not
limited to, Forms 10-K, Forms 10-Q, Forms 8- K, and proxy statements, (ii)
other Regulatory Authorities, and (iii) any applicable state securities or
banking authorities, except failures to file which are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Parent.
As of its respective date (or, if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing), each of such
reports and documents, including, the financial statements, exhibits, and
schedules thereto complied in all material respects with all applicable Laws.
As of its respective date, no Parent SEC Document contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading. Except for
Parent Subsidiaries that are registered as a broker, dealer, or investment
advisor, no Parent Subsidiary is required to file any SEC Documents.

6.15 Statements True and Correct. None of the information supplied
or to be supplied by Parent expressly for inclusion in the Registration
Statement to be filed by Parent with the SEC, will, when the Registration
Statement becomes effective, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by Parent expressly for inclusion in the Subject Company Proxy
Statement to be mailed to Subject Company's shareholders in connection with the
Subject Company Shareholders' Meeting, and any other documents to be filed by
Parent or any Parent Subsidiary with the SEC or any other Regulatory Authority
in connection with the transactions contemplated hereby, will, at the
respective time such documents are filed, and with respect to the Subject
Company Proxy Statement, when first mailed to the shareholders of Subject
Company, be false or misleading with respect to any material fact, or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or, in the case
of the Subject Company Proxy Statement or any amendment thereof or supplement
thereto, at the time of the Subject Company Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary to correct any statement made by Parent in any earlier
communication with respect to the solicitation of any proxy for the Subject
Company Shareholders' Meeting. All documents that Parent or any Parent
Subsidiary is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable Law. None of the
information supplied or to be supplied by Parent for inclusion in the Parent
Proxy Statement to be mailed to Parent shareholders in connection with the
Parent Shareholders' Meeting will, at the respective time such Parent Proxy
Statement is filed, or when such Parent Proxy Statement is first mailed to the
shareholders of Parent, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or, at the time of the Parent Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary to correct any statement made by Parent in any earlier
communication with respect to the solicitation of any proxy for the Parent
Shareholders' Meeting.

6.16 Accounting, Tax, and Regulatory Matters. Neither Parent nor
any Parent Subsidiary has taken any action or has any Knowledge of any fact or
circumstance relating to Parent that is reasonably likely to (i) prevent the
transactions contemplated hereby, including the Merger, from qualifying for
treatment as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any

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Consents of Regulatory Authorities referred to in Section 9.1(b) of this
Agreement, or (iii) prevent the transactions contemplated hereby, including the
Merger, from qualifying for pooling-of-interests accounting treatment;
provided, however, that should Parent's shareholders fail to approve an
amendment to Parents Restated Charter of Incorporation to increase the number
of authorized shares of Parent Common Stock, then Parent may take actions which
would prevent the transactions contemplated hereby, including the Merger, from
qualifying for pooling-of-interest accounting treatment.

ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION

7.1 Affirmative Covenants of Subject Company. Unless the prior
written consent of Parent shall have been obtained, and except as otherwise
expressly contemplated herein or expressly provided for in the Subject Company
Disclosure Memorandum from the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement, Subject Company shall and
shall cause each of the Subject Company Subsidiaries to (i) operate its
business only in the usual, regular, and ordinary course, (ii) use reasonable
efforts to preserve intact its business organization and Assets and maintain
its rights and franchises, and (iii) take no action which would (a) materially
adversely affect the ability of any Party to obtain any Consents required for
the transactions contemplated hereby or prevent the transactions contemplated
hereby, including the Merger, from qualifying for pooling-of-interests
accounting treatment or as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code, or (b) materially adversely affect the
ability of any Party to perform its covenants and agreements under this
Agreement.

7.2 Negative Covenants of Subject Company. Except as specifically
permitted by this Agreement or as and to the extent expressly disclosed or
provided for in the Subject Company Disclosure Memorandum, from the date of
this Agreement until the earlier of the Effective Time or the termination of
this Agreement, Subject Company covenants and agrees that it will not do or
agree or commit to do, or permit any of the Subject Company Subsidiaries to do
or agree or commit to do, any of the following without the prior written
consent of the chief executive officer, president, or chief financial officer
of Parent, which consent shall not be unreasonably withheld:

(a) amend the Charter, Bylaws, or other governing instruments
of Subject Company or any Subject Company Subsidiary; or

(b) incur any additional debt obligation for borrowed money
(other than indebtedness of Subject Company or the Subject Company Subsidiaries
to each other) in excess of an aggregate of $100,000 (for Subject Company and
the Subject Company Subsidiaries on a consolidated basis) except in the
ordinary course of the business of the Subject Company Subsidiaries consistent
with past practices (which shall include, for the Subject Company Subsidiaries
that are depository institutions, creation of deposit liabilities, purchases of
federal funds, advances from the Federal Reserve Bank or Federal Home Loan
Bank, and entry into repurchase agreements fully secured by U.S. government or
agency securities), or impose, or suffer the imposition, on any material Asset
of Subject Company or any of the Subject Company Subsidiaries of any Lien or
permit any such Lien to exist (other than in connection with deposits,
repurchase agreements, bankers acceptances, "treasury tax and loan" accounts
established in the ordinary course of business and the satisfaction of legal
requirements in the exercise of trust powers and Liens in effect as of the
date hereof that are disclosed in the Subject Company Disclosure Memorandum);
or

(c) repurchase, redeem, or otherwise acquire or exchange
(other than exchanges in the ordinary course under employee benefit plans),
directly or indirectly, any shares, or any securities convertible into any
shares, of the capital stock of Subject Company or any of the Subject Company
Subsidiaries, or declare or pay any dividend or make any other distribution in
respect of Subject Company's capital stock, provided that Subject Company may
(to the extent legally and contractually permitted to do so), but shall not be
obligated to, declare and pay regular quarterly cash dividends on the shares of
Subject Company Common Stock at a rate not in excess of $0.35 per share for the
first quarter of 1998, and $0.40 for each quarter thereafter, in all cases with
usual and regular record and payment dates in accordance with past practice,
provided, that, notwithstanding the provisions of Section 1.3, the Parties
shall cooperate in selecting the Effective Time to ensure that, with respect to
the quarterly period in which

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the Effective Time occurs, the holders of Subject Company Common Stock do not
become entitled to receive both a dividend in respect of their Subject Company
Common Stock and a dividend in respect of Parent Common Stock or fail to be
entitled to receive any dividend; or

(d) except for this Agreement, issue, sell, pledge, encumber,
authorize the issuance of, enter into any Contract to issue, sell, pledge,
encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of common stock or any other capital stock
of Subject Company or any Subject Company Subsidiary, or any stock appreciation
rights, or any option, warrant, conversion, or other Right to acquire any such
stock, or any security convertible into any such stock; or

(e) adjust, split, combine or reclassify any capital stock of
Subject Company or any of the Subject Company Subsidiaries or issue or
authorize the issuance of any other securities in respect of or in substitution
for shares of Subject Company Common Stock, or sell, lease, mortgage or
otherwise dispose of or otherwise encumber any shares of capital stock of any
Subject Company Subsidiary (unless any such shares of stock are sold or
otherwise transferred to another Subject Company Subsidiary) or any Asset
having a book value in excess of $50,000 other than in the ordinary course of
business for reasonable and adequate consideration; or

(f) except for purchases of investment securities acquired in
the ordinary course of business consistent with past practice, purchase any
securities or make any material investment, either by purchase of stock or
securities, contributions to capital, Asset transfers, or purchase of any
Assets, in any Person other than a wholly- owned Subsidiary of Subject Company,
or otherwise acquire direct or indirect control over any Person, other than in
connection with (i) foreclosures in the ordinary course of business, (ii)
acquisitions of control by a depository institution Subsidiary in its fiduciary
capacity, or (iii) the creation of new wholly-owned Subsidiaries organized to
conduct or continue activities otherwise permitted by this Agreement; or

(g) grant any increase in compensation or benefits to the
employees or officers of Subject Company or the Subject Company Subsidiaries,
except in the ordinary course of business consistent with past practice or as
required by Law; pay any severance or termination pay or any bonus other than
pursuant to written policies or written Contracts in effect on the date of this
Agreement; enter into or amend any severance agreements with officers of
Subject Company or the Subject Company Subsidiaries; grant any material
increase in fees or other increases in compensation or other benefits to
directors of Subject Company or the Subject Company Subsidiaries; or
voluntarily accelerate the vesting of any stock options or other stock-based
compensation or employee benefits (other than the acceleration of vesting which
occurs under a benefit plan upon a change of control of Subject Company); or

(h) enter into or amend any employment Contract between
Subject Company or any Subject Company Subsidiary and any Person (unless such
amendment is required by Law) that Subject Company does not have the
unconditional right to terminate without Liability (other than Liability for
services already rendered), at any time on or after the Effective Time; or

(i) adopt any new employee benefit plan of Subject Company or
the Subject Company Subsidiaries or terminate or withdraw from, or make any
material change in or to, any existing employee benefit plans of Subject
Company or any of the Subject Company Subsidiaries, other than any such change
that is required by Law or that, in the opinion of counsel, is necessary or
advisable to maintain the tax qualified status of any such plan, nor shall
Subject Company or any Subject Company Subsidiary make any distributions from
such employee benefit plans, except as required by Law, by the terms of such
plans, or in a manner consistent with past practices with respect to the
applicable plan; or

(j) make any material change in any Tax or accounting methods
or systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or regulatory accounting requirements or GAAP;
or

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(k) commence any Litigation other than in accordance with
past practice, settle any Litigation involving any Liability of Subject Company
or any Subject Company Subsidiary for material money damages or restrictions
upon the operations of Subject Company or any Subject Company Subsidiary; or

(l) except in the ordinary course consistent with past
practice, enter into, modify, amend, or terminate any material Contract
(excluding any loan Contract) or waive, release, compromise, or assign any
material rights or claims.

7.3 Covenants of Parent. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, Parent
covenants and agrees that it shall (i) continue to conduct its business and the
business of the Parent Subsidiaries in a manner designed in its reasonable
judgment to enhance the long-term value of the Parent Common Stock and the
business prospects of Parent and the Parent Subsidiaries, and (ii) take no
action which would (a) materially adversely affect the ability of any Party to
obtain any Consents required for the transactions contemplated hereby or
prevent the transactions contemplated hereby, including the Merger, from
qualifying for pooling- of-interests accounting treatment or as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, (b) materially adversely affect the ability of any Party to perform its
covenants and agreements under this Agreement, or (c) result in Parent entering
into an agreement with respect to an Acquisition Proposal with a third party
which could be reasonably expected to result in the Merger not being
consummated or an agreement with respect to an Acquisition Proposal to be
consummated prior to the Closing Date which would effect a change in the number
or kind of shares of Parent Common Stock held by Parent shareholders
immediately prior to such consummation; provided, that the foregoing shall not
prevent Parent or any Parent Subsidiary from acquiring any other Assets or
businesses or from discontinuing or disposing of any of its Assets or business
if such action is, in the reasonable judgment of Parent, desirable in the
conduct of the business of Parent and the Parent Subsidiaries and would not, in
the reasonable judgment of Parent, likely delay the Effective Time to a date
subsequent to the date set forth in Section 10.1(e) of this Agreement;
provided, however, should Parent's shareholders fail to approve an amendment to
Parent's Restated Charter of Incorporation to increase the number of authorized
shares of Parent Common Stock, then Parent may take such actions as would
prevent the transactions contemplated hereby, including the Merger, from
qualifying for pooling-of-interests accounting treatment.

7.4 Adverse Changes in Condition. Each Party agrees to give
written notice promptly to the other Party upon becoming aware of the
occurrence or impending occurrence of any event or circumstance relating to it
or any of its Subsidiaries which (i) is reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on it or (ii) would cause or
constitute a material breach of any of its representations, warranties, or
covenants contained herein or which would prevent the satisfaction of the
conditions precedent set forth in Article 9 of this Agreement, and to use its
reasonable efforts to prevent or promptly to remedy the same.

7.5 Reports. Each Party and its Subsidiaries shall file all
reports required to be filed by it with Regulatory Authorities between the date
of this Agreement and the Effective Time and, to the extent permitted by Law,
shall deliver to the other Party copies of all such reports promptly after the
same are filed. If financial statements are contained in any such reports
filed with the SEC, such financial statements will fairly present the
consolidated financial position of the entity filing such statements as of the
dates indicated and the consolidated results of operations, changes in
shareholders' equity, and cash flows of such entity for the periods then ended
in accordance with GAAP (subject in the case of interim financial statements to
normal recurring year end adjustments that are not material). As of their
respective dates, such reports filed with the SEC will comply in all material
respects with the Securities Laws and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with Laws applicable to such reports.

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ARTICLE 8
ADDITIONAL AGREEMENTS

8.1 Registration Statement; Proxy Statement; Shareholder Approval.
As promptly as practicable after the execution of this Agreement, each of
Parent and Subject Company shall prepare and file the Registration Statement,
of which the Subject Company Proxy Statement shall form a part, with the SEC,
and shall use its reasonable efforts to cause the Registration Statement to
become effective under the 1933 Act and Parent shall take any action required
to be taken under the applicable state Blue Sky or securities Laws in
connection with the issuance of the shares of Parent Common Stock upon
consummation of the Merger. Each of Parent and Subject Company shall furnish
all information concerning it and the holders of its capital stock as the other
Party may reasonably request in connection with such action. Each of Parent
and Subject Company shall use all reasonable efforts to have or cause the
Registration Statement to become effective as promptly as practicable, and
shall take any action required to be taken under any applicable federal or
state securities Laws in connection with the issuance of shares of Parent
Common Stock in the Merger. Parent shall use its commercially reasonable best
efforts to cause the Registration Statement to remain effective through the
Effective Time. No amendment or supplement to the Registration Statement shall
be made by Parent or Subject Company without the approval of the other party.
Parent and Subject Company each will advise the other, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, the issuance of any
stop order suspending the effectiveness of the Registration Statement or the
solicitation of proxies pursuant to the Subject Company Proxy Statement, the
suspension of the qualification of the Parent Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, any
request by the staff of the SEC for amendment of the Registration Statement,
the Subject Company Proxy Statement or, if it relates to the proposed amendment
to increase the number of authorized shares of Parent Common Stock, the Parent
Proxy Statement, the receipt from the staff of the SEC of comments thereon or
any request by the staff of the SEC for additional information with respect
thereto. All documents that Parent or Subject Company are responsible for
filing with the SEC in connection with the transactions contemplated hereby
shall as the time of filing comply as to form in all material respects with the
applicable requirements of the 1933 Act and the 1934 Act. Subject Company
shall call the Subject Company Shareholders' Meeting, to be held after the
Registration Statement is declared effective by the SEC for the purpose of
voting upon approval of this Agreement and the Plan of Merger and such other
related matters as it deems appropriate. Assuming the Registration Statement
is then effective, the Subject Company shall call the Subject Company
Shareholders' Meeting to be held not later than 40 days after the Parent's 1998
Annual Meeting of Shareholders. Otherwise, the Subject Company shall call the
Subject Company Shareholders' Meeting as soon thereafter as practicable after
the Registration Statement is declared effective by the SEC. In connection
with the Subject Company Shareholders' Meeting, (i) the Board of Directors of
Subject Company shall recommend (subject to compliance with its fiduciary
duties as advised by counsel) to its shareholders the approval of the Merger,
and (ii) the Board of Directors (subject to compliance with its fiduciary
duties as advised by counsel) and officers of Subject Company shall use their
reasonable efforts to obtain shareholder approval of the Merger. Parent shall
prepare and file the Parent Proxy Statement and its Annual Report on Form 10-K
with the SEC as soon as reasonably practicable following the preparation of
Parent's consolidated balance sheet (including related notes and schedules, if
any) as of December 31, 1997 and Parent's related consolidated statements of
earnings, changes in shareholders' equity, and cash flows (including related
notes and schedules, if any) for the one- year period ended December 31, 1997.
Parent shall use its commercially reasonable best efforts to (i) cause such
financial statements to be prepared as soon as possible following December 31,
1997, consistent with past practices, and (ii) respond promptly to all comments
of the SEC with respect to the Parent Proxy Statement. Each of Parent and
Subject Company shall furnish all information concerning it, its respective
Subsidiaries, officers, directors and shareholders as may be reasonably
required to comply with the 1934 Act and any comments of the SEC with respect
to the Parent Proxy Statement. Parent shall call the Parent Shareholders'
Meeting as soon as reasonably practicable following the filing of the Parent
Proxy Statement with the SEC and the completion of the SEC's review, if any, of
the Parent Proxy Statement; provided, in no event will Parent be deemed to be
required to hold the Parent Shareholders' Meeting less than thirty (30) days
following the earlier of (i) the completion of the SEC's review of the Parent
Proxy Statement or (ii) the lapse (without indication by the SEC that it
intends to review the Parent Proxy Statement) of the ten (10) day period
allocated for the SEC to indicate whether it intends to review the Parent Proxy
Statement. In connection with the

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Parent Shareholders' Meeting, (i) the Board of Directors of Parent shall
recommend (subject to compliance with its fiduciary duties as advised by
counsel) to its shareholders the approval of an amendment of the Restated
Charter of Incorporation of Parent to authorize the requested increase in its
number of authorized shares of Parent Common Stock and (ii) the Board of
Directors of Parent (subject to compliance with its fiduciary duties as advised
by counsel) and officers of Parent shall use their reasonable efforts to obtain
shareholder approval of such amendment.

8.2 Authorization of Shares; Exchange Listing. Parent shall
submit to its shareholders, at the Parent Shareholders' Meeting, a proposal to
amend the Restated Charter of Incorporation of Parent to increase the number of
authorized shares of Parent Common Stock by an amount at least sufficient to
Permit Parent to issue the number of shares of Parent Common Stock issuable in
connection with the Merger, and, subject to the approval of such amendment by
the shareholders of Parent, shall cause such amendment to become effective and
reserve for issuance a sufficient number of shares of Parent Common Stock for
the purpose of issuing shares of Parent Common Stock in accordance with the
provisions of Section 3.1 of this Agreement and the Plan of Merger. Should
Parent's shareholders fail to approve such amendment, then within thirty (30)
days after the date of the conclusion of the Parent Shareholders' Meeting,
Parent shall provide a written notice to Subject Company stating whether or not
Parent intends to proceed with the transactions contemplated by this Agreement,
including the Merger. Should Parent's shareholders approve such amendment or
should Parent determine to proceed with the Merger notwithstanding its failure
to obtain shareholder approval of such amendment, Parent shall use its
reasonable efforts to list, prior to the Effective Time, on the NYSE, subject
to official notice of issuance, the shares of Parent Common Stock to be issued
to the holders of Subject Company Common Stock pursuant to the Merger, and
Parent shall give all notices and make all filings with the NYSE required in
connection with the transactions contemplated herein.

8.3 Applications. Parent shall prepare and file, and Subject
Company shall cooperate in the preparation and, where appropriate, filing of,
applications with all Regulatory Authorities having jurisdiction over the
transactions contemplated by this Agreement seeking the requisite Consents
necessary to consummate the transactions contemplated by this Agreement. At
least five business days prior to each filing, Parent shall provide Subject
Company and its counsel with copies of such applications. Each of the Parties
shall deliver to each of the other Parties copies of all filings,
correspondence and orders sent by such Party to and copies of all filings,
correspondence and orders received by such Party from all Regulatory
Authorities in connection with the transactions contemplated hereby as soon as
practicable upon their becoming available.

8.4 Filings With State Offices. Upon the terms and subject to the
conditions of this Agreement, Parent, Merger Subsidiary and Subject Company
each agree to execute and file Articles of Merger with the Secretary of State
of the State of Tennessee and the Secretary of State of the State of Texas in
connection with the Closing.

8.5 Agreement as to Efforts to Consummate. Subject to the terms
and conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions contemplated by
this Agreement, including using its reasonable efforts to lift or rescind any
Order adversely affecting its ability to consummate the transactions
contemplated herein and to cause to be satisfied the conditions referred to in
Article 9 of this Agreement. Each Party shall use, and shall cause each of its
Subsidiaries to use, its reasonable efforts to obtain all Consents necessary or
desirable for the consummation of the transactions contemplated by this
Agreement.

8.6 Investigation and Confidentiality. (a) Prior to the Effective
Time, each Party shall keep the other Parties advised of all material
developments relevant to its business and to consummation of the Merger and
shall permit the other Parties to make or cause to be made such investigation
of the business and properties of it and its Subsidiaries and of their
respective financial and legal conditions as any other Party reasonably
requests, provided that such investigation shall be reasonably related to the
transactions contemplated hereby and shall not interfere unnecessarily with
normal operations. No Party shall be required to provide access to or to
disclose information where such access or disclosure would violate or prejudice
the rights of such Party's customers, jeopardize any

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attorney-client privilege 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 will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply. No investigation by a Party shall affect the representations
and warranties of any other Party.

(b) Each Party will hold, and will cause its respective
Affiliates and their respective officers, directors, employees, agents,
consultants, and other representatives to hold, in strict confidence, unless
compelled to disclose by judicial or administrative process (including without
limitation in connection with obtaining the necessary Consents of Regulatory
Authorities) or by other requirements of Law, all confidential documents and
confidential or proprietary information concerning the other Parties gathered
from the other Parties, or their respective officers, directors, employees,
agents, consultants or Representatives, pursuant to this Agreement, except to
the extent that such documents or information can be shown to have been (a)
previously lawfully known by the Party receiving such documents or information,
(b) in the public domain through no fault of such receiving Party, or (c) later
acquired by the receiving party from other sources not themselves bound by, and
in breach of, a confidentiality agreement. Except as provided in Sections 8.1,
8.2 and 8.3 hereof, no Party will disclose or otherwise provide any such
confidential or proprietary documents or information to any other Person,
except to the Party's auditors, Representatives and other consultants and
advisors who need such documents or information in connection with this
Agreement and the transactions contemplated hereby, and the Parties agree to
cause each of the foregoing to be subject to and bound by the confidentiality
provisions hereof.

8.7 Press Releases. Prior to the Effective Time, Subject Company
and Parent shall consult with each other as to the form and substance of any
press release or other public disclosure materially related to this Agreement
or any other transaction contemplated hereby; provided, that nothing in this
Section 8.7 shall be deemed to prohibit any Party from making any disclosure
which its counsel deems necessary or advisable in order to satisfy such Party's
disclosure obligations imposed by Law. Parent and Subject Company agree to use
their reasonable best efforts to issue a press release announcing the execution
and delivery of this Agreement within five (5) days after the date of this
Agreement.

8.8 Certain Actions. (a) Except with respect to this Agreement
and the transactions contemplated hereby, after the date of this Agreement,
neither Subject Company, the Subject Company Subsidiaries nor any
Representatives thereof retained by Subject Company or the Subject Company
Subsidiaries shall directly or indirectly solicit any Acquisition Proposal by
any Person. Except to the extent necessary to comply with the fiduciary duties
of Subject Company's Board of Directors as advised by counsel, Subject Company,
the Subject Company Subsidiaries, or Representatives thereof shall not furnish
any non-public information that it is not legally obligated to furnish,
negotiate with respect to, or enter into any Contract with respect to, any
Acquisition Proposal, but Subject Company may communicate information about
such an Acquisition Proposal to its shareholders if and to the extent that it
is required to do so in order to comply with its legal obligations as advised
by counsel. Subject Company shall promptly notify Parent orally and in writing
in the event that it receives any Acquisition Proposal or inquiry related
thereto. Subject Company shall (i) immediately cease and cause to be
terminated any existing activities, discussions, or negotiations with any
Persons conducted heretofore with respect to any of the foregoing, and (ii)
direct and use its reasonable efforts to cause all of its Representatives not
to engage in any of the foregoing.

(b) As a condition of and as an inducement to Parent's
entering into this Agreement, Subject Company covenants, acknowledges, and
agrees that it shall be a specific, absolute, and unconditionally binding
condition precedent to Subject Company's entering into a letter of intent,
agreement in principle, or definitive agreement (whether or not considered
binding, non-binding, conditional or unconditional) with any third party with
respect to an Acquisition Proposal, or supporting or indicating an intent to
support an Acquisition Proposal, other than this Agreement and the transactions
contemplated in this Agreement, regardless of whether Subject Company has
otherwise complied with the provisions of Section 8.8(a) hereof, that Subject
Company or such third party which is a party of the Acquisition Proposal shall
have paid Parent, as liquidated damages, the sum of Six Million Two Hundred
Thousand Dollars ($6,200,000), which sum represents the (i) direct costs and
expenses (including, but not limited to, fees and expenses incurred by Parent's
financial or other consultants, printing costs, investment bankers,

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accountants, and counsel) incurred by or on behalf of Parent in negotiating and
undertaking to carry out the transactions contemplated by this Agreement; and
(ii) indirect costs and expenses of Parent in connection with the transactions
contemplated by this Agreement, including Parent's management time devoted to
negotiation and preparation for the transactions contemplated by this
Agreement; and (iii) Parent's loss as a result of the transactions contemplated
by this Agreement not being consummated. Accordingly, Subject Company hereby
stipulates and covenants that prior to Subject Company's entering into a letter
of intent, agreement in principle, or definitive agreement, (whether binding or
non-binding, conditional or unconditional) with any third party with respect to
an Acquisition Proposal or supporting or indicating an intent to support an
Acquisition Proposal, either Subject Company or such third party shall have
paid to Parent the amount set forth above in immediately available funds to
satisfy the specific, absolute, and unconditionally binding condition precedent
imposed by this Section 8.8. Notwithstanding anything to the contrary in this
Section 8.8(b), in the event such Acquisition Proposal should be the result of
a hostile takeover of Subject Company, any sums due Parent hereunder shall be
paid only at the closing of the transactions set forth in such Acquisition
Proposal. Parent acknowledges that under no circumstances shall any officer or
director of Subject Company) (unless such officer or director shall have an
interest in a potential acquiring party in any Acquisition Proposal) be held
personally liable to Parent for any amount of the foregoing payment. On
payment of such amount to Parent, Parent shall have no cause of action or claim
(either in law or equity) whatsoever against Subject Company, or any officer of
director of Subject Company, with respect to or in connection with such
Acquisition Proposal or this Agreement.

(c) The requirements, conditions, and obligations imposed
by Section 8.8(b) shall continue in full force and effect from the date of this
Agreement until the earlier of (i) the Effective Time or (ii) March 31, 1999;
or (iii) the date on which this Agreement shall have been terminated (A)
mutually by the Parties pursuant to Section 10.1(a) of this Agreement; (B) by
Subject Company pursuant to Section 10.1(b), 10.1(c) or 10.1(f) of this
Agreement; (C) by Subject Company pursuant to Section 10.1(e), unless the
failure to consummate the transactions contemplated by this Agreement by
September 30, 1998, results from or is related to pending or threatened
Litigation arising out of or in connection with the Merger or an Acquisition
Proposal related to Subject Company or any Subject Company Subsidiary, in which
case the date shall be extended to that date which is thirty (30) days after
the final termination of such Litigation or threatened Litigation; (D) by
either Party pursuant to Section 10.1(d)(1)(i) of this Agreement; or (E) by
Parent pursuant to Section 10.1(d)(2) of this Agreement.

(d) As a condition of and as an inducement to Subject
Company's entering into this Agreement, Parent covenants, acknowledges, and
agrees that it shall be a specific, absolute, and unconditionally binding
condition precedent to Parent's termination or deemed termination of this
Agreement pursuant to Section 10.1(d)(2) only, that Parent shall have paid
Subject Company, as liquidated damages, the sum of Six Million Two Hundred
Thousand Dollars ($6,200,000), which sum represents the (i) direct costs and
expenses (including, but not limited to, fees and expenses incurred by Subject
Company's financial or other consultants, printing costs, investment bankers,
accountants, and counsel) incurred by or on behalf of Subject Company in
negotiating and undertaking to carry out the transactions contemplated by this
Agreement; and (ii) indirect costs and expenses of Subject Company in
connection with the transactions contemplated by this Agreement, including
Subject Company's management time devoted to negotiation and preparation for
the transactions contemplated by this Agreement; and (iii) Subject Company's
loss as a result of the transactions contemplated by this Agreement not being
consummated. Accordingly, Parent hereby stipulates and covenants that prior to
terminating, or within ten days of being deemed to have terminated, this
Agreement pursuant to Section 10.1(d)(2) only, Parent shall have paid, or shall
pay, as applicable, to Subject Company the amount set forth above in
immediately available funds. Subject Company acknowledges that under no
circumstances shall any officer or director of Parent be held personally liable
to Parent for any amount of the foregoing payment. On payment of such amount
to Subject Company, Subject Company shall have no cause of action or claim
(either in law or equity) whatsoever against Parent, or any officer of director
of Parent, with respect to or in connection with such termination of this
Agreement. Subject Company acknowledges and agrees that Parent shall have no
obligation to pay the sum set forth in this Section 8.8(d) to Subject Company
should Parent terminate this Agreement pursuant to any Section of this
Agreement other than Section 10.1(d)(2).

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8.9 Accounting and Tax Treatment. Each of the Parties undertakes
and agrees to use its reasonable efforts to cause the Merger, and to take no
action which would cause the Merger not, to qualify for pooling-of-interests
accounting treatment and treatment as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code for federal income tax purposes;
provided, however, that should Parent's shareholders fail to approve the
amendment to Parent's Restated Charter of Incorporation to increase its number
of authorized shares of Parent Common Stock, then Parent, in its sole and
absolute discretion, may take actions which would prevent the transactions
contemplated by this Agreement, including the Merger, from qualifying for
pooling-of-interest accounting treatment.

8.10 Agreement of Affiliates. Subject Company has disclosed in
Section 8.10 of the Subject Company Disclosure Memorandum each Person whom it
reasonably believes is an "affiliate" of Subject Company as of the date of this
Agreement for purposes of Rule 145 under the 1933 Act. Subject Company shall
use its reasonable efforts to cause each such Person to deliver to Parent not
later than 40 days prior to the Effective Time, a written agreement,
substantially in the form of Exhibit 2, providing that such Person will not
sell, pledge, transfer, or otherwise dispose of the shares of Subject Company
Common Stock held by such Person except as contemplated by such agreement or by
this Agreement and will not sell, pledge, transfer, or otherwise dispose of the
shares of Parent Common Stock to be received by such Person upon consummation
of the Merger except in compliance with applicable provisions of the 1933 Act
and the rules and regulations thereunder and until such time as financial
results covering at least 30 days of combined operations of Parent and Subject
Company have been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies. If the Merger will qualify for
pooling-of-interests accounting treatment, shares of Parent Common Stock issued
to such affiliates of Subject Company in exchange for shares of Subject Company
Common Stock shall not be transferable until such time as financial results
covering at least 30 days of combined operations of Parent and Subject Company
have been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies, regardless of whether each such
affiliate has provided the written agreement referred to in this Section 8.10
(and Parent shall be entitled to place restrictive legends upon certificates
for shares of Parent Common Stock issued to affiliates of Subject Company
pursuant to this Agreement to enforce the provisions of this Section 8.10).
Parent shall not be required to maintain the effectiveness of the Registration
Statement under the 1933 Act for the purposes of resale of Parent Common Stock
by such affiliates.

8.11 Employee Benefits and Contracts. Following the Effective
Time, Parent shall provide to officers and employees of the Subject Company and
any Subject Company Subsidiary, employee benefits under employee benefit and
welfare plans of Parent or the Parent Subsidiaries on terms and conditions
which when taken as a whole are substantially similar to those currently
provided by Parent or a Parent Subsidiary to their similarly situated officers
and employees. For purposes of participation, vesting, and benefit accrual
under such employee benefit plans, the service of the employees of the Subject
Company and any Subject Company Subsidiary prior to the Effective Time shall be
treated as service with Parent or a Parent Subsidiary participating in such
employee benefit plans.

8.12 Indemnification. (a) After the Effective Time, Parent shall
indemnify, defend and hold harmless the present and former directors, officers,
employees, and agents of the Subject Company and any Subject Company Subsidiary
(each, an "Indemnified Party") (including any person who becomes a director,
officer, employee, or agent prior to the Effective Time) against all
Liabilities (including reasonable attorneys' fees, and expenses, judgments,
fines and amounts paid in settlement) arising out of actions or omissions
occurring at or prior to the Effective Time (including the transactions
contemplated by this Agreement) to the full extent permitted under any of
Tennessee Law, Subject Company's Charter and Bylaws as in effect on the date
hereof and any indemnity agreements entered into prior to the date of this
Agreement by Subject Company or any Subject Company Subsidiary and any
director, officer, employee or agent of Subject Company or any Subject Company
Subsidiary, including provisions relating to advances of expenses incurred in
the defense of any Litigation. Without limiting the foregoing, in any case in
which approval by Parent is required to effectuate any indemnification, Parent
shall direct, at the election of the Indemnified Party, that the determination
of any such approval shall be made by independent counsel mutually agreed upon
between Parent and the Indemnified Party.

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(b) Parent shall use its reasonable efforts (and Subject
Company shall cooperate prior to the Effective Time in these efforts) to
maintain in effect for a period of four years after the Effective Time Subject
Company's existing directors' and officers' liability insurance policy
(provided that Parent may substitute therefor (i) policies of at least the same
coverage and amounts containing terms and conditions which are substantially no
less advantageous or (ii) with the consent of Subject Company given prior to
the Effective Time, any other policy) with respect to claims arising from facts
or events which occurred prior to the Effective Time, including consummation of
the Merger, and covering persons who are currently covered by such insurance;
provided, that the Surviving Corporation shall not be obligated to make
aggregate annual premium payments for such four-year period in respect of such
policy (or coverage replacing such policy) which exceed, for the portion
related to Subject Company's directors and officers, 150% of the annual premium
payments on Subject Company's current policy in effect as of the date of this
Agreement (the "Maximum Amount"). If the amount of the premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum Amount, Parent
shall use its reasonable efforts to maintain the most advantageous policies of
directors' and officers' liability insurance obtainable for a premium equal to
the Maximum Amount.

(c) Any Indemnified Party wishing to claim indemnification
under paragraph (a) of this Section 8.12, upon learning of any such Liability
or Litigation, shall promptly notify Parent thereof, provided that the failure
so to notify shall not affect the obligations of Parent under this Section 8.12
unless and to the extent such failure materially increases Parent's Liability
under this Section 8.12. In the event of any such Litigation (whether arising
before or after the Effective Time), (i) Parent or the Surviving Corporation
shall have the right to assume the defense thereof and Parent shall not be
liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if Parent or the Surviving
Corporation elects not to assume such defense or counsel for the Indemnified
Parties advises that there are substantive issues which raise conflicts of
interest between Parent or the Surviving Corporation and the Indemnified
Parties or between the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and Parent or the Surviving Corporation shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, that Parent shall be
obligated pursuant to this paragraph (c) to pay for only two firms of counsel
for all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties
will cooperate in the defense of any such Litigation, and (iii) neither Parent
nor the Surviving Corporation shall be liable for any settlement effected
without its prior written consent or have any obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall
determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable Law.

(d) If either Parent or the Surviving Corporation or any of
their respective successors or assigns shall consolidate with or merge into any
other Person and shall not be the continuing or surviving Person of such
consolidation or merger or shall transfer all or substantially all of its
Assets to any Person, then and in each case, proper provision shall be made so
that the successors and assigns of Parent or the Surviving Corporation, as the
case may be, shall assume the obligations set forth in this Section 8.12.

(e) Parent shall pay all reasonable costs, including
attorneys' fees, that may be incurred by any Indemnified Party in enforcing the
indemnity and other obligations provided for in this Section 8.12.

(f) The provisions of this Section 8.12 are intended to be
for the benefit of, and shall be enforceable by, each Indemnified Party and his
or her heirs and representatives.

ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE

9.1 Conditions to Obligations of Each Party. The respective
obligations of each Party to perform this Agreement and consummate the Merger
and the other transactions contemplated hereby are subject to the satisfaction
of the following conditions, unless waived by both Parties pursuant to Section
11.6 of this Agreement:

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(a) Shareholder Approval. The shareholders of Subject
Company shall have approved this Agreement and the consummation of the
transactions contemplated hereby and thereby, including the Merger, as and to
the extent required by Law, or by the provisions of any governing instruments
(without regard to any shares which are voted pursuant to irrevocable proxies,
the validity of which has been contested by the underlying owner, unless the
underlying owner has given written instructions with respect to the voting of
such shares in connection with this Agreement).

(b) Regulatory Approvals. All Consents of, filings and
registrations with, and notifications to, all Regulatory Authorities required
for consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
expired. No Consent obtained from any Regulatory Authority which is necessary
to consummate the transactions contemplated hereby shall be conditioned or
restricted in any manner.

(c) Legal Proceedings. No court or governmental or
regulatory authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced, or entered by Law or Order (whether temporary,
preliminary, or permanent) or taken any other action which prohibits,
restricts, or makes illegal consummation of the transactions contemplated by
this Agreement.

(d) Registration Statement. The Registration Statement shall
be effective under the 1933 Act, no stop orders suspending the effectiveness of
the Registration Statement shall have been issued, no action, suit, proceeding,
or investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing, and all necessary approvals under state
securities Laws or the 1933 Act or 1934 Act relating to the issuance or trading
of the shares of Parent Common Stock issuable pursuant to the Merger shall have
been received.

(e) Exchange Listing. The shares of Parent Common Stock
issuable pursuant to the Merger shall have been approved for listing on the
NYSE, subject to official notice of issuance.

(f) Tax Matters. Parent shall have received a written
opinion of counsel from Wyatt, Tarrant & Combs, and Subject Company shall have
received a written opinion of counsel from Winstead Sechrest & Minick P.C., in
form and substance reasonably satisfactory to Parent and Subject Company,
respectively, dated as of the Effective Time, in each case substantially to the
effect that (i) the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code, (ii) Parent, Merger Subsidiary
and Subject Company will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Internal Revenue Code; (iii) no gain or loss
will be recognized by the shareholders of Subject Company who exchange all of
their Subject Company Common Stock solely for Parent Common Stock pursuant to
the Merger (except with respect to cash received in lieu of a fractional share
interest in Parent Common Stock), (iv) the tax basis of the Parent Common Stock
received by shareholders of Subject Company who exchange Subject Company Common
Stock solely for Parent Common Stock in the Merger will be the same as the tax
basis of the Subject Company Common Stock surrendered in exchange therefor
(reduced by any amount allocable to a fractional share interest for which cash
is received) (v) the holding period of the Parent Common Stock received by
shareholders of Subject Company in the Merger will include the period during
which the shares of Subject Company Common Stock surrendered in exchange
therefor were held, provided such Subject Company Common Stock was held as a
capital asset by the holder of such Subject Company Common Stock at the
Effective Time, and (vi) neither Subject Company nor Parent will recognize gain
or loss as a consequence of the Merger. In rendering such Tax Opinion, such
counsel shall require and be entitled to rely upon representations and
covenants of officers of Parent, Subject Company, shareholders of Subject
Company and others reasonably satisfactory in form and substance to such
counsel.

9.2 Conditions to Obligations of Parent. The obligations of
Parent to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by Parent pursuant to Section 11.6(a) of
this Agreement:

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(a) Representations and Warranties. For purposes of this
Section 9.2(a), the accuracy of the representations and warranties of Subject
Company set forth in this Agreement shall be assessed as of the date of this
Agreement and as of the Effective Time with the same effect as though all such
representations and warranties had been made immediately prior to the Effective
Time (provided that representations and warranties which are confined to a
specific date shall speak only as of such date). The representations and
warranties of Subject Company set forth in Sections 5.1, 5.2, 5.3, 5.19 and
5.20 of this Agreement shall each be true and correct in all material respects.
There shall not exist inaccuracies in the representations and warranties of
Subject Company set forth in this Agreement (including the representations and
warranties set forth in Sections 5.1, 5.2, 5.3, 5.19 and 5.20) such that the
aggregate effect of such inaccuracies has, or is reasonably likely to have, a
Material Adverse Effect on Subject Company, provided that, for purposes of this
sentence only, those representations and warranties which are qualified by
references to "material" or "Material Adverse Effect" or "Knowledge" shall be
deemed not to include such qualifications.

(b) Performance of Agreements and Covenants. Each and all of
the agreements and covenants of Subject Company to be performed and complied
with pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied with in
all material respects.

(c) Certificates. Subject Company shall have delivered to
Parent (i) a certificate, dated as of the Effective Time and signed on its
behalf by its chief executive officer and its chief financial officer, to the
effect that the conditions of its obligations set forth in Sections 9.2(a) and
9.2(b) of this Agreement have been satisfied, and (ii) certified copies of
resolutions duly adopted by Subject Company's Board of Directors and
shareholders evidencing the taking of all corporate action necessary to
authorize the execution, delivery, and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all in such reasonable
detail as Parent shall request.

(d) Parent Pooling Letter. Parent shall have received a copy
of a letter, dated as of the date of filing of the Registration Statement with
the SEC and as of the Effective Time, addressed to it and in a form reasonably
acceptable to it, from Price Waterhouse LLP to the effect that the Merger will
qualify for pooling-of-interests accounting treatment; provided, however, this
shall not be a condition precedent to Parent's obligation to perform this
Agreement and consummate the Merger and the other transactions contemplated
hereby if Parent takes actions which prevent the transactions contemplated by
this Agreement, including the Merger, from qualifying for such accounting
treatment.

(e) Amendment of Parent's Charter. The shareholders of
Parent shall have approved an amendment to Parent's Restated Charter of
Incorporation to increase the number of authorized shares of Parent Common
Stock to a sufficient number of authorized shares of Parent Common Stock to
enable Parent to issue authorized shares of Parent Common Stock in accordance
with its obligations under Article 3 of this Agreement and the Plan of Merger.

(f) Consents and Approvals. Subject Company shall have
obtained any and all Consents required for consummation of the Merger (other
than those set forth in Section 9.1(b) of this Agreement) or for the preventing
of any Default under any Contract or Permit of such Party which, if not
obtained or made, is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Subject Company or Parent.

9.3 Conditions to Obligations of Subject Company. The obligations
of Subject Company to perform this Agreement and consummate the Merger and the
other transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by Subject Company pursuant to Section
11.6(b) of this Agreement.

(a) Representations and Warranties. For purposes of this
Section 9.3(a), the accuracy of the representations and warranties of Parent
set forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made immediately prior to the Effective
Time (provided that representations and warranties which are confined to a

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specified date shall speak only as of such date). The representations and
warranties of Parent set forth in Sections 6.1, 6.2, 6.3 and 6.16 of this
Agreement shall each be true and correct in all material respects. There shall
not exist inaccuracies in the representations and warranties of Parent set
forth in this Agreement (including the representations and warranties set forth
in Sections 6.1, 6.2, 6.3 and 6.16) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a Material Adverse Effect on
Parent; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to "material"
or "Material Adverse Effect" or "Knowledge" shall be deemed not to include such
qualifications.

(b) Performance of Agreements and Covenants. Each and all of
the agreements and covenants of Parent and/or Merger Subsidiary to be performed
and complied with by Parent and/or Merger Subsidiary pursuant to this Agreement
and the other agreements contemplated hereby prior to the Effective Time shall
have been duly performed and complied with in all material respects.

(c) Certificates. Parent shall have delivered to Subject
Company (i) a certificate, dated as of the Effective Time and signed on its
behalf by its chief executive officer and its chief financial officer, to the
effect that the conditions of its obligations set forth in Sections 9.3(a) and
9.3(b) of this Agreement have been satisfied, (ii) certified copies of
resolutions duly adopted by Parent's or Merger Subsidiary's Boards of Directors
and Parent's Shareholders evidencing the taking of all corporate action
necessary to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby, all in
such reasonable detail as Subject Company shall request, and (iii) should
Parent's shareholders approve an amendment to Parent's Restated Charter of
Incorporation to increase the number of its authorized shares of Parent Common
Stock, a copy certified by the Secretary of State of the State of Tennessee,
evidencing the amendment of the Restated Charter of Incorporation of Parent so
as to permit Parent to issue the shares of Parent Common Stock to be issued
pursuant to the Merger.

(d) Fairness Opinion. Subject Company shall have received an
opinion from Price Waterhouse LLP to the effect that the Merger is fair to
Subject Company shareholders from a financial point of view dated the date of
the Subject Company Proxy Statement.

(e) Consents and Approvals. Parent and/or Merger Subsidiary
shall have obtained any and all Consents required for consummation of the
Merger (other than those set forth in Section 9.1(b) of this Agreement) or for
the preventing of any Default under any Contract or Permit of such Party which,
if not obtained or made, is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Parent.

ARTICLE 10
TERMINATION

10.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement by the
shareholders of Subject Company, this Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Time:

(a) By mutual consent of the Board of Directors of Parent and
the Board of Directors of Subject Company; or

(b) By the Board of Directors of Parent or the Board of
Directors of Subject Company (provided that the terminating Party is not then
in breach of any representation or warranty contained in this Agreement under
the applicable standard set forth in Section 9.2(a) of this Agreement in the
case of Subject Company and Section 9.3(a) in the case of Parent or in material
breach of any covenant or other agreement contained in this Agreement) in the
event of an inaccuracy of any representation or warranty of the other Party
contained in this Agreement which cannot be or has not been cured within 30
days after the giving of written notice to the breaching Party of such
inaccuracy and which inaccuracy would provide the terminating Party the ability
to refuse to consummate the Merger

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under the applicable standard set forth in Section 9.2(a) of this Agreement in
the case of Subject Company and Section 9.3(a) of this Agreement in the case of
Parent; or

(c) By the Board of Directors of Parent or the Board of
Directors of Subject Company (provided that the terminating Party is not then
in breach of any representation or warranty contained in this Agreement under
the applicable standard set forth in Section 9.2(a) of this Agreement in the
case of Subject Company and Section 9.3(a) in the case of Parent or in material
breach of any covenant or other agreement contained in this Agreement) in the
event of a material breach by the other Party of any covenant or agreement
contained in this Agreement which cannot be or has not been cured within 30
days after the giving of written notice to the breaching Party of such breach;
or

(d)(1) By the Board of Directors of Parent or the Board of
Directors of Subject Company in the event (i) any Consent of any Regulatory
Authority required for consummation of the Merger and the other transactions
contemplated hereby shall have been denied by final non-appealable action of
such authority or if any action taken by such authority is not appealed within
the time limit for appeal, or (ii) the shareholders of Subject Company fail to
vote their approval of this Agreement and the transactions contemplated hereby
as required by the Texas BCA and this Agreement at the Subject Company
Shareholders' Meeting where the transactions were presented to such
shareholders for approval and voted upon, or (2) by Parent should the
shareholders of Parent, at the Parent Shareholders' Meeting, fail to vote their
approval of an amendment to the Restated Charter of Incorporation of Parent to
increase the number of authorized shares of Parent Common Stock, to the extent
Parent would not have sufficient authorized shares of Parent Common Stock
available for issuance in the Merger. Should Parent's shareholders fail to
approve an amendment to Parent's Restated Charter of Incorporation to increase
the number of authorized shares of Parent Common Stock, then should Parent fail
to give the notice to Subject Company called for under such circumstance in
Section 8.2 of this Agreement within the time period so provided, or should
Parent's notice indicate that Parent does not intend to proceed with the
Merger, then Parent shall, in such case, be deemed to have elected to terminate
this Agreement under Section 10.1(d)(2). Should Parent's shareholders fail to
approve such amendment to increase the number of authorized shares of Parent
Common Stock and should Parent provide notice to Subject Company in accordance
with Section 8.2 of this Agreement that it intends to proceed with the Merger,
provided (i) the conditions precedent set forth in Section 9.1 shall have been
satisfied (other than conditions precedent which have not been satisfied as a
result of the acts or omissions of Parent or Merger Subsidiary) and (ii) Parent
is not entitled to terminate this Agreement pursuant to Section 10.1(a), (b),
(c) or (d)(1), then Subject Company shall have the right to declare that Parent
has terminated this Agreement pursuant to this Section 10.1(d)(2) should the
Merger fail to become effective by the later of (A) September 30, 1998, or (b)
the last day of the calendar month containing that date which is sixty days
after the conclusion of the Parent Shareholders' Meeting, not later than
October 31, 1998; provided, however, nothing in this Section 10.1(d)(2) shall
prevent Parent from terminating this Agreement, should it have the right to do
so, pursuant to any Section of this Article 10 other than Section 10.1(d)(2);
or

(e) By the Board of Directors of Parent or the Board of
Directors of Subject Company in the event that the Merger shall not have been
consummated by September 30, 1998, if the failure to consummate the
transactions contemplated hereby on or before such date is not caused by any
willful breach of this Agreement by the Party electing to terminate pursuant to
this Section 10.1(e), and should Parent's shareholders fail to approve an
amendment to Parent's Restated Charter of Incorporation to increase the number
of authorized shares of Parent Common Stock to the extent Parent would not have
sufficient authorized shares of Parent Common Stock available for issuance in
the Merger, then Parent shall no longer have the right to terminate this
Agreement pursuant to this Section 10.1(e); or

(f) By the Board of Directors of Subject Company upon written
notice to Parent at any time during the ten-day period commencing two days
after the Determination Date, if both of the following conditions are
satisfied:

(1) the Average Closing Price shall be less than the product
of (i) 0.85 and (ii) the Starting Price; and

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(2) (i) the quotient obtained by dividing the Average Closing
Price by the Starting Price (such number being referred to
herein as the "Parent Ratio") shall be less than (ii) the
quotient obtained by dividing the Index Price on the
Determination Date by the Index Price on the Starting Date and
multiplying the quotient in this clause (2)(ii) by .85 (such
number being referred to herein as the "Index Ratio");

subject, however, to the following three sentences. If
Subject Company refuses to consummate the Merger pursuant to
this Section 10.1(f), it shall give prompt written notice
thereof to Parent; provided, that such notice of election to
terminate may be withdrawn at any time within the
aforementioned ten-day period. During the five-day period
commencing with its receipt of such notice, Parent shall have
the option to elect to increase the Exchange Ratio to equal
the lesser of (i) the quotient obtained by dividing (1) the
product of 0.85, the Starting Price, and the Exchange Ratio
(as then in effect) by (2) the Average Closing Price, and (ii)
the quotient obtained by dividing (1) the product of the Index
Ratio and the Exchange Ratio (as then in effect) by (2) the
Parent Ratio. If Parent makes an election contemplated by the
preceding sentence, within such five-day period, it shall give
prompt written notice to Subject Company of such election and
the revised Exchange Ratio, whereupon no termination shall
have occurred pursuant to this Section 10.1(f) and this
Agreement shall remain in effect in accordance with its terms
(except as the Exchange Ratio shall have been so modified),
and any references in this Agreement to "Exchange Ratio" shall
thereafter be deemed to refer to the Exchange Ratio as
adjusted pursuant to this Section 10.1(f).

For purposes of this Section 10.1(f), the following terms
shall have the meanings indicated:

"Average Closing Price" shall mean the average of the
daily last sales prices of Parent Common Stock as reported on
the NYSE (as reported by The Wall Street Journal or, if not
reported thereby, another authoritative source as reasonably
chosen by Parent) for the 20 consecutive full trading days in
which such shares are traded on the NYSE ending at the close
of trading on the Determination Date.

"Determination Date" shall mean the later of the date
(i) of the Subject Company Shareholders' Meeting and (ii) on
which the Consent of the Board of Governors of the Federal
Reserve System shall be received (and any requisite waiting
period shall have expired).

"Index Group" shall mean the 15 bank holding
companies listed below, the common stocks of all of which
shall be publicly traded and as to which there shall not have
been, since the Starting Date and before the Determination
Date, any public announcement of a proposal for such company
to be acquired or for such company to acquire another company
or companies in transactions with a value exceeding 25% of the
acquiror's market capitalization as of the Starting Date. In
the event that any such company or companies are removed from
the Index Group as a result of any of the events described in
the preceding sentence, the weights (which shall be determined
based upon the number of outstanding shares of common stock)
shall be redistributed proportionately for purposes of
determining the Index Price. The 15 bank holding companies
and the weights attributed to them are as follows:

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<PAGE> 110

Bank Holding Companies Weighting
---------------------- ---------
<S> <C>
AmSouth Bancorporation 5.367%
BB&T Corporation 8.928
Commerce Bancshares, Inc. 2.474
Crestar Financial Corporation 7.353
First American Corporation 3.895
First Security Corporation 7.725
First Tennessee National Corp. 4.275
Firstar Corporation 9.654
Huntington Bancshares, Inc. 12.753
Marshall & Ilsley Corporation 6.761
Mercantile Bancorporation, Inc. 8.688
National Commerce Bancorp 3.258
Old Kent Financial Corporation 3.137
Regions Financial Corporation 9.079
SouthTrust Corporation 6.655
------
Total 100.00%
======
</TABLE>

"Index Price" on a given date shall mean the weighted
average (weighted in accordance with the factors listed above)
of the closing prices of the companies composing the Index
Group.

"Starting Date" shall mean the fourth full trading
day after the announcement by press release of the Merger.

"Starting Price" shall mean the closing price per
share of Parent Common Stock as reported on the NYSE (as
reported by The Wall Street Journal or, if not reported
thereby, another authoritative source as reasonably chosen by
Parent) on the Starting Date.

If Parent or any company belonging to the Index Group declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares, or similar transaction between the date of
this Agreement and the Determination Date, the prices for the common stock of
such company or Parent shall be appropriately adjusted for the purposes of
applying this Section 10.1(f).

10.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1 of this Agreement, this
Agreement and the Plan of Merger shall become void and have no effect, except
that (i) the provisions of this Section 10.2, Section 8.6(b), Section 8.8,
Section 11.2 and Section 11.3 of this Agreement shall survive any such
termination and abandonment, and (ii) a termination pursuant to the terms of
this Agreement shall not relieve the breaching Party from Liability for an
uncured breach of a representation, warranty, covenant, or agreement.

10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except for those covenants and
agreements which by their terms apply in whole or in part after the Effective
Time.

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ARTICLE 11
MISCELLANEOUS

11.1 Definitions. (a) Except as otherwise provided herein, the
capitalized terms set forth below shall have the following meanings:

"Acquisition Proposal" with respect to a Party shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of the
stock or assets of, or other business combination involving such Party or any
of its Subsidiaries or the acquisition of a substantial equity interest in, or
a substantial portion of the Assets of, such Party or any of its Subsidiaries.

"Affiliate" of a Person shall mean any other Person, directly or
indirectly through one or more intermediaries, controlling, controlled by, or
under common control with such Person.

"Agreement" shall mean this Agreement and the Exhibits delivered
pursuant hereto and incorporated herein by reference.

"Articles of Merger" shall mean the Articles of Merger to be executed
by Parent, Merger Subsidiary and Subject Company and filed with the Secretary
of State of the State of Tennessee and the Secretary of State of the State of
Texas relating to the Merger as contemplated by Section 1.1 of this Agreement.

"Assets" of a Person shall mean all of the assets, properties,
businesses, and rights of such Person of every kind, nature, character and
description, whether real, personal or mixed, tangible or intangible, accrued
or contingent, or otherwise, wherever located.

"Bank" shall mean Merchants Bank, Houston, Texas.

"BHC Act" shall mean the federal Bank Holding Company Act of 1956, as
amended.

"Closing Date" shall mean the date on which the Closing occurs.

"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order or Permit.

"Contract" shall mean any legally binding written or oral agreement,
arrangement, authorization, commitment, contract, indenture, instrument, lease,
obligation, plan, practice, restriction, understanding, or undertaking of any
kind or character, or other document to which any Person is a party or that is
binding on any Person or its capital stock, Assets or business.

"Default" shall mean (i) any breach or violation of or default under
any Contract, Order, or Permit, (ii) any occurrence of any event that with the
passage of time or the giving of notice or both would constitute a breach or
violation of or default under any Contract, Order, or Permit, or (iii) any
occurrence of any event that with or without the passage of time or the giving
of notice would give rise to a right to terminate or revoke, change the current
terms of, or renegotiate, or to accelerate, increase or impose any Liability
under, any Contract, Order or Permit.

"Dissenting Shares" shall mean any shares of Subject Company Common
Stock with respect to which the record or beneficial holder has properly
perfected the holder's rights to dissent under Article 5.12 of the Texas BCA.

"Effective Time" shall have the meaning ascribed to such term in
Section 1.3 of this Agreement.

"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata) and which are

UPC/-Merchants Page 34
<PAGE> 112

administered, interpreted or enforced by the United States Environmental
Protection Agency and state and local agencies with jurisdiction over, and
including common law in respect of, pollution or protection of the environment,
including the Comprehensive Environmental Response Compensation and Liability
Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation
and Recovery Act, as amended, 42 U.S.C. 6901 et seq.("RCRA"), and other Laws
relating to emissions, discharges, releases, or threatened releases of any
Hazardous Material, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of any
Hazardous Material.

"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.

"ERISA Affiliate" shall mean any trade or business, whether or not
incorporated, that together with the entity under consideration would be deemed
a "single employer" within the meaning of section 4001(b) of ERISA.

"Exchange Agent" shall have the meaning ascribed to such term in
Section 4.1 of this Agreement.

"Exchange Ratio" shall have the meaning ascribed to such term in
Section 3.1(c) of this Agreement.

"Exhibits" shall mean the Exhibits so marked, copies of which are
attached to this Agreement. Such Exhibits are hereby incorporated by reference
herein and made a part hereof.

"FRB" shall mean the Board of Governors of the Federal Reserve System
or applicable Federal Reserve Bank.

"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.

"Hazardous Material" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance, or toxic substance (as those
terms are defined by any applicable Environmental Laws) and (ii) any chemicals,
pollutants, contaminants, petroleum, petroleum products, or oil (and
specifically shall include asbestos requiring abatement, removal, or
encapsulation pursuant to the requirements of governmental authorities and any
polychlorinated biphenyls).

"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title
II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder.

"Indemnified Party" shall have the meaning ascribed to such term in
Section 8.12 of this Agreement.

"Intellectual Property" shall mean copyrights, patents, trademarks,
service marks, service names, trade names, applications therefor, technology
rights and licenses, computer software (including any source or object codes
therefor or documentation relating thereto), trade secrets, franchises,
know-how, inventions, and other intellectual property rights.

"Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.

"Knowledge" as used with respect to a Person (including references to
such Person being aware of a particular matter) shall mean those facts that are
known by the Chairman, President, Chief Financial Officer, Chief Accounting
Officer, Chief Credit Officer, or General Counsel of such Person.

"Law" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule, or statute applicable to a Person or its Assets,
Liabilities or business, including those promulgated, interpreted, or enforced
by any Regulatory Authority.

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<PAGE> 113

"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost, or expense (including costs
of investigation, collection, and defense), claim, deficiency, guaranty, or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course
of business) of any type, whether accrued, absolute or contingent, liquidated
or unliquidated, matured or unmatured, or otherwise.

"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention,
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current Taxes upon the assets or
properties of a Party or its Subsidiaries which are not yet delinquent, and
(ii) for depository institution Subsidiaries of a Party, pledges to secure
deposits, and other Liens incurred in the ordinary course of banking business.

"Litigation" shall mean any action, arbitration, cause of action,
claim, complaint, criminal prosecution, demand letter, governmental or other
examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice (written or oral) by any Person alleging potential
Liability or requesting information relating to or affecting a Party, its
business, its Assets (including Contracts related to it), or the transactions
contemplated by this Agreement, but shall not include regular, periodic
examinations of depository institutions and their Affiliates by Regulatory
Authorities.

"Material Adverse Effect" on a Party shall mean an event, change, or
occurrence which, individually or together with any other event, change, or
occurrence, has a material adverse impact on (i) the financial condition,
business, or results of operations of such Party and its Subsidiaries, taken as
a whole, or (ii) the ability of such Party to perform its obligations under
this Agreement or to consummate the Merger or the other transactions
contemplated by this Agreement in accordance with applicable Law, provided that
"Material Adverse Effect" and "material adverse impact" shall not be deemed to
include the impact of (a) changes in banking and similar Laws of general
applicability or interpretations thereof by courts or governmental authorities,
(b) changes in GAAP or regulatory accounting principles generally applicable to
banks and their holding companies, (c) actions or omissions of a Party (or any
of its Subsidiaries) taken with the prior written consent of the other Party,
(d) changes in economic conditions or interest rates generally affecting
financial institutions, or (e) the direct effects of compliance with this
Agreement (including the expense associated with the vesting of benefits under
the various employee benefit plans of Subject Company as a result of the Merger
constituting a change of control) on the operating performance of the Parties,
including expenses incurred by the Parties in consummating the transactions
contemplated by the Agreement.

"Merger" shall mean the merger of Subject Company with and into Merger
Subsidiary.

"Merger Subsidiary" shall mean Union Planters Holding Corporation, a
wholly-owned subsidiary of Parent organized under the Laws of the State of
Tennessee.

"Merger Subsidiary Common Stock" shall mean the $1.00 par value common
stock of Merger Subsidiary.

"NASD" shall mean the National Association of Securities Dealers, Inc.

"NYSE" shall mean the New York Stock Exchange, Inc.

"1933 Act" shall mean the Securities Act of 1933, as amended.

"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.

"Operating Property" shall mean any property owned by the Party in
question or by any of its Subsidiaries or in which such Party or Subsidiary
holds a security interest, and, where required by the context, includes the
owner or operator of such property, but only with respect to such property.

UPC/-Merchants Page 36
<PAGE> 114

"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local, or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.

"Parent" shall mean Union Planters Corporation, a Tennessee
corporation.

"Parent Capital Stock" shall mean, collectively, the Parent Common
Stock, the Parent Preferred Stock and any other class or series of capital
stock of Parent.

"Parent Common Stock" shall mean the $5.00 par value common stock of
Parent.

"Parent Contracts" shall have the meaning ascribed to such term in
Section 6.11 of this Agreement.

"Parent Disclosure Memorandum" shall mean the written information
entitled "Parent Memorandum" delivered prior to the date of this Agreement to
Subject Company describing in reasonable detail the matters contained therein
and, with respect to each disclosure made therein, specifically referencing
each Section of this Agreement under which such disclosure is being made.

"Parent Financial Statements" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of Parent as of
September 30, 1997, and as of December 31, 1996 and 1995, and the related
statements of earnings, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) for the nine months ended
September 30, 1997 and for each of the three years ended December 31, 1996,
1995 and 1994, as filed by Parent in SEC Documents, and (ii) the consolidated
balance sheets of Parent (including related notes and schedules, if any) and
related statements of earnings, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents filed
with respect to periods ended subsequent to September 30, 1997.

"Parent Material Contracts" shall have the meaning ascribed to such
term in Section 6.11 of this Agreement.

"Parent Preferred Stock" shall mean the no par value preferred stock
of Parent and shall include the (i) Series A Preferred Stock and (ii) Series E
8% Cumulative, Convertible Preferred Stock, of Parent ("Parent Series E
Preferred Stock").

"Parent Proxy Statement" shall mean a proxy statement (complying with
the requirements of the 1934 Act) to be prepared by Parent and filed by Parent
with the SEC in connection with the Parent Shareholders' Meeting.

"Parent Rights" shall mean the preferred stock purchase rights issued
pursuant to the Parent Rights Agreement.

"Parent Rights Agreement" shall mean that certain Rights Agreement,
dated January 19, 1989, between Parent and Union Planters Bank, National
Association, as Rights Agent.

"Parent Shareholders' Meeting" shall mean a meeting of the
shareholders of Parent called to consider and vote upon, among other things, a
proposal to amend the Charter of Incorporation of Parent to authorize the
issuance of at least sufficient additional shares of Parent Common Stock to
permit Parent and Merger Subsidiary to consummate the Merger upon the terms and
conditions set forth in this Agreement.

"Parent Subsidiaries" shall mean the Subsidiaries of Parent and any
corporation, bank, or other organization acquired as a Subsidiary of Parent in
the future and owned by Parent at the Effective Time.

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"Participation Facility" shall mean any facility or property in which
the Party in question or any of its Subsidiaries participates in the management
and, where required by the context, said term means the owner or operator of
such facility or property, but only with respect to such facility or property.

"Party" shall mean Subject Company, Merger Subsidiary or Parent, and
"Parties" shall mean, collectively, Subject Company, Merger Subsidiary and
Parent.

"Permit" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing, franchise,
license, notice, permit, or right to which any Person is a party or that is or
may be binding upon or inure to the benefit of any Person or its securities,
Assets or business.

"Person" shall mean a natural person or any legal, commercial, or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.

"Plan of Merger" shall mean the Plan of Merger of even date herewith
entered into by Parent, Merger Subsidiary and Subject Company, in the form of
Exhibit 1.

"Registration Statement" shall mean the Registration Statement on Form
S-4, or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by Parent under the 1933
Act with respect to the shares of Parent Common Stock to be issued to the
shareholders of Subject Company in connection with the transactions
contemplated by this Agreement.

"Regulatory Authorities" shall mean, collectively, the FRB, the
Department of Financial Institutions of the State of Tennessee, the Texas
Department of Banking, all state regulatory agencies having jurisdiction over
any of the Parties or their respective Subsidiaries, the NYSE, the NASD, and
the SEC.

"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative of a Person.

"Rights" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, warrants, or other binding obligations
of any character whatsoever by which a Person is or may be bound to issue
additional shares of its capital stock or other rights, or securities or rights
convertible into or exchangeable for, shares of the capital stock of a Person.

"SEC" shall mean the Securities and Exchange Commission.

"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with the SEC pursuant to the
Securities Laws.

"Securities Laws" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, the Trust Indenture Act of 1939, as amended, and the rules
and regulations of any Regulatory Authority promulgated thereunder.

"Significant Subsidiary" shall have the meaning ascribed such to such
term in Rule 1-02(w) of Regulation S-X promulgated under the Securities Laws.

"Subject Company" shall mean Merchants Bancshares, Inc., a Texas
corporation.

"Subject Company Benefit Plans" shall have the meaning ascribed to
such term in Section 5.14(a) of this Agreement.

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<PAGE> 116

"Subject Company Common Stock" shall mean the common stock, $1.00 par
value per share, of Subject Company.

"Subject Company Contracts" shall have the meaning ascribed to such
term in Section 5.15 of this Agreement.

"Subject Company Disclosure Memorandum" shall mean the written
information entitled "Subject Company Disclosure Memorandum" delivered prior to
the date of this Agreement to Parent describing in reasonable detail the
matters contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made.

"Subject Company ERISA Plan" shall have the meaning ascribed to such
term in Section 5.14(a) of this Agreement.

"Subject Company Financial Statements" shall mean (i) the consolidated
statements of financial position (including related notes and schedules, if
any) of Subject Company as of September 30, 1997, and as of December 31, 1996
and 1995, and the related statements of operations, shareholders' equity, and
cash flows (including related notes and schedules, if any) for the nine months
ended September 30, and for each of the three fiscal years ended December 31,
1996, 1995 and 1994, as filed by Subject Company in SEC Documents, and (ii) the
consolidated statements of financial position of Subject Company (including
related notes and schedules, if any) and related statements of operations,
shareholders' equity, and cash flows (including related notes and schedules, if
any) included in SEC Documents filed with respect to periods ended subsequent
to September 30, 1997.

"Subject Company Preferred Stock" shall mean the $20.00 par value
preferred stock of Subject Company.

"Subject Company Proxy Statement" shall mean the proxy statement used
by Subject Company to solicit the approval of its shareholders of the
transactions contemplated by this Agreement, which shall include the prospectus
of Parent relating to the issuance of the Parent Common Stock to holders of
Subject Company Common Stock.

"Subject Company Shareholders' Meeting" shall mean the meeting of the
shareholders of Subject Company to be held pursuant to Section 8.1 of this
Agreement, including any adjournment or adjournments thereof.

"Subject Company Subsidiaries" shall mean the Subsidiaries of Subject
Company, which shall include Subject Company Subsidiaries described in Section
5.4 of this Agreement and any corporation, bank, or other organization acquired
as a Subsidiary of Subject Company in the future and owned by Subject Company
at the Effective Time.

"Subsidiaries" shall mean all those corporations, banks, associations,
or other entities of which the entity in question owns or controls 10% or more
of the outstanding equity securities either directly or through an unbroken
chain of entities as to each of which 10% or more of the outstanding equity
securities is owned directly or indirectly by its parent; provided, there shall
not be included any such entity acquired through foreclosure or any such equity
the equity securities of which are owned or controlled in a fiduciary capacity.

"Supplemental Letter" shall mean the supplemental letter of even date
herewith relating to certain understandings and agreements with respect to
certain employment matters following the Effective Time in addition to those
included in this Agreement.

"Surviving Corporation" shall mean Merger Subsidiary as the surviving
corporation resulting from the Merger.

"Takeover Laws" shall have the meaning ascribed to such term in Section
5.20 of this Agreement.

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"Tax" or "Taxes" shall mean all taxes, charges, fees, levies or other
assessments, including, without limitation, all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, estimated, severance, stamp,
occupation, property or other taxes, customs duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority
(domestic or foreign).

"Tax Returns" shall mean all returns and reports of or with respect to
any Tax which are required to be filed by or with respect to the applicable
Party.

"TBCA" shall mean the Tennessee Business Corporation Act.

"Texas BCA" shall mean the Texas Business Corporation Act.

"Texas Banking Commissioner" shall mean the Commissioner of the Texas
Department of Banking.

(b) Any singular term in this Agreement shall be deemed to include
the plural, and any plural term the singular. Whenever the words "include,"
"includes," or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."

11.2 Expenses. (a) Except as otherwise provided in this Section
11.2 and in Section 8.8, each of the Parties shall bear and pay all direct
costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including filing, registration and
application fees, printing fees, and fees and expenses of its own financial or
other consultants, investment bankers, accountants, and counsel, except that
each of the Parties shall bear and pay the filing fees payable in connection
with the Registration Statement and the Subject Company Proxy Statement and
printing and mailing costs incurred in connection with the printing and mailing
of the Registration Statement and the Subject Company Proxy Statement based on
the relative Asset sizes of the Parties at December 31, 1996.

(b) Nothing contained in this Section 11.2 shall constitute
or shall be deemed to constitute liquidated damages for the willful breach by a
Party of the terms of this Agreement or otherwise limit the rights of the
non-breaching Party.

11.3 Brokers and Finders. Each of the Parties represents and
warrants that neither it nor any of its officers, directors, employees, or
Affiliates has employed any broker or finder or incurred any Liability for any
financial advisory fees, investment bankers' fees, brokerage fees, commissions,
or finders' fees in connection with this Agreement or the transactions
contemplated hereby, except as disclosed in Section 11.3 of such Party's
Disclosure Memorandum. In the event of a claim by any broker or finder based
upon his or its representing or being retained by or allegedly representing or
being retained by Subject Company or Parent other than those disclosed in the
previous sentence, each of Subject Company and Parent, as the case may be,
agrees to indemnify and hold the other Party harmless of and from any Liability
incurred by such Party in respect of any such claim.

11.4 Entire Agreement. Except as otherwise expressly provided
herein, this Agreement (including the other documents and instruments referred
to herein, including, but not limited to, the Supplemental Letter) constitutes
the entire agreement between the Parties with respect to the transactions
contemplated hereunder and supersedes all prior arrangements or understandings
with respect thereto, written or oral, between Parent and Subject Company.
Nothing in this Agreement expressed or implied is intended to confer upon any
Person, other than the Parties or their respective successors, any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
other than as provided in the Supplemental Letter and in Sections 8.11 and 8.12
of this Agreement.

11.5 Amendments. To the extent permitted by Law, this Agreement
may be amended by a subsequent writing signed by each of the Parties upon the
approval of the Boards of Directors of each of the Parties, whether before or
after shareholder approval of this Agreement has been obtained.

UPC/-Merchants Page 40
<PAGE> 118

11.6 Waivers. (a) Prior to or at the Effective Time, Parent,
acting through its Board of Directors, chief executive officer, or other
authorized officer, shall have the right to waive any Default in the
performance of any term of this Agreement by Subject Company, to waive or
extend the time for the compliance or fulfillment by Subject Company of any and
all of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of Parent under this Agreement, except
any condition which, if not satisfied, would result in the violation of any
Law. No such waiver shall be effective unless in writing signed by a duly
authorized officer of Parent.

(b) Prior to or at the Effective Time, Subject Company,
acting through its Board of Directors, chief executive officer, or other
authorized officer, shall have the right to waive any Default in the
performance of any term of this Agreement by Parent and/or Merger Subsidiary,
to waive or extend the time for the compliance or fulfillment by Parent and/or
Merger Subsidiary of any and all of its obligations under this Agreement, and
to waive any or all of the conditions precedent to the obligations of Subject
Company under this Agreement, except any condition which, if not satisfied,
would result in the violation of any Law. No such waiver shall be effective
unless in writing signed by a duly authorized officer of Subject Company.

(c) The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect the right of such
Party at a later time to enforce the same or any other provision of this
Agreement. No waiver of any condition or of the breach of any term contained
in this Agreement in one or more instances shall be deemed to be or construed
as a further or continuing waiver of such condition or breach of a waiver of
any other condition or of the breach of any other term of this Agreement.

11.7 Assignment. Except in accordance with Section 1.4 of this
Agreement, neither this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by any Party hereto (whether by
operation of Law or otherwise) without the prior written consent of the other
Party. 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.

11.8 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
by hand, by facsimile transmission, by registered or certified mail, postage
prepaid, or by courier or overnight carrier, to the person at the addresses set
forth below (or at such other address as may be provided hereunder), and shall
be deemed to have been delivered as of the date so delivered:

Subject Company: Merchants Bancshares, Inc.
5005 Woodway, Suite 300 Houston, Texas
77052 Attention: J. W. Lander, III
Telecopy Number: (713) 622-8922

Copy to Subject Company Counsel: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Attention: Robert E. Crawford, Jr., Esq.
Telecopy Number: (214) 745-5390

Parent: Union Planters Corporation
7130 Goodlett Farms Parkway
Memphis, Tennessee 38018
Attention: Jackson W. Moore
Telecopy Number: (901) 580-2939

UPC/-Merchants Page 41
<PAGE> 119

Copy to Parent Counsel: Union Planters Corporation
7130 Goodlett Farms Parkway
Memphis, Tennessee 38018
Attention: E. James House, Jr., Esq.
Telecopy Number: (901) 580-2939

and

Wyatt, Tarrant & Combs
6075 Poplar Avenue, Suite 650
Memphis, Tennessee 38017
Attention: R. Nash Neyland, Esq.
Telecopy Number: (901) 537-1010

11.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Tennessee, without regard
to any applicable conflicts of Laws.

11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

11.11 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.

11.12 Interpretations. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against any Party, whether
under any rule of construction or otherwise. No Party to this Agreement shall
be considered the draftsman. The Parties acknowledge and agree that this
Agreement has been reviewed, negotiated, and accepted by all Parties and their
attorneys and shall be construed and interpreted according to the ordinary
meaning of the words used so as fairly to accomplish the purposes and
intentions of all Parties hereto.

11.13 Enforcement of Agreement. The Parties agree that time is of
the essence in the performance of their respective obligations under this
Agreement. The Parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement was not performed in
accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.

11.14 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.

UPC/-Merchants Page 42
<PAGE> 120

IN WITNESS WHEREOF, each of the Parties has caused this
Agreement to be executed on its behalf and its corporate seal to be hereunto
affixed and attested by officers thereunto as of the day and year first above
written.

ATTEST: MERCHANTS BANCSHARES, INC.

By: /S/ Norman H. Bird By: /S/ J. W. Lander, III
-------------------------- --------------------------------
Norman H. Bird, Secretary J.W. Lander, III, President

[CORPORATE SEAL]

ATTEST: UNION PLANTERS CORPORATION

By: /S/ E. James House, Jr. By: /S/ Jackson W. Moore
--------------------------- -------------------------------
Jackson W. Moore
President & Chief Operating
Officer

ATTEST: UNION PLANTERS HOLDING CORPORATION

By: /S/ E. James House, Jr. By: /S/ Jackson W. Moore
--------------------------- -------------------------------
Jackson W. Moore
Chairman & Chief Operating
Officer

[CORPORATE SEAL]

UPC/-Merchants Page 43
<PAGE> 121

AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 16, 1998
BETWEEN
UNION PLANTERS CORPORATION
UNION PLANTERS HOLDING CORPORATION
AND MERCHANTS BANCSHARES, INC.

THIS AMENDMENT to that certain Agreement and Plan of Merger by and between
MERCHANTS BANCSHARES, INC. ("Merchants" or "Subject Company"), UNION PLANTERS
CORPORATION ("UPC" or "Parent"), and UNION PLANTERS HOLDING CORPORATION
("Holding"), dated January 16, 1998 (the "Agreement") is made and entered into
as of May 26, 1998, by Merchants, UPC, and Holding, hereafter collectively
referenced as the "Parties".

WHEREAS, the Parties desire to amend the Agreement to reflect a mutually
agreed upon change in the Exchange Ratio, as defined in Article 3, Section
3.1(c) of the Agreement; and

WHEREAS, the Parties desire to amend Article 9, Section 9.3(d) of the
Agreement to reflect a mutually agreed upon change of the date of delivery of a
fairness opinion by Price Waterhouse LLP, which is a condition precedent for
Merchants to consummate the transactions contemplated by the Agreement; and

WHEREAS, the Parties desire that all terms, representations, warranties,
covenants, and conditions contained within the Agreement remain in full force
and effect except as expressly amended herein.

NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Parties agree that the Amendment shall be amended as follows:

1. Section 3.1(c) of the Agreement shall be deleted in its entirety and
replaced with the following:

<PAGE> 122

Section 3.2 and Section 10.1(f) of this Agreement (the
"Exchange Ratio"). Pursuant to the Parent Rights Agreement,
each share of Parent Common Stock issued in connection with
the Merger upon conversion of Subject Company Common Stock
shall be accompanied by a Parent Right.

2. Section 9.3(d) of the Agreement shall be deleted in its entirety and
replaced with the following:

(d) Fairness Opinion. Subject Company shall have received
an opinion from Price Waterhouse LLP to the effect that the
Merger is fair to Subject Company shareholders from a
financial point of view dated as of a mutually agreeable
date preceding the date of the Proxy Statement.

3. The Plan of Merger, attached to the Agreement as Exhibit 1, shall be
replaced in its entirety by an Amended and Restated Plan of Merger, which has
been altered to conform with the terms of this First Amendment.

4. Except as expressly amended herein, all terms, representations,
warranties, covenants, and conditions contained within the Agreement do and
shall remain in full force and effect. Capitalized terms used and not otherwise
defined in this Agreement shall have the same meanings as such terms are given
in the Agreement.

This Amendment Number 1 to the Agreement executed as of the 26th day of
May, 1998.

UNION PLANTERS CORPORATION

/s/ JACKSON W. MOORE
-------------------------------------
By: Jackson W. Moore
President and Chief Operating Officer

UNION PLANTERS HOLDING CORPORATION

/s/ JACKSON W. MOORE
-------------------------------------
By: Jackson W. Moore
Chairman and Chief Operating Officer

MERCHANTS BANCSHARES, INC.

/s/ J.W. LANDER III
-------------------------------------
By: J.W. Lander III
President

<PAGE> 123

APPENDIX B - THE PLAN OF MERGER

<PAGE> 124

EXHIBIT 1

AMENDED AND RESTATED PLAN OF MERGER

OF
MERCHANTS BANCSHARES, INC.
WITH AND INTO
UNION PLANTERS HOLDING CORPORATION

Pursuant to this Amended and Restated Plan of Merger ("Plan of
Merger"), Merchants Bancshares, Inc. ("Subject Company"), a corporation
organized and existing under the laws of the State of Texas, shall be merged
with and into Union Planters Holding Corporation ("Merger Subsidiary"), a
corporation organized and existing under the laws of the State of Tennessee and
which is a wholly-owned subsidiary of Union Planters Corporation ("Parent").
This Plan of Merger amends and replaces that certain plan of merger between
Subject Company and Merger Subsidiary dated as of January 16, 1998.

Except as otherwise provided herein, the capitalized terms set forth
below shall have the meanings ascribed thereto in that certain merger agreement
dated as of January 16, 1998 between Parent, Merger Subsidiary and Subject
Company, as amended by Amendment No. 1 thereto, (the "Agreement"), of which
this Plan of Merger is Exhibit 1.

ARTICLE 1
TERMS OF MERGER

1.1 Merger. Subject to the terms and conditions of the Agreement
and this Plan of Merger, at the Effective Time, Subject Company shall be merged
with and into Merger Subsidiary in accordance with the provisions of Section
48-21-109 of the TBCA and Article 5.01 of the Texas BCA, and with the effect
provided in Section 48-21-108 of the TBCA and Article 5.06 of the Texas BCA
(the "Merger"). Merger Subsidiary shall be the Surviving Corporation resulting
from the Merger and shall continue to be governed by the Laws of the State of
Tennessee. The Merger shall be consummated pursuant to the terms of the
Agreement and this Plan of Merger, which have been approved and adopted by the
respective Boards of Directors of Subject Company, Parent and Merger
Subsidiary.

1.3 Effective Time. The Merger and other transactions
contemplated by the Agreement and this Plan of Merger shall become effective at
the time the Articles of Merger reflecting the Merger shall become effective
with the Secretary of State of the States of Tennessee and Texas (the
"Effective Time").

1.4 Restructure of Transaction. Subject to the terms of the
Agreement, Parent shall, in its reasonable discretion, have the unilateral
right to revise the structure of the Merger contemplated by the Agreement and
this Plan of Merger in order to achieve tax benefits or for any other reason
which Parent may deem advisable.

ARTICLE 2
TERMS OF MERGER

2.1 Charter. The Charter of Merger Subsidiary in effect
immediately prior to the Effective Time shall be the Charter of the Surviving
Corporation until otherwise amended or repealed.

2.2 Bylaws. The Bylaws of Merger Subsidiary in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
until otherwise amended or repealed.

Plan of Merger - 1
<PAGE> 125

ARTICLE 3
MANNER OF CONVERTING SHARES

3.1 Conversion of Shares. Subject to the provisions of this
Article 3 (and Article 3 of the Agreement), at the Effective Time, by virtue of
the Merger and without any action on the part of Parent, Merger Subsidiary,
Subject Company, or the shareholders of any of the foregoing, the shares of the
constituent corporations shall be converted as follows:

(b) Each share of Merger Subsidiary Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall represent one share of the Surviving Corporation from and
after the Effective Time.

(c) Except for Dissenting Shares, each share of Subject
Company Common Stock (excluding shares held by Subject Company, any Subject
Company Subsidiary, Parent or any Parent Subsidiary, in each case other than in
a fiduciary capacity or as a result of debts previously contracted) issued and
outstanding at the Effective Time shall cease to be outstanding and shall be
converted into and exchanged for the right to receive 1.0345 shares of Parent
Common Stock (subject to possible adjustment as set forth in Section 3.2 and
Section 10.1(f) of the Agreement, the "Exchange Ratio"). Pursuant to the
Parent Rights Agreement, each share of Parent Common Stock issued in connection
with the Merger upon conversion of Subject Company Common Stock shall be
accompanied by a Parent Right.

3.2 Anti-Dilution Provisions. In the event Parent changes the
number of shares of Parent Common Stock issued and outstanding after the date
of this Plan of Merger and prior to the Effective Time as a result of a stock
split, stock dividend, subdivision, reclassification, conversion or similar
recapitalization with respect to such stock and the record date therefor (in
the case of a stock dividend) or the effective date thereof (in the case of a
stock split, subdivision, reclassification, conversion or similar
recapitalization for which a record date is not established) shall be prior to
the Effective Time, the Exchange Ratio shall be proportionately adjusted.

3.4 Fractional Shares. Notwithstanding any other provision of
this Plan of Merger, each holder of shares of Subject Company Common Stock
exchanged pursuant to the Merger who would otherwise have been

Plan of Merger - 2
<PAGE> 126

entitled to receive a fractional share of Parent Common Stock (after taking
into account all certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional share of
Parent Common Stock multiplied by the closing price of such common stock on the
NYSE-Composite Transactions List (as reported by The Wall Street Journal or, if
not reported thereby, any other authoritative source reasonably selected by
Parent) on the last trading day preceding the Effective Time. No such holder
will be entitled to dividends, voting rights, or any other rights as a
shareholder in respect of any fractional shares.

ARTICLE 4
EXCHANGE OF SHARES

4.1 Exchange Procedures. Promptly after the Effective Time,
Parent and Subject Company shall cause the exchange agent selected by Parent
(the "Exchange Agent") to mail to the former shareholders of Subject Company
appropriate transmittal materials (which shall specify that delivery shall be
effected, and risk of loss and title to the certificates theretofore
representing shares of Subject Company Common Stock shall pass, only upon
proper delivery of such certificates to the Exchange Agent). Subject Company
shall have the right to review and approve the transmittal materials. The
Exchange Agent may establish reasonable and customary rules and procedures in
connection with its duties, provided such rules and procedures do not have the
effect of limiting or eliminating the obligation of Parent and/or Merger
Subsidiary to deliver the consideration contemplated by Article 3 of this Plan
of Merger. After the Effective Time, each holder of shares of Subject Company
Common Stock (other than Dissenting Shares or shares to be canceled pursuant to
Section 3.3 of this Plan of Merger) issued and outstanding at the Effective
Time shall surrender the certificate or certificates representing such shares
to the Exchange Agent and shall promptly upon surrender thereof receive in
exchange therefor the consideration provided in Section 3.1(c) of this Plan of
Merger, together with all undelivered dividends and other distributions, if
any, in respect of such shares (without interest thereon) pursuant to Section
4.2 of this Plan of Merger. To the extent required by Section 3.4 of this Plan
of Merger, each holder of shares of Subject Company Common Stock issued and
outstanding at the Effective Time also shall receive, upon surrender of the
certificate or certificates representing such shares, cash in lieu of any
fractional share of Parent Common Stock to which such holder may be otherwise
entitled (without interest). Parent shall not be obligated to deliver the
consideration to which any former holder of Subject Company Common Stock is
entitled as a result of the Merger until such holder surrenders such holder's
certificate or certificates representing the shares of Subject Company Common
Stock for exchange as provided in this Section 4.1. The certificate or
certificates of Subject Company Common Stock so surrendered shall be duly
endorsed as the Exchange Agent may reasonably require. Any other provision of
the Agreement or this Plan of Merger notwithstanding, neither Parent, Merger
Subsidiary nor the Exchange Agent shall be liable to a holder of Subject
Company Common Stock for any amounts paid or property delivered in good faith
to a public official pursuant to any applicable abandoned property Law.

Plan of Merger - 3
<PAGE> 127

Common Stock issued and outstanding at the Effective Time until such holder
surrenders such certificate for exchange as provided in Section 4.1 of this
Plan of Merger. However, upon surrender of such Subject Company Common Stock
certificate, both a Parent Common Stock certificate and any undelivered
dividends and other distributions payable hereunder (without interest) shall be
delivered and paid with respect to each share represented by such certificate.
In the event any Subject Company Common Stock 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 Parent, the posting by such person of a bond in such amount as
Parent may reasonably direct as indemnity against any claim that may be made
against it with respect to such certificate, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed certificate the shares of Parent
Common Stock and cash in lieu of fractional shares and dividends and other
distributions deliverable in respect thereof pursuant to this Plan of Merger.

ARTICLE 5
MISCELLANEOUS

5.1 Conditions Precedent. Consummation of the Merger by Merger
Subsidiary shall be conditioned on the satisfaction of or waiver by Parent of
the conditions precedent to the Merger set forth in Sections 9.1 and 9.2 of the
Agreement. Consummation of the Merger by Subject Company shall be conditioned
on the satisfaction of, or waiver by Subject Company of, of the conditions
precedent to the Merger set forth in Sections 9.1 and 9.3 of the Agreement.

5.2 Termination. This Plan of Merger may be terminated at any
time prior to the Effective Time by the Parties hereto as provided in Article
10 of the Agreement.

5.3 Amendments. To the extent permitted by Law, this Plan of
Merger may be amended by a subsequent writing signed by each of the Parties
upon the approval of the Boards of Directors of each of the Parties, whether
before or after shareholder approval of the Agreement and this Plan of Merger
has been obtained; provided, that after any such approval by the holders of
Subject Company Common Stock, there shall be made no amendment that modifies in
any material respect the consideration to be received by the Subject Company
shareholders.

5.4 Assignment. Except as expressly contemplated hereby, neither
this Plan of Merger nor the Agreement, nor any of the rights, interests, or
obligations hereunder or thereunder shall be assigned by any Party hereto
(whether by operation of Law or otherwise) without the prior written consent of
the other Party. Subject to the preceding sentence, the Agreement and this
Plan of Merger will be binding upon, inure to the benefit of and be enforceable
by the Parties and their respective successors and assigns.

5.5 Governing Law. This Plan of Merger shall be governed by and
construed in accordance with the Laws of the State of Tennessee, without regard
to any applicable conflicts of Laws.

5.6 Counterparts. This Plan of Merger may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same document.

5.7 Captions. The captions contained in this Plan of Merger are
for reference purposes only and are not part of this Plan of Merger.

Plan of Merger - 4
<PAGE> 128

IN WITNESS WHEREOF, each of the Parties hereto has duly
executed and delivered this Amended and Restated Plan of Merger or has caused
this Amended and Restated Plan of Merger to be executed and delivered in its
name and on its behalf by its representatives thereunto duly authorized, all as
of May 26, 1998.

ATTEST: MERCHANTS BANCSHARES, INC.

By: /s/ Norman H. Bird By:/s/ J.W. Lander
----------------------------- ----------------------------------
Norman H. Bird, Secretary J.W. Lander, III, President

[CORPORATE SEAL]

ATTEST: UNION PLANTERS CORPORATION

By: /s/ E. James House, Jr. By: /s/ Jackson W. Moore
---------------------------- ---------------------------------
Jackson W. Moore
President & Chief Operating
Officer

ATTEST: UNION PLANTERS HOLDING CORPORATION

By: /s/ E. James House, Jr By: /s/ Jackson W. Moore
------------------------------ ---------------------------------
Secretary Jackson W. Moore
Chairman & President

[CORPORATE SEAL]

Plan of Merger - 5
<PAGE> 129

APPENDIX C

<PAGE> 130

Price Waterhouse LLP Letterhead

May 26, 1998

Board of Directors
Merchants Bancshares, Inc.
Suite 300
5005 Woodway
Houston, TX 77052

Members of the Board:

You have requested our opinion as financial advisors as to the fairness, from a
financial point of view, to the shareholders of Merchants Bancshares, Inc.
("Merchants"), of the aggregate consideration to be paid to such shareholders
("Aggregate Consideration") in the proposed merger (the "Merger") of Merchants
with and into a wholly-owned subsidiary of Union Planters Corporation ("UPC"),
pursuant to the Agreement and Plan of Merger dated as of January 16, 1998, as
amended by Amendment No. 1 thereto by and among Merchants, UPC, and Union
Planters Holding Corporation (the "Agreement"). Under the terms of the Merger,
each outstanding share of common stock of Merchants will be exchanged for 1.0345
shares of common stock of UPC (the "Exchange Ratio"). Price Waterhouse LLP
Corporate Finance Group ("PWCF") was informed by Merchants, and assumed for
purposes of its opinion, that the Merger would be accounted for as a
pooling-of-interests under generally accepted accounting principles.

PWCF, as part of its financial advisory business, is continually engaged in the
valuation of banking businesses and their securities in connection with merger
and acquisition activity and valuations for estate, corporate and other
purposes. As a result, we have significant experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of our business, Price
Waterhouse LLP also serves as the independent accountants for UPC, which
relationship was disclosed to Merchants. PWCF has acted as a financial advisor
to the Board of Directors of Merchants in regard to this transaction and in
rendering this fairness opinion and will receive a fee from Merchants for our
services.

In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4; Annual Reports to the
Shareholders of Merchants for the four years ended December 31, 1996; certain
interim reports to shareholders and Quarterly Reports on Form 10-Q of Merchants;
unaudited financial reports for the year ended December 31, 1997; certain
internal financial analyses and forecasts for Merchants prepared by management;
certain internal reports and reviews on asset and liability management, credit
rating procedures, deposit schedules and loan committee reviews; and UPC's
historical daily share price volatility and trading volumes in comparison to a
group of institutions deemed to be comparable to UPC. We also have held
discussions with members of the senior management of Merchants regarding the
past and current business operations, regulatory relationships, financial
condition and future prospects of Merchants. In addition, we have compared
certain financial and stock market information for Merchants with similar
information for certain other publicly traded companies, reviewed the financial
terms of certain recent business combinations in the banking industry and
performed such other studies and analyses that we considered appropriate.

In conducting our review and arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of all the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying any of such information. We have relied upon the
management of Merchants as to the reasonableness and achievability of the
financial and operating forecasts and projections provided to us (and the
assumptions and bases therein), and we have assumed that

<PAGE> 131

such forecasts and projections reflect the best currently available estimates
and judgments of Merchants and that such forecasts and projections will be
realized in the amounts and in the time periods currently estimated by such
management. We have also assumed that the aggregate allowances for loan losses
for Merchants are adequate to cover loan losses. In rendering our opinion, we
have not made or obtained any evaluations or appraisals of the property of
Merchants or UPC, nor have we examined any individual credit files. In addition,
we have assumed the market value of a common share of UPC stock is adequately
and best represented by the prices reported on the New York Stock Exchange.
Other than certain due diligence, we have conducted no investigation of UPC nor
have we relied upon any information learned in the course of our audit of UPC.
We have not relied on the financial statements of UPC and are not opining on the
reasonableness of any audit related issues thereof. We are not expressing an
opinion herein as to the price at which UPC common stock will trade at any time.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others, the following: (i)
the historical and current financial position and results of operations of
Merchants; (ii) the assets and liabilities of Merchants; (iii) the nature and
terms of certain other merger transactions; and (iv) an assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry in general.

Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Subsequent developments including, but not limited to, changes in prevailing
interest rates and other factors which generally influence the price of
securities, adverse changes in the current capital markets, the occurrence of
adverse changes in the financial condition, business, assets, results of
operations or prospects of Merchants or UPC, and any necessary actions by or
restrictions of federal, state or other governmental agencies or regulatory
authorities may affect this opinion. We do not have any obligation to update,
revise or reaffirm this opinion.

We have acted both as financial advisor and as an advisor of fairness solely to
Merchants' Board of Directors in connection with this transaction. The fee for
our role as provider of the Fairness Opinion is not contingent upon the
consummation of the merger, while a significant portion of our fee for acting as
financial advisor to Merchants is contingent on the merger's consummation.

Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Aggregate Consideration is fair, from a financial point of view, to
the common shareholders of Merchants.

This opinion is provided solely for the benefit of the Board of Directors of
Merchants. The Board of Directors of Merchants agrees that, except as set forth
herein, no such opinion or advice shall be used, reproduced, disseminated,
quoted or referred to at any time, in any manner or for any purpose, nor shall
any public references to PWCF be made by the Board of Directors of Merchants (or
such persons), without the prior written consent of PWCF and PWCF shall not
unreasonably withhold such consent. It is understood that the Fairness Opinion
may be included in its entirety in any proxy statement or other similar document
distributed to shareholders of Merchants in connection with the Merger. However,
no summary of or excerpt from the Fairness Opinion may be used and no public
reference (other than as provided in the preceding sentence) to the Fairness
Opinion may be made except with PWCF's prior approval, which will not be
unreasonably withheld or delayed. This opinion does not constitute a
recommendation to the Board of Directors or to any shareholder of Merchants with
respect to any approval of the Merger.

Very truly yours,

/s/ Price Waterhouse, LLP

Price Waterhouse, LLP
<PAGE> 132

APPENDIX D - Texas Dissenters Rights Statutes

<PAGE> 133

ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS

A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:

(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote thereon
as a class or otherwise;

(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation if special authorization of
the shareholders is required by this Act and the shareholders hold shares of a
class or series that was entitled to vote thereon as a class or otherwise;

(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the shareholder are
to be acquired.

B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:

(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or plan of exchange:

(a) listed on a national securities exchange;

(b) listed on the Nasdaq Stock Market (or successor quotation system)
or designated as a national market security on an interdealer quotation system
by the National Association of Securities Dealers, Inc., or successor entity; or

(2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any consideration
that is different than the consideration (other than cash in lieu of fractional
shares that the shareholder would otherwise be entitled to receive) to be
provided to any other holder of shares of the same class or series of shares
held by such shareholder; and

(3) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any consideration
other than:

<PAGE> 134

(a) shares of a domestic or foreign corporation that, immediately
after the effective time of the merger or exchange, will be part of a class or
series, shares of which are:

(i) listed, or authorized for listing upon official notice of
issuance, on a national securities exchange;

(ii) approved for quotation as a national market security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or successor entity; or

(iii) held of record by not less than 2,000 holders;

(b) cash in lieu of fractional shares otherwise entitled to be
received; or

Acts 1955, 54th Leg., p. 239, ch. 64, eff. Sept. 6, 1955. Amended by
Acts 1957, 55th Leg., p. 111, ch. 54, ss. 10; Acts 1973, 63rd Leg., p. 1508, ch.
545, ss. 36, eff. Aug. 27, 1973; Acts 1989, 71st Leg., ch. 801, ss. 34, eff.
Aug. 28, 1989; Acts 1991, 72nd Leg., ch. 901, ss. 32, eff. Aug. 26, 1991; Acts
1997, 75th Leg., ch. 375, ss. 29, eff. Sept. 1, 1997.

ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS

A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:

(1)(a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the shareholder
shall not have voted in favor of the action, the corporation, in the case of
action other than a merger, or the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the action
is effected, deliver or mail to the shareholder written notice that the action
has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and class
of the shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand within the
ten (10) day period shall be bound by the action.

<PAGE> 135

(b) With respect to proposed corporate action that is approved pursuant
to Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall be
accompanied by a copy of this Article and any articles or documents filed by the
corporation with the Secretary of State to effect the action. If the shareholder
shall not have consented to the taking of the action, the shareholder may,
within twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the shareholder's
shares. The fair value of the shares shall be the value thereof as of the date
the written consent authorizing the action was delivered to the corporation
pursuant to Section A of Article 9.10 of this Act, excluding any appreciation or
depreciation in anticipation of the action. The demand shall state the number
and class of shares owned by the dissenting shareholder and the fair value of
the shares as estimated by the shareholder. Any shareholder failing to make
demand within the twenty (20) day period shall be bound by the action.

(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may be, of
a demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.

(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.

B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the

<PAGE> 136

corporation (foreign or domestic) or other entity may, within sixty (60) days
after the expiration of the sixty (60) day period, file a petition in any court
of competent jurisdiction in the county in which the principal office of the
domestic corporation is located, asking for a finding and determination of the
fair value of the shareholder's shares. Upon the filing of any such petition by
the shareholder, service of a copy thereof shall be made upon the corporation
(foreign or domestic) or other entity, which shall, within ten (10) days after
service, file in the office of the clerk of the court in which the petition was
filed a list containing the names and addresses of all shareholders of the
domestic corporation who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
corporation (foreign or domestic) or other entity. If the petition shall be
filed by the corporation (foreign or domestic) or other entity, the petition
shall be accompanied by such a list. The clerk of the court shall give notice of
the time and place fixed for the hearing of the petition by registered mail to
the corporation (foreign or domestic) or other entity and to the shareholders
named on the list at the addresses therein stated. The forms of the notices by
mail shall be approved by the court. All shareholders thus notified and the
corporation (foreign or domestic) or other entity shall thereafter be bound by
the final judgment of the court.

C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.

D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a

<PAGE> 137

reasonable fee as court costs, and all court costs shall be allotted between the
parties in the manner that the court determines to be fair and equitable.

E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.

F. The provisions of this Article shall not apply to a merger if, on
the date of the filing of the articles of merger, the surviving corporation is
the owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.

G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.

Acts 1955, 54th Leg., p. 239, ch. 64, eff. Sept. 6, 1955. Amended by Acts 1967,
60th Leg., p. 1721, ch. 657, ss. 12, eff. June 17, 1967; Acts 1983, 68th Leg.,
p. 2570, ch. 442, ss. 9, eff. Sept. 1, 1983; Acts 1987, 70th Leg., ch. 93, ss.
27, eff. Aug. 31, 1987; Acts 1989, 71st Leg., ch. 801, ss. 35, eff. Aug. 28,
1989; Acts 1993, 73rd Leg., ch. 215, ss. 2.16, eff. Sept. 1, 1993.

ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS

A. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act shall not thereafter be
entitled to vote or exercise any other rights of a shareholder except the right
to receive payment for his shares pursuant to the provisions of those articles
and the right to maintain an appropriate action to obtain relief on the ground
that the corporate action would be or was fraudulent, and the respective shares
for which payment has been demanded shall not thereafter be considered
outstanding for the purposes of any subsequent vote of shareholders.

B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate

<PAGE> 138

such shareholder's rights under Articles 5.12 and 5.16 of this Act unless a
court of competent jurisdiction for good and sufficient cause shown shall
otherwise direct. If uncertificated shares for which payment has been demanded
or shares represented by a certificate on which notation has been so made shall
be transferred, any new certificate issued therefor shall bear similar notation
together with the name of the original dissenting holder of such shares and a
transferee of such shares shall acquire by such transfer no rights in the
corporation other than those which the original dissenting shareholder had after
making demand for payment of the fair value thereof.

C. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act may withdraw such demand
at any time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.

Acts 1955, 54th Leg., P. 239, ch. 64, eff. Sept. 6, 1955. Amended by Acts 1967,
60th Leg., p. 1723, ch. 657, ss. 13, eff. June 17, 1967; Acts 1983, 68th Leg.,
P. 2573, ch. 442, ss. 10, eff. Sept. 1, 1983; Acts 1993, 73rd Leg., ch. 215, ss.
2.17, eff. Sept. 1, 1993.

<PAGE> 139
APPENDIX E - Merchants Annual Report on Form 10-k
<PAGE> 140
================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

FOR FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM ______________ TO _______________

COMMISSION FILE NUMBER: 0-11033

MERCHANTS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

TEXAS 76-0045946
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)

5005 WOODWAY, SUITE 300 77056
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 622-0042

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
NONE N/A
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

TITLE OF CLASS
--------------
Common Stock, Par Value $1.00

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. Yes [X] No [ ]

Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

There is no established market for the registrant's common stock. Accordingly,
the registrant is unable to estimate the value of shares held by non-affiliates.
On March 1, 1998, there were 1,951,839 shares of common stock issued and
outstanding. See Item 5, entitled "Market for the Registrant's Common Equity and
Related Stockholder Matters" for additional information concerning the market
for the registrant's common stock.

================================================================================
<PAGE> 141
FORM 10-K CROSS REFERENCE INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I

Item 1. Business 3

Item 2. Properties 9

Item 3. Legal Proceedings 9

Item 4. Submission of Matters to a Vote of Security Holders 9

PART II

Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 10

Item 6. Selected Financial Data 11

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31

Item 8. Financial Statements and Supplementary Data 32

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 64

PART III

Item 10. Directors and Executive Officers of the Registrant 64

Item 11. Executive Compensation 66

Item 12. Security Ownership of Certain Beneficial Owners and Management 68

Item 13. Certain Relationships and Related Transactions 69

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 70

SIGNATURES 72
</TABLE>

1
<PAGE> 142
FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA"). These statements are being provided
in reliance upon the "safe harbor" provisions of the PSLRA as set forth in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. There are a number of such
statements appearing in this Form 10-K, including, but not limited to, (i) the
statement regarding management's expectations with respect to the outcome of
legal proceedings included in the paragraph under Item 3, Legal Proceedings,
(ii) the statement regarding management's expectations with respect to the
increase in the provision for loan losses in 1998 included in the second
paragraph under the heading, "Provision for Losses on Loans" contained in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), (iii) the statement regarding credit risk included in the
second paragraph under the heading "Investment Securities" in the Financial
Condition Analysis section of MD&A, (iv) the statement regarding expected growth
in real estate related loans included in the second paragraph under the heading
"Loans" in the Financial Condition Analysis section of MD&A, (v) the statement
regarding volatility in shareholders' equity included in the second paragraph
under the heading "Capital and Dividends" in the Financial Condition Analysis
section of MD&A, (vi) the statement regarding capital commitments included in
the paragraph under the heading "Capital Commitments" in the Financial Condition
Analysis section of MD&A, and (vii) the statement regarding transactions with
directors and officers and their affiliates included in the paragraph under Item
13, Certain Relationships and Related Transactions. Such forward-looking
statements include statements regarding the intent, belief, outlook, plans,
strategy, estimates or expectations of the Company, its directors or its
officers primarily with respect to future events and the future financial
performance of the Company, as well as underlying assumptions and other
statements which are other than statements of historical facts.

Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results, performance or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result" or words
or phrases of similar meaning. Readers of this Form 10-K are cautioned that any
such forward-looking statements are based on current information known to the
Company and are not guarantees of future events or performance and involve risks
and uncertainties, and that actual results may differ materially from those in
the forward-looking statements as a result of various factors. The accompanying
information contained in this Form 10-K identifies important factors that could
cause such differences. These factors include, without limitation, changes in
economic conditions, changes in interest rates, loss of deposits and loan demand
to other financial institutions, substantial changes in financial markets,
changes in real estate values and the real estate market, regulatory changes,
changes in the nature of the Company's loan portfolio, unanticipated results in
pending legal proceedings, unanticipated changes in the operations or financial
condition of the Company's borrowers, and other factors referenced in this Form
10-K. Though the Company has attempted to enumerate those factors it believes in
this Form 10-K. Though the Company has attempted to enumerate those factors it
believes to be important to its business, the Company wishes to caution
investors that other factors may prove to be important in affecting the
Company's business or operations. New factors emerge from time to time and it is
not possible for the Company to predict all of such factors, nor can it assess
the impact of each such factor on its business or the extent to which any
factor, or combination of factors, may cause the Company's actual results to
differ materially from those anticipated in the forward-looking statements. The
forward-looking statements are expressed in good faith and are believed by the
Company to have a reasonable basis, but there can be no assurance that the
expectations, beliefs or projections contained in the forward-looking statements
will result or be achieved or accomplished. In addition, the Company disclaims
any obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.

2
<PAGE> 143

PART I.

ITEM 1. BUSINESS

GENERAL

Merchants Bancshares, Inc. ("Merchants Bancshares" or the "Company") is a
Texas corporation organized in 1982 and is also a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "Holding Company Act").
Merchants Bancshares maintains its principal offices at 5005 Woodway, Suite 300,
Houston, Texas 77056 (telephone: (713) 622-0042).

Merchants Bancshares owns all of the outstanding capital stock of Gulf
Southwest Nevada Bancorp, Inc. ("Nevada Bancorp"), a Nevada corporation and an
intermediate bank holding company (unless otherwise indicated, all references
herein to Merchants Bancshares include Nevada Bancorp). Nevada Bancorp owns
100.0% of the outstanding capital stock of Merchants Bank ("Merchants Bank" or
the "Subsidiary Bank") and 80.0% of the outstanding capital stock of Funds
Management Group, Inc. ("FMG").

Merchants Bancshares' principal activity is the ownership and management of
the Subsidiary Bank. The Subsidiary Bank is a Texas state-chartered banking
association. The Subsidiary Bank offers a full range of banking services to its
customers, including demand and time deposits and various types of commercial
and consumer loans. The Subsidiary Bank draws substantially all of its deposits
and a majority of its loans from the Houston/Galveston SMA.

As a bank holding company, Merchants Bancshares may own or control,
directly or indirectly, one or more banks and furnish services to such banks.
The banking activities of Merchants Bancshares are conducted by the Subsidiary
Bank. The officers and directors of the Subsidiary Bank direct its operations.
The principal role of Merchants Bancshares is to provide management assistance
with respect to various aspects of the Subsidiary Bank operations, including the
areas of asset and liability management, business development, loan policies and
procedures, capital planning, advertising, data processing, credit and loan
administration, accounting, auditing, financial reporting and compliance with
legal and governmental regulations.

ACQUISITION OF TEXAS GULF COAST BANCORP, INC.

On May 1, 1995, Nevada Bancorp consummated its acquisition of Texas Gulf
Coast Bancorp, Inc. ("Texas Gulf"). Texas Gulf was a holding company which owned
100% of the stock of First Bank Mainland in LaMarque, Texas and over 95% of the
stock of each of Texas City Bank in Texas City, Texas and First Bank Pearland,
Pearland, Texas. As of May 1, 1995, Texas Gulf had consolidated assets of
approximately $203 million.

On January 1, 1996, First Bank Mainland, First Bank Pearland and Texas City
Bank were merged with and into Merchants Bank, which was the surviving bank. The
banking facilities of the three merged banks operate as branch facilities of
Merchants Bank.

SUMMARY OF PENDING MERGER

On January 16, 1998, the Company entered into an Agreement and Plan of
Merger to be acquired by Union Planters Corporation ("UPC"), a publicly traded
bank holding company based in Memphis, Tennessee, in a tax-free reorganization
to be accounted for as a pooling of interests. Pursuant to the merger agreement,
UPC will exchange one (1) share of its Common Stock, or approximately 1.9
million shares, for each outstanding share of the common stock of the Company.
The merger is subject to satisfaction of certain contractual conditions to
closing, including regulatory and shareholder approvals, and is expected to be
consummated in the second quarter of 1998. For additional information, see
"--Pending Merger."

3
<PAGE> 144

BANKING SERVICES

Merchants Bank is a state-chartered banking association organized in 1970.
The services offered by the Subsidiary Bank are generally those offered by
commercial banks of comparable size in the Subsidiary Bank's trade area. Such
services include short-term and medium-term loans, revolving credit
arrangements, inventory and accounts receivable financing, equipment financing,
real estate lending, Small Business Administration lending, letters of credit,
installment and other consumer loans, savings accounts and various savings
programs, including individual retirement accounts, and interest and
non-interest bearing checking accounts. These services are offered to
commercial, industrial, financial and individual customers.

Other than the Subsidiary Bank's charter to operate as a bank, the business
of Merchants Bancshares is not materially dependent upon any patent, trademark,
license, franchise or concession. The business of Merchants Bancshares is not
seasonal.

SUBSIDIARY BANK

The following table sets forth certain balance sheet and operating
information at December 31, 1997, with respect to the Subsidiary Bank:

MERCHANTS BANK
(IN THOUSANDS)

<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------
<S> <C>
Balance Sheet:
Assets $ 544,370
Deposits 485,589
Loans 342,566
Allowance for Credit Losses 3,687
Total Equity 53,878

Results of Operations:
Interest Income $ 39,168
Interest Expense 12,220
Provision for Credit Losses 1,740
Net Earnings 7,649
</TABLE>

Merchants Bank's main office is at 999 North Shepherd, Houston, Texas with
thirteen branches located in Houston and the surrounding communities.

SUBSIDIARY BANK HOLDING COMPANY

Nevada Bancorp is a Nevada corporation organized in 1994, and is wholly
owned by Merchants Bancshares. The only activities of Nevada Bancorp relate to
holding the stock of the Subsidiary Bank and FMG. Nevada Bancorp currently has
no employees.

SUPERVISION AND REGULATION

MERCHANTS BANCSHARES. As a bank holding company, Merchants Bancshares is
subject to regulation by the Federal Reserve Board ("FRB") and is required to
file with the FRB an annual report and to furnish such additional information as
the FRB may require pursuant to the Holding Company Act. The FRB may conduct
examinations of Merchants Bancshares and its nonbanking subsidiary, FMG.

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<PAGE> 145

Merchants Bancshares is required to obtain the prior approval of the FRB
for the acquisition of five percent or more of the voting shares or
substantially all the assets of any bank or bank holding company. In considering
proposed acquisitions, the FRB considers the expected benefits to the public,
including greater convenience, identifying and meeting the credit needs of the
applicant's entire community, increased competition or gains in efficiency,
weighed against the risks of possible adverse effects, such as undue
concentration of resources, lessening or elimination of competition, conflicts
of interest or unsound banking practices. If an application involves the
acquisition of the voting shares of a state or national bank in Texas, a copy of
such application must be submitted to the Texas Banking Commissioner
("Commissioner") pursuant to the Texas Finance Code (the "Finance Code").

Bank holding companies are prohibited by law, except in certain instances
prescribed by statute, from acquiring a direct or indirect interest in or
control of more than five percent of the voting shares of any company which is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
providing services to its subsidiaries. Bank holding companies, however, may
engage in, and may own shares of companies engaged in, certain activities found
by the FRB to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. When an application concerning these
activities is filed with the FRB, a copy of such application also must be
submitted to the Commissioner pursuant to the Finance Code for a determination
as to whether the application should be approved. The Commissioner is required
to oppose the application if the proposed activities would be detrimental to the
public's interest as the result of probable effects, such as undue concentration
of resources, competition, conflicts of interest or unsound banking practices.

Under the Holding Company Act and the FRB's regulations, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of
property or furnishing of services. The FRB possesses enforcement powers
intended to prevent or eliminate practices of bank holding companies and their
non-bank subsidiaries deemed to be unsafe and unsound or in violation of
applicable laws.

Since June 1, 1997, banks may merge with a bank located in another state so
long as one or both of the states have not opted out of interstate branching. A
bank whose home state opts out of interstate branching may not participate in
any interstate branching. The State of Texas has elected to opt out of
interstate branching through legislation that will expire September 2, 1999.

COMMUNITY REINVESTMENT. Merchants Bank is subject to the regulation under
the Community Reinvestment Act of 1977 ("CRA") and the federal banking agencies'
other implemented regulations promulgated thereunder. Under the CRA, all
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operation to help meet the credit needs of their entire
communities, including low-to-moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the federal banking regulatory
agencies, in connection with their examination of a depository institution, to
assess the institution's record in assessing and meeting the credit needs of the
community served by that institution, including low-to-moderate income
neighborhoods. The assessment of the institution's record is available to the
public. Further, such assessment is required of any institution which has
applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage
for a newly chartered institution; (iii) establish a new branch office that will
accept deposits; (iv) relocate an office; or (v) merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or bank holding company, the FRB will assess the records of each
subsidiary depository institution of the applicant bank holding company, and
such records may be the basis for denying the application. In its most recent
CRA compliance examination, Merchants Bank received a CRA rating of
"outstanding".

SUBSIDIARY BANK. As a Texas state chartered bank, the Subsidiary Bank is
subject to regulation, supervision and periodic examination by the Texas
Department of Banking. Because the Subsidiary Bank is not a member of the
Federal Reserve System (i.e., a "non-member bank") and its deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC") to the extent authorized
by law, it is also subject to supervision and regulation, as

5
<PAGE> 146

well as examination, by the FDIC. Various requirements of federal and Texas law
affect the operation of the Subsidiary Bank, including requirements relating to
maintenance of reserves against deposits, restrictions on the nature and the
amount of loans which may be made and the interest that may be charged thereon
and restrictions relating to investments and other activities.

Cash revenues derived from dividends paid by the Subsidiary Bank represent
the primary source of revenues for Merchants Bancshares. Under the Finance Code,
a state bank may not reduce its capital and surplus through dividends without
the prior written approval of the Commissioner. Dividends may be paid out of the
undivided profits of the Subsidiary Bank. At December 31, 1997, there was an
aggregate amount of $33,468,000 available for the payment of dividends by the
Subsidiary Bank under these restrictions. The payment of dividends is further
subject to the authority of regulatory authorities to prohibit payment of
dividends if such payment is determined to be an unsafe or unsound banking
practice or if after making such distribution, the Subsidiary Bank would be
considered "undercapitalized".

For further discussion of certain additional regulations affecting
Merchants Bancshares and the Subsidiary Bank, reference should be made to the
"Government Fiscal and Monetary Policies" discussion below.

COMPETITION

The activities in which the Subsidiary Bank engages are highly
competitive. Each activity engaged in and geographic market served involves
competition with other banks, as well as with non-banking financial institutions
and non-financial enterprises. The Subsidiary Bank actively competes with other
banks in its efforts to obtain deposits and make loans, in the scope and type of
services offered, in interest rates paid on time deposits and charged on loans
and in other aspects of banking. At December 31, 1997, the Subsidiary Bank had
deposits of approximately $485.6 million.

In addition to competing with other commercial banks within and outside
its primary service area, the Subsidiary Bank competes with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, industrial loan associations,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. Additional competition for deposits
comes from governmental and private issuers of debt obligations and other
investment alternatives for depositors such as money market funds and mutual
funds.

CUSTOMERS. The Subsidiary Bank is not dependent upon any single customer or
few customers, the loss of any one or more of which would have a materially
adverse effect upon its business.

GOVERNMENT FISCAL AND MONETARY POLICIES

The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the FRB. Changes in
the discount rate on FRB borrowings, availability of borrowings at the FRB
"discount window," open market operations, the imposition of any changes in
reserve requirements against banks' deposits and assets of foreign branches, the
imposition of any changes in reserve requirements against certain borrowings by
banks and their affiliates, and the placing of limits on interest rates which
banks may pay on time and savings deposits are some of the instruments of fiscal
and monetary policy available to the FRB. Fiscal and monetary policies influence
to a significant extent the overall growth of bank loans, investments and
deposits and the interest rates charged on loans or paid on time and savings
deposits. The nature of future monetary policies and the effect of such policies
on the future business and earnings of Merchants Bancshares and the Subsidiary
Bank cannot be predicted.

The FRB has cease and desist powers over bank holding companies,
non-banking subsidiaries or any institution-affiliated party thereof to
forestall activities which represent unsafe and unsound practices or constitute
violations of law or regulations. The FRB can also require affirmative actions
to correct a violation or practice through the issuance of a cease and desist
order. In certain instances, the FRB is empowered to assess civil penalties
against companies or individuals who violate the Holding Company Act or
regulations or orders issued

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<PAGE> 147

pursuant thereto in amounts up to $1,000,000 for each day's violation, to order
termination of non-banking activities of non-banking subsidiaries and to order
termination of ownership and control of a non-bank subsidiary by a bank holding
company.

Section 18(j) of the Federal Deposit Insurance Act makes applicable to
state nonmember insured banks the provisions of Section 23A of the Federal
Reserve Act among other statutes. Section 23A of the Federal Reserve Act and
related statutes impose limits and collateralization requirements with respect
to the amount of loans, extensions of credit, or investments or certain other
transactions by member banks with their "affiliates". Merchants Bancshares,
Nevada Bancorp and FMG are affiliates of the Subsidiary Bank and, therefore,
these restrictions are applicable to transactions by the Subsidiary Bank with
Merchants Bancshares, Nevada Bancorp and FMG. In addition, Section 23B of the
Federal Reserve Act prohibits a bank that is an insured depository institution
from engaging in certain transactions (including, for example, loans) with
certain affiliates unless the transactions are substantially the same or at
least as favorable to such bank or its subsidiaries as those prevailing at the
time for comparable transactions with or involving other nonaffiliated
companies. In the absence of such comparable transactions, any transaction
between a member bank and its affiliates must be on terms and under
circumstances, including credit standards, that, in good faith, would be offered
to or would apply to nonaffiliated companies. The Subsidiary Bank is also
subject to certain prohibitions against tie-in arrangements in connection with
extensions of credit and certain other transactions.

The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") places certain restrictions on activities of insured institutions
depending on their level of capital. An institution is categorized as either
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized." Federal banking regulators
are authorized to take prompt corrective action against institutions which are
in one of the undercapitalized categories. The capital classification of a bank
also affects the frequency of examinations of the bank and the deposit insurance
premiums paid by the bank. Under FDICIA, the FDIC is authorized to assess
insurance premiums on a bank's deposits at a variable rate depending on the
probability that the deposit insurance fund will incur a loss with respect to
the bank. Banks which are adequately capitalized or well capitalized presently
are not assessed premiums for deposit insurance; however, all depository
institutions are assessed a nominal annual fee. Currently, Merchants Bancshares
and the Subsidiary Bank are deemed to be well capitalized. This capital category
is determined only for purposes of applying the prompt corrective action
provisions of FDICIA and may not constitute an accurate representation of the
overall financial condition of Merchants Bancshares or the Subsidiary Bank.

EFFECTS OF INTEREST RATES AND USURY LAWS. Texas usury laws limit the rate
of interest that may be charged by the Subsidiary Bank. Certain federal laws
provide a limited preemption of Texas usury laws. The maximum rate of interest
that the Subsidiary Bank may charge on business loans under Texas law varies
between 18% per annum and (i) 28% per annum for business loans above $250,000 or
(ii) 24% per annum for other loans. Texas' floating usury ceilings are tied to
the 26-week United States Treasury Bill auction rate. A 1980 federal statute
removed the interest ceiling under usury laws for loans by the Subsidiary Bank
which are secured by first liens on residential real property.

EMPLOYEES. Merchants Bancshares and its subsidiaries had 322 full-time
equivalent employees as of December 31, 1997. None of the employees are
represented by any collective bargaining unit, and management believes it has
excellent relations with its employees.

PENDING MERGER.

On January 16, 1998, Merchants Bancshares, Inc. and UPC entered into an
Agreement and Plan of Merger (the "Agreement"), pursuant to which Merchants
Bancshares will be acquired by UPC. In accordance with the terms of the
Agreement, UPC will acquire Merchants Bancshares pursuant to the merger of
Merchants Bancshares with and into Union Planters Holding Corporation, a
wholly-owned subsidiary of UPC organized under the laws of Tennessee (the
"Merger"). Union Planters Holding Corporation will be the surviving entity
resulting from the Merger.

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<PAGE> 148

Upon consummation of the Merger, each share of the $1.00 par value common
stock of Merchants Bancshares ("Merchants Common Stock") (excluding shares as to
which dissenter's rights are exercised or shares held by Merchants Bancshares,
UPC, or any of their respective subsidiaries, in each case other than in a
fiduciary capacity or as a result of debts previously contracted) issued and
outstanding at the effective time of the Merger (the "Effective Time") shall
cease to be outstanding and shall be converted into and exchanged for the right
to receive one share of the $5.00 par value common stock of UPC, together with
associated preferred stock purchase rights (collectively, "UPC Common Stock")
(subject to possible adjustment as described below, the "Exchange Ratio").

The parties anticipate that the Merger will be completed in the second
quarter of 1998.

The Merger is intended to qualify as a reorganization (within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended) and for
financial accounting purposes, be accounted for as a "pooling of interests."

Consummation of the Merger is subject to various conditions, including: (i)
receipt of the approval by the shareholders of Merchants Bancshares of the
Merger; (ii) receipt of the approval by the shareholders of UPC at a meeting of
the shareholders of UPC (the "UPC Shareholders Meeting") of an amendment to the
Restated Charter of Incorporation of UPC to increase the number of authorized
shares of UPC Common Stock to a number sufficient to permit UPC to issue the
shares of UPC Common Stock contemplated by the Merger; (iii) receipt of
regulatory approval from the Board of Governors of the Federal Reserve System
and certain other applicable Regulatory Authorities (as that term is defined in
the Agreement); (iv) receipt of an opinion of legal counsel as to the tax
treatment of certain aspects of the Merger; (v) receipt of a letter from Price
Waterhouse LLP, UPC's independent public accountants, to the effect that the
Merger will qualify for pooling-of-interests accounting treatment; (vi) receipt
by Merchants Bancshares of a fairness opinion from Price Waterhouse LLP,
Merchants Bancshares' financial advisor, dated the date of the proxy statement
to be mailed to Merchants Bancshares' shareholders, concerning the fairness of
the Merger to Merchants Bancshares' shareholders, from a financial point of
view; and (vii) satisfaction of certain other conditions.

The Agreement may be terminated (i) by the mutual consent of Merchants
Bancshares and UPC, (ii) by Merchants Bancshares, if UPC breaches the Agreement
and fails to cure such breach, (iii) by UPC, if Merchants Bancshares breaches
the Agreement and fails to cure such breach, (iv) by either Merchants Bancshares
or UPC, if any consent by a Regulatory Authority required for the consummation
of the Merger is denied and is non-appealable, (v) by either Merchants
Bancshares or UPC, if the shareholders of Merchants Bancshares do not approve
the Merger, (vi) by UPC, if the shareholders of UPC do not approve the amendment
to the Restated Charter of Incorporation of UPC to increase the number of
authorized shares of UPC Common Stock, (vii) by Merchants Bancshares, if the
shareholders of UPC do not approve the amendment to the Restated Charter of
Incorporation of UPC to increase the number of authorized shares of UPC Common
Stock, unless UPC gives notice to Merchants Bancshares of its intent to proceed
with the Merger by acquiring the required shares of UPC Common Stock by some
other means, (viii) by Merchants Bancshares, if the Merger is not consummated by
September 30, 1998, provided that the failure to consummate is not caused by the
willful breach of the Agreement by Merchants Bancshares, (ix) by UPC, if the
Merger is not consummated by September 30, 1998, provided that the failure to
consummate is not caused by the willful breach of the Agreement by UPC,
provided, however, that if the shareholders of UPC do not approve the amendment
to the Restated Charter of Incorporation of UPC to increase the number of
authorized shares of UPC Common Stock, then UPC may not terminate the Agreement
pursuant to this provision, or (x) by Merchants Bancshares if the Average
Closing Price (as that term is defined in the Agreement) of UPC Common Stock (a)
is less than 85% of the Starting Price (as that term is defined in the
Agreement) and (b) reflects a decline, on the Determination Date (as defined in
the Agreement), of more than 15% below a weighted index of the stock prices of a
group of bank holding companies designated in the Agreement, provided, however,
that in the event Merchants Bancshares gives notice of its intention to
terminate the Agreement based on such provision, UPC has the right, within five
(5) days of its receipt of such notice, to elect to adjust the Exchange Ratio in
accordance with the terms of the Agreement, and the Agreement will not
terminate.

Merchants Bancshares will be obligated to pay UPC the sum of $6,200,000 if,
prior to the earlier of (i) March 31, 1999, (ii) the Effective Time, or (iii)
the date on which the Agreement is terminated pursuant to certain sections of
the Agreement, Merchants Bancshares enters into, supports or indicates its
support for a letter of intent, agreement in principle, or definitive agreement
(whether or not considered binding, non-binding, conditional or unconditional)
with

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<PAGE> 149

any third party with respect to a tender offer, exchange offer, merger,
consolidation, share exchange, business combination or similar transaction or
the acquisition by such third party of all or a substantial equity interest in,
or all or a substantial portion of the assets of, Merchants Bancshares or any of
Merchants Bancshares' subsidiaries.

UPC will be obligated to pay Merchants Bancshares the sum of $6,200,000 if
the shareholders of UPC fail to approve an amendment to the Restated Charter of
Incorporation of UPC to increase the number of authorized shares of UPC Common
Stock and (i) UPC fails to give notice to Merchants Bancshares within 30 days
after the UPC Shareholders Meeting that it intends to proceed with the Merger by
acquiring the required shares of UPC Common Stock by some other means, (ii) UPC
gives notice to Merchants Bancshares within 30 days after the UPC Shareholders
Meeting that it does not intend to proceed with the Merger, or (iii) UPC gives
notice to Merchants Bancshares within 30 days after the UPC Shareholders Meeting
that it intends to proceed with the Merger by acquiring the required shares of
UPC Common Stock by some other means, and the Merger is not consummated by the
later of (A) September 30, 1998, or (B) the last day of the calendar month
containing the date which is sixty days after the conclusion of the UPC
Shareholders' Meeting, but no later than October 31, 1998.

The Agreement and the Merger will be submitted for approval at a meeting of
the shareholders of Merchants Bancshares. Prior to the shareholders' meeting,
UPC will file a registration statement with the Securities and Exchange
Commission registering under the Securities Act of 1933, as amended, the shares
of UPC Common Stock to be issued in exchange for the outstanding shares of
Merchants Bancshares Common Stock. Such shares of stock of UPC will be offered
to the Merchants Bancshares shareholders pursuant to a prospectus that also will
serve as a proxy statement for the meeting of the shareholders of Merchants
Bancshares to consider and vote upon the Agreement and the Merger.

ITEM 2. PROPERTIES

The executive offices of Merchants Bancshares are located at 5005 Woodway, Suite
300, Houston, Texas 77056. The building is owned by Merchants Bank and consists
of a three story building with approximately 45,000 square feet. The executive
offices occupy approximately 2,200 square feet, the branch facility utilizes
approximately 8,000 square feet and the remaining space is rentable office
space.

The principal office of the Subsidiary Bank is a leased facility located at 999
North Shepherd in Houston. In addition, the Subsidiary Bank also leases the
banking office located in Atascocita, Texas. The other twelve banking offices
are owned by Merchants Bank.

ITEM 3. LEGAL PROCEEDINGS

Neither Merchants Bancshares nor any of its subsidiaries is a party to any legal
proceedings which, in management's judgment, based upon opinions of legal
counsel, would have a material adverse effect on the consolidated financial
position of Merchants Bancshares and its subsidiaries.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Since the annual shareholders' meeting held on May 20, 1997, no matters have
been submitted to a vote of the shareholders of Merchants Bancshares.

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PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

CAPITAL STOCK

There is no established public trading market for shares of Merchant's Common
Stock. The Board of Directors of Merchants Bancshares has no present intention
to arrange for the listing of the Merchants Common Stock on any stock exchange.
Notwithstanding the foregoing, a limited market for the shares of the Merchants
Common Stock exists, and such shares are traded on a sporadic basis. During
1997, 96,494 shares of the Merchants Common Stock were presented for transfer on
the books of Merchants Bancshares.

The following table sets forth the number of shares of the Merchants Common
Stock presented for transfer on the books of Merchants Bancshares for each
quarterly period within the last two calendar years.

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
First Quarter 31,790 15,249
Second Quarter 24,096 7,388
Third Quarter 28,684 15,342
Fourth Quarter 11,924 13,400
</TABLE>

Because there is no public trading market for the Merchants Common Stock, the
trading price is determined by private negotiations between the buyer and the
seller.

HOLDERS

At March 1, 1998, Merchants Common Stock was owned of record by 959
shareholders. On such date, no shares of Merchants Bancshares' preferred stock
were issued and outstanding.

DIVIDENDS

During 1997 and 1996, the Company paid quarterly dividends totaling
$2,245,000, or $1.15 per common share, and $1,597,000, or $.82 per common share,
respectively.

For information with respect to restrictions on the ability of the Company
and its subsidiaries to declare and pay dividends, see "Item 1. Business -
Supervision and Regulation."

SALES OF UNREGISTERED SECURITIES

On November 25, 1996, the Company sold 10,000 shares of Common Stock to Kim
Wheless at a price of $15.00 per share. On June 3, 1996, the Company issued
1,000 shares of Common Stock to each of Edgar Monteith and Stuart Hellmann in
connection with their service on the Development Board at the Tanglewood branch.
These shares were issued in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering.

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<PAGE> 151

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Loans $ 342,566 $ 294,524 $ 237,564 $ 144,459 $ 127,452
Allowance for loan losses 3,687 2,713 2,411 2,063 1,986
Investment securities 130,629 143,272 152,033 56,852 52,329
Total assets 545,951 494,570 486,649 253,027 242,005
Deposits 484,357 439,043 431,381 226,064 218,942
Long-term debt 0 0 3,083 0 0
Stockholders' equity 57,987 53,511 49,322 25,539 21,932

INCOME INFORMATION:
Interest income $ 39,228 $ 35,339 $ 29,174 $ 16,965 $ 15,801
Interest expense 12,196 11,169 9,577 4,796 4,943
---------- ---------- ---------- ---------- ----------
Net interest income 27,032 24,170 19,597 12,169 10,858
Provision for loan losses 1,740 940 135 50 410
Noninterest income 6,253 5,677 4,655 3,238 2,979
Noninterest expense 22,320 19,888 15,878 10,393 10,494
---------- ---------- ---------- ---------- ----------
Income before income taxes 9,225 9,019 8,239 4,964 2,933
Income tax expense 2,837 2,634 2,332 999 512
---------- ---------- ---------- ---------- ----------

Net income $ 6,388 $ 6,385 $ 5,907 $ 3,965 $ 2,421
========== ========== ========== ========== ==========

PER SHARE DATA:
Weighted average number of shares
of common stock outstanding 1,952,883 1,945,178 1,718,211 1,258,636 1,261,731
========== ========== ========== ========== ==========

Net income per common share $ 3.27 $ 3.28 $ 3.44 $ 3.15 $ 1.92
========== ========== ========== ========== ==========

Dividends per common share $ 1.15 $ .82 $ 0.41 $ 0.20 $ 0.10
========== ========== ========== ========== ==========

Book value per common share $ 29.71 $ 27.37 $ 25.38 $ 20.29 $ 17.39
========== ========== ========== ========== ==========

Return on average assets 1.23% 1.32% 1.47% 1.61% 1.03%
Return on average shareholders'
equity 11.35% 12.42% 14.61% 16.93% 11.56%
Dividend payout ratio 35.17% 25.00% 11.92% 6.35% 5.21%
Average equity to average assets 10.83% 10.60% 10.04% 9.52% 8.89%
Allowance for loan losses as a
percentage of nonperforming
loans 143.74% 88.03% 60.65% 153.6% 122.4%
</TABLE>

(1) The Company's financial statements for the fiscal year ended December 31,
1995 and following reflect the acquisition of Texas Gulf Coast Bancorp,
Inc., which occurred May 1, 1995. See note 2 to the Company's Consolidated
Financial Statements.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This section provides a narrative discussion and analysis of the Company's
results of operations and financial condition. The discussion should be read
with the consolidated financial statements and accompanying notes.

YEAR 2000 COMPLIANCE

The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in a major system failure or miscalculations.

The Company expects its Year 2000 date conversion project to be completed
on a timely basis. During the execution of this project the Company will incur
internal staff costs as well as consulting and other expenses related to
enhancements necessary to prepare the systems for the Year 2000. The expense of
the Year 2000 project as well as the related potential effect on the Company's
earnings is not expected to have a material effect on its financial position or
results of operations.

1997 EARNINGS OVERVIEW

The Company reported net earnings for 1997 of $6.4 million, versus $6.4
million and $5.9 million, respectively, in 1996 and 1995. On a fully diluted
basis, earnings per common share were $3.27 in 1997 compared to $3.28 in 1996
and $3.44 in 1995. Results for 1997 were reduced $1.6 million (approximately
$1.0 million after taxes) by merger-related expenses. The "Merger-Related
Expenses" discussion which follows provides details of the components of these
charges. Excluding the impact of the above described net charges on the
Company's results, earnings for 1997 would have been approximately $7.4 million,
or $3.79 per share on a fully-diluted basis.

The growth in 1997 earnings before the merger-related expenses was due to
the continued growth of net interest income, which increased 12% between 1997
and 1996, and the continued growth of noninterest income, which increased 10%.
Partially offsetting this growth was a higher provision for losses on loans,
which increased $800,000 between 1997 and 1996. The increase in the provision
for losses on loans resulted from the 16% increase in the volume of loans.
Noninterest expenses excluding the merger-related expenses increased only 4% in
1997. The following sections provide a more detailed discussion of the Company's
financial condition and results of operations.

MERGER RELATED EXPENSES

During 1997, the Company incurred certain merger-related expenses totaling
$1.6 million. Approximately $25,000 were expenses related to the preparation of
the due diligence site and approximately $72,000 for legal and professional fees
and expenses. In contemplation of the Merger, additional items were accrued for
and expensed in 1997. These accrued expenses were: (i) $1.2 million for an
investment advisory fee, (ii) $200,000 for a "fairness" opinion letter and (iii)
$35,000 for additional legal and professional fees.

Prior to consummation, certain other items are expected to be accrued and
expensed by the Company. Currently, the Company's pension plan is underfunded by
approximately $800,000 which will be funded prior to closing, as well as a
non-competition fee to be paid to Mr. J. W. Lander, III of $400,000.

The Company will pay Price Waterhouse an investment advisory fee of one
percent (1%) of the total transaction value to be determined at closing. The
Company has accrued for the one percent (1%) fee assuming a $124 million total
transaction value.

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<PAGE> 153

EARNINGS ANALYSIS

NET INTEREST INCOME

Net interest income is the principal source of earnings for the Company.
Net interest income is comprised of interest income and loan related fees less
interest expense. Net interest income is affected by a number of factors
including the level, pricing, mix and maturity of earning assets and
interest-bearing liabilities; interest-rate fluctuations; and asset quality. For
purposes of this discussion, net interest income is presented on a
fully-taxable-equivalent basis (FTE), which restates tax-exempt income to an
amount that would yield the same pre-tax income had the income been subject to
taxation at the federal statutory income tax rate. Reference is made to Table 4
and Table 5, which present the Company's average balance sheet and rate/volume
analysis for each of the three years ended December 31, 1997.

Net interest income (FTE) was $27.5 million in 1997, an increase of $2.8
million, or 11%, over 1996. Net interest income (FTE) in 1995 was $20.0 million.
The growth over the three year period is attributable primarily to the growth of
average earning assets, higher yields on earning assets, and a higher percentage
of loans in earning assets.

The net interest margin (net interest income (FTE) as a percentage of
average earning assets) for 1997 was 5.87%, compared to 5.61% and 5.48%,
respectively, for 1996 and 1995. The interest-rate spread between earning assets
and interest-bearing liabilities increased 23 basis points between 1996 and 1997
to 4.74% following a thirteen-basis-point increase between 1995 and 1996 from
4.38% to 4.51%.

INTEREST INCOME

A breakdown of the components of average earning assets is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Average earning assets
(in millions) $468.3 $439.4 $364.9
Comprised of:
Net loans 67% 59% 55%
Investment securities 28 34 32
Federal funds sold 4 6 8
Other earning assets 1 1 5
</TABLE>

Interest income (FTE) increased $3.9 million in 1997 to $39.7 million. The
increase is attributable to the growth of average earning assets which increased
interest income (FTE) by approximately $3.8 million in 1997. Average earning
assets in 1997 were $468.3 million, an increase of $28.9 million over 1996. Also
contributing to the increase in interest income (FTE) were higher yields on
average earning assets which increased interest income (FTE) approximately
$65,000. Higher loan volumes and yields, net of declines in the other earning
asset categories, accounted for all of the growth. The mix of average earning
assets has changed over the past three years due to a higher percentage of loans
to total earning assets between 1997 and 1995.

The growth of loans, which accounts for the increase in total earning
assets, is due primarily to the branch facilities opened in the latter part of
1996. The average yield on loans increased 4 basis points between 1996 and 1997
to 9.59%. Between 1996 and 1997, average investment securities decreased $17.4
million to $130.4 million and the average yield decreased 3 basis points to
6.23%.

The $6.3 million increase in interest income (FTE) from 1995 to 1996 was
attributable to the growth of average earning assets, primarily loans, partially
offset by $522,000 due to lower yields on earning assets. Average loans
increased $59.6 million between 1995 and 1996 and the average yield decreased
fourteen basis points to 9.55%.

13
<PAGE> 154

INTEREST EXPENSE

A breakdown of the components of average interest-bearing liabilities is as
follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Average interest-bearing liabilities
(in millions) $326.8 $307.3 $257.3
Comprised of:
Deposits:
Interest-bearing demand 35% 34% 32%
Savings 16 16 18
Time 49 50 49
Borrowings 0 0 1

- ---------------------

Rate on average interest-bearing
liabilities 3.73% 3.64% 3.72%
</TABLE>

Interest expense increased $1.0 million, or 9%, in 1997 to $12.2 million.
The increase is attributable to an increase in interest-bearing liabilities
which accounted for $704,000 of the increase, and an increased rate variance of
$323,000. Interest bearing liabilities increased $19.5 million during 1997 to
$326.8 million, primarily due to the growth of interest bearing deposits. The
growth of these deposits was required to fund the growth of average earning
assets. The average rate on interest-bearing liabilities increased nine basis
points.

The increase in interest expense between 1995 and 1996 was attributable to
the growth in interest-bearing liabilities from $257.3 million to $307.3
million, or 19%. This increase was partially offset by an eight-point-basis
decrease in the rates paid on interest-bearing liabilities to 3.64% from 3.72%.

PROVISION FOR LOSSES ON LOANS

The provision for losses on loans increased $800,000 in 1997 to $1.7
million as compared to $940,000 and $135,000, respectively, in 1996 and 1995.
The increases related primarily to the increased volume of loans. For a
discussion of the allowance for losses on loans, net charge-offs and
nonperforming assets, refer to the "Allowance for Losses on Loans" and
"Nonperforming Assets" sections which follow.

Management does not expect the provision for losses on loans to increase at
the same rate in 1998 as it did in 1997. In 1997, the provision for losses on
loans was 54 basis points of average loans compared to 36 basis points and 7
basis points, respectively, in 1996 and 1995. There are a number of factors that
impact the level of the provision for losses on loans, some of which are beyond
management's control, such as current and anticipated economic conditions and
the related impact on specific borrowers, the level of personal bankruptcies,
the level of nonperforming assets and changes in the nature of the loan
portfolio.

NONINTEREST INCOME

Noninterest income was $6.2 million in 1997, an increase of 10% over $5.7
million for 1996. Noninterest income was $4.7 million in 1995. Service charges
on deposit accounts, the largest component of noninterest income, decreased by
4% in 1997 as compared to an increase of 28% in 1996. The components of the
other service charges and fees consist of miscellaneous fees such as collection
fees, credit card fees, safe deposit rentals, check printing income and wire
transfer fees. These fees correlate to the level of transactions in each of the
referenced categories. In addition, accounting fees and commissions earned by
FMG are included in the total and account for the majority of the increase
during 1997.

14
<PAGE> 155

Other operating income increased $262,000, or 27%, from 1996 to 1997. The
majority of other operating income is derived from the operations of the
mortgage division and includes origination fees as well as fees charged for
servicing the underlying mortgages.

NONINTEREST EXPENSE

Noninterest expense was $22.3 million in 1997, an increase of $2.4 million
from 1996. Noninterest expense for 1995 was $15.9 million. In 1997, the largest
component of the increase was merger-related expenses (see Item 7. "Merger
Related Expenses"), which impacted noninterest expense by approximately $1.6
million. The merger-related charges were fees for legal, accounting and
financial advisory services.

Salaries and employee benefits expense represents the largest component of
noninterest expense. In 1997, salaries and employee benefits expense increased
$177,000, or 2%, to $11.3 million. This compared to $11.1 million in 1996 and
$8.3 million in 1995. The merger of the former data processing subsidiary into
Merchants Bank was the primary cause for the increase in salaries and employee
benefits expense from 1995 to 1996. At December 31, 1997, the Company had 322
full-time equivalent employees compared to 331 at December 31, 1996.

The Company monitors its expense levels using the expense ratio and
utilizes the efficiency ratio as a measure of its success in increasing
revenues, while controlling expenses. The expense ratio (noninterest expense
minus noninterest income, excluding significant nonrecurring revenues and
expenses and investment securities gains and losses divided by average assets)
was 2.79% in 1997 compared to 2.93% for 1996. The efficiency ratio, which is
calculated excluding the same items, divides noninterest expense by net interest
income (FTE) plus noninterest income. The efficiency ratio was 61.6% in 1997
compared to 65.6% in 1996.

TAXES

Applicable income taxes consist of provisions for federal income taxes,
totaling $2.8 million in 1997, an effective rate of 30.7%. This compares to
applicable income taxes of $2.6 million in 1996 and $2.3 million in 1995. These
amounts equate to effective tax rates of 29.2% and 28.3%, respectively, in 1996
and 1995. The variances from the statutory rate (34%) are attributable to
tax-exempt income from investment securities and loans. For additional
information regarding income taxes, see Note 10 to the consolidated financial
statements.

15
<PAGE> 156

FINANCIAL CONDITION ANALYSIS

At December 31, 1997, the Company reported $546.0 million of total assets
compared to $494.6 million at December 31, 1996. Average assets were $519.6
million for 1997, compared to $484.9 million and $402.6 million, respectively,
for 1996 and 1995.

INVESTMENT SECURITIES

The Company's investment securities portfolio of $130.6 million at December
31, 1997, consisted entirely of securities "available for sale" which are
carried on the consolidated balance sheet at fair value. These securities had
net unrealized gains at year end of $467,000. At December 31, 1996, the
investment portfolio was $143.2 million and consisted of $123.1 million of
available for sale securities and $20.2 million of held to maturity securities
which were carried on the consolidated balance sheet at amortized cost. The
decrease in the amount of securities in 1997 was due to the additional funding
required to support significant loan growth during the year. Note 4 to the
consolidated financial statements and Table 14 provide the composition of the
portfolio at December 31, 1997.

U.S. Treasury and U.S. Government agency obligations represented
approximately 79% of the investment securities portfolio at December 31, 1997.
The Company has some credit risk in the investment securities portfolio;
however, management does not consider that risk to be significant and does not
believe that cash flows will be significantly impacted.

At December 31, 1997, the Company did not hold any trading securities (as
currently defined by regulatory agencies).

LOANS

At December 31, 1997, loans, net of unearned income, were $342.6 million
compared to $294.5 million at year end 1996. Average loans for 1997 were $317.1
million compared to $260.8 million and $201.2 million, respectively, for 1996
and 1995. The Company's loan to deposit ratio was 71% at December 31,1997,
compared to 67% at the end of 1996 and 55% at the end of 1995. For 1997, loans
were 67% of the Company's average earning assets compared to 59% and 55%,
respectively, for 1996 and 1995. Table 9 provides the composition of the loan
portfolio for each of the last five years.

The largest segment of the Company's loan portfolio is real estate related
loans, which totaled $216 million, or 63% of the loan portfolio at December 31,
1997, an increase of $43.1 million over December 31, 1996. This segment is
expected to continue to be the largest segment and is expected to grow gradually
unless economic conditions change significantly.

Consumer loans, which constituted 17% of the loan portfolio at December 31,
1997, include loans to individuals for household and other consumer purposes.
Consumer loans decreased $5.0 million to $58.8 million from $63.8 million
reported at year end 1996. In 1997, the Company discontinued its practice of
purchasing indirect automobile loans, which accounts for the decrease in
consumer loans.

Commercial and industrial loans increased $10.1 million to $67.0 million at
December 31, 1997, as compared to $56.9 million at December 31, 1996. Commercial
and industrial loans accounted for 20% of the loan portfolio at December 31,
1997.

The growth of the loan portfolio in 1997 is primarily attributable to the
two branch facilities opened in the latter part of 1996.

16
<PAGE> 157

ALLOWANCE FOR LOSSES ON LOANS

The allowance for losses on loans at December 31, 1997 was $3.7 million, or
1.1% of loans, compared to $2.7 million, or .9%, at December 31, 1996.
Management's policy is to maintain the allowance at a level deemed sufficient to
absorb estimated losses in the loan portfolio. The allowance is reviewed monthly
in accordance with the methodology described in Note 1 to the consolidated
financial statements. Tables 10 and 12 provide detailed information regarding
the allowance for each of the last five years.

The provision for losses on loans charged against earnings was $1.7 million
in 1997, $940,000 in 1996 and $135,000 in 1995. Net charge-offs increased
$128,000 to $766,000, or .24% of average loans, for 1997. This compares to .24%
and .26%, respectively, for 1996 and 1995. The increases relate primarily to the
expanding loan portfolio.

To a very large extent, the Company's loan portfolio remains secured and
current reappraisals of collateral value have been received and undertaken in an
effort to further assess loss potential. Management has closely scrutinized its
loss potential on its nonperforming assets, as well as on the entire loan
portfolio, and has, to the best of its knowledge and belief, reserved for losses
accordingly.

LOAN CONCENTRATIONS

Management believes that the loan portfolio is adequately diversified. The
loan portfolio is spread over nine communities in three counties. At December
31, 1997, the Company had no concentrations of loans to a single industry
equaling 10% or more of total loans.

NONPERFORMING ASSETS

Nonperforming assets consist of nonaccrual loans, loans 90 days or more
past due and still accruing interest, and foreclosed properties. The policy of
Merchants Bank is to continue to accrue interest on loans which are 90 days or
more past due if periodic payments are being made on the loans. If a loan is
classified as past due and payments then resume on the loan, it continues to be
classified as past due until all past due amounts are paid. As shown in Table
11, nonperforming assets totaled $3.7 million at year end 1997, compared to $4.0
million at December 31, 1996. The year end 1997 total is comprised of $2.0
million of nonaccrual loans, which decreased $175,000 from December 31, 1996,
loans past due 90 days or more and still accruing interest of $611,000 and
foreclosed properties of $1.1 million. As a percentage of loans, nonperforming
assets were 1.1% of loans and foreclosed properties at December 31, 1997,
compared to 1.3% at December 31, 1996. In management's opinion, asset-quality
ratios remain at acceptable levels. The Company had no material renegotiated or
troubled debt restructuring loans during the years 1993 through 1997.

A breakdown of nonperforming assets is as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Nonaccrual loans $1,954 $2,129
Loans 90 days or more past due 611 953
------ ------
Nonperforming loans 2,565 3,082
Foreclosed properties 1,132 890
------ ------

Total $3,697 $3,972
====== ======
</TABLE>

The Company included in reported income for 1997, $68,336 of interest
received on nonaccrual loans. Had these loans paid interest at their original
rates, the Company would have reported $405,054 of interest on these nonaccrual
loans.

17
<PAGE> 158

OTHER EARNING ASSETS

Other earning assets include interest bearing deposits at financial
institutions and federal funds sold. At December 31, 1997, these assets totaled
$16.0 million, 3.3% of the Company's earning assets. This compares to $7.4
million, or 1.6% of earning assets at December 31, 1996.

The increase in other earning assets from 1996 is attributable to a $9.7
million increase in federal funds sold. This increase was due to excess
liquidity being needed to fund other earning assets, primarily loans.

DEPOSITS

The Company's deposit base is its primary source of liquidity and consists
of deposits from the communities served by the Company. Tables 4 and 7 present
the components of the Company's average deposits. Deposits were $484.4 million
at December 31, 1997 and averaged $460.8 million for the year.

The composition of average deposits over the last three years was as
follows:

<TABLE>
<CAPTION>
TYPE OF DEPOSITS 1997 1996 1995
---------------- ---- ---- ----
<S> <C> <C> <C>
Noninterest-bearing deposits 29% 29% 29%
Money market deposits 25% 24% 23%
Savings deposits 11% 12% 13%
Other time deposits 35% 35% 35%
</TABLE>

CAPITAL AND DIVIDENDS

Stockholders' equity increased $4.5 million in 1997 to $58.0 million, or
10.6% of total assets at December 31, 1997. This compares to shareholders'
equity of $53.5 million, or 10.8% of total assets at December 31, 1996 and $49.3
million, or 10.1% of total assets at December 31, 1995. The source of growth in
shareholders' equity in 1997 was the retention of net earnings of $4.1 million,
partially increased by the net change in unrealized gains on available for sale
securities of $386,000. The consolidated statement of changes in shareholders'
equity details the changes in equity for the last three years.

The fair-value adjustment of the Company's available for sale securities
portfolio, which is recorded as a component of shareholders' equity, may change
significantly as market conditions change. At December 31, 1995, the adjustment
resulted in an increase of shareholders' equity of $922,000, compared to a
decrease of $779,000 at December 31, 1996 and an increase of $386,000 at
December 31, 1997. Further volatility in shareholders' equity may occur in the
future as market conditions change. This adjustment is excluded from the
calculation of regulatory capital.

The Company and its subsidiaries must comply with the capital guidelines
established by the regulatory agencies that supervise their operations. These
agencies have adopted a system to monitor the capital adequacy of all insured
financial institutions. The system includes ratios based on the risk-weighting
of on-and off-balance-sheet transactions. If an institution's ratios fall below
certain levels, it becomes subject to regulatory action. The system adopted by
the agencies classifies institutions into five capital categories ranging from
well-capitalized to critically undercapitalized. The well-capitalized category
requires a leverage ratio of at least 5%, a Tier 1 regulatory capital to
risk-weighted assets ratio of at least 6%, and total regulatory capital to
risk-weighted assets ratio of at least 8%. Table 15 presents the Company's
regulatory capital ratios for the last three years and Note 15 to the
consolidated financial statements presents a comparison of the Company's and
Subsidiary Bank's capital levels and ratios to the minimums for an institution
to be considered well-capitalized and adequately capitalized. At December 31,
1997, the Company and Merchants Bank met the requirements for well-capitalized
institutions.

At December 31, 1997, the Company's leverage ratio was 10.82% and its Tier
1 and total regulatory capital to risk-weighted assets capital ratios were
15.76% and 16.79%, respectively, which are well above the regulatory minimums.
These ratios compare to 10.76%, 16.70% and 17.56%, respectively, at December 31,
1996.

18
<PAGE> 159

The Company declared cash dividends on its Common Stock of $2.245 million
in 1997 and $1.597 million in 1996. On a per share basis, this represented a 40%
increase to $1.15 per share for 1997 compared to $.82 per share in 1996.

The primary source for payment of dividends by the Company to its
shareholders is dividends received from its subsidiaries. Payment of dividends
by the Company's banking subsidiary is subject to various statutory limitations
and applicable banking laws.

ASSET/LIABILITY MANAGEMENT

The Company's assets and liabilities are principally financial in nature
and the resulting earnings thereon, primarily net interest income, are subject
to changes as a result of changes in market interest rates and the mix of the
various assets and liabilities. Interest rates in the financial markets affect
the Company's decisions on pricing its assets and liabilities which impacts net
interest income, the Company's primary cash flow stream. As a result, a
substantial part of the Company's risk-management activities are devoted to
managing interest-rate risk. For additional information, see "Item 7A.
Quantitative and Qualitative Disclosures about Market Risk."

LIQUIDITY

Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate the Company on an ongoing
basis. In the past, the Company's liquidity needs have primarily been met by
growth in core deposits. Although access to purchased funds from correspondent
banks is available, the Company does not generally rely on these external
funding sources. Generally, the cash and federal funds sold position,
supplemented by amortizing investment and loan portfolios, have created an
adequate liquidity position.

A financial service company's activities consist primarily of financing and
investing activities. These activities result in large cash flows. The
Consolidated Statement of Cash Flows indicates the sources of these cash flows.

CAPITAL COMMITMENTS

Merchants Bancshares believes that it has sufficient capital and financial
resources to meet its current and anticipated capital commitments.

CONDENSED STATEMENTS OF EARNINGS

The following is a comparison of Merchants Bancshares' condensed statements
of earnings for the most recent five-year period (dollars in thousands).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest income (2) $39,228 $35,339 $29,174 $16,965 $15,801
Interest expense 12,196 11,169 9,577 4,796 4,943
------- ------- ------- ------- -------
Net interest income (2) 27,032 24,170 19,597 12,169 10,858
Provision for loan losses 1,740 940 135 50 410
Noninterest income 6,253 5,677 4,655 3,238 2,979
Noninterest expense 22,320 19,888 15,878 10,393 10,494
------- ------- ------- ------- -------
Earnings before income
taxes 9,225 9,019 8,239 4,964 2,933
Income tax expense 2,837 2,634 2,333 999 512
------- ------- ------- ------- -------

Net earnings $ 6,388 $ 6,385 $ 5,906 $ 3,965 $ 2,421
======= ======= ======= ======= =======
</TABLE>

19
<PAGE> 160

(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.

(2) For the years ended December 31, 1997, 1996, 1995, 1994 and 1993, interest
income would have been $39,668, $35,820, $29,565, $17,156, and $16,071,
respectively, and net interest income would have been $27,472, $24,651,
$19,988, $12,360, and $11,128, respectively, if all such amounts were shown
using a comparable fully taxable equivalent basis (using a tax rate of
34%).

CONDENSED AVERAGE BALANCE SHEETS

Although year-end statistics present general trends, the daily average
balance sheets are more indicative of Merchants Bancshares' levels of activity
throughout the years indicated and less subject to day-to-day business activity
fluctuations. The following schedule sets forth a comparison of the most recent
five years' consolidated daily average balance sheets for Merchants Bancshares.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 28,599 $ 24,873 $ 20,745 $ 12,445 $ 12,123
Loans, net 317,058 260,794 201,248 135,077 123,605
Interest-bearing deposits 1,113 6,291 1,419 1,372 1,573
Investment securities:
Taxable 113,276 129,561 103,893 52,704 42,795
Non-taxable 17,109 18,212 14,272 5,494 7,600
-------- -------- -------- -------- --------
Total Securities 130,385 147,773 118,165 58,198 50,395
-------- -------- -------- -------- --------
Federal funds sold and interest
bearing deposits with Federal
Home Loan Bank 19,717 24,573 44,066 30,304 36,420
Other assets 22,714 20,606 17,001 8,633 11,509
-------- -------- -------- -------- --------
Total Assets $519,586 $484,910 $402,644 $246,029 $235,625
======== ======== ======== ======== ========

Liabilities and Stockholders' Equity:
Deposits
Noninterest bearing demand $133,994 $123,590 $101,883 $ 65,909 $ 59,577
Interest bearing demand 112,859 103,102 83,104 46,103 46,643
Savings 51,638 51,862 46,549 29,097 28,035
Time 162,282 152,201 125,123 79,786 78,712
-------- -------- -------- -------- --------
Total Deposits 460,773 430,755 356,659 220,895 212,967
-------- -------- -------- -------- --------

Borrowings 0 92 2,536 0 321
Other liabilities 2,548 2,646 3,011 1,716 1,394
-------- -------- -------- -------- --------
Total Liabilities 463,321 433,493 362,206 222,611 214,682
-------- -------- -------- -------- --------

Stockholders' Equity 56,265 51,417 40,438 23,418 20,943
-------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity $519,586 $484,910 $402,644 $246,029 $235,625
======== ======== ======== ======== ========
</TABLE>

20
<PAGE> 161

TABLE 1. SUMMARY OF CONSOLIDATED RESULTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
(IN THOUSANDS)
1997(1) 1996(1) 1995(1) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income(2) $ 39,228 $ 35,339 $ 29,174 $ 16,965 $ 15,801
Interest expense 12,196 11,169 9,577 4,796 4,943
-------- -------- -------- -------- --------
Net interest income(2) 27,032 24,170 19,597 12,169 10,858
Provision for losses on loans (1,740) (940) (135) (50) (410)
-------- -------- -------- -------- --------
Net interest income after
provision for losses on loans 25,292 23,230 19,462 12,119 10,448
Noninterest income
Service charges on deposit accounts 4,240 4,436 3,472 2,353 2,387
Other service charges and fees 774 280 256 222 200
Other operating income 1,224 962 927 663 363
-------- -------- -------- -------- --------
Total noninterest income 6,238 5,678 4,655 3,238 2,950
-------- -------- -------- -------- --------
Noninterest expense
Salaries and benefits 11,294 11,117 8,317 4,825 4,770
Occupancy expense 2,253 1,915 1,666 1,154 920
Equipment expense 1,733 1,573 824 530 479
Other operating expense 5,469 5,283 5,071 3,884 4,325
-------- -------- -------- -------- --------
Total noninterest expense 20,749 19,888 15,878 10,393 10,494
-------- -------- -------- -------- --------
Earnings before other operating
items and income taxes 10,781 9,020 8,239 4,964 2,904
Other operating items
Investment securities gains (losses) 15 (1) -- -- 29
Merger-related expenses (1,571) -- -- -- --
-------- -------- -------- -------- --------

Earnings before income taxes 9,225 9,019 8,239 4,964 2,933
Applicable income taxes 2,837 2,634 2,333 999 512
-------- -------- -------- -------- --------
Net earnings $ 6,388 $ 6,385 $ 5,906 $ 3,965 $ 2,421
======== ======== ======== ======== ========
</TABLE>

(2) For the years ended December 31, 1997, 1996, 1995, 1994 and 1993, interest
income would have been $39,668, $35,820, $29,565, $17,156 and $16,071,
respectively, and net interest income would have been $27,472, $24,651,
$19,988, $12,360, and $11,128, respectively, if all such amounts were shown
using a comparable fully taxable equivalent basis (using a tax rate of
34%).

21
<PAGE> 162

TABLE 2. CONTRIBUTION TO FULLY DILUTED EARNINGS PER SHARE

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
(IN THOUSANDS)
1997(1) 1996(1) 1995(1) 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net interest income $ 13.84 $ 12.42 $ 11.40 $ 9.67 $ 8.60
Provision for losses on loans (.89) (.48) (.08) (.04) (.32)
--------- --------- --------- --------- ---------
Net interest income after provision
for losses on loans 12.95 11.94 11.32 9.63 8.28
Noninterest income
Service charges on deposit accounts 2.17 2.28 2.02 1.87 1.89
Other service charges and fees .40 .14 .15 .18 .16
Other operating income .62 .50 .54 .52 .29
--------- --------- --------- --------- ---------
Total noninterest income 3.19 2.92 2.71 2.57 2.34
--------- --------- --------- --------- ---------
Noninterest expense
Salaries and benefits (5.78) (5.72) (4.84) (3.83) (3.78)
Occupancy expense (1.15) (.99) (.97) (.92) (.73)
Equipment expense (.89) (.81) (.48) (.42) (.38)
Other expense (3.60) (2.71) (2.95) (3.08) (3.43)
--------- --------- --------- --------- ---------
Total noninterest expense (11.42) (10.23) (9.24) (8.25) (8.32)
--------- --------- --------- --------- ---------

Earnings before income taxes 4.72 4.63 4.79 3.95 2.30
Applicable income taxes (1.45) (1.35) (1.35) (.80) (.38)
--------- --------- --------- --------- ---------

Net earnings $ 3.27 $ 3.28 $ 3.44 $ 3.15 $ 1.92
========= ========= ========= ========= =========

Average fully diluted shares (in thousands) 1,953 1,945 1,718 1,259 1,262
========= ========= ========= ========= =========
</TABLE>

22
<PAGE> 163

TABLE 3. BALANCE SHEET COMPOSITION - PERCENTAGE OF TOTAL ASSETS

<TABLE>
<CAPTION>
1997 AVERAGE BALANCES
------ ----------------
<S> <C> <C>
Investment securities:
Taxable 21.80% $ 113,276,267
Non-taxable 3.29% 17,109,101
Due from CD's 0.21% 1,112,500
Federal Funds Sold 3.80% 19,716,712
Net loans 61.02% 317,058,204
------ ----------------

Total interest earning assets 90.12% 468,272,784

Cash and due from banks 5.51% 28,598,860

Premises, equipment and other 4.37% 22,714,052
------ ----------------

Total Assets 100.00% $ 519,585,696
====== ================

PERCENTAGE OF TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits - interest bearing 62.89% $ 326,778,538
------ ---------------

Total interest bearing liabilities 62.89% 326,778,538

Deposits - non-interest bearing 25.79% 133,994,021
Other liabilities 0.49% 2,548,591
Stockholders' Equity 10.83% 56,264,546
------ ---------------

Total Liabilities and Stockholders' Equity 100.00% $ 519,585,696
====== ===============
</TABLE>

23
<PAGE> 164

TABLE 4. AVERAGE BALANCE AND AVERAGE INTEREST RATES
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------- ---------------------------------------
AVG. BAL. INTEREST AVG. RATE AVG. BAL. INTEREST AVG. RATE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable $ 113,276 $ 6,829 6.03% $ 129,561 $ 7,841 6.05%
Non-taxable 17,109 1,294 7.56% 18,212 1,415 7.77%
Due from CD's 1,113 60 5.39% 1,978 107 5.41%
Interest bearing deposits with banks 0 0 0.00% 4,312 210 4.87%
Federal Funds sold 19,717 1,084 5.50% 24,573 1,332 5.42%
Net loans 317,058 30,401 9.59% 260,795 24,915 9.55%
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 468,273 39,668 8.47% 439,431 35,820 8.15%
----------- ----------- ----------- ----------- ----------- -----------

Cash and due from banks 28,599 24,873
Premises, equipment and other 22,714 20,606
----------- -----------

$ 519,586 $ 484,910
=========== ===========

Deposits:
Demand - interest bearing $ 112,859 2,942 2.61% $ 103,102 $ 2,594 2.52%
Savings 51,638 1,426 2.76% 51,862 1,427 2.75%
Time 162,282 7,828 4.82% 152,201 7,140 4.69%
Borrowings 0 0 0.00% 92 8 8.70%
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 326,779 12,196 3.73% 307,257 11,169 3.64%
----------- ----------- ----------- ----------- ----------- -----------

Deposits - non-interest bearing 133,994 123,590
Other liabilities 2,548 2,646
Shareholders' equity 56,265 51,417
----------- -----------

$ 519,586 $ 484,910
=========== ===========
Net interest earnings $ 27,472 $ 24,651
=========== ===========

Net yield on interest earning assets 5.87% 5.61%
=========== ===========
Interest rate spread 4.74% 4.51%
=========== ===========

<CAPTION>
DECEMBER 31, 1995
---------------------------------------
AVG. BAL. INTEREST AVG. RATE
----------- ----------- -----------
<S> <C> <C> <C>
Investment Securities:
Taxable $ 103,893 $ 6,266 6.03%
Non-taxable 14,272 1,149 8.05%
Due from CD's 1,419 76 5.36%
Interest bearing deposits with banks 13,515 793 5.87%
Federal Funds sold 30,551 1,780 5.83%
Net loans 201,248 19,501 9.69%
----------- ----------- -----------
Total interest earning assets 364,898 29,565 8.10%
----------- ----------- -----------

Cash and due from banks 20,745
Premises, equipment and other 17,001
-----------

$ 402,644
===========

Deposits:
Demand - interest bearing $ 83,104 $ 2,031 2.44%
Savings 46,549 1,336 2.87%
Time 125,123 5,990 4.79%
Borrowings 2,536 220 8.68%
----------- ----------- -----------
Total interest bearing liabilities 257,312 9,577 3.72%
----------- ----------- -----------

Deposits - non-interest bearing 101,883
Other liabilities 3,011
Shareholders' equity 40,438
-----------

$ 402,644
===========
Net interest earnings $ 19,988
===========

Net yield on interest earning assets 5.48%
===========
Interest rate spread 4.38%
===========
</TABLE>

Note: Average balances are based upon daily balances. The interest on
non-taxable securities has been calculated on a fully taxable equivalent
basis incorporating a tax rate of 34%. Non-accruing loans have been
included in assets for these computations, thereby reducing yields on
these investments.

24
<PAGE> 165

TABLE 5. ANALYSIS OF VOLUME AND RATE CHANGES
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
CHANGES FROM CHANGES IN CHANGES IN CHANGES FROM CHANGES IN CHANGES IN
PRIOR YEAR VOLUME RATES PRIOR YEAR VOLUME RATES
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable securities $ (1,012) $ (986) $ (26) $ 1,575 $ 1,548 $ 27
Non-taxable securities (121) (86) (35) 266 317 (51)
Due from CD's (47) (47) (0) 31 30 1
Federal funds sold (248) (263) 15 (448) (348) (100)
Deposits with financial institutions (210) (210) 0 (583) (540) (43)
Loans 5,486 5,375 111 5,414 5,770 (356)
------------ ------------ ------------ ------------ ------------ ------------

Total interest income 3,848 3,783 65 6,255 6,777 (522)
------------ ------------ ------------ ------------ ------------ ------------
Interest expense:
Deposits:
Demand - interest bearing 348 245 103 563 489 74
Savings (1) (6) 5 91 152 (61)
Time 688 473 215 1,150 1,296 (146)
Borrowings (8) (8) 0 (212) (212) 0
------------ ------------ ------------ ------------ ------------ ------------

Total interest expense 1,027 704 323 1,592 1,725 (133)
------------ ------------ ------------ ------------ ------------ ------------

Net interest income $ 2,821 $ 3,079 $ (258) $ 4,663 $ 5,052 $ (389)
============ ============ ============ ============ ============ ============
</TABLE>

The rate/volume variance has been allocated to the changes in rates. Non-accrual
loans are included in the calculations made above. The interest on non-taxable
investment income has been calculated on a fully taxable equivalent basis
incorporating an effective tax rate of 34%.

25
<PAGE> 166

TABLE 6. NONINTEREST INCOME AND NONINTEREST EXPENSE

NONINTEREST INCOME

<TABLE>
<CAPTION>
1997 1996
BALANCE BALANCE $ CHANGE % CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 4,240 $ 4,436 $ (196) (4.42%)
Other service charges and fees 774 281 493 175.44%
Other operating income 1,224 962 262 27.24%
Securities transactions 15 (2) 17 0
------- ------- ------- ------

Total $ 6,253 $ 5,677 $ 576 10.15%
======= ======= ======= ======
</TABLE>

NONINTEREST EXPENSE

<TABLE>
<CAPTION>
1997 1996
BALANCE BALANCE $ CHANGE % CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $11,294 $11,117 $ 177 1.59%
Occupancy expense 2,253 1,915 338 17.65%
Furniture and equipment expense 1,733 1,573 160 10.17%
Other real estate expense 210 283 (73) (25.80)%
Merger related expense 1,571 0 1,571 100.00%
Other operating expense 5,259 5,000 259 5.18%
------- ------- ------- ------

$22,320 $19,888 $ 2,432 12.23%
======= ======= ======= ======
</TABLE>

TABLE 7. AVERAGE DEPOSITS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
(IN THOUSANDS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing demand $133,994 $123,590 $101,883 $ 65,909 $ 59,577
Interest-bearing demand(1) 112,859 103,102 83,104 46,103 46,643
Savings(1) 51,638 51,862 46,549 29,097 28,035
Time(1) 162,282 152,201 125,123 79,786 78,712
</TABLE>

(1) Table 4 presents the average rate paid on these deposit categories for each
of the three years ended December 31, 1997.

TABLE 8. ANALYSIS OF CERTIFICATES OF DEPOSIT EXCEEDING $100,000

<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
MATURITY (IN THOUSANDS)
-------- --------------------
<S> <C>
Three (3) months or less $ 23,540
Over three (3) months through six (6) months 10,448
Over six (6) months through twelve (12) months 12,196
Over twelve (12) months 2,588
---------

$ 48,772
=========
</TABLE>

26
<PAGE> 167

TABLE 9. COMPOSITION OF THE LOAN PORTFOLIO

LOAN PORTFOLIO

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 67,013 $ 56,935 $ 44,651 $ 28,593 $ 27,935
Real estate - construction 10,354 15,920 8,626 7,205 2,997
Real estate - other 205,163 156,472 123,130 80,472 68,837
Installment 58,774 63,833 59,765 27,786 27,428
Other 1,262 1,364 1,392 403 255
-------- -------- -------- -------- --------
Total loans, net of
unearned discount $342,566 $294,524 $237,564 $144,459 $127,452
======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
1 YEAR 1 - 5 AFTER
DUE IN: OR LESS YEARS 5 YEARS
------- ------- -------
<S> <C> <C> <C>
Commercial and industrial loans $34,799 $27,117 $ 5,097
Real estate construction 6,320 3,978 56
------- ------- -------

Total $41,119 $31,095 $ 5,153
======= ======= =======

Loans due after 1 year which have
Predetermined interest rates $22,378
Floating or adjustable rates 13,870
-------

Total $36,248
=======
</TABLE>

LOAN PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Commercial and industrial 19.6% 19.3% 18.8%
Real estate - construction 3.0% 5.4% 3.6%
Real estate - other 59.9% 53.1% 51.8%
Individuals for household and
other consumer purposes 17.2% 21.7% 25.2%
Other .3% .5% .6%
</TABLE>

27
<PAGE> 168

TABLE 10. ALLOCATION OF THE ALLOWANCE FOR LOSSES ON LOANS BY CATEGORY OF LOANS
AND THE PERCENTAGE OF LOANS BY CATEGORY TO TOTAL LOANS OUTSTANDING

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $1,290 19.6% $1,350 19.3% $1,621 18.8% $ 826 19.8% $1,010 21.9%
Real estate -
construction * 3.0% * 5.4% * 3.6% * 5.0% * 2.4%
Real estate -
other 918 59.9% 139 53.1% 50 51.8% 751 55.7% 277 54.0%
Installment 1,479 17.2% 1,224 21.7% 740 25.2% 486 19.2% 699 21.5%
Other * .3% * .5% * .6% * .3% * .2%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------

Total $3,687 100.0% $2,713 100.0% $2,411 100.0% $2,063 100.0% $1,986 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

* Less than $1,000

TABLE 11. NONACCRUAL AND PAST DUE LOANS AND FORECLOSED PROPERTIES

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,954 $ 2,129 $ 3,125 $ 1,215 $ 1,455
Past due 90 days or more 611 953 850 128 168
---------- ---------- ---------- ---------- ----------

Total non-performing
loans 2,565 3,082 3,975 1,343 1,623

Other real estate owned 1,132 890 1,697 1,461 1,578
---------- ---------- ---------- ---------- ----------

Total non-performing
assets $ 3,697 $ 3,972 $ 5,672 $ 2,804 $ 3,201
========== ========== ========== ========== ==========
</TABLE>

28
<PAGE> 169

TABLE 12. ALLOWANCE FOR LOSSES ON LOANS

<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 317,058 $ 260,795 $ 201,248 $ 135,077 $ 125,476
========= ========= ========= ========= =========

Loans outstanding at year-end $ 342,566 $ 294,524 $ 237,564 $ 144,459 $ 127,452
========= ========= ========= ========= =========

Allowance at beginning of period $ 2,713 $ 2,411 $ 2,063 $ 1,986 $ 1,725
--------- --------- --------- --------- ---------

Allowance of acquired banks 0 0 738 0 0
Provision charged to expense 1,740 940 135 50 410
--------- --------- --------- --------- ---------

Loans charged off:
Commercial and industrial (329) (403) (499) (175) (197)
Real estate - construction 0 0 0 0 0
Real estate - other (208) (41) (14) (159) (54)
Installment (420) (347) (211) (103) (136)
Other (16) (9) (18) 0 0
--------- --------- --------- --------- ---------
Total (973) (800) (742) (437) (387)
--------- --------- --------- --------- ---------

Loans recovered:
Commercial and industrial 61 85 101 155 150
Real estate - construction 0 0 0 0 0
Real estate - other 17 19 64 296 44
Installment 126 52 50 13 44
Other 3 6 2 0 0
--------- --------- --------- --------- ---------
Total 207 162 217 464 238
--------- --------- --------- --------- ---------
Net loans (charged-off) recovered (766) (638) (525) 27 (149)
--------- --------- --------- --------- ---------
Allowance at end of period $ 3,687 $ 2,713 $ 2,411 $ 2,063 $ 1,986
========= ========= ========= ========= =========
Ratios:
Allowance as a percent of loans
outstanding at year-end 1.08% .92% 1.01% 1.43% 1.56%
Allowance as a percent of
average loans 1.16% 1.04% 1.20% 1.53% 1.58%
Net loans charged-off (recovered)
as a percent of average loans
outstanding .24% .24% .26% (.02%) 0.12%
Allowance as a percentage
of nonperforming loans 143.74% 88.03% 60.65% 153.60% 122.40%

Nonperforming loans as a percentage
of loans .75% 1.05% 1.67% .93% 1.27%

Nonperforming assets as a percentage
of loans plus foreclosed properties 1.08% 1.34% 2.39% 1.94% 2.51%

Loans 90 days or more past due and
not on nonaccrual status as a
percentage of loans .18% .32% .36% .09% .13%
</TABLE>

29
<PAGE> 170

TABLE 13. RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
RATE SENSITIVE WITHIN
--------------------------------------------------- NONRATE
30-DAY 90-DAY 180-DAY ONE YEAR TOTAL SENSITIVE TOTAL
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned
Discount $ 97,027 $ 13,496 $ 21,912 $ 34,116 $ 166,551 $ 176,015 $ 342,566
Investment Securities 9,784 10,428 11,275 16,633 48,120 82,509 130,629
Federal Funds Sold 16,050 0 0 0 16,050 0 16,050
--------- --------- --------- --------- --------- --------- ---------
Total Earning Assets 122,861 23,924 33,187 50,749 230,721 258,524 489,245
--------- --------- --------- --------- --------- --------- ---------
Interest Bearing Liabilities:
Interest Bearing Deposits 205,167 33,878 37,102 40,882 317,029 19,578 336,607
--------- --------- --------- --------- --------- --------- ---------
Total Interest Bearing
Liabilities 205,167 33,878 37,102 40,882 317,029 19,578 336,607
--------- --------- --------- --------- --------- --------- ---------
Interest Sensitivity Gap $ (82,306) $ (9,954) $ (3,915) $ 9,867 $ (86,308)
========= ========= ========= ========= =========
Ratio of Earning Assets to
Interest Bearing Liabilities 59.88% 70.62% 89.45% 124.14% 72.78%
========= ========= ========= ========= =========
</TABLE>

TABLE 14. INVESTMENT SECURITIES AND OTHER EARNING ASSETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
U. S. Treasury & Agencies $103,857 $117,937 $129,110
States and Political Subdivisions 20,209 20,196 21,382
Other 6,563 5,017 227
-------- -------- --------
Total investment securities 130,629 143,150 150,719

Interest-bearing deposits 0 1,000 24,427
Federal funds sold 16,050 6,375 28,175
-------- -------- --------
Total investment securities and
other earning assets $146,679 $150,525 $203,321
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
AVAILABLE FOR SALE
----------------------------------------------------------------------
STATES & POLITICAL SUBDIVISIONS
U. S. TREASURY -------------------------------
& AGENCIES TAXABLE NON-TAXABLE OTHER TOTAL
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Due within one year:
Amortized Cost $ 33,471 $ 300 $ 2,791 $ 0 $ 36,562
Market Value 33,439 299 2,802 0 36,540
Yield 5.58% 5.40% 7.31% 0 5.71%
Due after one but within five years:
Amortized Cost $ 66,604 $ 199 $ 10,381 $ 0 $ 77,184
Market Value 66,922 205 10,573 0 77,700
Yield 6.25% 7.70% 6.91% 0 6.34%
Due after five but within ten years:
Amortized Cost $ 3,491 $ 0 $ 3,850 $ 0 $ 7,341
Market Value 3,496 0 4,054 0 7,550
Yield 6.30% 0 7.94% 0 7.16%
Due after ten years:
Amortized Cost $ 0 $ 2,000 $ 271 $ 6,563 $ 8,834
Market Value 0 1,998 278 6,563 8,839
Yield 0 6.36% 6.97% 5.63% 5.84%
</TABLE>

Note: The interest on non-taxable securities has been calculated on a fully
taxable equivalent basis incorporating a tax rate of 34%.

30
<PAGE> 171

TABLE 15. RISK-BASED CAPITAL

<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM
-------------------------------- REGULATORY
1997 1996 1995 REQUIREMENTS
----- ----- ----- ------------
<S> <C> <C> <C> <C>
Risk based capital ratios:
Tier 1 15.76% 16.70% 18.85% 4.00%
Total Capital 16.79% 17.56% 19.79% 8.00%
Leverage Ratio 10.82% 10.76% 11.98% 3.00%(1)
</TABLE>

(1) The FRB may require any bank holding company to maintain a leverage
ratio of up to 200 basis points above the required minimum.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The business of the Company and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans and investment
securities) which are primarily funded by interest-bearing liabilities
(deposits). Such financial instruments have varying levels of sensitivity to
changes in market interest rates resulting in market risk. Other than loans
which are originated and held for sale, all of the financial instruments of the
Company are for other than trading purposes.

Interest rate risk results when the maturity or repricing intervals of the
interest-earning assets and interest-bearing liabilities are different, creating
a risk that changes in the level of market interest rates will result in
disproportionate changes in the value of, and the net earnings generated from,
the Company's interest-earning assets and interest-bearing liabilities. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of attempting to select the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates. Because the Company's primary source of interest-bearing
liabilities is customer deposits, the Company's ability to manage the types and
terms of such deposits may be somewhat limited by customer preferences in the
market areas in which the Company operates. The rates and terms of the Company's
interest-earning assets result primarily from the Company's strategy of
investing in loans and securities (a substantial portion of which have
adjustable-rate terms) which permit the Company to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities (see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations Financial Condition Analysis - Asset/Liability Management" and Table
13) for a further discussion of rate sensitive assets, rate sensitive
liabilities and net interest spread).

INTEREST-RATE RISK

One of the most important aspects of management's efforts to sustain
long-term profitability for the Company is the management of interest-rate risk.
Management's goal is to maximize net interest income within acceptable levels of
interest-rate risk and liquidity. To achieve this goal, a proper balance must be
maintained between assets and liabilities with respect to size, maturity,
repricing date, rate of return, and degree of risk.

The Company uses interest-rate sensitivity (GAP) analysis to monitor the
amounts and timing of balances exposed to changes in interest rates, as shown in
Table 13. The analysis presented in Table 13 has been made at a point in time
and could change significantly on a daily basis. The GAP report is not relied
upon exclusively to evaluate the impact of, or predict how the Company is
positioned to react to, changing interest rates. Other methods such as
simulation analysis are also considered in evaluating the Company's
interest-rate risk.

At December 31, 1997, the GAP report indicated that the Company was
liability sensitive, with $86.3 million more liabilities than assets repricing
within one year.

31
<PAGE> 172

Balance sheet simulation analysis is conducted at year end to determine the
impact on net interest income for the coming twelve months under several
interest-rate scenarios. One such scenario uses rates at December 31, 1997, and
holds the rates and volumes constant for simulation. When this position is
compared to rising rates (prime rate to 11% by year-end 1998) and declining
rates (prime rate to 6%), net interest income was a negative $649,000 and
$493,000, respectively, for the year ended December 1998. Another simulation
using an "estimated" scenario (prime rate to 8%) resulted in a $63,000 pretax
decrease in net interest income. Those scenarios are within the Company's policy
limit of a 10% variation.

The actual impact of changing interest rates on net interest income is
dependent on a number of factors such as the growth of earning assets and
interest-bearing liabilities, the magnitude of the interest rate changes, the
timing of the repricing of assets and liabilities, interest-rate spreads, and
the asset/liability strategies implemented by management.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

32
<PAGE> 173

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ......................................... 35

Merchants Bancshares, Inc. and Subsidiaries :

Consolidated Balance Sheet - December 31, 1997 and 1996 ....... 36

Consolidated Statement of Income -
For each of the three years in the period
ended December 31, 1997 .............................. 38

Consolidated Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1997 .............................. 40

Consolidated Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1997 .............................. 41

Merchants Bancshares, Inc. (Parent Company Only):

Balance Sheet - December 31, 1997 and 1996 .................... 44

Statement of Income -
For each of the three years in the period
ended December 31, 1997 .............................. 45

Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1997 .............................. 40

Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1997 .............................. 46

Notes to Financial Statements .......................................... 47
</TABLE>

All other schedules or supplementary data are omitted as the required
information is inapplicable or the information is presented in the financial
statements or related notes.

33
<PAGE> 174

MERCHANTS BANCSHARES, INC.

AND SUBSIDIARIES

FINANCIAL STATEMENTS

DECEMBER 31, 1997

34
<PAGE> 175

[HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C. LETTERHEAD]

Board of Directors and Shareholders
Merchants Bancshares, Inc.
Houston, Texas

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying consolidated balance sheet of Merchants
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997, and the
balance sheet of Merchants Bancshares, Inc. (parent company only) as of December
31, 1997 and 1996, and the related statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Merchants
Bancshares, Inc. and subsidiaries and the financial position of Merchants
Bancshares, Inc. (parent company only) as of December 31, 1997 and 1996, and the
respective results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

Hidalgo, Banfill, Zlotnik & Kermali, P.C.

Houston, Texas
February 4, 1998

35
<PAGE> 176
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks (Note 3) $ 37,563,149 $ 30,072,740
Time deposit with financial institution -- 1,000,000
Federal funds sold 16,050,000 6,375,000
Investment securities (Note 4):
Available-for-sale 130,628,753 123,076,038
Held-to-maturity (Market value
1996 - $ 20,650,858) -- 20,196,377

Loans (Note 5):
Loans, net of unearned income
of $ 5,369,899 in 1997 and
$ 6,285,388 in 1996 342,566,214 294,523,715
Less allowance for credit losses 3,687,351 2,712,864
------------ ------------

Total loans, net 338,878,863 291,810,851

Bank premises and equipment (Note 6) 14,733,290 14,797,074
Accrued interest receivable 3,665,261 3,662,988
Real estate and other loan related assets 1,323,432 959,347
Other assets 3,108,077 2,620,007
------------ ------------

Total Assets $545,950,825 $494,570,422
============ ============
</TABLE>

See notes to financial statements.

36
<PAGE> 177

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Deposits:
Noninterest bearing $ 147,749,156 $ 129,314,210
Interest bearing (Note 7) 336,607,429 309,728,402
------------- -------------

484,356,585 439,042,612
Accrued interest, taxes and other
liabilities 3,607,583 2,016,475
------------- -------------

Total Liabilities 487,964,168 441,059,087
------------- -------------

Commitments and Contingencies (Note 11) -- --

Stockholders' Equity (Notes 9, 12 and 15):
Preferred stock, $ 20 par value,
authorized 2,000,000 shares -- --
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1997
and 1996 1,977,855 1,977,855
Paid-in capital 25,766,675 25,766,675
Retained earnings 30,096,598 25,954,348
Net unrealized gain (loss) on
investment securities available-for-sale
(net of income taxes) 467,323 81,024
------------- -------------

58,308,451 53,779,902
Less cost of stock held in treasury:
Common, 26,016 shares in 1997 and
22,885 in 1996 (321,794) (268,567)
------------- -------------

Total Stockholders' Equity 57,986,657 53,511,335
------------- -------------

Total Liabilities and
Stockholders' Equity $ 545,950,825 $ 494,570,422
============= =============
</TABLE>

See notes to financial statements.

37
<PAGE> 178

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest Income:
Interest and fees
on loans $ 30,401,317 $ 24,915,315 $ 19,500,532
Investment securities:
Taxable interest 6,829,289 7,841,312 6,265,941
Non-taxable interest 853,726 933,985 758,059
Interest bearing deposits with bank -- 209,595 793,023
Time deposits with financial
institutions 59,978 106,857 76,140
Federal funds sold 1,083,678 1,332,412 1,780,062
------------ ------------ ------------

Total Interest Income 39,227,988 35,339,476 29,173,757
------------ ------------ ------------

Interest Expense:
Deposits 12,196,470 11,160,623 9,356,469
Long-term borrowings -- 8,642 220,418
------------ ------------ ------------

Total Interest Expense 12,196,470 11,169,265 9,576,887
------------ ------------ ------------

Net interest income 27,031,518 24,170,211 19,596,870
Provision for credit
losses (Note 5) 1,740,000 940,000 135,000
------------ ------------ ------------
Net interest income after
provision for credit losses 25,291,518 23,230,211 19,461,870
------------ ------------ ------------

Noninterest Income:
Service charges on deposit
accounts 4,239,574 4,436,228 3,472,492
Other service charges
and fees 773,650 280,453 256,110
Other operating income 1,224,327 962,249 926,841
Securities transactions (Note 4) 14,958 (1,625) (40)
------------ ------------ ------------

Total Noninterest Income 6,252,509 5,677,305 4,655,403
------------ ------------ ------------

Noninterest Expense:
Salaries and employee
benefits 11,294,074 11,116,967 8,316,752
Occupancy expense 2,252,723 1,915,379 1,665,812
Furniture and equipment
expense 1,732,816 1,573,489 824,168
Other real estate expense 209,615 282,925 290,364
Merger related expenses (Note 2) 1,571,555 -- --
Other operating expense (Note 16) 5,258,996 4,999,688 4,780,721
------------ ------------ ------------

Total Noninterest Expense 22,319,779 19,888,448 15,877,817
------------ ------------ ------------
</TABLE>

See notes to financial statements.

38
<PAGE> 179

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (CONTINUED)

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income before provision for
income taxes 9,224,248 9,019,068 8,239,456
Provision for income taxes
(Note 10) 2,836,600 2,634,100 2,332,700
------------ ------------ ------------
Net Income $ 6,387,648 $ 6,384,968 $ 5,906,756
============ ============ ============

Weighted Average Number of Common
Shares Outstanding 1,952,883 1,945,178 1,718,211
============ ============ ============

Net Income per Common Share $ 3.27 $ 3.28 $ 3.44
============ ============ ============
</TABLE>

See notes to financial statements.

39
<PAGE> 180

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES (CONSOLIDATED)
AND
MERCHANT BANCSHARES, INC. (PARENT COMPANY ONLY)

STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Preferred Common Paid-In Retained Available-for- Treasury
Stock Stock Capital Earnings Sale Stock
------------ ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- $ 1,281,650 $ 8,630,862 $ 16,002,758 $ (62,728) $ (313,444)
Net income -- -- -- 5,906,756 -- --
Cash dividends declared -
common stock, $.41 per share -- -- -- (742,928) -- --
Net change in unrealized gain (loss)
on investment securities
available-for-sale -- -- -- -- 1,001,073 --
Common stock issued -- 696,205 17,135,813 -- (78,790) --
Acquired 15,328 shares of
treasury stock -- -- -- -- -- (174,256)
Sold 3,457 shares of treasury
stock -- -- -- -- -- 39,133
------------ ------------ ------------ ------------ ------------ ------------

Balance at December 31, 1995 -- 1,977,855 25,766,675 21,166,586 859,555 (448,567)
Net income -- -- -- 6,384,968 -- --
Cash dividends declared -
common stock, $.82 per share -- -- -- (1,597,206) -- --
Net change in unrealized gain (loss)
on investment securities available-
for-sale -- -- -- -- (778,531) --
Sold 12,000 shares of treasury stock -- -- -- -- -- 180,000
------------ ------------ ------------ ------------ ------------ ------------

Balance at December 31, 1996 -- 1,977,855 25,766,675 25,954,348 81,024 (268,567)
Net income -- -- -- 6,387,648 -- --
Cash dividends declared - common
stock, $1.15 per share -- -- -- (2,245,398) -- --
Net change in unrealized gain (loss)
on investment securities available-
for-sale -- -- -- -- 386,299 --
Acquired 3,131 shares of treasury
stock -- -- -- -- -- (53,227)
------------ ------------ ------------ ------------ ------------ ------------

Balance at December 31, 1997 $ -- $ 1,977,855 $ 25,766,675 $ 30,096,598 $ 467,323 $ (321,794)
============ ============ ============ ============ ============ ============
</TABLE>

See notes to financial statements.

40
<PAGE> 181

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:

Net income $ 6,387,648 $ 6,384,968 $ 5,906,756
------------ ------------ ------------

Adjustments to Reconcile Net
Income to Cash Flows
from Operating Activities:

Provision for credit losses 1,740,000 940,000 135,000
Discount (Accretion) amortized to
income 428,768 647,568 246,698
Loss (Gain) on sale or maturity of
investment securities (14,958) 1,625 40
Origination of mortgage loans for sale (11,859,523) (10,878,114) (7,419,281)
Proceeds from mortgage loans sold 11,697,709 10,965,560 7,336,361
Depreciation and amortization 1,561,023 1,148,126 888,835
Loss (Gain) on sale of premises
and equipment (139,161) (58,652) 24,216
Provision for losses on real
estate and other loan related
assets 152,004 176,446 109,900
Loss (Gain) on sale of real estate
and other loan related assets 40,951 (17,922) 11,528
Decrease (Increase) in accrued
interest receivable (2,273) 266,916 (164,755)
Decrease (Increase) in other
assets (837,411) 287,206 (110,580)
Increase (Decrease) in accrued
interest, taxes and other
liabilities 1,591,108 (559,638) 219,740
------------ ------------ ------------

Total Adjustments 4,358,237 2,919,121 1,277,702
------------ ------------ ------------

Net Cash Flows From
Operating Activities 10,745,885 9,304,089 7,184,458
------------ ------------ ------------
</TABLE>

See notes to financial statements.

41
<PAGE> 182
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Investing Activities:
Net decrease (increase) in time
deposits in financial institutions 1,000,000 (102,000) 1,096,000
Proceeds from the maturities of
held-to-maturity investment securities 2,785,000 2,525,000 19,036,859
Proceeds from the sales of
available-for-sale investment securities 613,402 6,989,472 --
Proceeds from the maturities of
available-for-sale investment securities 45,731,028 53,584,174 19,311,807
Purchase of held-to-maturity
investment securities (1,011,330) (1,368,028) (24,717,436)
Purchase of available-for-sale
investment securities (35,302,945) (54,811,429) (20,152,737)
Net (increase) decrease in loans (48,400,861) (56,082,964) (13,919,914)
Rebates paid to customers (1,244,264) (1,471,245) (1,033,599)
Recoveries of loans charged-off 207,855 162,295 216,986
Proceeds from sale of premises
and equipment 243,816 124,524 24,738
Capital expenditures (1,390,767) (7,192,938) (599,288)
Proceeds from sale of real
estate and other loan related assets 289,032 359,437 423,356
Excess of cost over equity in net assets
of acquired subsidiary (115,790) -- --
----------- ----------- -----------

Net Cash Flows From Investing
Activities (36,595,824) (57,283,702) (20,313,228)
----------- ----------- -----------

Cash Flows From Financing Activities:
Net increase in demand deposits,
NOW accounts and savings accounts 31,945,381 6,103,772 14,980,594
Net increase in time deposits 13,368,592 1,557,836 9,311,209
Repayment of long-term borrowings -- (3,082,960) (374,045)
Proceeds from sale of treasury stock -- 180,000 39,133
Purchase of treasury stock (53,227) -- (174,256)
Dividends paid (2,245,398) (1,597,206) (742,928)
Purchase Minority interest -- (286,697) --

Net Cash Flows From Financing Activities 43,015,348 2,874,745 23,039,707
----------- ----------- -----------
</TABLE>

See notes to financial statements.

42
<PAGE> 183

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Increase (decrease) in
Cash and Cash Equivalents 17,165,409 (45,104,868) 9,910,937
Cash and Cash Equivalents at
Beginning of Period 36,447,740 81,552,608 41,912,004
Cash Received in Acquisition of Bank -- -- 29,729,667
------------ ------------ ------------
Cash and Cash Equivalents at
End of Period $ 53,613,149 $ 36,447,740 $ 81,552,608
============ ============ ============

Interest Paid $ 12,108,196 $ 11,243,162 $ 9,489,152
============ ============ ============

Federal Income Taxes Paid $ 3,930,000 $ 2,435,309 $ 1,635,366
============ ============ ============

Non-Cash Transactions:
Bank loans for real estate and
other loan related assets sold $ 248,730 $ 1,067,492 $ 607,832

Foreclosed properties transferred to
real estate and other loan
related assets $ 892,798 $ 774,593 $ 736,956

Unrealized gain (loss) on available-
for-sale investment securities $ 708,065 $ 122,762 $ 1,313,525

Held-to-maturity investment securities
transferred to available-for-sale
investment securities $ 18,403,958 $ -- $ --

Issued 696,205 shares of common
stock for the merger with
Texas Gulf Coast Bancorp, Inc. $ -- $ -- $ 17,753,228
</TABLE>

See notes to financial statements.

43
<PAGE> 184

MERCHANTS BANCSHARES, INC.
(PARENT COMPANY ONLY)

BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash $ 211,948 $ 609,223
Time deposit with financial institution -- 1,000,000
Due from bank subsidiary 1,646,974 1,356,268
Investment in bank subsidiary 56,931,097 50,096,619
Equipment 57,890 82,403
Excess of cost of subsidiaries over
equity in net assets acquired, net
of accumulated amortization of
$ 307,247 in 1997 and $ 292,857
in 1996 268,419 282,809
Other assets 270,579 84,330
------------ ------------

Total Assets $ 59,386,907 $ 53,511,652
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Accrued expenses $ 1,400,250 $ 317
------------ ------------

Total Liabilities 1,400,250 317
------------ ------------

Commitments and Contingencies (Note 11) -- --

Stockholders' Equity (Notes 9, 12 and 15):
Preferred stock, $ 20 par value,
authorized 2,000,000 shares -- --
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1997
and 1996 1,977,855 1,977,855
Paid-in capital 25,766,675 25,766,675
Retained earnings 30,096,598 25,954,348
Net unrealized gain (loss) on investment
securities available-for-sale
(net of income taxes) 467,323 81,024
------------ ------------

58,308,451 53,779,902
Less cost of stock held in treasury:
Common, 26,016 shares in 1997 and
22,885 in 1996 (321,794) (268,567)
------------ ------------

Total Stockholders' Equity 57,986,657 53,511,335
------------ ------------

Total Liabilities and Stockholders' Equity $ 59,386,907 $ 53,511,652
============ ============
</TABLE>

See notes to financial statements.

44
<PAGE> 185

MERCHANTS BANCSHARES, INC.
(PARENT COMPANY ONLY)

STATEMENT OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Cash dividend from subsidiary $ 1,000,000 $ -- $ 3,000,000
Interest income 59,978 91,736 13,072
----------- ----------- -----------

1,059,978 91,736 3,013,072
----------- ----------- -----------

Expenses:
Operating expenses 230,857 212,916 197,568
Merger related expenses (Note 2) 1,460,153 -- --
----------- ----------- -----------
1,691,010 212,916 197,568
----------- ----------- -----------

Income (loss) before
income tax benefit and
equity in undistributed
income of subsidiary (631,032) (121,180) 2,815,504

Income tax benefit 570,500 199,000 299,400
----------- ----------- -----------

Income (loss) before equity
in undistributed income
of subsidiary (60,532) 77,820 3,114,904

Equity in undistributed
income of subsidiary 6,448,180 6,307,148 2,791,852
----------- ----------- -----------

Net income $ 6,387,648 $ 6,384,968 $ 5,906,756
=========== =========== ===========
</TABLE>

See notes to financial statements.

45
<PAGE> 186

MERCHANTS BANCSHARES, INC.
(PARENT COMPANY ONLY)

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:

Net Income $ 6,387,648 $ 6,384,968 $ 5,906,756

Adjustments to Reconcile Net Income to
Cash Flows From Operating Activities:

Equity in undistributed income
of subsidiary (6,448,180) (6,307,148) (2,791,852)
Amortization and depreciation 31,990 24,250 17,040
Loss on sale of equipment 6,914 -- --
Increase (Decrease) in accrued expenses 1,399,933 (19,127) (119,222)
Decrease (Increase) in due from subsidiary (290,706) 452,732 (862,944)
Decrease (Increase) in other assets (186,249) 217,349 427,000
------------ ------------ ------------

Net Cash Flows From Operating Activities 901,350 753,024 2,576,778
------------ ------------ ------------

Cash Flows From Investing Activities:
(Decrease) in due to Bank subsidiary -- -- (43,472)
Purchase of equipment -- (68,412) (26,500)
------------ ------------ ------------

Net Cash Flows From Investing Activities -- (68,412) (69,972)
------------ ------------ ------------

Cash Flows From Financing Activities:
Proceeds from sale of treasury stock -- 180,000 39,133
Purchase of treasury stock (53,227) -- (174,256)
Dividends paid (2,245,398) (1,597,206) (742,928)
------------ ------------ ------------

Net Cash Flows From Financing Activities (2,298,625) (1,417,206) (878,051)
------------ ------------ ------------

Net Increase (Decrease) in Cash
and Cash Equivalents (1,397,275) (732,594) 1,628,755
Cash and Cash Equivalents at
Beginning of Year 1,609,223 2,341,817 713,062
------------ ------------ ------------
Cash and Cash Equivalents at
End of Year $ 211,948 $ 1,609,223 $ 2,341,817
============ ============ ============

Interest Paid $ -- $ -- $ --
============ ============ ============

Taxes Paid $ 3,930,000 $ 2,435,309 $ 1,635,366
============ ============ ============

Non-Cash Transactions:
Issued 696,205 shares of common stock
for the merger with Texas Gulf
Coast Bancorp, Inc. $ -- $ -- $ 17,753,228
============ ============ ============
</TABLE>

See notes to financial statements.

46
<PAGE> 187
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Merchants Bancshares, Inc. (Company)
and its subsidiaries conform to generally accepted accounting principles and
practices within the banking industry.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period, the
most significant of which relates to the allowance for credit losses. Actual
results could differ from those estimates.

The Company and its subsidiaries offer a full range of financial services to
commercial, industrial, financial and individual customers in the greater
Houston, Texas and surrounding area, including short-term and medium-term loans,
revolving credit arrangements, inventory and accounts receivable financing,
equipment financing, real estate lending, Small Business Administration lending,
letters of credit, installment and other consumer loans, savings accounts and
various savings programs, including individual retirement accounts, and interest
and non-interest-bearing checking accounts. Other services include federal tax
depository, safe deposit and night depository services. A summary of the more
significant accounting policies follows:

FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements include the accounts of the parent company
and its wholly-owned subsidiary, Gulf Southwest Nevada Bancorp, Inc. and its
wholly-owned subsidiary Merchants Bank and majority owned subsidiary Funds
Management Group, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation. Investment in subsidiary is accounted for
on the equity method of accounting in the Parent Company Only financial
statements.

INVESTMENT SECURITIES

Investment securities are classified in three categories and accounted for as
follows: debt securities that the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost;
debt and equity securities bought and held principally for the purpose of
reselling, of which the Company has none, are classified as trading securities
and are carried at fair value, with unrealized gains and losses included in
income; debt or equity securities not classified as either held-to-maturity or
trading securities are deemed available-for-sale and are carried at fair value,
with unrealized gains and losses, net of applicable income taxes, reported as a
separate component of stockholders' equity.

Interest income on investment securities, including amortization of premiums and
accretion of discounts, is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities, which are reported in securities transactions.

LOANS

Loans are stated at the principal amount outstanding, net of unearned income and
the allowance for credit losses. Mortgage loans held for sale are carried at the
lower of aggregate cost or fair value. Interest on commercial, real estate and
other loans is accrued over the term of the loan based on the amount of
principal outstanding except

47
<PAGE> 188

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS (CONTINUED)

where serious doubt exists as to the collectibility of a loan, in which case the
accrual of interest is discontinued. Interest income on installment loans is
computed primarily on sum-of-the-months-digit method which, in the aggregate,
does not differ materially from the interest method. Net loan origination and
commitment fees are being deferred and amortized into income over the term of
the loan as an adjustment of the yield.

Nonaccrual loans are those on which the accrual of interest has ceased. Loans
are placed on nonaccrual status if in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued but not collected
at the date a loan is placed on nonaccrual status is reversed against interest
income. All cash receipts, whether designated as principal or interest are used
to reduce the carrying value of the loan when it is in the nonaccrual status.
Loans are restored to accrual status when principal and interest payments are
brought current and future payments in accordance with loan terms are reasonably
assured.

The carrying value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the loans
observable market price or the fair value of the collateral, if the loan is
collateral dependent. A loan is considered impaired when, based on current
information, it is probable that the borrower will be unable to pay contractual
interest or principle payments as scheduled in the loan agreement. The Company
considers its nonaccrual loans as impaired loans.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is established by a charge to income as a
provision for credit losses. Actual credit losses or recoveries are charged or
credited directly to this allowance. The amount of the allowance is determined
based upon evaluation of the loan portfolio, a review of past loan loss
experience and management's judgment with respect to current and expected
economic conditions and their potential impact on the loan portfolio.

BANK PREMISES AND EQUIPMENT

Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed on the straight-line method based upon the
estimated useful lives of the assets. Amortization of leasehold improvements is
based on the estimated useful lives of the improvements or the term of the
respective lease, whichever is shorter. At the time of a retirement or sale, the
related cost and accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recorded in income. Maintenance and repairs are
charged to expense as incurred. Renewals and betterments, expenditures which
generally increase the value of the property or extend its useful life, are
capitalized.

REAL ESTATE AND OTHER LOAN RELATED ASSETS

Real estate and other loan related assets are stated at the lower of cost or
estimated fair value, less the estimated costs to sell. Any reduction from cost
(loan value) to estimated fair value at the time of foreclosure is charged to
the allowance for credit losses. Subsequent valuation adjustments are charged to
current earnings through the provision for revaluation of real estate and other
loan related assets. Losses on dispositions are recognized in the period of
occurrence while gains are not

48
<PAGE> 189

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REAL ESTATE AND OTHER LOAN RELATED ASSETS (CONTINUED)

recognized until all criteria for income recognition have been met. Also, any
income received or expense incurred during the period the assets are owned is
recognized as income or expense during the period in which it is received or
incurred and is included in other real estate expense.

EXCESS OF COST OVER EQUITY IN NET ASSETS ACQUIRED

The fair value of the net assets acquired in transactions accounted for as
purchases is recorded as an investment by the parent company. The excess of the
cash or market value of the consideration given in the transactions over the
fair value of the net assets acquired is recorded as the excess of cost over
fair value of assets acquired, which is amortized into other operating expenses
on a straight-line basis over periods of 15 to 40 years.

INCOME TAXES

The Company and its subsidiaries file a consolidated Federal income tax return.
The subsidiaries record income tax expense by applying the statutory tax rate to
their income as adjusted for tax exempt interest and other temporary differences
and remit the portion of Federal income taxes currently due to the parent
company. The parent company records, as a tax benefit, the difference between
total taxes reflected by the subsidiaries and the consolidated provision for
income taxes. Deferred tax assets and liabilities are recognized for balance
sheet basis differences for tax and financial reporting purposes. The deferred
taxes represent future tax return consequences of those differences. Investment
tax credits and alternative minimum tax credits are recognized as a reduction of
Federal income taxes when such credits are utilized.

EARNINGS PER SHARE

Earnings per share of common stock are computed by dividing earnings by the
weighted average number of shares outstanding during the year.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods.

RECLASSIFICATIONS

Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 presentation.

49
<PAGE> 190

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - ACQUISITION AND MERGERS

The Company in January 1998 signed a definitive agreement to merge with and into
Union Planters Corporation in a stock for stock exchange. The merger is subject
to shareholder and regulatory approval and certain contractual closing
conditions. Merger related expenses of $1,571,555 were paid or accrued in 1997
and consisted of fees for investment bankers, attorneys, accountants and other
related charges.

In January of 1997, the Company through its wholly owned subsidiary Gulf
Southwest Nevada Bancorp, Inc., acquired 80% of the common stock of Funds
Management Group, Inc. for $75,000. Subsequent to the acquisition, 100% of an
issue of callable preferred stock was acquired for $75,000. The excess of cost
of the acquired Company over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed of $115,790, was recorded as excess of
cost over the net equity in net assets acquired and is being amortized over 15
years. The acquisition was accounted for as a purchase transaction. The
operations of Funds Management Group, Inc. since January 1, 1997 are included in
the accompanying financial statements.

On January 1, 1996, Gulf Southwest Nevada Bancorp, Inc. a wholly owned
subsidiary of the Company merged all of its subsidiary Banks into its Merchants
Bank subsidiary and the former subsidiary Banks became branches of Merchants
Bank. In January of 1996, Merchants Bank purchased the data processing equipment
of G.S.W. Data Processing, Inc. and Central Data Processing, Inc. at net book
value. The two wholly owned subsidiaries were then liquidated into their parent,
Gulf Southwest Nevada Bancorp, Inc.

On May 1, 1995, the Company through its wholly owned subsidiary Gulf Southwest
Nevada Bancorp, Inc. acquired all of the outstanding common stock of Texas Gulf
Coast Bancorp, Inc. by issuing 696,205 shares (with a fair value of $25.50 per
share) of Merchants Bancshares, Inc. (formerly Gulf Southwest Bancorp, Inc.)
common stock plus cash of $52,231 for fractional and dissenter shares to effect
the merger. The acquisition and merger was accounted for as a purchase
transaction. The excess of cost of the acquired Company over the sum of the
amounts assigned to identifiable assets acquired less liabilities assumed of
$194,650 was recorded as excess of cost over the net equity in net assets
acquired and is being amortized over 15 years.

The operations of Texas Gulf Coast Bancorp, Inc. since May 1, 1995 are included
in the accompanying financial statements.

NOTE 3 - RESERVE REQUIREMENTS

Cash and due from banks of approximately $16,391,000 and $12,315,000 at December
31, 1997 and 1996, respectively, were maintained to satisfy regulatory reserve
and other requirements.

NOTE 4 - INVESTMENT SECURITIES

The amortized cost and estimated fair value of available-for-sale and
held-to-maturity investment securities were as follows:

50
<PAGE> 191

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 4 - INVESTMENT SECURITIES (CONTINUED)

AVAILABLE-FOR-SALE INVESTMENT SECURITIES:

<TABLE>
<CAPTION>
December 31, 1997: Unrealized Gross
Amortized --------------------------- Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $103,566,123 $ 460,528 $ 169,093 $103,857,558
State, county and municipal
obligations 19,791,148 420,231 3,601 20,207,778
Other 6,563,417 -- -- 6,563,417
------------ ------------ ------------ ------------

$129,920,688 $ 880,759 $ 172,694 $130,628,753
============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
December 31, 1996: Unrealized Gross
Amortized --------------------------- Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $117,936,759 $ 652,515 $ 529,753 $118,059,521
Other 5,016,517 -- -- 5,016,517
------------ ------------ ------------ ------------

$122,953,276 $ 652,515 $ 529,753 $123,076,038
============ ============ ============ ============
</TABLE>

HELD-TO-MATURITY INVESTMENT SECURITIES:

<TABLE>
<CAPTION>
December 31, 1996: Unrealized Gross
Amortized --------------------------- Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
State, county and municipal
obligations $ 20,196,377 $ 462,085 $ 7,604 $ 20,650,858
============ ============ ============ ============
</TABLE>

Cash proceeds from the maturity of held-to-maturity investment securities during
1997, 1996 and 1995 were $2,785,000 $2,525,000 and $19,036,859, respectively.
Cash proceeds from the maturity and sales of available-for-sale investment
securities during 1997, 1996 and 1995 were $46,344,430, $60,573,646, and
$19,311,807 respectively. Net gains or losses from the sale of
available-for-sale investment securities for 1997, 1996 and 1995 amounted to
$14,958 (gross gains of $14,958 and gross losses of $0), $(1,625), (gross gains
of $13 and gross losses of $1,638) and $0, respectively. There were no sales of
held-to-maturity securities in 1997, 1996, and 1995. During 1995 early
redemption of held-to-maturity investment securities resulted in a net loss of
$40 (gross gains of $53 and gross losses of $93).

In October of 1997, the subsidiary bank changed the classification of its
taxable and non-taxable State, county and municipal investment securities from
held-to-maturity to available-for-sale. The amortized cost of these investment
securities was $18,403,958 and the unrealized gain was $405,912. This transfer
was made to provide management more flexibility in their funds management to
maximize investment yields, liquidity and control interest rate risk.

51
<PAGE> 192

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 4 - INVESTMENT SECURITIES (CONTINUED)

The amortized cost and estimated fair value of investment securities at December
31, 1997 by contractual maturity were as follows:

<TABLE>
<CAPTION>
Available-for Sale
-------------------------------
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 36,562,591 $ 36,540,788
Due after one year through
five years 77,183,540 77,699,868
Due after five years through
ten years 7,340,448 7,549,468
Due after ten years 8,834,109 8,838,629
------------ ------------

Total Investment Securities $129,920,688 $130,628,753
============ ============
</TABLE>

Investment securities with amortized costs of $40,484,033 and $61,273,539 at
December 31, 1997 and 1996, were pledged to secure public deposits and for other
purposes as required by law.

NOTE 5 - LOANS

The loan portfolio was comprised of the following categories at December 31:

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Commercial and industrial $ 67,012,667 $ 56,934,963
Real estate - construction 10,354,407 15,920,334
Real estate - other 205,665,975 156,471,949
Installment loans 63,640,998 70,117,783
Mortgage loans held for sale 374,033 212,219
Other loans 888,033 1,151,855
------------- -------------

Total loans 347,936,113 300,809,103

Less:
Unearned income (5,369,899) (6,285,388)
Allowance for credit
losses (3,687,351) (2,712,864)
------------- -------------

Net Loans $ 338,878,863 $ 291,810,851
============= =============
</TABLE>

52
<PAGE> 193

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

Loans on which interest was not being accrued and past due loans (90 days or
more) amounted to $1,953,933 and $611,106, respectively at December 31, 1997,
compared to $2,129,094 and $952,700, respectively at December 31, 1996.

The allowance for credit losses related to these impaired loans was $255,570 and
$217,148 in 1997 and 1996, respectively. Interest income lost on impaired loans
and the average balance of impaired loans was as follows for the year ended
December 31:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income that would have
been recorded $ 405,054 $ 318,314 $ 262,583
Interest income recognized 68,336 43,684 61,858
---------- ---------- ----------

Interest income lost $ 336,718 $ 274,630 $ 200,725
========== ========== ==========

Average balance of impaired loans $2,291,385 $2,340,463 $2,179,898
========== ========== ==========
</TABLE>

Some of the directors and executive officers of the Company and its subsidiaries
and their related parties are loan customers at the Company's subsidiary bank.
In management's judgment, such borrowings were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others and do not involve other than normal risk of
collectibility.

An analysis of loans to these parties, exclusive of loans to such persons that
in the aggregate do not exceed $60,000, is as follows:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 8,312,918 $ 11,768,064
New loans 5,071,312 4,474,637
Amounts collected (4,268,816) (2,780,363)
Loans to customers no longer
related parties (97,171) (5,149,420)
------------ ------------

Balance at end of year $ 9,018,243 $ 8,312,918
============ ============
</TABLE>

53
<PAGE> 194

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 5 - LOANS (CONTINUED)

Transactions in the allowance for credit losses were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 2,712,864 $ 2,410,815 $ 2,062,786
Allowance of acquired banks -- -- 737,941
Provision charged to expense 1,740,000 940,000 135,000
Loan losses:
Charge-offs (973,368) (800,245) (741,898)
Recoveries 207,855 162,294 216,986
----------- ----------- -----------

Net loan losses (765,513) (637,951) (524,912)
----------- ----------- -----------

Balance at end of year $ 3,687,351 $ 2,712,864 $ 2,410,815
=========== =========== ===========
</TABLE>

NOTE 6 - BANK PREMISES AND EQUIPMENT

Bank premises and equipment were comprised of the following at December 31:

<TABLE>
<CAPTION>
Estimated
Useful Lives 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 3,085,009 $ 3,146,964
Bank premises and leasehold improvements 5 to 40 yrs. 13,289,544 12,536,132
Furniture and equipment 5 to 10 yrs. 7,538,386 7,337,963
Automobiles 5 yrs. 538,103 478,223
Less - accumulated depreciation
and amortization (9,717,752) (8,702,208)
------------ ------------

Net balance at end of year $ 14,733,290 $ 14,797,074
============ ============
</TABLE>

Depreciation and amortization charged to operating expense was $1,294,896 in
1997, $1,022,186 in 1996, and $814,045 in 1995.

54
<PAGE> 195

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - INTEREST BEARING DEPOSITS

Interest bearing deposits were comprised of the following categories at December
31:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Interest bearing demand $118,074,553 $104,314,922
Savings 53,562,466 53,811,662
Time 116,198,489 113,424,591
------------ ------------
48,771,921 38,177,227
------------ ------------
Time over $100,000 $336,607,429 $309,728,402
============ ============
</TABLE>

NOTE 8 - BORROWINGS

In December of 1997, the subsidiary bank purchased $1,546,900 of stock in the
Federal Home Loan Bank and created a credit facility with them to provide for
borrowings if needed to fund future loan demand.

At December 31, 1997, the bank had a blanket borrowing capacity of $36,000,000
to be collateralized by their 1 to 4 family mortgage portfolio and up to
$50,000,000 of short term borrowings with the delivery of investment securities
to collateralize the loan.

The interest rates charged on borrowings vary depending on the collateral given
and the term of the loan.

At December 31,1997 the bank had no borrowings under the credit facility.

NOTE 9 - DIVIDENDS FROM SUBSIDIARIES

Dividends paid by the company's subsidiaries are the primary source of funds
available to the company for payment of dividends to stockholders and other
operating needs. Dividends paid by the company's subsidiary bank are subject to
restrictions by certain regulatory agencies.

At December 31, 1997, approximately $33,467,500 of the subsidiary banks' net
assets were available for payment of dividends under these restrictions.

55
<PAGE> 196

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 10 - FEDERAL INCOME TAXES

Deferred income taxes result from differences between amounts of assets and
liabilities as measured for income tax and financial reporting purposes. The
significant components of Federal deferred tax assets and liabilities as of
December 31, are as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Carrying value of other real estate owned $ 12,600 $ 15,900
Allowance for credit losses 986,200 394,600
Accumulated depreciation 25,100 --
Loan discount 41,200 --
---------- ----------
1,065,100 410,500
---------- ----------

Deferred Tax Liabilities:
Accretion on municipal bonds 36,300 51,500
Accumulated depreciation -- 206,700
Unrealized investment securities gains 240,800 41,700
---------- ----------
277,100 299,900
---------- ----------

Net Deferred Tax $ 788,000 $ 110,600
========== ==========
</TABLE>

The consolidated provision for income taxes for the years ended December 31,
consists of the following:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable $ 3,713,100 $ 2,334,800 $ 1,556,600

Deferred (876,500) 299,300 776,100
----------- ----------- -----------

$ 2,836,600 $ 2,634,100 $ 2,332,700
=========== =========== ===========
</TABLE>

The income tax expense applicable to securities gains and losses for the years
1997, 1996 and 1995 was $5,056, $(553) and $(12), respectively.

The difference between the effective tax rate on consolidated income before
income taxes and the statutory rate is attributed to the following:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax provision at
statutory rate $ 3,136,200 $ 3,066,500 $ 2,801,400
Tax exempt income (295,700) (334,600) (257,800)
Nondeductible (deductible) expense (3,900) 20,900 (115,100)
Tax benefits and tax rate differences -- (118,700) (95,800)
----------- ----------- -----------

$ 2,836,600 $ 2,634,100 $ 2,332,700
=========== =========== ===========
</TABLE>

56
<PAGE> 197

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)

Deferred income taxes result from temporary differences between the carrying
value of assets and liabilities for financial reporting and tax reporting
purposes. The sources and related tax effects of these differences are as
follows:

<TABLE>
<CAPTION>
Tax effect of temporary differences: 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Other real estate owned $ 3,300 $ 196,100 $ 73,900
Allowance for credit losses (591,600) (128,400) (24,800)
Accumulated depreciation (231,800) (79,200) 36,500
Accretion on municipal bonds (15,200) 9,100 (9,500)
Loan discount (41,200) -- --
Use of net operating loss -- -- 282,900
Use of alternative minimum tax credit -- 301,700 321,300
Use of investment tax credit -- -- 95,800
--------- --------- ---------

$(876,500) $ 299,300 $ 776,100
========= ========= =========
</TABLE>

NOTE 11 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company's subsidiary bank is a party to
financial instruments with off balance sheet risk to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheet.

The Company's subsidiary bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Collateral is required
to support the off-balance sheet instruments when it is deemed necessary.
Collateral held varies, but may include: deposits held in financial
institutions, accounts receivable, inventory and property, plant and equipment.

Financial instruments whose contract amounts represent potential credit risk are
as follows at December 31:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $62,340,715 $50,461,880
Standby and commercial letters of credit $ 1,451,419 $ 1,061,723
Letters of guaranty $ 127,500 $ 159,579
</TABLE>

57
<PAGE> 198

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company and subsidiaries have non-cancelable operating leases covering
certain equipment and buildings. The following is a schedule of future minimum
lease payments as of December 31, 1997:

<TABLE>
<CAPTION>
Year Ending December 31, Buildings Equipment
------------------------ ---------- ----------
<S> <C> <C>
1998 $ 389,577 $ 142,616
1999 324,262 91,731
2000 323,430 --
2001 323,430 --
2002 323,430 --
2003 and after 1,778,861 --
---------- ----------
$3,462,990 $ 234,347
========== ==========
</TABLE>

Rent expense incurred under operating leases amounted to $510,758, $591,596 and
$519,882 for the years ended December 31, 1997, 1996 and 1995, respectively.

Various lawsuits are pending against the Company's subsidiary bank. Management,
after reviewing these suits with legal counsel, considers that the aggregate
liability, if any, would not have a material adverse effect on the Company's
financial position.

NOTE 12 - STOCK BASED INCENTIVE PLAN

In May of 1997, the Company adopted the 1997 Flexible Incentive Plan.
Participation in the Plan is confined to employees of the Company, or one or
more of its subsidiaries, and such consultants and non-employee directors as may
be designated by the Board of Directors.

The aggregate number of shares of Common Stock which may be issued under the
Plan shall not exceed 200,000 shares. The maximum number of shares with respect
to which stock options or stock appreciation rights may be granted in any fiscal
year to any Named Executive Officer under the Plan shall not exceed 50,000
shares. Shares issued under the plan may be either authorized and unissued
Common Stock or Common Stock held in or acquired for the treasury of the
Company.

The plan provides for the grant of any or all of the following types of awards:
(1) stock options, including incentive stock options and non-qualified stock
options; (2) stock appreciation rights, either in tandem with stock options or
freestanding; (3) restricted stock awards; (4) performance shares; (5)
performance units; (6) dividend equivalent rights; and (7) other stock based
awards.

The Board of Directors will, with regard to each stock option determine the
number of shares subject to the option, term of the option (which, for incentive
stock options, shall not exceed ten years (five years in the case of an employee
owning over 10% of the Common Stock)) the exercise price per share of stock
subject to the option (which, for incentive stock options, must be not less than
the fair market value of the Common Stock at the time of grant (110% of fair
market value in the case of an employee owning more than 10% of the Common
Stock)) the vesting schedule (if any) and the other material terms of the
option.

58
<PAGE> 199

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 12 - STOCK BASED INCENTIVE PLAN (CONTINUED)

The purchase price on any shares of Common Stock purchased pursuant to the
exercise of an award granted under the Plan shall be payable in full on the
exercise date in cash, by surrender to the Company of shares of Common Stock of
the Company registered in the name of the participant, by delivery to the
Company of such other lawful consideration as the Board of Directors may
determine, or by a combination of the foregoing. Any such shares so surrendered
shall be deemed to have a value per share equal to the fair market value of a
share of Common Stock on such date.

FASB Statement No. 123 establishes accounting and reporting standards for
stock-based incentive plans, and allows two alternative methods for accounting
for employee incentives: (a) the fair-value-based method, or (b) the
intrinsic-value-based method, on which Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" was based.

The Company will account for its employee stock-based compensation plans under
the intrinsic-value-method. Under this method no compensation expense is
recognized at date of grant because the exercise price of the stock option
equals the fair market value of the underlying stock.

No awards were granted under the 1997 Flexible Incentive Plan in 1997.

NOTE 13 - EMPLOYEE BENEFIT PLANS

The Company has a noncontributory defined benefit pension plan covering
substantially all full time employees. Benefits are based on an employee's years
of service and compensation. The Company makes contributions to the plan
annually based upon actuarial valuations. The plan assets are managed and
invested by a corporate trustee. The plan assets are invested in several equity,
bond and common trust investment funds managed by the trustee.

The Company's pension plan was adopted on September 1, 1994. The Texas Gulf
Coast Bancorp, Inc. noncontributory defined benefit pension plan was merged with
the Company's pension plan on December 31, 1995.

Unrecognized prior service cost of the Company's pension plan is being amortized
on a straight line basis over fifteen years.

Net periodic pension cost for the pension plan was as follows for December 31:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefit earned during the year $ 447,280 $ 384,439 $ 400,863
Interest cost on projected benefit obligation 204,480 143,107 189,701
Actual (gain) on plan assets (229,968) (135,776) (148,629)
Net amortization and deferrals (6,738) 10,974 9,127
--------- --------- ---------

Net pension cost $ 415,054 $ 402,744 $ 451,062
========= ========= =========
</TABLE>

59
<PAGE> 200

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

Significant assumptions used in determining pension cost for the Company are as
follows:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.5% 7.0%
Expected rate of increase in compensation 3.0% 3.0% 4.0%
Expected long-term rate of return on plan assets 8.0% 8.0% 8.0%
</TABLE>

Funded status of the pension plan at December 31, is as follows:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Project benefit obligation $(2,997,409) $(2,735,566)
Plan assets at fair value 2,893,715 2,632,427
----------- -----------
Plan assets (less than) projected
benefit obligation (103,694) (103,139)
Unrecognized net (gains) loss (799,644) (680,710)
Unrecognized net (assets) obligation
being amortized over 15 years (208,398) (237,143)
Unrecognized prior service cost 552,936 602,086
----------- -----------

(Accrued) prepaid pension cost $ (558,800) $ (418,906)
=========== ===========
</TABLE>

The Company has a qualified employee benefit plan under section 401(k) of the
Internal Revenue Code. Employees can contribute up to 15% of their compensation
to the plan on a pretax basis subject to regulatory limits and the Company at
its discretion can match up to 100 percent of 6 percent of the participant's
compensation. The administrative cost of the plan is paid by the Company at no
cost to the participants.

NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.

Cash and cash equivalents - - For cash and due from banks, time deposits in
financial institutions and federal funds sold, the carrying amount is a
reasonable estimate of fair value.

Investment securities - - Investment securities fair value equals quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. See Note One for
valuation methodologies used for investment securities.

Loans - - The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.

60
<PAGE> 201

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Deposits - - The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.

Commitments to extend credit and standby letters of credit - - The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counter parties. For fixed-rate commitments,
fair value also considers the difference between current levels of interest
rates and committed rates. The fair value of letters of credit is based on fees
currently charged for similar letters of credit.

The estimated fair values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 53,613,149 $ 53,613,149 $ 37,447,740 $ 37,447,740
Investment securities $130,628,753 $130,628,753 $143,272,415 $143,726,896
Loans, net $338,878,863 $337,276,217 $291,810,851 $290,970,172

Liabilities:
Deposits $484,356,585 $484,418,265 $439,042,612 $439,187,121

Off -balance sheet instruments:
Letters of credit fees $ -- $ 17,585 $ -- $ 6,565
</TABLE>

NOTE 15 - CAPITAL ADEQUACY

The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements.

Under the risk-based capital guidelines, different categories of assets are
assigned different risk weights, based upon the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances and
certain off-balance sheet items to determine a "risk weighted" asset base.

These quantitative measures require that banking organizations achieve minimum
ratios of total capital to risk weighted assets of 8.0%, (of which at least 4.0%
should be in the form of Tier 1 capital). Total capital is defined as the sum of
Tier 1 and Tier 2 capital elements with Tier 2 being limited to 100 percent of
Tier 1. For bank holding companies, Tier 1 capital includes with certain
restrictions, common stockholders' equity, perpetual preferred stock and
minority interest in

61
<PAGE> 202

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 15 - CAPITAL ADEQUACY (CONTINUED)

consolidated subsidiaries. Tier 2 capital includes, with certain restrictions,
certain forms of perpetual preferred stock, maturing capital instruments and the
allowance for possible credit losses.

In addition to the risked-based capital guidelines, regulatory authorities have
adopted the use of a leverage ratio as an additional tool to evaluate the
capital adequacy of banks and bank holding companies. The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted average total
assets. The leverage ratio adopted by the federal banking agencies requires a
ratio of 3.0% "Tier 1" capital to adjusted average total assets for banks with a
CAMEL rating of 1 or for bank holding companies with a BOPEC rating of 1. All
other institutions will be expected to maintain a leverage ratio of 4.0% to
5.0%.

The following table summarizes the Company's Tier 1, Total Capital and leverage
ratio as of December 31:

<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount Ratio Amount Ratio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tier 1 Capital $56,452,111 15.76% $52,298,251 16.70%
Tier 1 Capital Minimum Requirement 14,330,964 4.00% 12,530,072 4.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $42,121,147 11.76% $39,768,179 12.70%
=========== =========== =========== ===========

Total Capital $60,139,462 16.79% $55,011,115 17.56%
Total Capital Minimum Requirement 28,661,928 8.00% 25,060,144 8.00%
----------- ----------- ----------- -----------
Excess Total Capital $31,477,534 8.79% $29,950,971 9.56%
=========== =========== =========== ===========

Tier 1 Capital - Leverage Ratio $56,452,111 10.82% $52,298,251 10.76%
Tier 1 Capital Requirement 15,651,625 3.00% 14,588,204 3.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $40,800,486 7.82% $37,710,047 7.76%
=========== =========== =========== ===========
</TABLE>

The following table summarized the Company's subsidiary bank's Tier 1, Total
Capital and leverage ratio as of December 31:

<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount Ratio Amount Ratio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tier 1 Capital $53,410,674 14.92% $48,789,800 15.62%
Tier 1 Capital Minimum Requirement 14,314,700 4.00% 12,490,826 4.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $39,095,974 10.92% $36,298,974 11.62%
=========== =========== =========== ===========

Total Capital $57,098,025 15.96% $51,502,664 16.49%
Total Capital Minimum Requirement 28,629,400 8.00% 24,981,652 8.00%
----------- ----------- ----------- -----------
Excess Total Capital $28,468,625 7.96% $26,521,012 8.49%
=========== =========== =========== ===========

Tier 1 Capital - Leverage Ratio $53,410,674 10.28% $48,789,800 10.10%
Tier 1 Capital Requirement 15,585,180 3.00% 14,496,664 3.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $37,825,494 7.28% $34,293,136 7.10%
=========== =========== =========== ===========
</TABLE>

62
<PAGE> 203

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)

NOTES TO FINANCIAL STATEMENTS

NOTE 15 - CAPITAL ADEQUACY (CONTINUED)

As of December 31, 1997 and 1996 the most recent notification from the Federal
Reserve Bank of Dallas, as to the Company and the Texas Department of Banking,
as to the Company's subsidiary bank categorized each of them as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since notification that management believes have changed
these categories.

NOTE 16 - OTHER OPERATING EXPENSE

Other operating expense for the years ended December 31, are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Stationery, supplies and printing $ 658,186 $ 785,927 $ 357,924
Legal, accounting and professional 832,712 702,733 542,437
Data processing 172,149 157,701 729,121
Advertising 365,308 428,284 297,435
Insurance 175,390 113,233 418,856
Postage and freight 385,761 373,307 420,876
Other 2,669,490 2,438,503 2,014,072
---------- ---------- ----------

$5,258,996 $4,999,688 $4,780,721
========== ========== ==========
</TABLE>

63
<PAGE> 204

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following lists the executive officers and directors of the Company.
Information regarding such persons, their ages, their present positions held
with the Company and Merchants Bank, and their principal occupations for the
last five years are as follows:

<TABLE>
<CAPTION>
POSITIONS OF EXECUTIVE OFFICERS WITH
NAME THE COMPANY AND MERCHANTS BANK AGE
---- ------------------------------ ---
<S> <C> <C>
J. W. Lander, Jr. Chairman of the Board, Director 72
and Chief Executive Officer of
the Company; Chairman of the Board
and Chief Executive Officer of
Merchants Bank

J. W. Lander, III President, Treasurer, Director and Chief 46
Operating Officer of the Company;
Senior Vice President of Merchants Bank

Norman H. Bird Vice President, Director and Secretary of 53
the Company; Executive Vice President
of Merchants Bank

Donald R. Harding Director of the Company; 57
President of Merchants Bank
</TABLE>

J. W. Lander, Jr., is Chairman of the Board of the Company and has served in
this capacity since May 1988. He was President of the Company from July 1982 to
April 1988. Mr. Lander is also Chairman of the Board and a director of Merchants
Bank. He is President and a director of Nevada Bancorp, positions he has held
since April 1994. In addition, he is a director of Stewart & Stevenson, Inc., a
manufacturer of heavy equipment. He has been a director of the Company since
1982. J. W. Lander, Jr., is the father of J. W. Lander, III.

J. W. Lander, III, is President, Treasurer and Assistant Secretary of the
Company and has served in these capacities since May 1988. Mr. Lander is also
Senior Vice President and a director of Merchants Bank. He is Treasurer and a
director of Nevada Bancorp, positions he has held since April 1994. He has been
a director of the Company since 1983. J. W. Lander, III is the son of J. W.
Lander, Jr.

Norman H. Bird, is Vice President and Secretary of the Company and has held
these offices since May 1988. Mr. Bird is also Executive Vice President of
Merchants Bank, an office he has held since April 1985, and has served as a
director of Merchants Bank since April 1985. He is Secretary of Nevada Bancorp,
an office he has held since April 1994. He has been a director of the Company
since October 1989.

Donald R. Harding, is President and a director of Merchants Bank and has served
in these capacities since March 1982. He has been a director of the Company
since 1982.

64
<PAGE> 205

Each director/officer of the Company holds office until his successor is duly
elected and qualifies unless such director/officer sooner resigns or is removed
from office. Directors of the Company receive a fee of $500 for each directors
meeting attended.

BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Merchants Bancshares' directors and executive officers, and persons who
beneficially own more than ten percent of the Common Stock, to file reports of
beneficial ownership of Common Stock and changes in beneficial ownership on
Forms 3, 4 and 5 (collectively, "SEC Forms") with the Securities and Exchange
Commission ("SEC"). Directors, executive officers and ten percent beneficial
owners are required under regulations promulgated by the SEC to furnish
Merchants Bancshares with copies of all SEC Forms which they file.

Based solely on information provided to Merchants Bancshares by its directors,
executive officers and ten percent beneficial owners, Merchants Bancshares
believes that its directors, executive officers and ten percent beneficial
owners have complied with all filing requirements applicable to them with
respect to acquisitions and dispositions of shares of Merchants Common Stock
occurring during 1997.

65
<PAGE> 206

ITEM 11. EXECUTIVE COMPENSATION

The officers and directors of the Company are compensated by Merchants Bank for
services performed by them on behalf of Merchants Bank. The following table sets
forth the summary compensation of the Chairman (and CEO) and the four other most
highly compensated executive officers of the Company and its subsidiaries for
the three years ended December 31, 1997 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(4)
- ------------------ ---- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
J. W. Lander, Jr.
Director and
Chairman of the
Board of the
Company; Chairman 1997 $220,150 $ 25,000 $ 25,350(2) $ 2,375
of the Board of 1996 220,150 0 20,650(2) 2,477
Merchants Bank 1995 180,953 0 14,925(2) 2,240

J. W. Lander, III
Director, President,
Treasurer and Asst.
Secretary of the
Company; Senior 1997 $ 95,000 $ 25,000 $ 25,550(2) $ 1,800
Vice President- 1996 95,000 25,000 17,025(2) 1,800
Merchants Bank 1995 84,975 8,498 14,270(2) 1,416

Donald R. Harding
Director of the 1997 $100,000 $ 25,000 $ 6,500(3) $ 1,458
Company; President - 1996 100,000 25,000 5,200(3) 1,708
Merchants Bank 1995 86,880 8,688 4,800(3) 1,426

Norman H. Bird
Director, Vice
President and
Secretary of the
Company; Executive 1997 $ 98,400 $ 20,000 $ 6,500(3) $ 1,776
Vice President - 1996 98,400 18,000 5,200(3) 1,746
Merchants Bank 1995 85,300 7,725 4,400(3) 1,367

Richard Chafey
Sr. Vice President 1997 $100,000 $ 20,000 $ 0 $ 1,104
Merchants Bank 1996 100,000 17,800 0 0
</TABLE>

- ----------

(1) The aggregate amount of perquisites and other benefits is excluded since
such compensation is less than the lesser of either $50,000 or 10 percent
of the total annual salary and bonus reported for the named executive
officer.

(2) Includes fees paid in his capacity as a director of Merchants Bank, Gulf
Southwest Nevada Bancorp, and a member of the Development Boards of
Merchants Bank - League City, Texas City, Pearland, LaMarque and Dickinson.

(3) Includes fees paid in his capacity as a director of Merchants Bank.

(4) Amounts of all other compensation are amounts contributed by the Subsidiary
Bank for fiscal year 1995, 1996 and 1997 under the Company's Employee
Savings Plan.

66
<PAGE> 207

PENSION PLAN

The following table shows the approximate annual retirement benefits under the
Merchants Bancshares Pension Plan (before the reduction made for social security
benefits) to eligible employees in specified compensation and years of service
categories, assuming retirement occurs at age 65 and that benefits are payable
only during the employee's lifetime.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 125,000 $ 21,349 $ 28,465 $ 35,531 $ 42,697 $ 49,814
150,000 25,619 34,158 42,648 51,232 59,777
175,000 29,889 39,851 49,765 59,767 69,740
200,000 34,159 45,544 56,882 68,302 79,703
225,000 38,429 51,237 63,999 76,837 89,666
250,000 42,699 56,930 71,116 85,372 99,629
275,000 46,969 62,623 78,233 93,907 109,592
</TABLE>

The compensation used in computing average monthly compensation is the total of
all amounts paid by the Company as shown on the employee's Form W-2, plus
amounts electively deferred by the employee under the 401k Plan. Credited years
of service for the Named Executive Officers as of December 31, 1997 are as
follows: Mr. Bird, 12 years; Mr. Chafey, 2 years; Mr. Harding, 21 years; Mr.
Lander, Jr., 34 years; and Mr. Lander, III, 15 years.

COMPENSATION OF DIRECTORS

The members of the Board of Directors of Merchants Bancshares receive a
directors fee of $500 for each board meeting attended.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with J. W. Lander, Jr.,
J. W. Lander, III, Donald R. Harding and Norman H. Bird (the "Executives"). The
employment agreements are for the period from September 26, 1997 to the date
that is the second anniversary of a Change in Control (as defined in the
employment agreements) (the first anniversary in the case of Mr. Lander, Jr.),
with automatic extensions for an additional one-year period on each anniversary
of the Change in Control unless at least 90 days prior to such anniversary date
the Company or the Executive gives notice that it or he does not wish to have
the term extended. The employment agreements also provide for annual incentive
compensation pursuant to an incentive compensation plan adopted annually by the
Board of Directors of the Subsidiary Bank. The bonus amounts payable pursuant to
such plan are based on the achievement of (i) a specific earnings goal by the
Subsidiary Bank set by the Board of Directors of the Subsidiary Bank, and (ii)
certain other individual goals related to such Executive's job responsibilities.
Upon the termination of an Executive's employment without cause, such Executive
will be entitled to receive, among other things, his base salary and incentive
compensation through the stated term of the employment agreement.

The employment agreements provide that, in the event of a change in
control, if, within two years after the change in control, an Executive
terminates his employment because of certain specified changes in his employment
situation or if he is terminated without cause, he will be entitled to receive
(in addition to salary and incentive compensation earned prior to termination) a
single lump sum payment in an amount equal to (i) two times his annual base
salary, incentive compensation and value of the annual fringe benefits for the
year immediately preceding the year in which his employment terminates, plus
(ii) the value of the portion of his benefits under any

67
<PAGE> 208

savings, pension, profit sharing or deferred compensation plans that are
forfeited under those plans by reason of the termination of employment. The
Executive also would receive a gross-up payment for any excise tax payable under
Section 4999 of the Internal Revenue Code.

In addition, pursuant to the terms of his employment agreement, upon
consummation of a change in control, J. W. Lander, III will receive a payment of
$400,000 for his agreement not to compete with the Company (or its successor)
during his continued employment and for a period of three years after his
termination of employment.

On October 10, 1997, the Company entered into indemnification agreements
with the Executives which provide that the Company will indemnify the Executive
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred if he is or is threatened to be named in an action, suit or
proceeding because he is or was a director, officer, employee or agent of the
Company or was serving at the request of the Company in such a capacity for
another entity. To be entitled to indemnification, the Executive must have acted
in good faith and in the reasonable belief that his conduct was in the best
interests of the Company and, in the case of a criminal proceeding, must have
had no reasonable cause to believe that his conduct was unlawful.
Indemnification will be limited to reasonable expenses actually incurred in
respect of a proceeding in which the Executive is found liable on the basis that
he improperly received a personal benefit or in which he is found liable to the
Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No person who served as a member of the Compensation Committee of Merchants Bank
during 1997 (i) was an officer or employee of the Company or any of its
subsidiaries during such year, (ii) was formerly an officer of the Company or
any of its subsidiaries, or (iii) was a party to any material transaction set
forth under "Certain Relationships and Related Transactions."

No executive officer of the Company served as a member of the compensation or
similar committee or board of directors of any other entity one of whose
executive officers served on the Compensation Committee of Merchants Bank or
the Board or the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of March 1, 1998, 1,951,839 shares of Merchants Common Stock were
outstanding, each of which is entitled to one vote.

The following table sets forth information regarding the beneficial ownership of
the Merchants Common Stock on March 1, 1998, by each current director, each
Named Executive Officer, each beneficial owner of more than five percent (5%) of
the Merchants Common Stock and all directors and executive officers as a group.

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESSES BENEFICIAL AND OWNERSHIP(1) COMMON STOCK
- ------------------ --------------------------- ------------
<S> <C> <C>
Norman H. Bird 820 *
Donald R. Harding 4,379(2) *
JWL/GSW, Ltd. 400,000(3) 20.5%
J. W. Lander, Jr. 400,000(3)
J. W. Lander, III 8,500 *
Vanco Trusts (4) 453,995 23.3%
All directors and officers as
a group (4 persons) 413,699 21.2%
</TABLE>

* Less than one (1) percent.

68
<PAGE> 209

- --------------------

(1) Unless otherwise indicated, each person has sole voting and investment
power over the shares listed.

(2) Shares are owned jointly by Mr. Harding and his wife. Mr. Harding has sole
voting and investment power over the shares.

(3) JWL/GSW, Ltd. is a family limited partnership, for which Mr. Lander, Jr.
and Mr. Lander, III are general partners with voting and investment power
over the shares listed. Approximately 98% of JWL/GSW, Ltd. is owned by the
Lander Children's Trust for which Mr. Lander, III is Trustee. The address
for Messrs. Lander, Jr. and Lander, III and JWL/GSW, Ltd. is 5005 Woodway,
Suite 300, Houston, Texas 77056.

(4) P.O. Box 1239, McAllen, Texas 78502

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of the officers and directors of Merchants Bancshares and their affiliates
are customers of Merchants Bank. Such directors, officers and affiliates have
had transactions in the ordinary course of business with Merchants Bank,
including borrowings, all of which were on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing from
time to time for comparable transactions with unaffiliated persons and did not
involve more than the normal risk of collectibility or features unfavorable to
Merchants Bank. Merchants Bancshares expects that its directors and officers and
their affiliates will continue to enter into such transactions on similar terms
and conditions in the future.

69
<PAGE> 210
PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

(1) Financial Statements See index to financial statements at Item 8 of
this report.

(2) Exhibits

(b) REPORTS ON FORM 8-K.

In January 1998, a Form 8-K was filed with the Securities and Exchange
Commission to report that on January 16, 1998, the Company entered
into an Agreement and Plan of Merger to be acquired by Union Planters
Corporation ("UPC"), a publicly traded bank holding company based in
Memphis, Tennessee, in a tax-free reorganization to be accounted for
as a pooling of interests. Pursuant to the merger agreement, UPC will
exchange one (1) share of its common stock for each outstanding common
share of the Company. The merger is subject to satisfaction of certain
contractual conditions to closing, regulatory and shareholder
approvals, and is expected to be consummated in the second quarter of
1998. For additional information, see "Item 1. Pending Merger."

<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
(c) EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession

2.1 Agreement and Plan of Merger 8K 01/16/98 0-11033 2.1

(3) Articles of Incorporation and Bylaws

3.1 Articles of Incorporation, together with
amendments thereto 8-K 07/19/96 0-11033 3.1

3.2 Bylaws of the Registrant 8-K 07/19/96 0-11033 3.2

(4) Instruments defining rights of security holders,
including indentures

4.1 Form of specimen certificate representing the
Common Stock, par value $1.00 per share of
the Registrant S-4 07/06/90 33-35767 4.1

(10) Material contracts

10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3

10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
</TABLE>

70
<PAGE> 211
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
10.5 Merchants Bancshares, Inc.
Flexible Incentive Plan 10-K 12/31/96 0-11033 10.5

10.6 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander Jr. N/A N/A N/A N/A

10.7 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A

10.8 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A

10.9 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A

10.10 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, Jr. N/A N/A N/A N/A

10.11 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A

10.12 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A

10.13 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A

(21) Subsidiary of the Registrant

21.1 List of subsidiaries N/A N/A N/A N/A

(27) Financial Data Schedule

27.1 Financial Data Schedule N/A N/A N/A N/A
</TABLE>

71
<PAGE> 212

Pursuant to the requirements of Section 13 or 15 (d) 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.

MERCHANTS BANCSHARES, INC.

BY: /s/ J. W. Lander, Jr.
-----------------------------------
J. W. Lander, Jr.
Chief Executive Officer

Date:

Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Norman H. Bird Director, Secretary,
- ------------------------------- and Vice President March 10, 1998
Norman H. Bird

/s/ Donald Harding Director March 10, 1998
- -------------------------------
Donald Harding

Director, Chairman,
/s/ J. W. Lander, Jr. and Chief Executive March 10, 1998
- ------------------------------- Officer
J. W. Lander, Jr.

Director, President and
/s/ J. W. Lander, III Principal Financial and March 10, 1998
- ------------------------------- Accounting Officer
J. W. Lander, III
</TABLE>

72
<PAGE> 213

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

EXHIBITS TO

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

COMMISSION FILE NUMBER 0-11033

MERCHANTS BANCSHARES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<PAGE> 214
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- ------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession

2.1 Agreement and Plan of Merger 8K 01/16/98 0-11033 2.1

(3) Articles of Incorporation and Bylaws

3.1 Articles of Incorporation, together with
amendments thereto 8-K 07/19/96 0-11033 3.1

3.2 Bylaws of the Registrant 8-K 07/19/96 0-11033 3.2

(4) Instruments defining rights of security holders,
including indentures

4.1 Form of specimen certificate representing the
Common Stock, par value $1.00 per share of
the Registrant S-4 07/06/90 33-35767 4.1

(10) Material contracts

10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3

10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4

10.5 Merchants Bancshares, Inc.
Flexible Incentive Plan 10-K 12/31/96 0-11033 10.5

10.6 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander Jr. N/A N/A N/A N/A

10.7 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A

10.8 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A

10.9 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A
</TABLE>

73
<PAGE> 215
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- ------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
10.10 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, Jr. N/A N/A N/A N/A

10.11 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A

10.12 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A

10.13 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A

(21) Subsidiary of the Registrant

21.1 List of subsidiaries N/A N/A N/A N/A

(27) Financial Data Schedule

27.1 Financial Data Schedule N/A N/A N/A N/A
</TABLE>

74
<PAGE> 216
APPENDIX F

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934

For the quarterly period ended MARCH 31, 1998

[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number 0-11033

MERCHANTS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

Texas 76-0045946
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

5005 WOODWAY, SUITE 300
HOUSTON, TEXAS 77056
(Address of principal executive offices) (zip code)

(713) 622-0042
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)

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.

Yes [X] No [_]

As of May 1, 1998, Registrant had outstanding 1,951,839 shares of its $1.00 par
value per share common stock.

1
<PAGE> 217

MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The March 31,1998 and 1997 financial statements included herein are
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in
the opinion of management of the registrant, necessary to a fair
statement of the results for the interim periods.

PAGE
No.

Consolidated Balance Sheets at March 31, 1998 and
at December 31,1997............................................. 3

Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997................................... 4

Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997................................... 5

Notes to Interim Consolidated Financial Statements
for the Period Ended March 31,1998.............................. 7

Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results
of Operations................................................... 8

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
About Market Risk............................................... 12

PART II - OTHER INFORMATION

Item 1 Legal Proceedings................................................. 13

ITEM 2 CHANGE IN SECURITIES AND USE OF PROCEEDS.......................... 13

ITEM 3 DEFAULTS UPON SENIOR SECURITIES................................... 13

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 13

ITEM 5 OTHER INFORMATION................................................. 13

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.................................. 13

2
<PAGE> 218

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)

ASSETS
March 31, December 31,
1998 1997
--------- ------------

Cash and due from banks $ 26,081 $ 37,563
Interest bearing deposits with banks 471 0
Federal funds sold 40,000 16,050
Investment securities:
Available-for-Sale 127,211 130,629
Loans, net of allowance for
loan losses 334,967 338,879
Bank premises and equipment 14,637 14,733
Accrued interest receivable 3,592 3,665
Other assets 4,660 4,432
-------- --------
Total Assets $551,619 $545,951
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing $149,380 $147,749
Interest bearing 339,239 336,608
-------- --------
488,619 484,357
Accrued interest, taxes and
other liabilities 3,742 3,607
-------- --------
Total Liabilities 492,361 487,964
-------- --------
Stockholders' Equity:
Common stock 1,978 1,978
Paid-in capital 25,767 25,767
Retained earnings 31,308 30,097
Unrealized securities gains 527 467
-------- --------
59,580 58,309
-------- --------
Less cost of stock held in treasury:
Common Stock (322) (322)
-------- --------
Total Stockholders' Equity 59,258 57,987
-------- --------
Total Liabilities and
Stockholders' Equity $551,619 $545,951
======== ========

See Notes to Interim Consolidated Financial Statements.

3
<PAGE> 219

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)

THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
Interest Income:
Interest and fees on loans $ 7,999 $ 6,904
Investment securities:
Taxable 1,641 1,819
Non-taxable 208 220
Time deposits with banks 1 13
Federal funds sold 368 249
------- -------
Total Interest Income 10,217 9,205
------- -------

Interest Expense:
Interest bearing deposits 3,139 2,933
Total Interest Expense 3,139 2,933
------- -------

Net interest income 7,078 6,272
Provision for possible loan losses 435 435
------- -------
Net interest income after provision
for loan losses 6,643 5,837
------- -------

Non-Interest Income:
Service charges and fees 1,123 1,184
Other operating income 324 291
------- -------

Total Non-Interest Income 1,447 1,475
------- -------

Non-Interest Expense:
Salaries and employee benefits 2,930 2,812
Furniture, equipment and
occupancy expense 972 960
Other operating expenses 1,444 1,432
------- -------

Total Non-Interest Expense 5,346 5,204
------- -------

Income before income taxes 2,744 2,108
Income taxes 850 645
------- -------

Net Income $ 1,894 $ 1,463
======= =======

Per Share:
Net Income $ .97 $ .75
======= =======
Dividends - Common Stock $ .35 $ .25
======= =======

See Notes to Interim Consolidated Financial Statements.

4
<PAGE> 220

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,894 $ 1,463

ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for loan losses 435 435
Depreciation and amortization 352 335
Discount (accretion) amortized
to income 82 124
Origination of mortgage loans for sale (4,209) (1,455)
Proceeds from mortgage loans sold 3,386 1,639
Provision for losses on real
estate and other assets 46 5
(Increase) decrease in interest
receivable 73 (42)
(Decrease) increase in accrued
interest and other liabilities 134 360
Other - net (77) (56)
-------- --------
Total Adjustments 222 1,345
-------- --------

NET CASH PROVIDED BY OPERATING
ACTIVITES 2,116 2,808
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities of held-to-
maturity investment securities 0 1,835
Proceeds from the maturities of available-
for-sale investment securities 16,939 9,721
Purchase of available-for-sale
investment securities (13,513) (8,218)
Net decrease (increase) in loans 3,966 (14,236)
Purchase of bank premises and equipment (261) (369)
Proceeds from sale of real estate
and other loan related assets 235 101
Other (123) (421)
-------- --------

NET CASH USED BY INVESTING ACTIVITIES 7,243 (11,587)
-------- --------

See Notes to Interim Consolidated Financial Statements.

5
<PAGE> 221

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)

THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 4,263 10,503
Dividends paid (683) (489)
-------- --------

NET CASH PROVIDED BY FINANCING
ACTIVITIES 3,580 10,014
-------- --------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 12,939 1,235
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 53,613 36,448
-------- --------
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 66,552 $ 37,683
======== ========

For the three months ended March 31:
Interest paid $ 3,141 $ 2,898
======== ========

Income taxes paid $ 0 $ 0
======== ========

Non-Cash Transactions:
Foreclosed properties transferred
to other real estate and loan
related assets $ 477 $ 322

Bank loans for other real estate
and loan related assets sold $ 46 $ 139

See Notes to Interim Consolidated Financial Statements.

6
<PAGE> 222

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. PRESENTATION OF FINANCIAL INFORMATION

The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of Management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have been
included. The Results of Operations for the three months ended March 31, 1998,
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K of Merchants Bancshares, Inc. (the "Company"), for the year
ended December 31, 1997.

NOTE 2. EARNINGS PER SHARE

Earnings per share amounts have been computed using the weighted average number
of common shares and common share equivalents outstanding during the period.
The number of such primary shares were 1,951,839 and 1,954,970 for the periods
ended March 31,1998 and 1997, respectively.

NOTE 3. PENDING MERGER

On January 16, 1998, a Form 8-K was filed with the Securities and Exchange
Commission to report that the Company entered into an Agreement and Plan of
Merger to be acquired by Union Planters Corporation ("UPC"), a publicly traded
bank holding company based in Memphis, Tennessee, in a tax-free reorganization
to be accounted for as a pooling of interests. Pursuant to the merger
agreement, UPC will exchange one (1) share of its common stock for each
outstanding common share of the Company. The merger is subject to satisfaction
of certain contractual conditions to closing, is subject to regulatory and
shareholder approvals, and is expected to be consummated in the second quarter
of 1998.

7
<PAGE> 223

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

ANALYSIS OF STATEMENT OF INCOME

The following analysis discusses material changes in the results of operations
for the first quarter of 1998 as compared to the first quarter of 1997.
Merchants Bancshares, Inc. recorded earnings of $1,894,000 in the first quarter
of 1998. This level of earnings represented a increase of $431,000 from the
$1,463,000 earned in the first quarter of 1997.

YEAR 2000 COMPLIANCE

The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a major system failure or miscalculations.

The Company expects its Year 2000 date conversion project to be completed on a
timely basis. During the execution of this project the Company will incur
internal staff costs as well as consulting and other expenses related to
enhancements necessary to prepare the systems for the Year 2000. The expense of
the Year 2000 project as well as the related potential effect on the Company's
earnings is not expected to have a material effect on its financial position or
results of operations.

NET INTEREST INCOME

Net interest income increased 12.9% in the first quarter of 1998 when compared
to the same quarter of 1997. The increase of $806,000 resulted from a
$1,012,000 (11.0%) increase in interest income or earning assets, partially
offset by an increase of $206,000 (7.0%) in interest expense. Higher loan
volume was the principal reason for the increase in interest income.

The Company's subsidiary bank (the "Subsidiary Bank") attempts to adjust the
rates paid or earned on interest bearing liabilities and interest earning assets
to maintain a consistent net interest margin to the extent possible.

PROVISION FOR POSSIBLE LOAN LOSSES

The $435,000 provision for credit losses for the first quarter of 1998 was the
same for the first quarter of 1997. The provision for credit losses for the
first quarter of 1998 was offset by $105,000 in net losses charged to the
allowance as compared with net losses of $176,000 for the same period in 1997.
The ratio of the allowance for credit losses to outstanding loans was 1.19% on
March 31, 1998, as compared to .96% on March 31, 1997.

The Subsidiary Bank's policy is to maintain a level in the allowance for
possible loan losses that is adequate to cover the loan losses sustained plus
provide for any future possible losses on problem loans. The adequacy of the
allowance is continually monitored and management considers the current level to
be appropriate based on an evaluation of the Subsidiary Bank's loan portfolio.
The transactions in the allowance for possible loan losses were as follows:

8
<PAGE> 224

PROVISION FOR POSSIBLE LOAN LOSSES (CONTINUED)

FOR THE QUARTER
ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------

Loans outstanding at period end $338,984,000 $308,554,000
============ ============

Allowance at beginning of period $ 3,687,000 $ 2,713,000
------------ ------------

Provision charged to expense 435,000 435,000
------------ ------------
Loans charged off:
Commercial and industrial (62,000) (13,000)
Real estate (13,000) (20,000)
Installment (202,000) (167,000)
------------ ------------
Total (277,000) (200,000)
------------ ------------
Loans recovered:
Commercial and industrial 151,000 3,000
Real estate 6,000 3,000
Installment 15,000 18,000
------------ ------------
Total 172,000 24,000
------------ ------------
Net Loans recovered (charged off) (105,000) (176,000)
------------ ------------
Allowance at end of period $ 4,017,000 $ 2,972,000
============ ============

Ratios:
Allowance as a percent of
loans outstanding 1.19% .96%
============ ============
Allowance as a percent of
nonperforming loans 181.2% 108.2%
============ ============

NON-PERFORMING ASSETS

All loans which cause management to have doubt as to the borrower's ability to
substantially comply with present loan repayment terms are included in the
schedule of non-performing loans.

Non-performing loans consist of loans on which interest is not being accrued
and loans which are 90 days or more past due as to principal and/or interest
payment and not yet in a non-accruing status. The policy of the Subsidiary Bank
is to continue to accrue interest on loans which are 90 days or more past due if
periodic payments are being made on the loans. If a loan is classified as past
due and payments then resume on the loan, it continues to be classified as past
due until all past due amounts are paid.

9
<PAGE> 225

NON-PERFORMING ASSETS (CONTINUED)

The following table discloses information regarding non-performing assets for
the indicated periods:

March 31,
-----------------------
1998 1997
---------- ----------

Non-accrual loans $1,684,000 $2,480,000
Past due 90 days or more 533,000 266,000
---------- ----------
Total 2,217,000 2,746,000
Other real estate owned 1,367,000 930,000
---------- ----------
Total non-performing assets $3,584,000 $3,676,000
========== ==========

NON-INTEREST INCOME

The components included in
non-interest income for the
indicated periods are as follows:

FOR THE QUARTER
ENDED MARCH 31,
-----------------------
1998 1997
---------- ----------

Service charges and fees $1,123,000 $1,184,000
Other operating income 324,000 291,000
Securities transactions 0 0
---------- ----------
Total non-interest income $1,447,000 $1,475,000
========== ==========

Noninterest income decreased $28,000 or 1.9% for the first quarter of 1998
compared to the same quarter in 1997. The decrease is primarily due to a
reduction in fees charged for non-sufficient funds.

The Subsidiary Bank maintains a policy of constantly monitoring and evaluating
service charges and fees to ensure that the fees charged reflect the cost of
service provided and remain competitive with other financial institutions
located in the Subsidiary Bank's market area.

NON-INTEREST EXPENSE

Non-interest expense increased by 2.7% for the first quarter of 1998 over the
first quarter of 1997. The totals were as follows:

FOR THE QUARTER
Ended March 31,
--------------------------
1998 1997
---------- ---------

Salaries and employee benefits $2,930,000 $2,812,000
Furniture, equipment and occupancy
expense 972,000 960,000
Other operating expenses 1,444,000 1,432,000
---------- ----------
Total non-interest expenses $5,346,000 $5,204,000
========== ==========

Salaries and employee benefits are the most significant operating expenses of
the Company. These expenses increased by 4.2% for the first quarter of 1998 as
compared to the first quarter of 1997. Other noninterest expenses increased
$24,000 or 1.0% for the first quarter ended March 31, 1998 as compared to the
same period in 1997.

10
<PAGE> 226

ANALYSIS OF BALANCE SHEET

EARNING ASSETS

When comparing the total of earning assets at March 31, 1998, to the total at
December 31, 1997, earning assets increased 3.5%. The increase of $17.1
million was due primarily to an increase of $24 million in federal funds sold
and a decrease of $11.5 million in cash which was partially offset by a decrease
of $3.9 million and $3.4 million in loans and investment securities,
respectively.

Included in the total of earning assets at March 31, 1998 are loans totaling
$1.7 million which are on a non-accrual status. This compares to non-accrual
loans totaling $2.5 million and $2.0 million at March 31, 1997 and December 31,
1997, respectively.

DEPOSITS

The most important funding source for earning asset growth is deposits. Total
deposits increased by .9% from December 31, 1997 to March 31, 1998, compared to
an increase of 2.4% from December 31, 1996 to March 31, 1997. Non-interest
bearing deposits increased 1.1% from December 31, 1997 to March 31, 1998, while
interest-bearing deposits increased .8% for the same period.

CAPITAL

Shareholders' equity increased $1.3 million, or 2.2% for the three months ended
March 31, 1998, as compared to an increase of 1.2% for the same period in 1997.
The ratio of shareholders' equity to total assets was 10.7% on March 31,1998,
as compared to 10.6% on December 31, 1997 and 10.7% on March 31, 1997.

Bank holding companies and their bank subsidiaries are required to maintain
certain capital ratios. The Federal Reserve Board's guidelines classify
capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital
consists of common and qualifying preferred shareholders' equity less goodwill.
Tier 2 capital consists of mandatory convertible debt, preferred stock not
qualifying as Tier 1, qualifying subordinated debt and the allowance for loan
losses up to 1.25% of risk-weighted assets. The minimum ratio for the sum of
Tier 1 and Tier 2 to risk weighted assets is 8.0%, at least one-half of which
should be in the form of Tier 1 capital. At March 31, 1998, core capital (Tier
1) and total capital (Tier 1 and Tier 2) as a percentage of risk-weighted assets
was 16.05% and 17.17%, respectively. The Subsidiary Bank at March 31, 1998 had
core capital of 15.41% and total capital of 16.53% as a percentage of risk
weighted assets.

In addition to the foregoing ratios, bank holding companies are required to
maintain a minimum ratio of core capital to total assets (hereinafter referred
to as the "Leverage Ratio") of at least 3.0%. At March 31, 1998, the Company's
Leverage Ratio was 10.47%. A similar leverage ratio applicable to the
Subsidiary Bank has been adopted by the FDIC. At March 31, 1997, the
Subsidiary Bank's ratio was 10.06%.

LIQUIDITY AND CAPITAL COMMITMENTS

Liquidity is the ability of the Company and the Subsidiary Bank to meet their
short-term needs for cash arising from demands such as operating expenses,
withdrawal of deposits and demand for loans. The liquidity of the Company is
primarily provided by dividends from the Subsidiary Bank and interest on time
deposits in financial institutions.

11
<PAGE> 227

LIQUIDITY AND CAPITAL COMMITMENTS (CONTINUED)

The Subsidiary Bank's liquidity is primarily provided by maturing loans,
deposits, cash, short-term investments, time deposits in other banks, federal
funds sold and profits. With bank regulators critically reviewing liquidity,
the Company has adopted a policy of maintaining a minimum liquidity level of
20% as measured by the FDIC formula, at the Subsidiary Bank. As of March 31,
1998, the liquidity level of the Subsidiary Bank was 36.9%.

The Company believes that both it and the Subsidiary Bank have sufficient
capital and financial resources to meet its current and anticipated capital
commitments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable

12
<PAGE> 228

PART II - OTHER INFORMATION

Item 1. Legal proceedings.

Not applicable

Item 2. Changes in securities.

Not applicable

Item 3. Defaults upon senior securities.

Not applicable

Item 4. Submission of matters to a vote of security holders.

Not applicable

Item 5. Other information.

Not applicable

Item 6. Exhibits and reports on Form 8-K.

(a) Exhibits
27.1 Financial Data Schedule

(b) Reports of Form 8-K

In January, 1998, a Form 8-K was filed with the Securities and
Exchange Commission to report that on January 16, 1998, the
Company entered into an Agreement and Plan of Merger to be
acquired by Union Planters Corporation ("UPC"), a publicly traded
bank holding company based in Memphis, Tennessee, in a tax-free
reorganization to be accounted for as a pooling of interests.
Pursuant to the merger agreement, UPC will exchange one (1) share
of its common stock for each outstanding common share of the
Company. The merger is subject to satisfaction of certain
contractual conditions to closing, is subject to regulatory and
shareholder approvals, and is expected to be consummated in the
second quarter of 1998.

13
<PAGE> 229

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- ------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession

2.1 Agreement and Plan of Reorganization 8-K 01/16/98 0-11033 2.1

(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation of the Registrant,
together with amendments thereto 8-K 07/19/96 0-11033 3.1

3.2 Bylaws of the Registrant 8-K 07/19/96 0-11033 3.2

(10) Material contracts

10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3

10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4

10.5 Merchants Bancshares, Inc.
Flexible Incentive Plan 10-K 12/31/96 0-11033 10.5

10.6 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander Jr. 10-K 12/31/97 0-11033 10.6

10.7 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander, III 10-K 12/31/97 0-11033 10.7

10.8 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Donald R. Harding 10-K 12/31/97 0-11033 10.8

10.9 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Norman H. Bird 10-K 12/31/97 0-11033 10.9

10.10 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, Jr. 10-K 12/31/97 0-11033 10.10

10.11 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, III 10-K 12/31/97 0-11033 10.11

</TABLE>

14
<PAGE> 230

<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- ------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C>
10.12 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Donald R. Harding 10-K 12/31/97 0-11033 10.12

10.13 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Norman H. Bird 10-K 12/31/97 0-11033 10.13

(27) Financial Data Schedule

27.1 Financial Data Schedule N/A N/A N/A N/A

</TABLE>

15
<PAGE> 231

SIGNATURES

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.

MERCHANTS BANCSHARES, INC.

Date: May 5, 1998 BY: /s/ J. W. Lander, Jr.
-----------------------------------------
J.W. Lander, Jr., Chairman

Date: May 5, 1998 BY: /s/ J. W. Lander, III
-----------------------------------------
J. W. Lander, III, President
(principal financial and chief accounting
officer)

<PAGE> 232

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Restated Charter of the Registrant provides as follows:

TWELFTH: INDEMNIFICATION OF CERTAIN PERSONS:

To the fullest extent permitted by Tennessee law, the
Corporation may indemnify or purchase and maintain insurance to
indemnify any of its directors, officers, employees or agents and any
persons who may serve at the request of the Corporation as directors,
officers, employees, trustees or agents of any other corporation, firm,
association, national banking association, state-chartered bank, trust
company, business trust, organization or any other type of entity
whether or not the Corporation shall have any ownership interest in
such entity. Such indemnification(s) may be provided for in the Bylaws,
or by resolution of the Board of Directors or by appropriate contract
with the person involved.

Article V, INDEMNIFICATION, of the Registrant's Amended and Restated
Bylaws provides as follows:

The Corporation does hereby indemnify its directors and
officers to the fullest extent permitted by the laws of the State of
Tennessee and by ARTICLE TWELFTH of its Charter. The Corporation may
indemnify any other person to the extent permitted by the Charter and
by applicable law.

Indemnification of corporate directors and officers is
governed by Sections 48-18-501 through 48-18-509 of the Tennessee
Business Corporation Act (the "Act"). Under the Act, a person may be
indemnified by a corporation against judgments, fines, amounts paid in
settlement and reasonable expenses (including attorneys' fees) actually
and necessarily incurred by him in connection with any threatened or
pending suit or proceeding or any appeal thereof (other than an action
by or in the right of the corporation), whether civil or criminal, by
reason of the fact that he is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a
director or officer, employee or agent of another corporation of any
type or kind, domestic or foreign, if such director or officer acted in
good faith for a purpose which he reasonably believed to be in the best
interest of the corporation and, in criminal actions or proceedings
only, in addition, had no reasonable cause to believe that his conduct
was unlawful. A Tennessee corporation may indemnify a director or
officer thereof in a suit by or in the right of the corporation against
amounts paid in settlement and reasonable expenses, including
attorneys' fees, actually and necessarily incurred as a result of such
suit unless such director or officer did not act in good faith or with
the degree of diligence, care and skill which ordinarily prudent men
exercise under similar circumstances and in like positions.

A person who has been wholly successful, on the merits or
otherwise, in the defense of any of the foregoing types of suits or
proceedings is entitled to indemnification for the foregoing amounts. A
person who has not been wholly successful in any such suit or
proceeding may be indemnified only upon the order of a court or a
finding that the director or officer met the required statutory
standard of conduct by (i) a majority vote of a disinterested quorum of
the Board of Directors, (ii) the Board of Directors based upon the
written opinion of independent legal counsel to such effect, or (iii) a
vote of the shareholders.

<PAGE> 233

ITEM 21. EXHIBITS.

The following exhibits are filed herein or have been, as
noted, previously filed:

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ----------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 16, 1998, by
and between Union Planters Corporation, Union Planters Holding
Corporation and Merchants Bancshares, Inc., and Amendment No. 1
thereto (Included as Appendix A to the Proxy Statement included
as part of this Registration Statement.)

2.2 Amended and Restated Plan of Merger of Merchants Bancshares,
Inc. into and with Union Planters Holding Corporation. (Included
as Appendix B to the Proxy Statement included as part of this
Registration Statement.)

4.1 Restated Charter of Union Planters Corporation. (Incorporated by
reference to Exhibit 3(a) to the UPC March 1998 Form 10-Q).

4.2 Amended and Restated Bylaws of Union Planters Corporation.
(Incorporated by reference to Exhibit 3(d) to the Annual Report
on Form 10-K of UPC for the fiscal year ended December 31, 1996
(File No. 0-6919).

5.1 Opinion of E. James House, Jr., Secretary and Manager of the
Legal Department of Union Planters Corporation, as to the
validity of the shares of UPC Common Stock.

8.1 Opinion of Wyatt, Tarrant & Combs as to federal income tax
consequences.

23.1 Consent of Price Waterhouse LLP.

23.2 Consent of Hidalgo, Banfill, Zlotnik & Kermali, P.C.,
independent accountants for Merchants Bancshares, Inc.

23.3 Consent of E. James House, Jr., Secretary and Manager of the
Legal Department of Union Planters Corporation (included in
Exhibit 5.1).

23.4 Consent of Wyatt Tarrant & Combs (included in Exhibit 8.1).

23.5 Consent of Price Waterhouse LLP Corporate Finance Division.

24.1 Power of Attorney*

99.1 Form of proxy of Merchants Bancshares, Inc.
</TABLE>

* Previously Filed.

II-2

<PAGE> 234

ITEM 22. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(2) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(3) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.

(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.

(7) That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.

(8) That every prospectus: (i) that is filed pursuant to Paragraph (7)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-3

<PAGE> 235

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment No. 1 to registration
statement 333-49959 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee on this the 17th day of June 1998.

REGISTRANT

UNION PLANTERS CORPORATION

By: /s/ Benjamin W. Rawlins, Jr.
-------------------------------------------------
Benjamin W. Rawlins, Jr.
Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No.1 to registration statement has been signed
below by the following persons in the capacities and at the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/Benjamin W. Rawlins, Jr. Chairman of the Board, Chief Executive June 17, 1998
- ---------------------------------- Officer, Director (Principal
Benjamin W. Rawlins, Jr. Executive Officer)

/s/Jackson W. Moore President, Chief Operating Officer, June 17, 1998
- ---------------------------------- Director
Jackson W. Moore

/s/John W. Parker Executive Vice President and June 17, 1998
- ---------------------------------- Chief Financial Officer
John W. Parker (Principal Financial Officer)

/s/M. Kirk Walters Senior Vice President, Treasurer, June 17, 1998
- ---------------------------------- and Chief Accounting Officer
M. Kirk Walters

/s/Edgar H. Bailey Vice Chairman of the Board June 17, 1998
- ---------------------------------- and Director
Edgar H. Bailey
</TABLE>

II-4

<PAGE> 236

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/Albert M. Austin Director June 17, 1998
- ----------------------------------
Albert M. Austin

/s/Marvin E. Bruce Director June 17, 1998
- ----------------------------------
Marvin E. Bruce

/s/George W. Bryan Director June 17, 1998
- ----------------------------------
George W. Bryan

/s/James E. Harwood Director June 17, 1998
- ----------------------------------
James E. Harwood

/s/Parnell S. Lewis, Jr. Director June 17, 1998
- ----------------------------------
Parnell S. Lewis, Jr.

/s/C.J. Lowrance, III Director June 17, 1998
- ----------------------------------
C. J. Lowrance, III

/s/Stanley D. Overton Director June 17, 1998
- ----------------------------------
Stanley D. Overton

/s/Dr. V. Lane Rawlins Director June 17, 1998
- ----------------------------------
Dr. V. Lane Rawlins
June 17, 1998
/s/Donald F. Schuppe Director
- ----------------------------------
Donald F. Schuppe

/s/Mike P. Sturdivant Director June 17, 1998
- ----------------------------------
Mike P. Sturdivant

/s/David M. Thomas Director June 17, 1998
- ----------------------------------
David M. Thomas

Director
- ----------------------------------
Richard A. Trippeer, Jr.

Director
- ----------------------------------
Spence L. Wilson

/s/ E. James House, Jr.
- ----------------------------------
E. James House, Jr.
Attorney in Fact
</TABLE>

II-5

<PAGE> 237

EXHIBIT INDEX

The following exhibits are filed herein or have been, as
noted, previously filed:

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ----------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 16, 1998, by
and between Union Planters Corporation, Union Planters Holding
Corporation and Merchants Bancshares, Inc. and Amendment No. 1
thereto (Included as Appendix A to the Proxy Statement included
as part of this Registration Statement.)

2.2 Amended and Restated Plan of Merger of Merchants Bancshares, Inc.
into and with Union Planters Holding Corporation. (Included as
Appendix B to the Proxy Statement included as part of this
Registration Statement.)

4.1 Restated Charter of Union Planters Corporation. (Incorporated by
reference to Exhibit 3(a) to the UPC March 1998 Form 10-Q).

4.2 Amended and Restated Bylaws of Union Planters Corporation.
(Incorporated by reference to exhibit 3(d) to the Annual Report
on Form 10-K of UPC for the fiscal year ended December 31, 1996
(File No. 0-6919).

5.1 Opinion of E. James House, Jr., Secretary and Manager of the
Legal Department of Union Planters Corporation, as to the
validity of the shares of UPC Common Stock.

8.1 Opinion of Wyatt, Tarrant & Combs as to federal income tax
consequences.

23.1 Consent of Price Waterhouse LLP.

23.2 Consent of Hidalgo, Banfill, Zlotnik & Kermali, P.C.,
independent accountants for Merchants Bancshares, Inc.

23.3 Consent of E. James House, Jr., Secretary and Manager of the
Legal Department of Union Planters Corporation (included in
Exhibit 5.1).

23.4 Consent of Wyatt Tarrant & Combs (included in Exhibit 8.1).

23.5 Consent of Price Waterhouse LLP Corporate Finance Division.

24.1 Power of Attorney*

99.1 Form of proxy of Merchants Bancshares, Inc.
</TABLE>

* Previously Filed.

II-6

<PAGE> 1

EXHIBIT 5.1

LOGO
UNION PLANTERS CORPORATION

June 12, 1998

Union Planters Corporation
7130 Goodlett Farms Parkway
Memphis, Tennessee 38018

Re: 2,019,825 Shares of the Common Stock, $5.00 Par Value Per
Share of Union Planters Corporation, a Tennessee Corporation
("UPC")

Gentlemen:

The undersigned has participated in the preparation of a registration statement
on Form S-4 (the "Registration Statement") for filing with the Securities and
Exchange Commission in respect to not more than 2,019,825 shares of UPC's common
stock, $5.00 par value per share ("UPC Common Stock") which may be issued by UPC
pursuant to an Agreement and Plan of Merger dated as of January 16, 1998, as
amended by Amendment No. 1 thereto, by and between UPC, Union Planters Holding
Corporation ("UPHC") and Merchants Bancshares, Inc. (the "Merger Agreement").

For purposes of rendering the opinion expressed herein, the undersigned has
examined UPC's Charter and all amendments thereto; UPC's Bylaws and amendments
thereto; the Merger Agreement and such of UPC's corporate records as the
undersigned has deemed necessary and material to rendering the undersigned's
opinion. The undersigned has relied upon certificates of public officials and
representations of UPC officials, and has assumed that all documents examined by
the undersigned as originals are authentic, that all documents submitted to the
undersigned as photocopies are exact duplicates of original documents, and that
all signatures on all documents are genuine.

Further, the undersigned is familiar with and has supervised all corporate
action taken in connection with the authorization of the issuance and offering
of the subject securities.

Based upon and subject to the foregoing and subsequent assumptions,
qualifications and exceptions, it is the undersigned's opinion that:

1. UPC is a duly organized and validly existing corporation in good
standing under the laws of the State of Tennessee and has all requisite power
and authority to issue, sell and deliver the subject securities, and to carry on
its business and own its property; and

2. The shares of UPC Common Stock to be issued by UPC pursuant to the
Merger Agreement have or will have been duly authorized and when issued by UPC
in accordance with the Merger Agreement, such shares of UPC Common Stock will be
fully paid and nonassessable.

The opinion expressed above is limited by the following assumptions,
qualifications and exceptions.

(a) The undersigned is licensed to practice law only in the State
of Tennessee and expresses no opinion with respect to the
effect of any laws other than those of the State of Tennessee
and of the United States of America.

(b) The opinion stated herein is based upon statutes, regulations,
rules, court decisions and other authorities existing and
effective as of the date of this opinion, and the undersigned
undertakes no responsibility to

<PAGE> 2

Union Planters Corporation
7130 Goodlett Farms Parkway
Memphis, Tennessee 38018

Page 2

update or supplement said opinion in the event of or in response
to any subsequent changes in the law or said authorities, or upon
the occurrence after the date hereof of events or circumstances
that, if occurring prior to the date hereof, might have resulted
in a different opinion.

(c) This opinion is limited to the legal matters expressly set forth
herein, and no opinion is to be implied or inferred beyond the
legal matters expressly so addressed.

The undersigned hereby consents to the undersigned being named as a party
rendering a legal opinion under the caption "Legal Opinions" in the Prospectus
constituting part of the Registration Statement and to the filing of this
opinion with the Securities and Exchange Commission as well as all state
regulatory bodies and jurisdictions where qualification is sought for the sale
of the subject securities.

The undersigned is an officer of, and receives compensation from UPC and
therefore is not independent from UPC.

Very truly yours,

UNION PLANTERS CORPORATION

By: /s/ E. James House, Jr.
-------------------------------
E. James House, Jr.
Manager, Legal Department

<PAGE> 1
EXHIBIT 8.1

[Wyatt, Tarrant & Combs Letterhead]

502 562-7278

June 17, 1998

Board of Directors
Union Planters Corporation
7130 Goodlett Farms Parkway
Memphis, Tennessee 38018

Gentlemen:

We have acted as counsel to Union Planters Corporation, a Tennessee
corporation ("UPC"), in connection with (i) the proposed merger (the "Merger")
of Merchants Bancshares, Inc., a Texas Corporation, ("Merchants"), with and into
Union Planters Holding Corporation, a Tennessee corporation and a wholly-owned
subsidiary of UPC ("Holdings"), pursuant to the terms of the Agreement and Plan
of Merger by and between UPC, Holdings and Merchants dated January 16, 1998 (the
"Merger Agreement") and related Plan of Merger between UPC, Holdings and
Merchants (collectively, the "Plan of Reorganization"), and (ii) the filing of
the registration statement by UPC on Form S-4 (together with all amendments and
exhibits thereto through the date hereof, the "Registration Statement"), under
the Securities Act of 1933, as amended (the "Act"), covering the shares of UPC
Common Stock to be issued pursuant to the Plan of Reorganization. Capitalized
terms used but not defined herein shall have the meanings assigned to them in
the Registration Statement.

In rendering this opinion we have examined such documents as we have
deemed relevant or necessary, including without limitation, the Plan of
Reorganization and the Registration Statement. In our examination, we have
assumed the genuineness of all signatures, the due execution and delivery of all
documents, the legal capacity of all natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or copies, and the
authenticity of the originals of such copies.

As to factual matters, in rendering this opinion, we have relied solely
on and have assumed the present and continuing truth and accuracy of (i) the
description of the facts relating to the Merger contained in the Plan of
Reorganization and Registration

<PAGE> 2

Board of Directors
Union Planters Corporation

June 17, 1998

Page 2.

Statement, (ii) the factual representations and warranties contained in the Plan
of Reorganization and Registration Statement and related documents and
agreements, and (iii) the factual matters addressed by representations from
certain executive officers of UPC, Holdings and Merchants contained in letters
to us dated March 31, 1998, copies of which are attached as Exhibit A and
Exhibit B to this opinion (the "Representation Letters"). The Representation
Letters address various factual matters relevant to the qualification of the
Merger as a tax-deferred reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). The initial and continuing truth
and accuracy of all such factual matters constitutes an integral basis for, and
a material condition to, this opinion.

The scope of this opinion is limited strictly to the matters set forth
below and no other opinion may be implied or inferred beyond such matters.
Without limiting the foregoing sentence, we express no opinion as to (i) any of
the local, state, foreign or other federal tax consequences resulting from the
Merger, (ii) the federal income tax consequences to shareholders of Merchants
subject to special rules under the Code, such as foreign persons, tax-exempt
organizations, insurance companies, financial institutions, dealers in stocks
and securities, and persons who do not own such stock as a capital asset, (iii)
the federal income tax consequences affecting shares of Merchants Common Stock
acquired upon exercise of stock options, stock purchase plan rights or otherwise
as compensation; (iv) the tax consequences to holders of warrants, options or
other rights to acquire shares of Merchants Common Stock; (v) the tax
consequences of the parties to the Merger Agreement of the inclusion in income
of the amount of the bad-debt reserve maintained by Merchants and/or its
subsidiaries and any other amounts resulting from any required change in
accounting methods; and (vi) the tax consequences of the parties to the Merger
Agreement of any income and deferred gain recognized pursuant to Treasury
Regulations issued under Section 1502 of the Code.

Subject to the qualifications, assumptions and conditions provided
herein, we are of the opinion that:

1. The acquisition by Holdings of substantially all of the assets of
Merchants in exchange for shares of UPC Common Stock and the assumption of
liabilities of Merchants pursuant to the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.

2. Merchants, UPC and Holdings will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.

<PAGE> 3

Board of Directors
Union Planters Corporation

June 17, 1998

Page 3.

3. No gain or loss will be recognized by Merchants as a result of the
Merger.

4. No gain or loss will be recognized by Holdings or UPC as a result of
the Merger.

5. No gain or loss will be recognized by the shareholders of Merchants
as a result of the exchange of Merchants Common Stock for UPC Common Stock
pursuant to the Merger, except that a gain or loss will be recognized on the
receipt of any cash in lieu of a fractional share. Assuming that the Merchants
Common Stock is a capital asset in the hands of the respective Merchants
shareholders, any gain or loss recognized as a result of the receipt of cash in
lieu of a fractional share will be a capital gain or loss equal to the
difference between the cash received and that portion of the holder's tax basis
in the Merchants Common Stock allocable to the fractional share.

6. The tax basis of UPC Common Stock to be received by the shareholders
of Merchants will be the same as the tax basis of the Merchants Common Stock
surrendered in exchange therefor (reduced by any amount allocable to a
fractional share interest for which cash is received).

7. The holding period of the UPC Common Stock to be received by
shareholders of Merchants will include the holding period of the Merchants
Common Stock surrendered in exchange therefor, provided the Merchants shares
were held as a capital asset by the shareholders of Merchants on the date of the
exchange.

8. A shareholder of Merchants who perfects his dissenter's rights and
who receives payment of the fair market value of his shares of Merchants Common
Stock will be treated as having received such payment in redemption of such
stock. Such redemption will be subject to the conditions and limitations of
Section 302 of the Code.

This opinion is based on the Code, the Treasury Regulations promulgated
thereunder, judicial decisions and administrative pronouncements of the Internal
Revenue Service ("IRS"), all existing and in effect on the date of this opinion
and all of which are subject to change at any time, possibly retroactively. Any
such change could materially alter the conclusions reached in this opinion. We
undertake no obligation to you or any other person to give notice of any such
change. As noted above, this opinion is limited strictly to the matters
expressly stated herein and no other opinion may be implied or inferred beyond
such matters. You should realize that this opinion is not binding on the IRS or
the courts.

<PAGE> 4

Board of Directors
Union Planters Corporation

June 17, 1998

Page 4.

This opinion is provided to you solely for purposes of complying with
the requirements of Item 21(a) of Form S-4 under the Act and Section 9.1(g) of
the Merger Agreement. We hereby consent to the use of this opinion as an exhibit
to the Registration Statement, to the disclosure and summarization of the
opinion in the Registration Statement, including in the proxy
statement/prospectus included therein, and to the reference to this Firm in the
Registration Statement under the caption "Legal Matters." In giving this consent
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Act or the rules and regulations of
the Securities and Exchange Commission promulgated thereunder.

Very truly yours,

/s/ WYATT, TARRANT & COMBS

WYATT, TARRANT & COMBS

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus constituting part of this Registration Statement on Form
S-4 of Union Planters Corporation of our report dated January 15, 1998, except
as to Note 2 which is as of March 3, 1998, which appears on page 41 of Union
Planters Corporation's 1997 Annual Report to Shareholders, which is incorporated
by reference in its Annual Report on Form 10-K of the year ended December 31,
1997. We also consent to the reference to us under the heading "EXPERTS" in such
Proxy Statement/Prospectus.

PRICE WATERHOUSE LLP

/s/ PRICE WATERHOUSE LLP
- --------------------------

Memphis, Tennessee
June 19, 1998

<PAGE> 1

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration
Statement of Union Planters Corporation on Form S-4 of our report relating to
Merchants Bancshares, Inc. dated March 4, 1998 appearing in the Merchants
Bancorp Annual Report on Form 10-K for the year ended December 31, 1997, and to
the reference to us under the heading "EXPERTS" in this Registration Statement.

HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C.

/s/HIDALGO, BANFILL, ZLOTNIK & KERMALI, PC.
-------------------------------------------

Houston, Texas
June 17, 1998

<PAGE> 1

EXHIBIT 23.5

CONSENT OF PRICE WATERHOUSE LLP

We hereby consent to the inclusion of our opinion letter dated May 26, 1998
to the Board of Directors of Merchants Bancshares, Inc. (included as
"Appendix C" to the Proxy Statement/Prospectus included in the Form S-4
Registration Statement relating to the proposed merger of Merchants Bancshares,
Inc. with and into Union Planters Holding Corporation, a wholly owned subsidiary
of Union Planters Corporation) and to the references to such opinion in such
Registration Statement. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act if 1933, as amended (the "Securities Act") or the rules and
regulations of the Securities Exchange Commission (the "SEC") thereunder, nor do
we thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act or the rules and regulations of the SEC thereunder.

Very truly yours,
PRICE WATERHOUSE LLP

/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP

New York, New York
June 18, 1998

<PAGE> 1

EXHIBIT 99.1

MERCHANTS BANCSHARES, INC.

The undersigned hereby constitutes and appoints J.W. Lander, Jr. and
J.W. Lander, III, or either of them, as proxies, each with full power of
substitution, to vote the number of shares of common stock of Merchants
Bancshares, Inc. ("Merchants") which the undersigned would be entitled to vote
if personally present at the Special Meeting of Merchants shareholders to be
held at Merchants Bank - Tanglewood, 5005 Woodway, Houston, Texas 77056, at
10:00 a.m., local time, on July 30, 1998, and at any adjournment or postponement
thereof (the "Special Meeting"), upon the proposals described in the Proxy
Statement/Prospectus and the Notice of Special Meeting of Shareholders, both
dated June __, 1998, the receipt of which is acknowledged in the manner
specified below. The undersigned hereby revokes all prior proxies given to vote
shares of common stock at the Special Meeting.

1. MERGER. To consider and vote upon a proposal to approve an Agreement
and Plan of Merger, dated as of January 16, 1998, as amended by
Amendment No. 1 thereto (the "Agreement"), by and between Merchants,
Union Planters Corporation, a Tennessee corporation ("UPC"), and Union
Planters Holding Corporation ("UP Holding"), a wholly-owned subsidiary
of UPC, and the related Amended and Restated Plan of Merger (the "Plan
of Merger"), by and between Merchants, UPC and UP Holding, pursuant to
which (i) Merchants will merge (the "Merger") with and into UP Holding,
with the effect that UP Holding shall be the corporation surviving from
the Merger, and (ii) each share of the $1.00 par value common stock of
Merchants ("Merchants Common Stock") issued and outstanding at the
effective time of the Merger will be converted into 1.0345 shares of
the $5.00 par value common stock of UPC and the associated "Preferred
Share Rights" (as defined in the accompanying Proxy
Statement/Prospectus), subject to possible adjustment, and cash in lieu
of any fractional share, all as more fully described in the
accompanying Proxy Statement/Prospectus.

FOR [ ] AGAINST [ ] ABSTAIN [ ]

2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 ABOVE.

Please sign exactly as name appears below. When shares are held jointly, both
should sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.

DATED: , 1998
------------------------------

-------------------------------------------
Signature

-------------------------------------------
Signature if held jointly

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
MERCHANTS BANCSHARES, INC.
AND MAY BE REVOKED PRIOR TO ITS EXERCISE.