<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1998
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
COMMERCE BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 6712 43-0889454
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
JURISDICTIONOF
INCORPORATION OR
ORGANIZATION)
1000 WALNUT
KANSAS CITY, MISSOURI 64106
(816) 234-2000
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
J. DANIEL STINNETT, ESQ.
VICE PRESIDENT, SECRETARY
AND GENERAL COUNSEL
COMMERCE BANCSHARES, INC.
1000 WALNUT
KANSAS CITY, MISSOURI 64199-3686
(816) 234-2350
FAX: (816) 234-2333
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DENNIS P. WILBERT, ESQ. HOWARD MICK, ESQ.
BLACKWELL SANDERS PEPER MARTIN LLP STINSON, MAG & FIZZELL, P.C.
TWO PERSHING SQUARE 1201 WALNUT STREET
2300 MAIN, SUITE 1000 KANSAS CITY, MISSOURI 64106
KANSAS CITY, MISSOURI 64108 (816) 842-8600
(816) 983-8124 FAX: (816) 691-3495
FAX: (816) 983-8080
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement is declared
effective and all other conditions to the Merger (as defined herein) have been
satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT* OFFERING PRICE* REGISTRATION FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$5.00 per share....... 818,204 shares $23.50 $19,227,794 $5,673
</TABLE>
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* Pursuant to Rule 457(f)(2) under the Securities Act of 1933, and solely for
the purpose of calculating the registration fee, the proposed maximum
aggregate offering price represents the book value of the maximum amount of
common stock, $5.00 par value per share, of Fidelity Bankshares, Inc.
estimated to be outstanding immediately prior to, and to be canceled in, the
Merger as of June 30, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
, 1998
Dear Fidelity Bankshares, Inc. Shareholder:
You are cordially invited to attend the Special Meeting of the Shareholders
of Fidelity Bankshares, Inc. ("Fidelity Bankshares") which will be held at
, on , , 1998, commencing at p.m., local time. At this important
meeting, holders of common stock of Fidelity Bankshares will be asked to
consider and vote on a proposal relating to the sale of Fidelity Bankshares
pursuant to the merger of Fidelity Bankshares with and into CBI-Kansas, Inc.
("CBI"), a wholly-owned subsidiary of Commerce Bancshares, Inc. (the
"Merger"). Each share of Fidelity Bankshares' common stock will be converted
into the right to receive 2.0767 shares of common stock of Commerce
Bancshares, Inc.
Fidelity Bankshares presently owns all of the issued and outstanding shares
of Fidelity State Bank ("Fidelity Bank") and approximately 99% of the issued
and outstanding stock of Heritage Bank of Olathe (the "Heritage Bank").
The Merger is subject to certain required regulatory approvals and other
conditions and will be consummated shortly after the necessary regulatory
approvals are obtained and other conditions are satisfied or waived. Under
Kansas law, holders of common stock of Fidelity Bankshares have dissenters'
rights of appraisal with respect to the Merger.
The enclosed Prospectus/Proxy Statement describes the terms of the Merger in
more detail. You should review the Prospectus/Proxy Statement carefully. Your
board of directors has carefully reviewed and considered the terms and
conditions of the Merger and believes that it is fair and in the best
interests of Fidelity Bankshares and its shareholders and unanimously
recommends that shareholders vote "for" the proposal.
A majority vote of all outstanding shares of Fidelity Bankshares' common
stock is required to approve the Merger. To ensure your shares will be
represented at the meeting, whether or not you plan to attend, I urge you to
promptly sign, date and mail your proxy in the enclosed self-addressed
envelope, which requires no postage. You may cancel your proxy by attending
the meeting and voting in person.
Sincerely,
Taunce H. Mathiason
President
<PAGE>
FIDELITY BANKSHARES, INC.
To the Shareholders of Fidelity Bankshares, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the shareholders of
Fidelity Bankshares, Inc. ("Fidelity Bankshares") will be held at , on ,
1998, commencing at p.m., local time (the "Special Meeting"). At the
Special Meeting, shareholders will be asked to consider and vote upon the
following matter, which is more fully described in the accompanying
Prospectus/Proxy Statement:
A proposal to approve the Agreement and Plan of Reorganization, dated as
of July 1, 1998 (the "Acquisition Agreement"), by and among Commerce
Bancshares, Inc., CBI-Kansas, Inc. and Fidelity Bankshares, a copy of which
is attached as Annex A to the accompanying Prospectus/Proxy Statement.
Holders of Fidelity Bankshares common stock of record at the close of
business on , 1998, will be entitled to notice of and to vote at the
Special Meeting or any adjournment or postponement thereof. Approval of the
Acquisition Agreement, which is a condition to the consummation of the
transactions contemplated by the Acquisition Agreement, requires the
affirmative vote of the holders of a majority of the outstanding shares of
Fidelity Bankshares common stock. Pursuant to K.S.A. (S) 17-6712, Kansas law
provides that Fidelity Bankshares' shareholders are entitled to dissenters'
rights.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ACQUISITION AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE APPROVAL OF THE ACQUISITION AGREEMENT.
By Order of the Board of Directors
President
Garden City, Kansas
, 1998
<PAGE>
PROSPECTUS OF
COMMERCE BANCSHARES, INC.
818,204 SHARES OF COMMON STOCK
$5.00 PAR VALUE
----------------
PROXY STATEMENT OF
FIDELITY BANKSHARES, INC.
----------------
This Prospectus/Proxy Statement ("Prospectus") relates to the issuance of up
to 818,204 shares of $5.00 par value common stock (the "Commerce Stock") of
Commerce Bancshares, Inc. ("Commerce") in exchange for shares of $5.00 par
value common stock ("Fidelity Bankshares Stock") of Fidelity Bankshares, Inc.
("Fidelity Bankshares") in the merger, described herein, pursuant to which
Fidelity Bankshares will be merged with and into CBI-Kansas, Inc. ("CBI"), a
wholly-owned subsidiary of Commerce (the "Merger").
This Prospectus is also a proxy statement furnished at the direction of the
Board of Directors of Fidelity Bankshares in connection with the solicitation
of proxies from its shareholders to be voted at a special meeting of the
shareholders of Fidelity Bankshares to be held on , 1998, and at any
adjournment or postponement thereof, for the purpose of considering and voting
upon approval of the acquisition agreement described herein.
----------------
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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is , 1998, and it is first being mailed on or
about , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION...................................................... 1
INCORPORATION BY REFERENCE................................................. 1
SUMMARY.................................................................... 3
The Companies............................................................ 3
Fidelity Bankshares Special Meeting...................................... 3
The Merger............................................................... 4
Stock Certificates; Dividend Withholding................................. 4
Conditions to the Merger................................................. 4
Recommendation of the Board of Directors................................. 4
Dissenters' Rights of Appraisal.......................................... 4
Accounting Treatment..................................................... 4
Federal Income Tax Consequences.......................................... 5
Comparative Stock Prices................................................. 5
Comparative Per Share Data............................................... 6
Pro Forma and Selected Financial Data.................................... 7
THE COMPANIES.............................................................. 8
FIDELITY BANKSHARES SPECIAL MEETING........................................ 8
Purpose of the Special Meeting........................................... 8
Solicitation and Revocation of Proxies................................... 8
Voting of Proxies, Persons Entitled to Vote, and Vote Required........... 9
THE MERGER................................................................. 9
General.................................................................. 9
Conversion of Fidelity Bankshares Stock.................................. 9
Exchange of Fidelity Bankshares Stock Certificates....................... 9
Fractional Shares........................................................ 10
Background of Negotiations............................................... 10
Reasons for the Merger................................................... 12
Opinion of Fidelity Bankshares Financial Advisor......................... 13
Operations and Management After the Merger............................... 18
Conditions to the Merger................................................. 19
Conduct of Business Pending the Merger................................... 19
No Solicitation.......................................................... 19
Waiver and Amendment..................................................... 19
Possible Termination of the Merger....................................... 20
Effective Time........................................................... 20
Employment Terms of Taunce H. Mathiason.................................. 20
Federal Securities Laws Consequences..................................... 20
Rights of Dissenting Shareholders........................................ 20
Transactions Between Commerce and Fidelity Bankshares.................... 21
Accounting Treatment; Restrictions on Sales by Affiliates................ 21
FEDERAL INCOME TAX CONSEQUENCES............................................ 23
BENEFICIAL OWNERSHIP OF SECURITIES......................................... 24
DIFFERENCES IN RIGHTS OF SHAREHOLDERS...................................... 26
General.................................................................. 26
Number of Directors and Term............................................. 26
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Removal of Directors.................................................... 26
Voting.................................................................. 26
Dividends and Liquidation Preference.................................... 27
Preemptive Rights....................................................... 27
Special Meetings........................................................ 27
Indemnification; Limitation of Liability................................ 27
Shareholder Inspection.................................................. 28
Amendment of Articles of Incorporation.................................. 28
Amendment of Bylaws..................................................... 28
Notice of Shareholder Proposals; Nominations of Directors............... 28
Shareholders' Vote for Mergers.......................................... 29
Appraisal Rights........................................................ 29
Anti-takeover Statutes.................................................. 29
Preferred Share Purchase Rights Plan.................................... 31
SELECTED CONSOLIDATED FINANCIAL DATA OF FIDELITY BANKSHARES............... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FIDELITY BANKSHARES......................... 33
Financial Condition..................................................... 33
Results of Operations................................................... 33
Average Balances, Interest Rates and Yields............................. 35
Rate/Volume Analyses of Net Interest Income............................. 36
Asset/Liability Management.............................................. 36
Investment Portfolio.................................................... 37
Loan Portfolio.......................................................... 37
Risk Elements of Loan Portfolio......................................... 39
Loan Concentrations..................................................... 39
Summary of Loan Loss.................................................... 40
Deposits................................................................ 41
Short-term Borrowings and FHLB Advances................................. 42
Liquidity and Capital................................................... 42
Effect of Recent Accounting Developments................................ 42
Year 2000 Compliance.................................................... 43
Effects of Inflation.................................................... 43
COMMERCE STOCK AND FIDELITY BANKSHARES STOCK COMPARATIVE PER SHARE PRICES
AND DIVIDENDS............................................................ 44
LEGAL OPINION............................................................. 44
EXPERTS................................................................... 44
Independent Public Accountants for Commerce Bancshares, Inc............. 44
Independent Public Accountants for Fidelity Bankshares, Inc............. 45
SHAREHOLDER PROPOSALS..................................................... 45
INDEX TO FINANCIAL STATEMENTS OF FIDELITY BANKSHARES, INC. AND ITS
SUBSIDIARIES............................................................. F-i
ANNEXES
Annex A--Copy of Acquisition Agreement
Annex B--Rights of Shareholders Dissenting from the Proposed Merger
Annex C--Opinion of Alex Sheshunoff & Co. Investment Banking
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Commerce is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission ("SEC"). Such reports, proxy statements and
other information can be inspected and copied at the offices of the SEC at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, Room 1400; 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers who file electronically with the SEC. The address of that
site is http://www.sec.gov.
Commerce Stock is listed on the Nasdaq National Market System ("Nasdaq") and
reports, proxy statements and other information concerning Commerce may also
be inspected at the offices of the Nasdaq, 1735 K Street, N.W., Washington,
D.C. 20006-1506.
Commerce has filed a Registration Statement on Form S-4 with the SEC with
respect to the Commerce Stock to be issued in connection with the Merger. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. The Registration Statement and any amendments thereto,
including exhibits filed as a part thereof, are available at the SEC for
inspection and copying as set forth above.
----------------
INCORPORATION BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS RELATING TO COMMERCE,
AND THE EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE WITHOUT CHARGE TO EACH
PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED UPON WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON TO COMMERCE BANCSHARES, INC., 1000 WALNUT,
P.O. BOX 13686, KCLG KANSAS CITY, MISSOURI 64199-3686, ATTENTION: J. DANIEL
STINNETT, TELEPHONE NUMBER: (816) 234-2350. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1998.
The following documents filed by Commerce with the SEC are hereby
incorporated by reference herein:
(a) Commerce's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
(b) Commerce's Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1998 and June 30, 1998.
(c) The description of the Commerce Stock set forth in the Form 8-A
Registration Statement as filed with the Commission on February 26, 1968,
as supplemented by the Form 8-A Registration Statement as filed with the
Commission on August 31, 1988 and as amended by Form 8-A12G/A as filed with
the Commission on June 10, 1996.
All documents filed by Commerce pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus but prior
to shall be deemed to be incorporated by reference into
this Prospectus from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified, to constitute a part of this Prospectus.
<PAGE>
----------------
No person is authorized to give any information or to make any
representation not contained in this Prospectus, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell, or
solicitation of an offer to purchase, the securities offered by this
Prospectus, or the solicitation of a proxy, in any jurisdiction, to or from
any person to whom it is unlawful to make such offer, solicitation of an offer
or proxy solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any distribution of the securities pursuant to this Prospectus
shall, under any circumstances, create an implication that there has been no
change in the information set forth herein since the date of this Prospectus.
2
<PAGE>
SUMMARY
The following is a brief summary of certain information in this
Prospectus/Proxy Statement (the "Prospectus"). This summary is not intended to
be complete and it is qualified in all respects by the information appearing
elsewhere in or incorporated by reference in this Prospectus, the Annexes
hereto and the documents referred to herein.
THE COMPANIES
Commerce Bancshares, Inc. ("Commerce") is a registered multi-bank holding
company which directly or indirectly owns all of the outstanding capital stock
(except directors' qualifying shares) of one national banking association with
offices in Missouri and Kansas, one national banking association located in
Illinois, three national banking associations located in Kansas, a credit card
bank in Omaha, Nebraska, a mortgage banking company, a credit life insurance
company, a small business investment company, a property and casualty insurance
agency and a company primarily engaged in holding bank-related real property.
The principal assets of Commerce are represented by its banking subsidiaries.
The business of Commerce consists primarily of ownership, supervision and
control of its subsidiaries, including providing advice, counsel and
specialized services in various fields of financial and banking policy and
operations. The total assets of Commerce, on a consolidated basis as of June
30, 1998, were approximately $10.3 billion and net income for the six months
ended June 30, 1997, was approximately $72 million. See "--Pro Forma and
Selected Financial Data". The principal executive offices of Commerce are at
the Commerce Bank Building, 1000 Walnut, Kansas City, Missouri 64199-3686
(telephone number (816) 234-2000).
Fidelity Bankshares, Inc. ("Fidelity Bankshares") is a registered bank
holding company headquartered in Garden City, Kansas which owns all of the
issued and outstanding capital stock of Fidelity State Bank ("Fidelity Bank"),
a Kansas state bank located in Garden City, Kansas, and approximately 99% of
the issued and outstanding common stock of Heritage Bank of Olathe ("Heritage
Bank"), a Kansas state bank located in Olathe, Kansas. The total assets of
Fidelity Bankshares on a consolidated basis, as of June 30, 1998 were
approximately $225 million and net income for the six months ended June 30,
1998 was approximately $1.2 million. See "SELECTED CONSOLIDATED FINANCIAL DATA
OF FIDELITY BANKSHARES". The principal executive offices of Fidelity Bankshares
are at 215 N. Main, Garden City, Kansas 67846 (telephone number (316) 276-
5600).
CBI-Kansas, Inc. ("CBI") is a wholly-owned subsidiary of Commerce. Pursuant
to the Agreement and Plan of Reorganization among Commerce, Fidelity Bankshares
and CBI, dated July 1, 1998 (the "Acquisition Agreement"), Fidelity Bankshares
will be merged with and into CBI.
FIDELITY BANKSHARES SPECIAL MEETING
A special meeting of the shareholders of Fidelity Bankshares will be held at
in Garden City, Kansas on , 1998, at p.m., local time (the
"Fidelity Bankshares Special Meeting"), for the purpose of approving the
Acquisition Agreement.
Only holders of record of Fidelity Bankshares common stock, par value $5.00
per share ("Fidelity Bankshares Stock"), at the close of business on ,
1998, will be entitled to notice of and to vote at the Fidelity Bankshares
Special Meeting. At the Fidelity Bankshares Special Meeting, each holder of
Fidelity Bankshares Stock will be entitled to one vote for each share held, and
the affirmative vote of a majority of the outstanding shares of Fidelity
Bankshares Stock is required to approve the Acquisition Agreement. Abstentions
and failures to vote will have the same effect as votes cast against approval
of the Acquisition Agreement. On June 30, 1998, directors and executive
officers of Fidelity Bankshares beneficially owned approximately 7.60% of the
outstanding shares of Fidelity Bankshares Stock. All officers and directors of
Fidelity Bankshares owning Fidelity Bankshares Stock have indicated they intend
to vote in favor of the Acquisition Agreement.
3
<PAGE>
THE MERGER
Commerce, CBI and Fidelity Bankshares have entered into the Acquisition
Agreement, a copy of which is attached hereto as Annex A and incorporated
herein by reference, pursuant to which Fidelity Bankshares will be merged with
and into CBI. The Acquisition Agreement provides that each share of Fidelity
Bankshares Stock outstanding immediately prior to the Effective Time (as
defined in the Acquisition Agreement) of the Merger will be converted into
2.0767 shares of common stock, par value $5.00 per share, of Commerce
("Commerce Stock"). Fractional shares of Commerce Stock will not be issued in
connection with the Merger. Holders of Fidelity Bankshares Stock otherwise
entitled to a fractional share will be paid the value of the fractional share
in cash.
The Acquisition Agreement also provides that, simultaneously with the Merger,
Heritage Bank will be merged with and into Commerce Bank, N.A. (the "Bank
Merger"). In the Bank Merger, each share of common stock of Heritage Bank not
owned by Fidelity Bankshares and outstanding immediately prior to the Effective
Time of the Bank Merger will be converted into cash in an amount equal to
$106.05 per share.
STOCK CERTIFICATES; DIVIDEND WITHHOLDING
Shareholders of Fidelity Bankshares, other than those Fidelity Bankshares
shareholders who perfect their dissenters' rights of appraisal, must surrender
the certificates for their shares of Fidelity Bankshares Stock to Commerce, and
inform Commerce of their federal taxpayer identification number, before
receiving a certificate for the number of shares of Commerce Stock and any cash
in lieu of fractional shares to which such shareholders are entitled. Until a
Fidelity Bankshares shareholder surrenders the certificates for his or her
Fidelity Bankshares Stock and informs Commerce of his or her federal taxpayer
identification number, Commerce may withhold the payment of any or all
dividends which would otherwise be payable to such shareholder as a shareholder
of Commerce. See "THE MERGER--Exchange of Fidelity Bankshares Stock
Certificates."
CONDITIONS TO THE MERGER
The Merger is subject to certain conditions, including approval of the
Acquisition Agreement by the shareholders of Fidelity Bankshares and approval
of the Merger and the Bank Merger by appropriate state and federal banking
authorities. Applications will be filed with appropriate state and federal
banking authorities seeking their approval of the Merger and the Bank Merger.
See "THE MERGER--Conditions to the Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of Fidelity Bankshares believes that the Merger is in
the best interests of Fidelity Bankshares and its shareholders and unanimously
recommends that its shareholders vote FOR the approval of the Acquisition
Agreement.
DISSENTERS' RIGHTS OF APPRAISAL
Holders of Fidelity Bankshares Stock who are opposed to the Merger have the
right to dissent from the Merger in accordance with Section 17-6712 of the
Kansas General Corporation Code ("KGCC") which provides that a shareholder
shall be entitled to receive the fair value of his or her shares (exclusive of
any element of value arising from the expectation or accomplishment of the
Merger) as of the day prior to the day on which the Merger is approved by the
other shareholders if such shareholder: (1) delivers a written demand for
appraisal of such shares to Fidelity Bankshares prior to the vote on the
Acquisition Agreement at the Fidelity Bankshares Special Meeting; (2) does not
vote in favor of the Merger; and (3) makes written demand for payment of the
fair value of his or her shares within twenty (20) days after receiving notice
that the Merger became effective. See "THE MERGER--Rights of Dissenting
Shareholders."
ACCOUNTING TREATMENT
The Merger will be treated by Commerce as a pooling of interests for
accounting purposes.
4
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization under Section 368(a)(1)
of the Internal Revenue Code of 1986, as amended (the "Code"). As a condition
to the closing of the Merger, Blackwell Sanders Peper Martin LLP ("BSPM") will
deliver an opinion, based upon certain customary assumptions and
representations, to the effect that, for federal income tax purposes, no gain
or loss will be recognized by either Fidelity Bankshares or its shareholders as
a result of the Merger to the extent they receive Commerce Stock solely in
exchange for their Fidelity Bankshares Stock. With respect to Fidelity
Bankshares Stock exchanged for cash as the result of the exercise of
dissenters' rights, the exchange will be treated as a sale, and normal
recognition and gain and loss treatment will apply. For a more complete
description of the federal income tax consequences, see "FEDERAL INCOME TAX
CONSEQUENCES."
COMPARATIVE STOCK PRICES
Shares of Commerce Stock are traded on the Nasdaq. The last sale price of
Commerce Stock as reported on Nasdaq on June 30, 1998 (the last trading day
preceding the execution of the Acquisition Agreement, which was also the date
preceding the announcement of the execution of the Acquisition Agreement) was
$48.8125. The last sale price for Commerce Common Stock as reported on Nasdaq
on , 1998 (the most recent date for which it was practicable to obtain
market price data prior to the printing of this Prospectus) was $ .
As of June 30, 1998, there were 243 holders of record of Fidelity Bankshares
Stock. There is no established public trading market for the shares of Fidelity
Bankshares Stock and there has been limited trading of Fidelity Bankshares
Stock. Management has reviewed available records of purchases and sales of
Fidelity Bankshares Stock and, based on such review, since January 1, 1996
sales of Fidelity Bankshares Stock have been at prices ranging from $41.40 to
$47.88 per share. See "COMMERCE STOCK AND FIDELITY BANKSHARES STOCK COMPARATIVE
PER SHARE PRICES AND DIVIDENDS."
5
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth per share data of Commerce and Fidelity
Bankshares on both a historical and a pro forma basis and on an equivalent pro
forma basis for Fidelity Bankshares. This table should be read in conjunction
with the historical financial statements and notes thereto for Commerce
incorporated herein by reference, and for Fidelity Bankshares contained herein.
Pro forma combined and equivalent pro forma per share data reflect the combined
results of Commerce and Fidelity Bankshares presented as though they were one
company for all periods shown. Pro forma and equivalent pro forma cash
dividends paid per share reflect Commerce's cash dividends paid in the periods
indicated. The pro forma amounts do not include any adjustments for any
estimated operating efficiencies or revenue enhancements resulting from the
Merger.
The following pro forma and equivalent pro forma information is based on the
exchange ratio of 2.0767 shares of Commerce Stock for each share of Fidelity
Bankshares Stock.
<TABLE>
<CAPTION>
HISTORICAL EQUIVALENT
-------------------- PRO FORMA
FIDELITY PRO FORMA FIDELITY
COMMERCE* BANKSHARES COMMERCE* BANKSHARES
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Basic income per common equivalent
share:
Twelve months ended:
December 31, 1997................. $ 2.24 $ 5.03 $ 2.24 $ 4.65
December 31, 1996................. 1.98 5.10 1.99 4.13
December 31, 1995................. 1.72 3.62 1.72 3.58
Six months ended:
June 30, 1998..................... 1.23 3.02 1.24 2.57
June 30, 1997..................... 1.05 2.61 1.06 2.19
Cash dividends paid per share:
Twelve months ended:
December 31, 1997................. $ 0.52 $ 1.84 $ 0.52 $ 1.08
December 31, 1996................. 0.46 1.84 0.46 0.95
December 31, 1995................. 0.41 1.84 0.41 0.86
Six months ended:
June 30, 1998..................... 0.29 0.92 0.29 0.60
June 30, 1997..................... 0.26 0.92 0.26 0.54
Book value per common share at:
December 31, 1997................. $16.92 $46.74 $16.99 $35.29
December 31, 1996................. 15.70 43.63 15.77 32.75
December 31, 1995................. 14.56 40.53 14.62 30.37
June 30, 1998..................... 17.62 48.80 17.70 36.75
June 30, 1997..................... 15.96 45.10 16.04 33.31
</TABLE>
- --------
* Commerce information has been restated for a three for two stock split
declared in February 1998.
6
<PAGE>
PRO FORMA AND SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
(UNAUDITED)
The following table presents for Commerce and Fidelity Bankshares on an
historical basis, selected consolidated financial data and unaudited pro forma
combined amounts reflecting the Merger. The pro forma amounts assume the Merger
had been effective during the periods presented. Pro forma per share amounts
assume an Exchange Ratio of 2.0767 shares of Commerce Common Stock for each
share of Fidelity Bankshares Stock. See "THE MERGER--Conversion of Fidelity
Bankshares Stock."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income and
other income:
Commerce............... $ 314,970 $ 275,679 $ 577,866 $ 524,905 $ 488,895 $ 435,645 $ 405,947
Fidelity Bankshares.... 5,594 5,450 10,746 9,040 8,666 8,282 8,418
Pro Forma.............. $ 320,564 $ 281,129 $ 588,612 $ 533,945 $ 497,561 $ 443,927 $ 414,365
Net income:
Commerce............... $ 71,977 $ 61,732 $ 132,702 $ 119,512 $ 107,640 $ 96,111 $ 86,894
Fidelity Bankshares.... 1,152 985 1,910 1,920 1,360 1,015 749
Pro Forma.............. $ 73,129 $ 62,717 $ 134,612 $ 121,432 $ 109,000 $ 97,126 $ 87,643
Basic income per common
and common equivalent
share:
Commerce*.............. $ 1.23 $ 1.05 $ 2.24 $ 1.98 $ 1.72 $ 1.64 $ 1.51
Fidelity Bankshares.... 3.02 2.61 5.03 5.10 3.62 2.70 1.99
Pro Forma.............. $ 1.24 $ 1.06 $ 2.24 $ 1.99 $ 1.72 $ 1.64 $ 1.50
Historical dividends
paid per common share:
Commerce*.............. $ 0.29 $ 0.26 $ 0.52 $ 0.46 $ 0.41 $ 0.54 $ 0.48
Fidelity Bankshares.... 0.92 0.92 1.84 1.84 1.84 1.84 1.84
Pro Forma.............. $ 0.29 $ 0.26 $ 0.52 $ 0.46 $ 0.41 $ 0.54 $ 0.48
Total assets (end of
period):
Commerce............... $10,336,214 $ 9,793,986 $10,306,941 $9,698,186 $9,573,951 $8,035,574 $8,047,413
Fidelity Bankshares.... 225,129 207,809 227,299 206,332 169,859 162,197 158,170
Pro Forma.............. $10,561,343 $10,001,795 $10,534,240 $9,904,518 $9,743,810 $8,197,771 $8,205,583
Long-term borrowings
(end of period):
Commerce............... $ 3,887 $ 10,303 $ 7,207 $ 14,120 $ 14,562 $ 6,487 $ 6,894
Fidelity Bankshares.... 9,612 51 4,161 53 66 78 89
Pro Forma.............. $ 13,499 $ 10,354 $ 11,368 $ 14,173 $ 14,628 $ 6,565 $ 6,983
Total stockholders'
equity (end of period):
Commerce............... $ 1,022,936 $ 930,723 $ 980,784 $ 921,271 $ 883,783 $ 728,198 $ 712,620
Fidelity Bankshares.... 18,642 17,036 17,855 16,479 15,262 14,327 14,096
Pro Forma.............. $ 1,041,578 $ 947,759 $ 998,639 $ 940,750 $ 899,045 $ 742,525 $ 726,716
Book value per common
share (end of period):
Commerce*.............. $ 17.62 $ 15.96 $ 16.92 $ 15.70 $ 14.56 $ 17.62 $ 17.55
Fidelity Bankshares.... 48.80 45.10 46.74 43.63 40.53 38.15 37.55
Pro Forma.............. $ 17.70 $ 16.04 $ 16.99 $ 15.77 $ 14.62 $ 12.57 $ 12.37
</TABLE>
- --------
*Commerce information has been restated for a three for two stock split
declared in February 1998.
7
<PAGE>
THE COMPANIES
Commerce Bancshares, Inc. ("Commerce") is a registered multi-bank holding
company which directly or indirectly owns all of the outstanding capital stock
(except directors' qualifying shares) of one national banking association with
offices in Missouri and Kansas, one national banking association located in
Illinois, three national banking associations located in Kansas, a credit card
bank in Omaha, Nebraska, a mortgage banking company, a credit life insurance
company, a small business investment company, a property and casualty
insurance agency and a company primarily engaged in holding bank-related real
property. The principal assets of Commerce are represented by its banking
subsidiaries. The business of Commerce consists primarily of ownership,
supervision and control of its subsidiaries, including providing advice,
counsel and specialized services in various fields of financial and bank
policy and operations. The total assets of Commerce, on a consolidated basis
as of June 30, 1998, were approximately $10.3 billion and net income for the
six months ended June 30, 1998, was approximately $72 million. See
"INCORPORATION BY REFERENCE" and "SUMMARY--Pro Forma and Selected Financial
Data". The principal executive offices of Commerce are at the Commerce Bank
Building, 1000 Walnut, Kansas City, Missouri 64199-3686 (telephone number
(816) 234-2000).
Fidelity Bankshares, Inc. ("Fidelity Bankshares") is a registered bank
holding company headquartered in Garden City, Kansas which owns all of the
issued and outstanding capital stock of Fidelity State Bank ("Fidelity Bank"),
a Kansas state bank located in Garden City, Kansas, and approximately 99% of
the issued and outstanding common stock of Heritage Bank of Olathe ("Heritage
Bank"), a Kansas state bank located in Olathe, Kansas. The total assets of
Fidelity Bankshares on a consolidated basis, as of June 30, 1998, were
approximately $225 million and net income for the six months ended June 30,
1998, was approximately $1.2 million. See "FINANCIAL STATEMENTS OF FIDELITY
BANKSHARES, INC. AND ITS SUBSIDIARIES" and "SELECTED CONSOLIDATED FINANCIAL
DATA OF FIDELITY BANKSHARES". The principal executive offices of Fidelity
Bankshares are at 215 N. Main, Garden City, Kansas, 67846 (telephone number
(316) 276-5600).
CBI-Kansas, Inc. ("CBI") is a wholly-owned subsidiary of Commerce. Pursuant
to the Agreement and Plan of Reorganization among Commerce, Fidelity
Bankshares and CBI, dated July 1, 1998 (the "Acquisition Agreement"), Fidelity
Bankshares will be merged with and into CBI.
FIDELITY BANKSHARES SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
The purpose of the Fidelity Bankshares Special Meeting is to consider and
vote upon a proposal to approve the Acquisition Agreement which provides,
among other things, for the merger of Fidelity Bankshares with and into CBI
(the "Merger"). CBI will be the surviving corporation and the Articles of
Incorporation, Bylaws, directors and officers of CBI will remain the Articles
of Incorporation, Bylaws, directors and officers of CBI. Shareholders of
Fidelity Bankshares will receive shares of Commerce Stock in the Merger.
SOLICITATION AND REVOCATION OF PROXIES
This Prospectus is being furnished to the shareholders of Fidelity
Bankshares in connection with the solicitation of proxies by the Board of
Directors of Fidelity Bankshares for use at the Fidelity Bankshares Special
Meeting to be held at p.m., local time, on , 1998, at and at any
adjournment or adjournments thereof. Any proxy given does not affect the right
to vote in person at the Fidelity Bankshares Special Meeting and may be
revoked at any time before it is exercised; there is no formal method required
for revocation.
Except for the cost of preparing this Prospectus, the cost of solicitation
of proxies for the Fidelity Bankshares Special Meeting will be borne by
Fidelity Bankshares. In addition to solicitation by mail, Fidelity Bankshares
may cause proxies to be solicited personally or by telephone or telegram by
Fidelity Bankshares' regular employees.
8
<PAGE>
VOTING OF PROXIES, PERSONS ENTITLED TO VOTE, AND VOTE REQUIRED
All shares represented by a proxy given pursuant to this solicitation will
be voted as specified thereon at the Fidelity Bankshares Special Meeting. If
no specification is given on a signed proxy, such shares will be voted in
favor of the proposal to approve the Acquisition Agreement. Abstentions and
failures to vote will have the same effect as votes cast against approval of
the Acquisition Agreement. The Board of Directors of Fidelity Bankshares is
not aware of any other business to be presented at the Fidelity Bankshares
Special Meeting. Should any such other business be presented at the Fidelity
Bankshares Special Meeting, the person or persons named in the proxy will vote
the same in accordance with their judgment.
The affirmative vote of the holders of at least a majority of the
outstanding shares of Fidelity Bankshares Stock is required to approve the
Acquisition Agreement. Only holders of Fidelity Bankshares Stock of record as
of the close of business on , 1998, are entitled to vote at the Fidelity
Bankshares Special Meeting. At the close of business on that date,
shares of Fidelity Bankshares Stock were outstanding. Holders of shares of
Fidelity Bankshares Stock are entitled to one vote for each share held on the
record date.
THE MERGER
GENERAL
The Acquisition Agreement and certain related matters are summarized below.
This summary does not purport to be a complete statement of the terms and
conditions of the Merger and is qualified in its entirety by reference to the
Acquisition Agreement, which is attached as Annex A to this Prospectus and is
incorporated herein by reference.
At the Effective Time, Fidelity Bankshares will merge with and into CBI, the
separate corporate existence of Fidelity Bankshares will cease and CBI will
survive and continue to exist as a wholly-owned subsidiary of Commerce.
CONVERSION OF FIDELITY BANKSHARES STOCK
At the Effective Time, automatically by virtue of the Merger and without any
action on the part of any party or shareholder, each share of Fidelity
Bankshares Stock (excluding (i) shares held by Fidelity Bankshares or Commerce
or any of its subsidiaries, in each case other than in a fiduciary capacity
and (ii) any shares with respect to which dissenters' rights are being
exercised) issued and outstanding immediately prior to the Effective Time will
be converted into 2.0767 shares of Commerce Stock.
As of June 30, 1998, there were issued and outstanding options for 12,000
shares of Fidelity Bankshares Stock, exercisable at prices ranging from $35.63
to $37.55 per share. Such options were granted to officers of Fidelity
Bankshares, Fidelity Bank and Heritage Bank pursuant to the 1985 Nonstatutory
Stock Option Plan for Fidelity Bankshares of Garden City, Inc. (the "Fidelity
Bankshares Option Plan"). As of June 30, 1998, Taunce H. Mathiason, who is the
President of Fidelity Bankshares and held options for 1,500 shares of Fidelity
Bankshares Stock, was the only current officer or employee who held options
pursuant to the Fidelity Bankshares Option Plan. Pursuant to the Fidelity
Bankshares Option Plan, the Fidelity Bankshares Board of Directors in its sole
discretion may cancel, effective upon the date of the consummation of a merger
in which Fidelity Bankshares is not the surviving corporation, any option that
remains unexercised on such date. Written notice of such cancellation must be
given a reasonable period of time prior to the proposed date of such
cancellation. It is a condition to the obligations of Commerce and CBI to
consummate the Merger that the Fidelity Bankshares Board of Directors
terminate any options that have not been exercised prior to the consummation
of the Merger.
EXCHANGE OF FIDELITY BANKSHARES STOCK CERTIFICATES
At the Effective Time certificates evidencing shares of Fidelity Bankshares
Stock which are to be exchanged for shares of Commerce Stock will be deemed
for all corporate purposes, other than the payment of dividends
9
<PAGE>
and other distributions on such stock, to evidence ownership of such shares of
Commerce Stock. As soon as practicable after the Effective Time, Commerce or
its agent, as the Exchange Agent, will send a notice and transmittal form to
each record holder of certificates for Fidelity Bankshares Stock advising such
holder of the procedures for surrendering Fidelity Bankshares certificates to
Commerce or its agent in exchange for a certificate for the number of whole
shares of Commerce Stock and a check for the cash amount of any fractional
interests to which such holder is entitled. The shares of Commerce Stock will
be deemed to have been issued at the Effective Time. Promptly following the
surrender of the Fidelity Bankshares certificates, Commerce or its agent will
deliver to the surrendering Fidelity Bankshares shareholders certificates
evidencing whole shares of Commerce Stock and a check for the cash amount of
any fractional interest, all in accordance with the notice and transmittal
form. See "--Fractional Shares." Holders of Fidelity Bankshares Stock will be
entitled to dividends, without interest, which may be declared and payable to
holders of record of Commerce Stock after the Effective Time; provided,
however, that any such dividends will be remitted to each Fidelity Bankshares
shareholder entitled thereto, without interest, at the time that such
certificates representing shares of Fidelity Bankshares Stock are surrendered
for exchange, subject to any applicable abandoned property, escheat or similar
law.
FRACTIONAL SHARES
Neither certificates nor scrip representing fractional shares of Commerce
Stock will be issued, but in lieu thereof, each holder of shares of Fidelity
Bankshares Stock who would otherwise have been entitled to a fraction of a
share of Commerce Stock will be paid the cash value of such fraction
determined by multiplying such fraction by the Commerce Stock Price. The
"Commerce Stock Price" means the average of ten (10) closing sale prices of
Commerce Stock as reported by the Nasdaq on each of the ten (10) consecutive
trading days preceding the third trading date prior to the Closing Date.
BACKGROUND OF NEGOTIATIONS
In 1997, the management of Fidelity Bankshares and the Fidelity Bankshares
Board of Directors (the "Fidelity Bankshares Board") received several
unsolicited inquiries or expressions of interest with respect to a possible
merger or acquisition of Fidelity Bankshares. Such inquiries did not result in
any exchange of confidential information.
Also during 1997, the Fidelity Bankshares Board decided to engage in capital
planning related to the Fidelity Bankshares' strategic plan which called for
substantial growth, both internally and by acquisition. In August 1997, the
Fidelity Bankshares Board formed a Strategic and Capital Planning Committee
(the "Committee") consisting of Directors Robert Beckett, Joseph Burnside,
Bill King and Michael Reed to focus on capital planning. The Fidelity
Bankshares Board also authorized the Committee to retain a consultant to
assist in their capital planning.
In November 1997, the Committee met with Alex Sheshunoff & Co. Investment
Banking ("Sheshunoff") representatives to discuss Sheshunoff's possible roles
in capital consulting. Sheshunoff representatives presented an overview of the
strategic and financial position of Fidelity Bankshares. The Committee
concluded that the ability of Fidelity Bankshares to generate the necessary
capital to accomplish its strategic plan was restrained by probable dilution
of earnings and control as well as by the amount of capital which would be
necessary to make substantial acquisitions. The Committee also believed that
the market values for bank stocks were at historically high levels and that
the benefit to stockholders of establishing a liquid market for their stock
warranted retaining Sheshunoff in connection with the possible sale of
Fidelity Bankshares.
In January 1998, the Committee submitted its recommendation to the Fidelity
Bankshares Board. Based on that report, the Fidelity Bankshares Board engaged
Sheshunoff in connection with the possible sale of Fidelity Bankshares. In
March 1998, Sheshunoff sent an Offering Memorandum to interested companies. On
April 1, 1998, the Fidelity Bankshares Board reviewed four proposals submitted
in response to the Offering Memorandum. Two proposals were for cash and were
deemed insufficient by the Fidelity Bankshares Board. Two proposals involved a
merger: one from Commerce and one from Gold Banc Corporation ("Gold Banc").
10
<PAGE>
Commerce presented a proposal valued at approximately $37,500,000. The
proposal provided for a floating exchange ratio of $8.00 on either side of the
recent trading range of $70.00 per share of Commerce Stock and walk away
options of $8.00 on either side. Commerce has since effected a 3 for 2 stock
split. The Fidelity Bankshares Board reviewed Commerce's financial and company
history materials which accompanied the proposal. The Fidelity Bankshares
Board authorized Commerce to engage in due diligence.
The second proposal was from Gold Banc. The Gold Banc proposal was a fixed
share exchange valued at $43,000,000 on the signing of the definitive
agreement and the proposal also included Gold Banc allowing the Fidelity
Bankshares outstanding stock options valued at $900,000 to be exercised prior
to the proposed merger without affecting the exchange ratio to be used in the
proposed merger. The Fidelity Bankshares Board reviewed Gold Banc's financial
and company history materials which accompanied the proposal.
On April 20, 1998, the Fidelity Bankshares Board met and was informed that
Commerce due diligence had been completed. The Fidelity Bankshares Board then
determined that Gold Banc should proceed with due diligence. Shortly
thereafter, Gold Banc completed its due diligence and final offers from
Commerce and Gold Banc were requested.
On May 8, 1998, Commerce submitted a revised proposal which was somewhat
less than the earlier proposal valued at $37,500,000. After some discussion
between Commerce representatives and Sheshunoff representatives, Commerce
submitted a new proposal valued at $38,000,000. The proposal was a fixed
exchange ratio at the signing of the definitive agreement with walk-away
provisions. The fixed exchange ratio was to be based on a price of $50.00 per
share of Commerce Stock (after the 3-2 split). In connection with this revised
proposal, Commerce requested a meeting with the Fidelity Bankshares Board. The
Fidelity Bankshares Board met with Commerce representatives, including David
W. Kemper, the Chief Executive Officer of Commerce, on May 13, 1998.
Gold Banc offered the same stated value as the previous offer, $43,000,000
plus allowing the stock options valued at $900,000 to be exercised without
affecting the exchange ratio. Gold Banc requested a meeting with the Fidelity
Bankshares Board and a meeting was held on May 20, 1998.
The Fidelity Bankshares Board met on June 1, 1998 to review the updated
offers by Commerce and Gold Banc. The Fidelity Bankshares Board authorized
Sheshunoff to communicate to Commerce that the Fidelity Bankshares Board was
prepared to enter into definitive agreement negotiations if the Commerce offer
were revised to provide that Commerce would allow the outstanding stock
options to be exercised without affecting the exchange ratio and to provide
that the price of the Commerce Stock for purposes of fixing the exchange ratio
would be based on the 20-day trailing average daily price of Commerce Stock
for the 20 trading days ended on the day preceding the signing of the
definitive agreement. Commerce agreed to those counter-proposals and the
Fidelity Bankshares Board decided to pursue definitive agreement negotiations
with Commerce.
On June 2, 1998, after being informed by Sheshunoff that the Fidelity
Bankshares Board was entering into definitive agreement discussions with
Commerce, Gold Banc submitted a revised offer with a fixed price at close of
the merger valued at $45,000,000 which value did not include allowing the
stock options to be exercised without affecting the exchange ratio.
After adjustments, the price as of July 1, 1998 which would have been
received under each proposal was $101.76 per share from Commerce and $114.22
per share from Gold Banc. Notwithstanding that the Gold Banc proposal, based
on current market values, would result in a higher purchase price than the
Commerce proposal, the Fidelity Bankshares Board at its meeting on June 29,
1998 chose to proceed with execution of a definitive agreement with Commerce,
rather than Gold Banc for the following reasons.
. Both proposals would be accretive to the buyer and dilutive to the
Fidelity Bankshares stockholders in terms of book value, earnings and
dividends attributable to the stock which the Fidelity Bankshares
stockholders would receive in an exchange of shares, but based on
current market values, the Gold Banc proposal was far more dilutive.
Based on projections obtained from Gold Bank of its 1998 earnings, and
an exchange at current market values, Sheshunoff determined that the
Gold Banc
11
<PAGE>
proposal, on a pro forma basis, would result in a 34.9% dilution in net
income per share to the Fidelity Bankshares stockholders; a dilution in
book value per share of 45.8%; and a reduction in per share dividends to
the Fidelity Bankshares stockholders of 62.8%. The comparable estimated
per share dilution amounts, on a pro forma basis, from the Commerce
proposal were: a 12.5% dilution in net income per share; a 19.1%
dilution in book value per share; and a 27.8% reduction in per share
dividends. The actual dilution, however, would be more or less than that
stated, depending on Commerce's earnings and future dividend rates.
. Commerce is a far larger company than Gold Banc and its operations cover
a substantially greater area. Commerce has banks located throughout much
of Kansas, Missouri and parts of Illinois, as well as the Kansas City
and St. Louis metropolitan areas, while Gold Banc's banking subsidiaries
are located primarily in smaller agricultural communities in the State
of Kansas, with a very small market share in the Kansas portion of the
Kansas City metropolitan area. The Fidelity Bankshares Board estimated
that the banking assets attributable to Fidelity Bankshares would
comprise approximately 25% of Gold Banc's total banking assets following
a merger, but only about 2.5% of Commerce's total banking assets. Thus,
Commerce was perceived to offer a far greater degree of diversification
of risk and opportunities for internal growth in major markets than Gold
Banc.
. Commerce Stock was viewed by the Fidelity Bankshares Board to be more
liquid than that of Gold Banc. The monthly dollar volume in Commerce
Stock has averaged approximately $80,000,000 during 1998, while the
dollar volume of transactions in the Gold Banc stock has averaged
approximately $8,000,000. The Fidelity Bankshares Board was concerned
that if a transaction with Gold Banc were consummated, as soon as any
transfer restrictions were removed, a large number of the stockholders
of Fidelity Bankshares would wish to sell their Gold Banc stock, which
could depress the market value of Gold Banc stock. The Fidelity
Bankshares Board believed that the Fidelity Bankshares stockholders
would be less likely to sell Commerce Stock than Gold Banc stock and, in
any event, the Board viewed the market for Commerce Stock as larger and
less volatile so that any sale which did take place would not have a
significant effect on the market value of Commerce Stock.
The Fidelity Bankshares Board gave final approval to the Acquisition
Agreement on June 29, 1998 and on July 1, 1998, Fidelity Bankshares entered
into the Acquisition Agreement. For a more complete discussion of the
comparisons between the Commerce and Gold Banc proposals considered by the
Fidelity Bankshares Board, see "--Opinion of Fidelity Bankshares Financial
Advisor." A copy of the full report of Sheshunoff was reviewed by the Fidelity
Bankshares Board at its June 29, 1998 meeting and may be reviewed and copied
at the office of Fidelity Bank at 215 North Main, Garden City, Kansas by any
shareholder of record of Fidelity Bankshares at such shareholder's expense.
REASONS FOR THE MERGER
Fidelity Bankshares. The Fidelity Bankshares Board believes that the terms
of the Acquisition Agreement are fair to, and in the best interests of,
Fidelity Bankshares, its shareholders and its subsidiary banks. In considering
the terms and conditions of the Acquisition Agreement, the Fidelity Bankshares
Board considered a number of factors. The Fidelity Bankshares Board did not
assign any relative or specific weights to the factors considered. The
material factors considered were:
The Financial Terms and Structure of the Merger. The Fidelity Bankshares
Board is of the view that, based on historical and anticipated trading
ranges for Commerce Stock, the value of the consideration to be received by
Fidelity Bankshares represents a fair multiple of Fidelity Bankshares' per
share book value and earnings. The Fidelity Bankshares Board also
considered that, based on its belief that Commerce would continue to pay
cash and stock dividends at its current rate, the Merger would result in a
continuation of significant dividend income, as compared to other
alternatives, and stock price appreciation to Fidelity Bankshares'
shareholders. There can be no assurance, however, that current dividends
are indicative of future dividends or that recent stock price appreciation
is indicative of future performance. See "COMMERCE STOCK AND FIDELITY
BANKSHARES STOCK COMPARATIVE PER SHARE PRICES AND DIVIDENDS." Further, the
Fidelity Bankshares Board considered the quality and history of Commerce's
earnings and the ability to maintain those earnings given the management
quality and depth;
12
<PAGE>
diversification of risk; representation in growing market areas and ability
to grow internally; Commerce's $10 billion in assets; and its rating by
Standard and Poor's as A+ in earnings and dividends. Additionally, the
Fidelity Bankshares Board recognized that the shares of Commerce Stock were
listed for trading on the Nasdaq and would provide a liquid investment as
compared to shares of Fidelity Bankshares Stock. The Fidelity Bankshares
Board also considered that the Merger would qualify as a tax-free
reorganization under the Code. See "FEDERAL INCOME TAX CONSEQUENCES."
The Non-Financial Terms of the Merger. The Fidelity Bankshares Board
considered the social and economic effect on the employees, depositors and
customers of, and others dealing with, Fidelity Bank and Heritage Bank and
on the communities in which such banks are located or operate. They
concluded that because of its favorable position among its peer group of
national and regional financial institutions in terms of profitability,
capital adequacy and asset quality, its large menu of banking and banking
related products, strong management, acquisition experience and history of
operating acquired banking locations as community banks, Commerce would be
an excellent successor to the existing Fidelity Bankshares owners.
Commerce. In approving the Acquisition Agreement, management of Commerce
considered the price, financial condition of Fidelity Bankshares, the
projected synergies which Commerce anticipates will result from the Merger and
the compatibility of the businesses of the banking organizations.
OPINION OF FIDELITY BANKSHARES FINANCIAL ADVISOR
Fidelity Bankshares retained Sheshunoff to provide its opinion of the
fairness, from a financial viewpoint, of the consideration to be received by
Fidelity Bankshares' stockholders in connection with the Merger (the "Merger
Consideration"). As part of its investment banking business, Sheshunoff is
regularly engaged in the valuation of securities in connection with mergers
and acquisitions, and valuations for estate, corporate and other purposes. The
Fidelity Bankshares Board retained Sheshunoff based upon its experience as a
financial advisor in mergers and acquisitions of financial institutions, and
its knowledge of financial institutions. On June 29, 1998, Sheshunoff rendered
its oral opinion that, as of such date, the Merger Consideration was fair,
from a financial point of view, to the stockholders of Fidelity Bankshares.
Sheshunoff reviewed Commerce and Fidelity Bankshares financial data as of
March 31, 1998 and recent bank stock market conditions, and rendered its
written fairness opinion letter as of July 1, 1998.
The full text of Sheshunoff's opinion letter ("Opinion") which sets forth,
among other things, assumptions made, procedures followed, matters considered,
and limitations on the review undertaken is attached as Annex C to this
Prospectus. Fidelity Bankshares' stockholders are urged to read the Opinion
carefully and in its entirety. Sheshunoff's Opinion is addressed to the
Fidelity Bankshares Board and does not constitute a recommendation to any
stockholder of Fidelity Bankshares as to how such stockholder should vote at
the Fidelity Bankshares Special Meeting.
In connection with its Opinion, Sheshunoff: (i) reviewed the Acquisition
Agreement; (ii) reviewed certain publicly available financial statements and
other information concerning Fidelity Bankshares and Commerce, respectively,
as well as that of Gold Banc; (iii) reviewed certain internal financial
statements and other financial and operating data of Fidelity Bankshares
provided to Sheshunoff by Fidelity Bankshares' management; (iv) analyzed
certain publicly available financial analyses and projections of Commerce and
Gold Banc provided by independent banking securities analysts; (v) reviewed
the reported market prices and trading activity for Commerce Stock and Gold
Banc Common Stock; (vi) discussed the past and current operations, financial
condition, and future prospects of Fidelity Bankshares with its executive
management; (vii) compared Fidelity Bankshares, Commerce and Gold Banc from a
financial point of view with certain other banking companies that Sheshunoff
deemed to be relevant; (viii) compared the financial performance of Commerce
and Gold Banc and the market prices and trading activity of Commerce Stock and
Gold Banc Common Stock with that of certain other comparable publicly traded
companies and their equity securities; (ix) reviewed the financial terms, to
the extent publicly available, of certain comparable merger transactions in
the Midwestern United States and in Kansas; (x) analyzed the financial
characteristics of the resulting institution following consummation of the
Merger with Commerce as well as the financial characteristics resulting from a
combination with Gold Banc
13
<PAGE>
under the terms of consideration proposed by Gold Banc on a pro-forma basis,
as well as the accretion or dilution to various accounts such as equity,
earnings, and dividends in both scenarios; (xi) analyzed Fidelity Bankshares'
contributions to equity and earnings to the combined institution following the
Merger with Commerce as well as from a combination with Gold Banc under the
terms of consideration proposed by Gold Banc, and Fidelity Bankshares'
resulting ownership of the combined institution in both scenarios; (xii)
utilized discounted cash flow analysis to analyze the net present value of the
anticipated cash flows from an investment in all of the Fidelity Bankshares
Stock considering projected earnings and the future residual value of the
stock, and; (xiii) performed such other analyses and reviews as Sheshunoff
deemed appropriate.
In connection with its review, Sheshunoff relied upon and assumed the
accuracy and completeness of all of the foregoing information provided to it
or made publicly available, and Sheshunoff did not assume any responsibility
for independent verification of such information. With respect to internal
confidential financial projections provided by Fidelity Bankshares, Sheshunoff
assumed that such projections were reasonably prepared on the basis reflecting
the best currently available estimates and judgments of the future financial
performance of Fidelity Bankshares and did not independently verify the
validity of such assumptions. Sheshunoff did not make any independent
evaluation or appraisal of the assets or liabilities of Fidelity Bankshares,
nor was Sheshunoff furnished with any such appraisals. Sheshunoff did not
examine any individual loan files of Fidelity Bankshares. Sheshunoff is not an
expert in the evaluation of loan portfolios for the purposes of assessing the
adequacy of the allowance for losses with respect thereto and has assumed that
such allowances for each of the companies are, in the aggregate, adequate to
cover such losses.
With respect to Commerce and Gold Banc, Sheshunoff relied solely upon
publicly available data regarding Commerce's and Gold Banc's financial
condition and performance. Sheshunoff did not meet with or discuss this
publicly available information with the management of Commerce or Gold Banc.
Sheshunoff did not conduct any independent evaluation or appraisal of the
assets, liabilities or business prospects of Commerce or Gold Banc, was not
furnished with any evaluations or appraisals, and did not review any
individual credit files of Commerce or Gold Banc.
Sheshunoff's Opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to Sheshunoff
as of December 31, 1997 and July 1, 1998.
In connection with rendering its Opinion, Sheshunoff performed a variety of
financial analyses. The preparation of an opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an Opinion is not readily susceptible to partial analysis
or summary description. Moreover, the evaluation of fairness, from a financial
point of view, of the consideration to be received by the stockholders of
Fidelity Bankshares is to some extent a subjective one based on the experience
and judgment of Sheshunoff and not merely the result of mathematical analysis
of financial data. Accordingly, notwithstanding the separate factors
summarized below, Sheshunoff believes that its analyses must be considered as
a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all analyses and factors, could create
an incomplete view of the evaluation process underlying its Opinion. The
ranges of valuations resulting from any particular analysis described below
should not be taken to be Sheshunoff's view of the actual value of Fidelity
Bankshares.
In performing its analyses, Sheshunoff made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Fidelity Bankshares. The
analyses performed by Sheshunoff are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable
than suggested by such analyses, nor are they appraisals. In addition,
Sheshunoff's analyses should not be viewed as determinative of Fidelity
Bankshares Board's or Fidelity Bankshares management's opinion with respect to
the value of Fidelity Bankshares.
The following is a summary of the analyses performed by Sheshunoff in
connection with its Opinion dated as of July 1, 1998. The following discussion
contains financial information concerning Fidelity Bankshares, Commerce and
Gold Banc as of March 31, 1998, and market information as of July 1, 1998:
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Analysis of Selected Transactions. Sheshunoff performed an analysis of
premiums paid in selected pending or recently completed acquisitions of
banking organizations in Kansas and in the Midwestern United States, with
comparable characteristics to the Fidelity Bankshares and Commerce transaction
as well as the proposed Fidelity Bankshares and Gold Banc transaction. Two
sets of comparable transactions were analyzed to ensure a thorough comparison.
The first set of comparable transactions (the "State Guideline
Transactions") consisted of a group of comparable transactions based upon the
geographical market area of Fidelity Bankshares. The State Guideline
Transactions specifically consisted of 11 mergers and acquisitions of banks
located in Kansas which announced their sale between the dates of June 1, 1997
and June 30, 1998. The analysis yielded multiples of the State Guideline
Transactions' purchase price relative to: (i) book value ranging from 1.33
times to 3.79 times with an average of 2.13 times and a median of 1.97 times
(compared with the multiple implied in the Merger of 2.25 times March 31, 1998
book value, and the multiple implied in the proposed merger with Gold Banc of
2.52 times book value); (ii) last twelve months earnings ranging from 5.64
times to 43.21 times with an average of 18.75 times and a median of 17.21
times (compared with the multiple implied in the Merger of 20.99 times last
twelve months earnings as of March 31, 1998, and the multiple implied in the
proposed merger with Gold Banc of 23.56 times); and (iii) total assets ranging
between 8.10% and 30.15% with an average of 15.88% and a median of 14.50%
(compared with the multiple implied in the Merger of 17.64% of March 31, 1998
total assets, and the multiple implied in the proposed merger with Gold Banc
of 19.80%).
The second set of comparable transactions (the "Regional Guideline
Transactions") consisted of another banking group of comparable transactions
based upon the geographical market area of Fidelity Bankshares as well as the
seller's assets similar to Fidelity Bankshares's assets. The Regional
Guideline Transactions specifically consisted of nine mergers and acquisitions
of banks whereby the seller was located in the Midwest and reported total
assets between $150 million and $500 million. The analysis yielded multiples
of the Regional Guideline Transactions' purchase price relative to: (i) book
value ranging from 1.39 times to 3.50 times with an average of 2.72 times and
a median of 2.96 times (compared with the multiple implied in the Merger of
2.25 times March 31, 1998 book value, and the multiple implied in the proposed
merger with Gold Banc of 2.52 times book value); (ii) last twelve months
earnings ranging from 12.89 times to 33.47 times with an average of 21.23
times and a median of 21.52 times (compared with the multiple implied in the
Merger of 20.99 times last twelve months earnings as of March 31, 1998, and
the multiple implied in the proposed merger with Gold Banc of 23.56 times);
and (iii) total assets ranging between 9.04% and 32.57% with an average of
22.99% and a median of 23.21% (compared with the multiple implied in the
Merger of 17.64% of March 31, 1998 total assets, and the multiple implied in
the proposed merger with Gold Banc of 19.80%).
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
Sheshunoff estimated the present value of the future stream of after-tax cash
flow that Fidelity Bankshares could produce through the year 2002, under
various circumstances, assuming that Fidelity Bankshares performed in
accordance with the earnings/return projections of management. Sheshunoff
estimated the terminal value for Fidelity Bankshares at the end of the period
by applying multiples of earnings ranging from 18 times to 20 times and then
discounting the cash flow streams, dividends paid to the shareholders
(assuming all earnings in excess of that required to maintain a tangible
equity to tangible asset percentage of 6.0% are paid out in dividends) and
terminal value using discount rates ranging from 12% to 16% chosen to reflect
different assumptions regarding the required rates of return of Fidelity
Bankshares and the inherent risk surrounding the underlying projections. This
discounted cash flow analysis indicated an aggregate value range of $46.6
million to $59.3 million, compared to the value of the Merger Consideration
for Fidelity Bankshares of $40.09 million, based on the closing price per
share of Commerce Stock at July 1, 1998, and compared to the value of the
proposed merger consideration by Gold Banc of $45.0 million (fixed price).
Sheshunoff also performed a cash flow analysis using an estimated terminal
value for Fidelity Bankshares at the end of the period by applying multiples
of book value ranging from 2.20 times to 2.60 times and then
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discounting the cash flow streams, dividends paid to the shareholders
(assuming all earnings in excess of that required to maintain a tangible
equity to tangible asset percentage of 6.0% are paid out in dividends) and
terminal value using discount rates ranging from 12% to 16% chosen to reflect
different assumptions regarding the required rates of return of Fidelity
Bankshares and the inherent risk surrounding the underlying projections. This
discounted cash flow analysis indicated an aggregate value range of $32.1
million to $41.9 million, compared to the value of the Merger Consideration
for Fidelity Bankshares of $40.09 million, based on the closing price per
share of Commerce Stock at July 1, 1998, and compared to the value of the
proposed merger consideration by Gold Banc of $45.00 million (fixed price).
Comparable Company Analysis. Sheshunoff compared selected balance sheet
data, asset quality, capitalization and profitability measures and market
statistics using financial data at March 31, 1998 and market data as of June
25, 1998 for Commerce to a group of selected Midwestern bank holding companies
which Sheshunoff deemed to be relevant. The following numbers reflect Commerce
March 31, 1998 financial information.
The group of selected Midwestern bank holding companies (the "First Midwest
Group") included all banks (eleven banks) in the Midwestern region of the
United States with reported assets between $5.0 billion and $10.0 billion.
This comparison, among other things, showed that: (i) Commerce's equity to
asset percentage was 9.89%, compared to an average of 8.62% and a median of
8.73% for the First Midwest Group; (ii) for the last twelve months ended March
31, 1998, Commerce's return on average equity was 13.8%, compared to an
average of 16.54% and a median of 16.8% for the First Midwest Group; (iii) for
the last twelve months ended March 31, 1998, Commerce's return on average
assets was 1.36%, compared to an average of 1.42% and a median of 1.51% for
the First Midwest Group; (iv) as of July 1, 1998, Commerce's price per share
to March 31, 1998 book value per share was 2.80 times, compared to an average
of 2.97 times and median of 2.87 times for the First Midwest Group; and (v) as
of July 1, 1998, Commerce's price per share to estimated 1998 earnings per
share as of March 31, 1998 was 19.6 times, compared to an average of 17.9
times and median of 17.7 times for the First Midwest Group.
Sheshunoff also compared selected balance sheet data, asset quality,
capitalization and profitability measures and market statistics using
financial data at March 31, 1998 and market data as of June 25, 1998 for Gold
Banc to two separate groups of selected bank holding companies which
Sheshunoff deemed to be relevant. The following numbers reflect Gold Banc's
March 31, 1998 financial information.
The first group compared to Gold Banc consisted of a group of selected
Midwestern bank holding companies (the "Second Midwest Group") which included
all banks (17 banks) in the Midwestern region of the United States with
reported assets between $600 million and $900 million. Although Gold Banc
reported assets below $600 million as of June 30, 1998, after the acquisitions
already announced by Gold Banc, total assets equate to $785 million which is
within this range. This comparison, among other things, showed that: (i) Gold
Banc's equity to asset percentage was 8.64%, compared to an average of 9.06%
and a median of 9.21% for the Second Midwest Group; (ii) for the last twelve
months ended March 31, 1998, Gold Banc's return on average equity was 9.62%,
compared to an average of 10.84% and a median of 11.81% for the Second Midwest
Group; (iii) for the last twelve months ended March 31, 1998, Gold Banc's
return on average assets was 0.82%, compared to an average of 1.01% and a
median of 1.11% for the Second Midwest Group; (iv) as of July 1, 1998, Gold
Banc's price per share to March 31, 1998 book value per share was 4.48 times,
compared to an average of 2.47 times and median of 2.34 times for the Second
Midwest Group; and (v) as of July 1, 1998, Gold Banc's price per share to
estimated 1998 earnings per share as of March 31, 1998 (assuming completion of
all pending mergers) was 33.06 times, compared to an average of 23.87 times
and median of 22.29 times for the Second Midwest Group.
The second group of bank holding companies (the "High P/E Group") compared
to Gold Banc included all publicly-traded banks (66 banks) in the United
States with reported assets below $1.0 billion that traded with a price to
earnings ("P/E") multiple (as of the close of trading on June 25, 1998)
between 25.0 times and 40.0
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times. Although Gold Banc had a P/E multiple of 44.12 times, this multiple did
not include the accretion provided by the aforementioned Gold Banc
acquisitions which are reported to increase Gold Banc's earnings per share,
resulting in a P/E multiple of 33.06 times 1998 projected earnings. This
comparison, among other things, showed that: (i) Gold Banc's equity to asset
percentage was 8.64%, compared to an average of 10.42% and a median of 9.20%
for the High P/E Group; (ii) for the last twelve months ended March 31, 1998,
Gold Banc's return on average equity was 9.62%, compared to an average of
10.36% and a median of 10.41% for the High P/E Group; (iii) for the last
twelve months ended March 31, 1998, Gold Banc's return on average assets was
0.82%, compared to an average of 1.07% and a median of 1.05% for the High P/E
Group; (iv) as of July 1, 1998, Gold Banc's price per share to March 31, 1998
book value per share was 4.48 times, compared to an average of 2.86 times and
median of 2.73 times for the High P/E Group; and (v) as of July 1, 1998, Gold
Banc's price per share to estimated 1998 earnings per share as of March 31,
1998 (assuming completion of all pending mergers) was 33.06 times, compared to
an average of 29.94 times and median of 27.30 times for the High P/E Group.
Sheshunoff also compared selected stock market results of Gold Banc to the
publicly available corresponding data of the S&P 500 index. Results from
indexing the S&P 500 index to Gold Banc's stock from June 25, 1997 to June 25,
1998 revealed a stronger price movement of Gold Banc's stock to the price
movements of the S&P 500 index. During this time period, Gold Banc's stock
increased approximately 213% while the S&P 500 index increased approximately
27%.
Pro-Forma Analysis. In an effort to determine the financial characteristics
of the combined institution after consummation of an acquisition, Sheshunoff
analyzed the expected resulting institution utilizing pro-forma analysis.
Fidelity Bankshares' contribution to equity and earnings to the combined
company after being acquired by Commerce equaled 1.71% and 1.58%,
respectively. The resulting ownership of the combined company based on the
current exchange ratio of 818,204 shares for all of Fidelity Bankshares'
shares (including 12,000 option shares) was 1.38%. Fidelity Bankshares'
contribution to equity and earnings to the combined company after being
acquired by Gold Banc equaled 26.7% and 22.3%, respectively. The resulting
ownership of the combined company based on the current exchange ratio of
2,195,122 shares for all of Fidelity Bankshares' shares was 14.5%.
In an effort to determine the dilutive/accretive effect of the Merger with
Commerce and the terms of consideration proposed by Gold Banc, Sheshunoff
utilized additional pro-forma analyses. Based on the exchange ratio of 2.0767
shares of Commerce Stock for each share of Fidelity Bankshares Stock
outstanding, Commerce would experience an increase in earnings from $2.45 per
share to $2.46 per share, and an increase in book value from $17.60 per share
to $17.66 per share. Based on the exchange ratio proposed by Gold Banc of 5.57
shares of Gold Banc Common Stock for each share of Fidelity Bankshares Stock
outstanding, Gold Banc would experience an increase in earnings from $0.62 per
share (assuming completion of all aforementioned pending acquisitions) to
$0.68 per share, and increase in book value from $3.78 per share to $4.41 per
share.
Sheshunoff also compared the pro-forma effect on earnings and equity that
Fidelity Bankshares' shareholders receive versus the relative contributions
that the Fidelity Bankshares shareholders provided for each proposed
transaction. With respect to the Merger with Commerce, Fidelity Bankshares
shareholders will experience a pro-forma earnings per share of $2.46. Based on
an exchange ratio of 2.0767 shares of Commerce Stock for each share of
Fidelity Bankshares stock, Fidelity Bankshares shareholders receive $5.11 per
Fidelity Bankshares share in Commerce earnings. When compared to the original
Fidelity Bankshares earnings of $5.84 per share, this is a 12.5% decrease.
With respect to the proposed consideration for an acquisition by Gold Banc,
Fidelity Bankshares shareholders would have experienced a pro-forma earnings
per share of $0.68. Based on an exchange ratio of 5.57 Gold Banc shares for
each Fidelity Bankshares share, Fidelity Bankshares shareholders would have
received $3.80 per Fidelity Bankshares share in Gold Banc earnings. When
compared to the original Fidelity Bankshares earnings of $5.84 per share, this
is a 34.9% decrease. With respect to the Merger with
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Commerce, Fidelity Bankshares shareholders will experience a pro-forma book
value per share of $17.66. Based on an exchange ratio of 2.0767 Commerce
shares for each Fidelity Bankshares share, Fidelity Bankshares shareholders
receive $36.68 per Fidelity Bankshares share in Commerce book value. When
compared to the original Fidelity Bankshares book value of $45.32 per share,
this is a 19.1% decrease. With respect to the proposed merger with Gold Banc,
Fidelity Bankshares shareholders would have experienced a pro-forma book value
per share of $4.41. Based on an exchange ratio of 5.57 Gold Banc shares for
each Fidelity Bankshares share, Fidelity Bankshares shareholders would have
received $24.58 per Fidelity Bankshares share in Gold Banc book value. When
compared to the original Fidelity Bankshares book value of $45.32 per share,
this is a 45.8% decrease.
No company or transaction used in the comparable company and comparable
transaction analyses is identical to Fidelity Bankshares or the Merger.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of Fidelity Bankshares and other factors that could
affect the public trading value of the companies to which they are being
compared. Mathematical analysis (such as determining the average or median) is
not in itself a meaningful method of using comparable transaction data or
comparable company data.
Pursuant to an engagement letter dated January 21, 1998, between Fidelity
Bankshares and Sheshunoff, Fidelity Bankshares agreed to pay Sheshunoff a
retainer fee of $5,000, a professional fee of $25,000 payable upon the
execution of a definitive agreement with respect to a business combination,
sale or similar transaction (the professional fee shall be credited to the
transaction fee), and a transaction fee as a percentage of the consideration
paid in the transaction equal to 0.75% of the consideration paid to Fidelity
Bankshares up to $32 million in transaction value, or 0.85% of the
consideration paid to Fidelity Bankshares if the consideration is within a
range of $32.0 million to $35.0 million, or 1.00% of the consideration paid to
Fidelity Bankshares if the consideration is in excess of $35 million. Fidelity
Bankshares also agreed to indemnify and hold harmless Sheshunoff and its
shareholders, directors, officers, partners, agents, employees and other
affiliates against certain liabilities in connection with its services under
the engagement letter, except in certain cases for liabilities resulting from
the bad faith or negligence of Sheshunoff.
To the best of Fidelity Bankshares' knowledge, there has been no material
relationship between Sheshunoff or its affiliates and Fidelity Bankshares or
its affiliates other than as described herein during the past two years, nor
is any such relationship mutually understood to be contemplated. The amount of
the consideration to be paid in the Merger was determined by negotiations
between Commerce and Fidelity Bankshares with assistance from Sheshunoff.
THE FIDELITY BANKSHARES BOARD OF DIRECTORS RECOMMENDS THAT FIDELITY
BANKSHARES SHAREHOLDERS VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENT.
OPERATIONS AND MANAGEMENT AFTER THE MERGER
At the Effective Time, the Articles of Incorporation and By-Laws of CBI as
in effect immediately prior to the Effective Time will remain the Articles of
Incorporation and By-Laws of CBI, as the surviving corporation, from and after
the Effective Time until amended as provided by law and the officers and
directors of CBI will remain the officers and directors of CBI from and after
the Effective Time. It is expected that existing management of the surviving
corporation will be supplemented with personnel from Commerce who will assist
in bringing new methods and systems to the surviving corporation which have
been developed by Commerce. Commerce also expects to enhance the net interest
margin and non-interest income of the surviving corporation by expanding the
products and services offered. Commerce will also analyze the surviving
corporation's operations for potential efficiencies and anticipates achieving
operating cost savings through the proposed consolidation and the elimination
of redundant costs. While there can be no assurances that operating cost
savings will be realized or in what fiscal period the savings will actually be
recorded, plans are currently being developed to realize operating cost
savings. It is expected that the annualized level of operating cost savings
achieved will be realized unevenly throughout the period of consolidation,
with the majority of any savings
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realized in the latter part of the period. The extent to which the operating
cost savings will be achieved depends, among other things, on the regulatory
environment and economic conditions, and may be affected by unanticipated
changes in business activities, inflation and operating costs.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the fulfillment of certain
conditions set forth in the Acquisition Agreement, including the following:
(a) Approval of the Acquisition Agreement by the holders of a majority of
all the outstanding shares of Fidelity Bankshares Stock;
(b) The accuracy of representations of Commerce, CBI and Fidelity
Bankshares made in the Acquisition Agreement and the performance of their
respective obligations thereunder;
(c) The absence of a material adverse event since July 1, 1998, affecting
the financial condition, properties, assets, liabilities, rights or
business of any of Commerce, Fidelity Bankshares, Fidelity Bank, Heritage
Bank or the Non-Bank Subsidiaries (as defined in the Acquisition
Agreement);
(d) The receipt by Commerce and Fidelity Bankshares of an opinion from
BSPM relating to certain tax matters;
(e) The receipt by Commerce of an opinion from Stinson, Mag & Fizzell,
P.C. as to certain corporate matters regarding Fidelity Bankshares;
(f) The receipt by Fidelity Bankshares of an opinion from BSPM as to
certain cooperate matters regarding Commerce.
(g) The receipt of necessary regulatory approvals;
(h) A minimum amount of capital and minimum loan loss reserve of Fidelity
Bankshares;
(i) The Commerce Stock price shall not be less than $40.72 or greater
than $55.09, and
(j) Dissenters' Rights shall not have been exercised with respect to more
than 10% of the outstanding shares of Fidelity Bankshares Stock on the
Closing Date.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Acquisition Agreement, Fidelity Bankshares has agreed to
carry on its business and cause Fidelity Bank, Heritage Bank and the Non-Bank
Subsidiaries to carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as conducted prior to the
execution of the Acquisition Agreement.
NO SOLICITATION
The Acquisition Agreement provides that none of Fidelity Bankshares,
Fidelity Bank, Heritage Bank or any of the Non-Bank Subsidiaries will solicit
or encourage or, subject to the fiduciary duties of their directors as advised
by counsel, hold discussions or negotiations with, or provide information to,
any person in connection with any proposal from any person relating to the
acquisition of all or a substantial portion of the business, assets or stock
of Fidelity Bankshares, Fidelity Bank, Heritage Bank or the Non-Bank
Subsidiaries. Fidelity Bankshares is required to promptly advise Commerce of
its receipt of, and the substance of, any such proposal or inquiry.
WAIVER AND AMENDMENT
Prior to or at the Effective Time, any provision of the Acquisition
Agreement, including, without limitation, the conditions to consummation of
the Merger, may be (i) waived, to the extent permitted under law, in writing
by the party which is entitled to the benefits thereof; or (ii) amended at any
time by written agreement of the parties, whether before or after approval of
the Acquisition Agreement by the shareholders of Fidelity Bankshares;
provided, however, that after any such approval, no such amendment shall alter
the amount or
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change the form of the consideration or alter or change any of the terms of
the Acquisition Agreement if such alteration or change would adversely affect
the holders of Fidelity Bankshares Stock or would legally require further
approval of such holders. It is anticipated that a condition to consummate the
Merger would be waived only in those circumstances where the Board of
Directors of Commerce, CBI or Fidelity Bankshares, as the case may be, deems
such waiver to be in the best interests of such company and its shareholders.
POSSIBLE TERMINATION OF THE MERGER
Provided that the terminating party is not then in material breach of the
Acquisition Agreement, the Acquisition Agreement may be terminated (i) by
mutual consent of the parties to the Acquisition Agreement; (ii) by Commerce
if any required regulatory approval is denied or is conditioned or restricted
in any manner which would materially and adversely affect the operations of
Commerce; (iii) by Commerce or Fidelity Bankshares if the other has materially
breached the Acquisition Agreement and has not timely cured such breach; (iv)
by Commerce or Fidelity Bankshares if any condition precedent to their
respective obligations is not satisfied prior to the Closing Date or (v) by
either party if the consummation of the Merger has not occurred by October 30,
1998; provided, however, if prior to such date Fidelity Bankshares gives its
data processing supplier six-months notice of termination of its current data
processing agreement, then such date would be extended to December 31, 1998.
EFFECTIVE TIME
It is presently anticipated that the effective time of the Merger will occur
in the fourth quarter of 1998, but no assurance can be given to that effect.
EMPLOYMENT TERMS OF TAUNCE H. MATHIASON
Taunce H. Mathiason, the President of Fidelity Bankshares, Fidelity
Bankshares and Commerce have entered into an agreement pursuant to which
immediately prior to the Effective Time of the Merger, Fidelity Bankshares
will make certain contributions to Mr. Mathiason's deferred compensation
account. Upon consummation of the Merger, Mr. Mathiason will serve as
Community Bank President of Commerce responsible for managing the Kansas
Southwestern Garden City, Kansas market, receive an annual salary of $135,000,
receive an annual bonus of $20,000, receive options to purchase Commerce
Stock, receive restricted Commerce Stock and participate in employee benefit
plans of Commerce.
FEDERAL SECURITIES LAWS CONSEQUENCES
The shares of Commerce Stock to be issued pursuant to the Merger have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"). The provisions of Rule 145 under the Securities Act allow such shares
to be sold without restriction by shareholders of Fidelity Bankshares who are
not deemed to be "affiliates" (as that term is defined in the rules under the
Securities Act) of Fidelity Bankshares and who do not become affiliates of
Commerce. The shares of Commerce to be issued to affiliates of Fidelity
Bankshares or Commerce may be resold only pursuant to an effective
registration statement, pursuant to Rule 145 under the Securities Act, or in
transactions otherwise exempt from registration under the Securities Act.
Affiliates of Fidelity Bankshares will be required to agree in writing to such
restrictions. Commerce will not be obligated and does not intend to register
its shares under the Securities Act for resale by shareholders who are
affiliates.
RIGHTS OF DISSENTING SHAREHOLDERS
In order to have dissenters' rights, a holder of Fidelity Bankshares Stock
must not vote his or her shares in favor of the Acquisition Agreement or
deliver an unmarked, but signed proxy. If the Merger is approved, holders of
shares of Fidelity Bankshares Stock will possess the right to seek appraisal
of their shares pursuant to Section 17-6712 of the KGCC ("Section 17-6712").
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The following is a summary of the provisions of Section 17-6712 and is
qualified in its entirety by reference to the full text of such section, a
copy of which is attached to this Prospectus as Annex B. The failure to comply
with the provisions of Section 17-6712 may result in a termination or loss of
appraisal rights thereunder.
A holder of record of shares of Fidelity Bankshares Stock who elects to
exercise appraisal rights under Section 17-6712 must deliver a written
objection to the Acquisition Agreement to Fidelity Bankshares prior to the
vote on the Acquisition Agreement by the holders of Fidelity Bankshares Stock
at the Fidelity Bankshares Special Meeting to be held on , 1998. Any such
objection should be sent to Fidelity Bankshares at 215 N. Main, Garden City,
Kansas 67846, Attention: Taunce A. Mathiason.
Within 10 days after the Effective Date, CBI, as the surviving corporation
in the Merger, will give written notice to each former holder of shares of
Fidelity Bankshares Stock who has complied with the written notice requirement
that the Merger has become effective and that dissenters' rights are available
for any or all of such holder's shares in connection therewith. Within 20 days
after the date of the mailing of the notice, such holder must demand in
writing to CBI the payment of the fair value of such holder's shares of
Fidelity Bankshares Stock. Any such demand should be sent to CBI c/o Commerce
Bancshares, Inc., 1000 Walnut, Kansas City, Missouri 64199-3686, Attention: J.
Daniel Stinnett. Within 30 days after the expiration of the 20 day period, CBI
shall pay to such holder the value of such holder's shares, exclusive of any
element of value arising from the expectation or accomplishment of the Merger.
If CBI and a dissenting shareholder fail to agree upon the fair value of the
Fidelity Bankshares Stock, within four months after the Effective Time of the
Merger, but not thereafter, either CBI or any shareholder entitled to
dissenters' rights under Section 17-6712 may file a petition in the District
Court of Kansas demanding a determination of the value of the stock of all
shareholders entitled to appraisal. Inasmuch as CBI has no obligation to file
such a petition, the failure of a shareholder to do so within the period
specified could nullify such shareholder's previous written demand for
appraisal.
If a petition for appraisal described above is timely filed by a
shareholder, CBI is obligated to provide the shareholder with a verified list
of all shareholders who have demanded appraisal. After notice to such
shareholders, the court is empowered to conduct a hearing upon the petition,
to determine those shareholders entitled to appraisal and to determine the
"fair value" of the shares held by them as of the date on which the Merger is
consummated, which under the KGCC would be determined exclusive of any element
of value arising from accomplishment or expectation of the Merger.
When the "fair value" is so determined, the court will direct the payment by
CBI of such value, with interest thereon if the court so determines, to the
shareholders entitled to receive the same, upon surrender by such shareholders
of the certificates representing their shares of Fidelity Bankshares Stock to
CBI at CBI c/o Commerce Bancshares, Inc., 1000 Walnut, Kansas City, Missouri
64199-3686, Attention: J. Daniel Stinnett. Upon application of CBI or any
shareholder entitled to participate in the appraisal proceeding, the court may
in its discretion permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of those
other shareholders entitled to an appraisal who have complied with the above
conditions.
TRANSACTIONS BETWEEN COMMERCE AND FIDELITY BANKSHARES
No shares of Fidelity Bankshares Stock are presently owned by Commerce or by
any of its subsidiaries or principals, or by trustees for the benefit of
Commerce or any of its subsidiaries, shareholders or employees as a class or
by an escrow arrangement instituted by Commerce.
ACCOUNTING TREATMENT; RESTRICTIONS ON SALES BY AFFILIATES
It is intended that the Merger will qualify as a pooling of interests for
accounting and financial reporting purposes. Under this method of accounting,
the consolidated assets and liabilities of Fidelity Bankshares will be
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carried forward to the consolidated financial statements of Commerce at their
recorded amounts and the consolidated net income of Fidelity Bankshares, if
material, will be included in the net income of Commerce.
In order for the Merger to qualify as a pooling of interests, each person
who is an "affiliate" (as defined in Rules 145 and 405 adopted under the
Securities Act) of Fidelity Bankshares at the time the Acquisition Agreement
is submitted for the approval of Fidelity Bankshares' shareholders must agree
in writing not to sell, pledge, transfer or otherwise dispose of any shares of
Commerce Stock until financial results covering at least 30 days of combined
operations of Commerce and Fidelity Bankshares have been published. Pursuant
to the Acquisition Agreement, Commerce has agreed to publish such results in a
timely manner.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the provisions of the Code, the
applicable regulations thereunder, judicial authority, current administrative
rulings and practice as of the date hereof and the opinion to be provided by
BSPM. The opinion of BSPM will be based upon certain assumptions and
representations by the management of each of Fidelity Bankshares and Commerce
and by certain holders of the outstanding Fidelity Bankshares Stock. A ruling
from the Internal Revenue Service concerning the tax consequences of the
Merger will not be requested. The following discussion does not address the
federal income tax consequences to special classes of taxpayers including,
without limitation, foreign corporations, tax exempt entities and persons who
acquired their Fidelity Bankshares Stock pursuant to the exercise of an
employee option or otherwise as compensation.
In the opinion of BSPM, the Merger will constitute a reorganization within
the meaning of Code Section 368(a)(1). Consequently:
1. Shareholders of Fidelity Bankshares will not recognize gain or loss
upon the receipt of Commerce Stock in the Merger for their shares of
Fidelity Bankshares Stock.
2. The basis of Commerce Stock received by shareholders of Fidelity
Bankshares in the Merger will equal the basis of their stock exchanged.
3. The holding period of Commerce Stock received in the Merger by
shareholders of Fidelity Bankshares who are not dealers will include the
holding period of their stock exchanged.
4. Cash paid to holders of Fidelity Bankshares Stock who dissent from the
Merger and cash paid to holders of Fidelity Bankshares Stock in lieu of
fractional shares will be treated as proceeds of sales on which gain or
loss will be recognized.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. EACH FIDELITY BANKSHARES SHAREHOLDER SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM
OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE AND LOCAL AND
OTHER TAX LAWS.
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BENEFICIAL OWNERSHIP OF SECURITIES
FIDELITY BANKSHARES STOCK OWNERSHIP
The following table sets forth certain information as of June 30, 1998,
relating to the beneficial ownership of Fidelity Bankshares Stock by (a) each
person known to Fidelity Bankshares to be the beneficial owner of 5% or more
of the outstanding Fidelity Bankshares Stock, (b) each director and executive
officer of Fidelity Bankshares, and (c) all directors and executive officers
of Fidelity Bankshares as a group. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission which
generally attribute beneficial ownership of securities to persons who possess
sole or shared voting power and/or investment power with respect to those
securities. Except as otherwise indicated, each person indicated below has
sole voting and investment power with respect to the shares of Fidelity
Bankshares Stock reported as beneficially owned by such person.
<TABLE>
<CAPTION>
NAME OF DIRECTOR OR EXECUTIVE
OFFICER
OR NAME AND ADDRESS OF BENEFICIAL PERCENTAGE OF BENEFICIAL
OWNER NUMBER OF SHARES OWNERSHIP(1)
--------------------------------- ---------------- ------------------------
<S> <C> <C>
James F. Reed(2).................... 40,860 10.70%
4248 Louisiana Blvd. NE
Albuquerque, NM 87109
Mary Lou Reed(3).................... 40,860 10.70%
4248 Louisiana Blvd. NE
Albuquerque, NM 87109
Katherine M. Hart(4)................ 30,860 8.08%
911 N. 6th Street #1056
Garden City, KS 67846
Lloyd H. Haag(5).................... 30,260 7.92%
19842 Highway K116
Holton, KS 66436
Richard James Vogel(6).............. 30,260 7.92%
1400 Southwest Eden Court
Topeka, KS 66604-2686
Bill A. King(7)..................... 7,988 2.09%
Joe R. Burnside(8).................. 6,580 1.72%
Robert L. Beckett(9)................ 6,309 1.65%
Michael A. Reed(10)................. 3,157 *
Dennis Kleysteuber(11).............. 2,405 *
Taunce H. Mathiason(12)............. 1,800 *
Richard D. Harp(13)................. 800 *
Ronald L. Megli(14)................. 100 *
All Directors and Executive Officers 29,139 7.60%
as a group (10 persons)............
</TABLE>
- --------
* Less than one percent
(1) At the close of business on June 30, 1998, there were 381,992 shares of
Fidelity Bankshares Stock outstanding.
(2) Includes (i) 16,945 shares held by Mr. Reed's wife, Mary Lou Reed, (ii)
2,360 shares held by Mary Lou Reed as Trustee of the Jennifer Pecastaing
Reed Irrevocable Trust of 1987, under Trust Agreement dated November 27,
1987, and (iii) 1,880 shares held by Mary Lou Reed as Trustee of the
James F. Reed Irrevocable Trust under Trust Agreement dated December 15,
1978. Mary Lou Reed has sole voting and investment power with respect to
such shares, and Mr. Reed disclaims beneficial ownership of his wife's
shares.
(3) Includes (i) 2,360 shares held by Mrs. Reed as Trustee of the Jennifer
Pecastaing Reed Irrevocable Trust of 1987, under Trust Agreement dated
November 27, 1987, and (ii) 1,880 shares held by Mrs. Reed as Trustee of
the James F. Reed Irrevocable Trust under Trust Agreement dated December
15, 1978.
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Mrs. Reed has sole voting and investment power with respect to such
shares. Also includes 19,675 shares held by Mrs. Reed's husband, James F.
Reed. Mr. Reed has sole voting and investment power with respect to such
shares, and Mrs. Reed disclaims beneficial ownership of her husband's
shares.
(4) Includes (i) 30,260 shares held by Katherine M. Hart as Co-Trustee of The
Finnup Foundation Trust, under Trust Agreement dated January 27, 1978,
(ii) 200 shares held by Ms. Hart jointly with her daughter, Mary Caroline
Hart, (iii) 200 shares held by Ms. Hart jointly with her daughter, Ruth
Hart Spiker, and (iv) 200 shares held by Ms. Hart jointly with her
daughter, Julia Hart Peterson. Katherine M. Hart has shared voting and
investment power with respect to such shares.
(5) All 30,260 shares are held by Lloyd H. Haag as Co-Trustee of The Finnup
Foundation Trust, under Trust Agreement dated January 27, 1978. Mr. Haag
has shared voting and investment power with respect to such shares.
(6) All 30,260 shares are held by Richard James Vogel as Co-Trustee of The
Finnup Foundation Trust, under Trust Agreement dated January 27, 1978.
Mr. Vogel has shared voting and investment power with respect to such
shares.
(7) Bill A. King is a director of Fidelity Bankshares. Includes (i) 5,302
shares held by Mr. King jointly with his wife, Dewees King, (ii) 1,500
shares held by Mr. King jointly with his mother, Verda B. Garner, (iii)
233 shares held by Mr. King jointly with his son, Chris R. King, (iv) 233
shares held by Mr. King jointly with his son, Jeffery King and (v) 120
shares held by Mr. King jointly with his daughter, Julie Brennaman. Mr.
King has shared voting and investment power with respect to such shares.
(8) Joe R. Burnside is a director of Fidelity Bankshares. Includes 6,480
shares held jointly with Mr. Burnside's wife, Jana L. Burnside. Mr.
Burnside and Mrs. Burnside share voting and investment power with respect
to such shares.
(9) Robert L. Beckett is a director of Fidelity Bankshares. Includes 1,359
shares held by Fidelity Bank as Custodian of the Robert Beckett Self
Directed IRA. Mr. Beckett has sole voting and investment power with
respect to such shares. Also includes 540 shares held by Mr. Beckett as
Co-Trustee of the Beckett Trust A, under Trust Agreement dated January
26, 1988, as to which Mr. Beckett has shared voting and investment power.
(10) Michael A. Reed is a director of Fidelity Bankshares. Includes 26 shares
held by Fidelity Bank as Custodian of the Michael A. Reed Self Directed
IRA. Mr. Reed has sole voting and investment power with respect to such
shares. Also includes (i) 200 shares held by Mr. Reed's wife, Marion Sue
Reed and (ii) 51 shares held by Fidelity Bank as Custodian of the Marion
Sue Reed Self Directed IRA. Mrs. Reed has sole voting and investment
power with respect to the shares held in her individual name and sole
voting and investment power with respect to the shares held in her Self
Directed IRA, and Mr. Reed disclaims beneficial ownership of such shares.
(11) Dennis Kleysteuber is a director of Fidelity Bankshares.
(12) Taunce H. Mathiason is Chairman of the Board, President, Chief Executive
Officer and a director of Fidelity Bankshares. Includes 1,500 shares of
Fidelity Bankshares Stock underlying options granted under the 1985
Nonstatutory Stock Option Plan for Fidelity Bankshares of Garden City,
Inc. Also includes 200 shares held by Mr. Mathiason jointly with his
wife, Mary M. Mathiason, as to which Mr. Mathiason shares voting and
investment power.
(13) Richard D. Harp is Executive Vice President of Fidelity Bankshares.
Includes 100 shares held by Mr. Harp jointly with his wife, Alicia L.
Harp. Mr. Harp and Mrs. Harp share voting and investment power with
respect to such shares. Also includes (i) 100 shares held by Mr. Harp
jointly with his son, Reed A. Harp, (ii) 100 shares held by Mr. Harp
jointly with his son, Russell G. Harp, and (iii) 100 shares held by Mr.
Harp jointly with his son, Ryan T. Harp. Mr. Harp has sole voting and
investment power with respect to such shares.
(14) Ronald L. Megli is Vice President of Fidelity Bankshares.
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DIFFERENCES IN RIGHTS OF SHAREHOLDERS
GENERAL
Fidelity Bankshares is incorporated in the State of Kansas, and Commerce is
incorporated in the State of Missouri. Fidelity Bankshares shareholders, whose
rights are currently governed by Kansas law (including the KGCC), the Fidelity
Bankshares Articles of Incorporation and Fidelity Bankshares Bylaws will, upon
consummation of the Merger, become shareholders of Commerce. After such time,
their rights will then be governed by Missouri law, including the Missouri
General and Business Corporation Law (the "MGBCL"), the Commerce Articles of
Incorporation and the Commerce Bylaws.
Material differences that may affect the rights and interests of
shareholders of Fidelity Bankshares and Commerce are set forth below. This
summary is not intended to be an exhaustive description of the provisions
discussed. It is qualified in its entirety by reference to the KGCC, MGBCL,
the Fidelity Bankshares Articles of Incorporation, the Fidelity Bankshares
Bylaws, the Commerce Articles of Incorporation and the Commerce Bylaws.
NUMBER OF DIRECTORS AND TERM
The Fidelity Bankshares Bylaws provide that such corporation shall have 11
directors, unless a majority of the board of directors votes to change such
number. Currently the Fidelity Bankshares Board consists of six directors.
Each director of Fidelity Bankshares serves a term of 1 year.
Under the Commerce Bylaws, the Commerce Board consists of twelve directors;
however the Commerce Board has the authority to increase or decrease (but not
below 3) the exact number of directors. Currently, the Commerce Board consists
of fifteen directors. The Commerce Bylaws provide that directors are elected
to a three year term. The Commerce Articles of Incorporation and the Commerce
Bylaws provide for a staggered Board of Directors comprised of three classes
as nearly equal in size as practicable. Each class holds office until the
third annual meeting for election of directors following the election of such
class.
REMOVAL OF DIRECTORS
Pursuant to the KGCC directors of Fidelity Bankshares may be removed, with
or without cause, at a meeting of the shareholders by a majority vote of the
shares entitled to vote at an election of directors; provided, however, that
if less than the entire board is to be removed, no director may be removed
without cause, if the votes cast against such director's removal would be
sufficient to elect such director if then cumulatively voted at an election of
the entire board of directors. The Commerce Articles of Incorporation provide
that the entire Board of Directors may only be removed by an 80% majority of
the shares then entitled to vote for the election of directors.
VOTING
Fidelity Bankshares shareholders have cumulative voting rights in connection
with the election of directors and each shareholder is entitled to as many
votes as are equal to the number of shares of Fidelity Bankshares Stock held
by such shareholder multiplied by the number of directors to be elected. A
Fidelity Bankshares shareholder may cast all of such votes for a single
director or may distribute them among the directors up for election. Commerce
shareholders, however, do not have cumulative voting rights in connection with
the election of directors and each outstanding share of Commerce Stock is
entitled to one vote on each matter submitted to shareholder vote.
The Fidelity Bankshares Bylaws state that, unless required otherwise by the
Articles of Incorporation or Bylaws of Fidelity Bankshares, the holders of a
majority of the outstanding shares of stock entitled to vote at a meeting of
shareholders constitutes a quorum at such meeting, and issues brought before a
meeting of shareholders will be decided by a vote of the holders of a majority
of the shares represented and entitled to vote.
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<PAGE>
The Commerce Bylaws (except with respect to the election of directors who are
elected by a plurality) contain a similar provision. Special voting provisions
apply in the case of a merger or change in control. See "--Shareholders' Vote
for Mergers;--Anti-takeover Statutes."
DIVIDENDS AND LIQUIDATION PREFERENCE
Holders of shares of Commerce Stock and Fidelity Bankshares Stock are
entitled to dividends when and if declared by the Boards of Directors of their
respective corporations; upon liquidation, such holders are entitled to share
pro rata in the assets of their respective corporations remaining after
payments to creditors and any preferred shareholders.
PREEMPTIVE RIGHTS
Holders of Fidelity Bankshares Stock have preemptive rights to purchase
Fidelity Bankshares Stock in certain limited instances set forth in the
Fidelity Bankshares Articles of Incorporation. Holders of Commerce Stock,
however, do not have preemptive rights.
SPECIAL MEETINGS
The Fidelity Bankshares Bylaws provide that the Chairman of the Board, the
President, the Secretary, the Board of Directors and shareholders owning at
least 20% of the Fidelity Bankshares Stock entitled to vote at any such
meeting may each call special shareholder meetings. The Commerce Bylaws
provide that special meetings of the Commerce shareholders may only be called
by its Chairman of the Board, its President or a majority of the Commerce
Board.
INDEMNIFICATION; LIMITATION OF LIABILITY
The MGBCL and the KGCC permit indemnification of officers, directors and
others on substantially similar terms. A corporation may indemnify any person
made or threatened to be made a party to any legal proceeding, including any
suit by or in the name of the corporation, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation in any such capacity with respect to
another enterprise, against expenses and other amounts reasonably incurred by
him in connection with such legal proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interest
of the corporation, and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. The foregoing
notwithstanding, no indemnification may be made in respect to any claim
brought by or in the name of the corporation as to which such person is
adjudged to be liable to the corporation unless and only to the extent that a
proper court determines that in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
that the court deems proper. A corporation is required to indemnify its
directors, officers, employees or agents to the extent that such persons have
been successful in defending an action, suit or proceeding or any claim, issue
or matter therein. These indemnification rights are not exclusive of any other
rights to which the person seeking indemnification is entitled and do not
limit a corporation's right to provide further indemnification.
The Fidelity Bankshares Bylaws provide rights of indemnification generally
as set forth in the KGCC described above, except that the right of
indemnification is limited to directors and officers. The Fidelity Bankshares
Bylaws also provide that each director or officer shall be indemnified to the
full extent permitted by Kansas law. The Fidelity Bankshares Bylaws state that
the indemnification provision therein is a matter of contract between Fidelity
Bankshares and its officers and directors and no amendment to such provision
will diminish the indemnification obligations of Fidelity Bankshares and its
successors set forth in the Fidelity Bankshares Bylaws for claims based on
acts or omissions of any person prior to the date of such amendment. The
Commerce Bylaws provide rights of indemnification generally as set forth in
the MGBCL described above, except that the right of indemnification is limited
to directors and officers.
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<PAGE>
SHAREHOLDER INSPECTION
Under the KGCC, any shareholder may inspect the corporation's stock ledger,
shareholder list and other books and records for any proper purpose. A "proper
purpose" is defined as a purpose reasonably related to such person's interest
as a shareholder. The KGCC specifically provides that a shareholder may
appoint an agent for the purpose of examining the stock ledger, list of
shareholders or other books and records of the corporation. A shareholder may
apply to the Kansas district court to compel inspection in the event the
shareholder's request to examine the books and records is refused. In general,
the corporation has the burden of proving an improper purpose where that
shareholder requests to examine only the shareholder ledger or the shareholder
list, and in all other circumstances, the shareholder has the burden of
proving a proper purpose. The right of shareholders to inspect under the MGBCL
is generally similar to that of shareholders under the KGCC. Neither the MGBCL
nor Missouri case law, however, provides specific guidance as to whether a
shareholder may appoint an agent for the purpose of examining books and
records or the extent to which a shareholder must have a "proper purpose."
Accordingly, in comparison with the KGCC, in a given situation, a Missouri
shareholder may be provided with less guidance as to the scope of its ability
to inspect the books and records of the corporation.
AMENDMENT OF ARTICLES OF INCORPORATION
Under the KGCC, the Fidelity Bankshares Articles of Incorporation may be
amended upon a resolution of the Fidelity Bankshares Board, proposing the
amendment and its submission to the Fidelity Bankshares' shareholders for
their approval by the majority of the shares of Fidelity Bankshares Stock
entitled to vote. Pursuant to KGCC, any amendment that would adversely affect
the rights of holders of Fidelity Bankshares Stock requires the approval of a
majority of the holders of such class of stock.
The Commerce Articles of Incorporation provide that provisions of the
Commerce Articles of Incorporation dealing with the number, term, and removal
of directors, and certain business combinations may not be repealed or amended
without the affirmative vote of holders of at least three-fourths of the
outstanding shares of voting stock. The Commerce shareholders may otherwise
amend, alter, change or repeal any provision of the Commerce Articles of
Incorporation as the MGBCL, which is identical to the KGCC in this respect,
provides.
AMENDMENT OF BYLAWS
The shareholders of Fidelity Bankshares may make, alter, amend or repeal the
Fidelity Bankshares' Bylaws by a majority vote of the shares entitled to vote
thereon. A majority of the Directors of Fidelity Bankshares may make, alter,
amend or repeal the Fidelity Bankshares' Bylaws. However, the Fidelity
Bankshares Board of Directors may not amend, repeal, or alter provisions which
the shareholders of Fidelity Bankshares expressly prohibited the Board of
Directors from amending, repealing or altering at the time of the
shareholders' enactment of any such provision. The Commerce Articles of
Incorporation authorize the Commerce Board to make, alter and repeal bylaws,
subject to the rights of shareholders at any regular or special meeting to
alter or repeal bylaws made by the Commerce Board.
NOTICE OF SHAREHOLDER PROPOSALS; NOMINATIONS OF DIRECTORS
The Fidelity Bankshares Bylaws provide that a shareholder may bring any
matter before the annual meeting of shareholders without giving notice to
Fidelity Bankshares, unless notice of such matter is required by law. The
Commerce Bylaws provide that any shareholder who intends to bring a matter
before the annual meeting of shareholders must deliver written notice of such
shareholder's intent to the Secretary of Commerce. Such notice must be
received by the Secretary not later than sixty days nor more than ninety days
in advance of such meeting.
Such written notice must set forth (i) a brief description of the proposal
and the reasons for it, (ii) the name and address of the shareholder, (iii)
the class and number of shares of capital stock of Commerce which are
beneficially owned by the shareholder, (iv) any arrangement between such
shareholder and any other person in connection with the proposal and any
material interest of the shareholder in the proposed business described in the
notice, (v) a representation that such shareholder will appear in person or
proxy at the annual meeting and
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(vi) if such business is a nomination for director, each nomination sought to
be made, together with a description of the qualifications and business or
professional experience of each proposed nominee and disclosing the
information about him or her that is required by the Securities Exchange Act
of 1934 and the rules and regulations promulgated thereunder, to be disclosed
in the proxy materials for the meeting involved as if he or she were a nominee
of the corporation for election as one of its directors.
SHAREHOLDERS' VOTE FOR MERGERS
In the area of mergers and/or other corporate reorganizations, the KGCC
differs from the MGBCL in a number of respects. A corporation incorporated
under the KGCC must obtain the affirmative vote of the holders of a majority
of the outstanding shares of the corporation entitled to vote thereon to
approve a merger with another corporation, the sale of substantially all of
the corporation's assets or the voluntary dissolution of the corporation. In
the same situations, the MGBCL requires the approval of persons holding at
least two-thirds of the outstanding shares entitled to vote thereon.
The KGCC does not require a shareholder vote of the surviving corporation in
a merger if (i) the merger agreement does not amend the existing articles of
incorporation, (ii) each outstanding share of the surviving corporation before
the merger is unchanged, and (iii) the number of shares to be issued in the
merger does not exceed 20% of the shares outstanding immediately prior to such
issuance. The MGBCL has no such exception.
Neither the MGBCL nor the KGCC requires a vote of a corporation's
shareholders if such corporation is merged with and into a parent corporation
that owns 90% or more of such corporation's stock.
APPRAISAL RIGHTS
Both the KGCC and the MGBCL provide appraisal rights to shareholders
entitled to vote in merger transactions (except as indicated below). The MGBCL
also provides such rights in a sale of assets, unless pursuant to a voluntary
dissolution of the corporation, whereas the KGCC does not. The KGCC does not
recognize dissenters' rights of appraisal in a merger or consolidation if the
dissenting shares of the corporation are listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 shareholders, or if the corporation is the
surviving corporation and no vote of its shareholders is required, subject to
certain exceptions.
ANTI-TAKEOVER STATUTES
The MGBCL and KGCC contain certain provisions which may be deemed to have an
anti-takeover effect.
The KGCC contains a "Control Share Acquisition Statute" which provides that
an "Acquiring Person" who, after any acquisition of shares of an issuing
public corporation, has the voting power, when added to all shares of the same
corporation owned or controlled by the Acquiring Person, to exercise or direct
the exercise of (i) 20% or more but less than 33 1/3%, (ii) 33 1/3% or more
but less than a majority, or (iii) a majority of the voting power of
outstanding stock of such corporation, must obtain shareholder approval for
the purchase of the "Control Shares." If approval is not given, the Acquiring
Person's shares lose the right to vote. The statute prohibits an Acquiring
Person from voting its shares unless certain disclosure requirements are met
and the retention or restoration of voting rights is approved by both (i) a
majority of the outstanding voting stock, and (ii) a majority of the
outstanding voting stock after exclusion of Interested Shares. "Interested
Shares" are defined as shares owned by the Acquiring Person, by directors who
are also employees, and by officers of the corporation. Shareholders are given
dissenters' rights with respect to the vote on Control Share Acquisitions and
may demand payment of the fair value of their shares.
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A number of acquisitions of shares are deemed not to constitute Control
Share Acquisitions, including good faith gifts, transfers pursuant to wills,
purchases pursuant to an issuance by the corporation, mergers involving the
corporation which satisfy the other requirements of the KGCC, transactions
with a person who owned a majority of the voting power of the corporation
within the prior year, or purchases from a person who has previously satisfied
the provisions of the Control Share Acquisition Statute so long as the
transaction does not result in the purchasing party having voting power after
the purchase in a percentage range (such ranges are as set forth in the
immediately preceding paragraph) beyond the range for which the selling party
previously satisfied the provisions of the statute. Additionally, a
corporation may exempt itself from application of the statute by inserting a
provision in its articles of incorporation or bylaws expressly electing not to
be covered by the statute. The Fidelity Bankshares Articles of Incorporation
and the Fidelity Bankshares Bylaws do not "opt out" of the Control Share
Acquisition Statute; however, because Commerce is acquiring "Control Shares"
of Fidelity Bankshares in a merger to which Fidelity Bankshares is a party and
which satisfies the other requirements of the KGCC, the provisions of the
Control Share Acquisition Statute do not apply to a merger such as the Merger.
The MGBCL contains a control share acquisition statute similar to that
contained in the KGCC; however, the Commerce Bylaws "opt out" of its
provisions.
The MGBCL also contains a business combination statute that protects
domestic corporations from unsolicited take-overs by prohibiting certain
transactions. The statute restricts certain "Business Combinations" between a
corporation and an "Interested Shareholder" and its "Affiliates" and
"Associates" (as defined therein). A "Business Combination" includes a merger
or consolidation, certain sales, leases, exchanges, mortgages, transfers,
pledges and similar dispositions of corporate assets or stock and any
reclassifications, recapitalization and reorganizations that increase the
proportionate voting power of the Interested Shareholder. An "Interested
Shareholder" includes any person or entity which beneficially owns or controls
20% or more of the outstanding voting shares of the corporation. Pursuant to
the Missouri business combination statute, a Missouri corporation may at no
time engage in a Business Combination with an Interested Shareholder other
than (i) a Business Combination approved by the board of directors prior to
the date on which the Interested Shareholder acquired such status; (ii) a
Business Combination approved by the holders of a majority of the outstanding
voting stock not beneficially owned by the Interested Shareholder or its
Affiliates or Associates at a meeting called no earlier than five years after
the date on which the Interested Shareholder acquired such status; or (iii) a
Business Combination that satisfies certain detailed fairness and procedural
requirements. Notwithstanding the foregoing, unless the board of directors of
the corporation approved such Business Combination prior to the date on which
the Interested Shareholder acquired such status, no such Business Combination
may be engaged in for a period of five years after such date.
The MGBCL exempts from its business combination provisions: (i) corporations
not having a class of voting stock registered under Section 12 of the Exchange
Act; (ii) corporations which adopt provisions in their original articles of
incorporation or, under certain circumstances, adopt amendments to their
bylaws expressly electing not to be covered by the statute; and (iii) certain
circumstances in which a shareholder inadvertently becomes an Interested
Shareholder. The Commerce Articles and Commerce Bylaws do not "opt out" of the
Missouri business combination statute.
The KGCC contains a business combination statute similar to that contained
in the MGBCL. Like the Missouri business combination statute, the Kansas
business combination statute generally prohibits a domestic corporation from
engaging in mergers or other business combinations with any person who is the
beneficial owner of 15% or more of the outstanding voting stock of the
corporation (an "Interested Shareholder"). The prohibition can be avoided if,
prior to the date on which the shareholder becomes an Interested Shareholder,
the Board of Directors of the Kansas corporation approves either the business
combination or the transaction which resulted in the shareholder becoming an
Interested Shareholder. The MGBCL imposes a longer prohibition period on
transactions with Interested Shareholders than the three-year prohibition
provided for under the KGCC, thereby potentially increasing the period during
which an unsolicited takeover may be frustrated. In addition, the KGCC, unlike
its Missouri counterpart, does not apply if the Interested Shareholder obtains
at least 85% of the
30
<PAGE>
corporation's voting stock upon consummation of the transaction which resulted
in the shareholder's becoming an Interested Shareholder. Thus, a person
acquiring at least 85% of the corporation's voting stock could circumvent the
defensive provisions of the KGCC. The Fidelity Bankshares Articles of
Incorporation and Bylaws do not "opt out" of the Kansas business combination
statute; however, because there is no public market for the securities of
Fidelity Bankshares, the provisions of the business combination statute are
presently inapplicable to them.
PREFERRED SHARE PURCHASE RIGHTS PLAN
As described in the Form 8-A12G/A Registration Statement filed by Commerce
with the SEC on June 10, 1996 and incorporated herein by reference, Commerce
Stock has attached rights to acquire shares of preferred stock in response to
certain takeover proposals. Fidelity Bankshares does not have a rights plan.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF FIDELITY BANKSHARES
The following table sets forth certain historical financial data with
respect to Fidelity Bankshares on a consolidated basis. The financial data as
of June 30, 1998, and June 30, 1997, reflects all normal recurring adjustments
which are, in the opinion of Fidelity Bankshares' management, considered
necessary for a fair presentation of the financial condition and results of
operations for such interim periods. The results for the interim periods
presented herein are not necessarily indicative of results to be expected for
any other period or for the entire fiscal year. The information contained in
this table should be read in conjunction with Fidelity Bankshares' historical
Consolidated Financial Statements and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEETS INFORMATION:
Total assets............ $225,129 $227,299 $206,332 $169,859 $162,197 $158,170
Loans and leases, net of
allowance for losses... 150,890 152,473 128,470 101,414 102,166 99,840
Investment securities... 50,706 47,569 48,389 46,684 43,677 41,132
Total deposits.......... 194,058 201,307 186,592 147,684 143,542 131,985
Advances from Federal
Home Loan Bank and
Notes Payable.......... 11,312 5,911 2,053 2,266 2,628 3,364
Federal funds
purchased.............. -- 1,125 -- 3,650 850 7,575
Stockholders' equity.... 18,642 17,855 16,479 15,262 14,327 14,096
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF EARNINGS
INFORMATION:
Interest income........ $ 8,898 $ 8,447 $17,011 $13,971 $12,598 $10,817 $10,820
Interest expense....... 4,445 3,906 8,115 6,588 5,774 4,129 3,934
Net interest income.... 4,453 4,541 8,896 7,383 6,823 6,688 6,886
Provision for loan
losses................ 100 509 691 160 505 1,012 463
Net interest income
after provision for
loan losses........... 4,353 4,032 8,205 7,223 6,318 5,676 6,423
Noninterest income..... 1,141 909 1,850 1,657 1,843 1,594 1,532
Noninterest expense.... 3,635 3,307 7,044 6,013 6,095 5,831 6,555
Provision for income
taxes................. 707 649 1,101 947 705 423 651
Net earnings........... 1,152 985 1,910 1,920 1,360 1,015 749
PER SHARE DATA:
Basic earnings per
common share.......... $ 3.02 $ 2.61 $ 5.03 $ 5.10 $ 3.62 $ 2.70 $ 1.99
Cash dividends per
common share.......... 0.92 0.92 1.84 1.84 1.84 1.84 1.84
Book value per common
share................. 48.80 45.10 46.74 43.63 40.53 38.15 37.55
Dividend payout ratio.. 30.51% 35.25% 36.58% 36.11% 50.82% 68.05% 92.31%
Weighted average number
of common shares
outstanding........... 381,992 377,735 379,864 376,819 375,655 375,369 375,778
FINANCIAL RATIOS:
Return on average
assets(1)............. 1.03% 0.90% 0.92% 1.06% 0.84% 0.63% 0.49%
Return on average
stockholders'
equity(1)............. 12.46% 11.66% 11.15% 12.20% 9.25% 7.01% 5.27%
Average equity to
average assets........ 8.17% 8.28% 8.22% 8.73% 9.04% 8.87% 9.23%
Net interest margin.... 4.36% 4.37% 4.64% 4.45% 4.60% 4.65% 4.68%
Net interest spread.... 4.24% 4.18% 3.91% 3.64% 3.77% 4.62% 4.94%
</TABLE>
- --------
(1) Interim ratios have been annualized for purposes of comparability with
year-end data.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FIDELITY BANKSHARES
The primary business of Fidelity Bankshares is community-oriented banking,
offering a variety of financial services. These services include taking
deposits, which are in turn used to generate loans for small businesses, agri-
business, commercial and residential real estate, and consumer-oriented loans.
Fidelity Bankshares invests approximately 25% of its assets in U.S. government
bonds and U.S. Agencies, primarily for purposes of liquidity, and to pledge to
public deposits. Ancillary services include packaging mortgage loans for sale,
providing brokerage services through a third-party provider and providing
trust services to customers in Southwest Kansas.
Fidelity Bankshares' primary source of income is from interest on its loans
and investments. A majority of the loans are short-term, adjustable rate.
Interest expense is incurred from interest paid on deposits and to the Federal
Home Loan Bank ("FHLB"), as well as short-term borrowings. Net income is
primarily dependent upon the difference between the average yield earned on
loans and investments and the average rate paid on deposits and borrowings.
Fidelity Bankshares controls interest-rate risk to the extent that the average
maturity/repricing on earning assets and interest-bearing liabilities is less
than two years; however, other factors also affect spread, such as economic
and competitive factors, which influence interest rates, loan demand, and
deposit flows.
Fidelity Bankshares derives approximately 10-15% of its income from non-
interest income, including fee income on deposit accounts, trust services fee
income, and other fees on loans. Net income is affected by provision for loan
losses, non-interest expenses, and provisions for income taxes.
FINANCIAL CONDITION
June 30, 1998 compared to December 31, 1997
Total assets decreased approximately $2.2 million from December 31, 1997 to
June 30, 1998, although earning assets increased slightly. Cash and other non-
interest-earning balances decreased and investment securities increased. Loans
decreased approximately $1.6 million at June 30, 1998, compared to December
31, 1997.
Total deposits decreased during this period from $201.3 million to $194.1
million. This decrease was mostly due to a decreased dependence on public
funds. At the same time, advances from FHLB increased from $4.1 million at
December 31, 1997 to $9.6 million at June 30, 1998.
December 31, 1997 compared to December 31, 1996
Total assets at December 31, 1997, were $227.3 million compared to $206.3
million at December 31, 1996. This growth was primarily the result of an
increase in loan demand. Bank premises and equipment increased $1.3 million
during this period because the Company completed construction of two remote
facilities and began construction of another. The Company also advanced on its
line of credit from FHLB to help fund the increase in loans.
Total deposits grew by $14.7 million from December 31, 1996 to December 31,
1997. This growth was a combination of increased public deposits and market
response to competitively-priced time deposits.
RESULTS OF OPERATIONS
Comparison of six months ended June 30, 1998 and six months ended June 30,
1997
Net earnings for the six months ended June 30, 1998 increased $167,000, or
17%, from the same period ended June 30, 1997. During such periods, net
interest income decreased $88,000, or 1.9%, despite an increase of $451,000,
or 5.3%, in interest income; however, interest income for the six months ended
June 30, 1997 included a one time, nonrecurring payment of prior period, non-
accrued interest totaling $442,000. Interest expense during these periods
increased by $539,000, or 13.8%.
33
<PAGE>
Noninterest income increased $232,000, or 25.5%, as a result of considerable
growth in the Trust Department's assets, increased sales of residential
mortgages in the secondary market, and higher deposit charges due to increased
activity.
Noninterest expense increased $328,000, or 9.9%, for the six months ended
June 30, 1998 as compared to the same period ended June 30, 1997, especially
in areas such as salaries and employee benefits, occupancy and equipment
expense, and data processing fees. These increases are substantially related
to the addition of three branches and the resulting increase in online deposit
activity.
Provision for income taxes increased $58,000, or 8.9%, for the six month
period ended June 30, 1998 as compared to the same period ended June 30, 1997.
Comparison of December 31, 1997 to December 31, 1996
Net earnings for the fiscal year ended December 31, 1997, were relatively
unchanged from the previous year at $1.9 million. During such periods, net
interest income increased $1,513,000, or 20.5%, as a result of an increase of
$3,040,000, or 21.8%, in interest income, partially offset by an increase of
$1,527,000, or 23.2%, in interest expense. In March of 1997, Fidelity Bank
recognized $442,000 of interest on a loan returned to accruing status. During
this same month, an additional $385,000 was provided for loan losses.
Noninterest income increased $193,000, or 11.6%, in 1997 as compared to
1996, and noninterest expense increased $1,031,000, or 17.1%, during such
periods. Added costs in salaries and employee benefits, occupancy and
equipment expense and data processing fees were directly related to starting
new branches.
Provision for income taxes for 1997 was higher as a percentage of income
than 1996 due to an increase in Kansas taxable income resulting in an increase
of $154,000, or 16.3%.
Comparison of December 31, 1996 to December 31, 1995
Net earnings of $1.9 million for the fiscal year ended December 31, 1996,
were 41.2% higher than fiscal year ended December 31, 1995. This $559,000
increase was primarily due to three factors: an increase in net interest
income caused by a 26% growth in net loans; a reduction in state privilege
taxes due to U.S. Government and Agency interest which was non-taxable for
state purposes; and the elimination of FDIC insurance premiums in 1996. During
such periods, net interest income increased $560,000, or 8.2%, as a result of
an increase of $1,373,000, or 10.9%, in interest income, partially offset by
an increase of $814,000, or 14.1%, in interest expense.
Noninterest income decreased $186,000, or 10.1%, in 1996 as compared to
1995, and noninterest expense decreased $82,000, or 1.3%, during such periods.
Provision for income taxes for 1996 increased $242,000, or 34.3%, as
compared to 1995, reflecting for the most part an increase in net earnings.
34
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made. All average balances are monthly average balances. Loan
fees are included in interest income. Non-accruing loans have been included in
the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- -------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE AND FEES RATE BALANCE AND FEES RATE BALANCE AND FEES RATE
-------- --------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks(1).............. $ 8,549 $ -- -- $ 7,041 $ -- -- $ 6,992 $ -- --
Federal funds sold..... 2,319 127 5.47% 5,449 464 8.52% 6,592 486 7.37%
Taxable investment
securities............ 47,425 3,109 6.56% 48,775 2,959 6.07% 44,863 2,485 5.54%
Non-taxable investment
securities............ 1,727 75 4.34% 1,622 66 4.07% 1,086 43 3.96%
Loans, net(2).......... 140,390 13,700 9.76% 110,166 10,482 9.51% 95,922 9,584 9.99%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest earning
assets................ 191,861 17,011 8.87% 166,012 13,971 8.42% 148,463 12,598 8.49%
Bank premises and
equipment............. 3,580 -- -- 2,480 -- -- 2,439 -- --
Other assets........... 3,244 -- -- 2,993 -- -- 3,080 -- --
-------- -------- --------
Total Assets........... $207,234 -- -- $178,526 -- -- $160,974 -- --
======== ======== ========
LIABILITIES &
STOCKHOLDERS' EQUITY
Non-interest bearing
deposits.............. $ 25,630 -- -- $ 24,488 -- -- $ 23,329 -- --
Interest bearing
deposits.............. 76,042 2,890 3.80% 65,234 2,376 3.64% 58,105 2,010 3.46%
Time deposits.......... 83,946 4,858 5.79% 71,091 3,937 5.54% 62,532 3,447 5.51%
Federal funds purchased
and Federal Home Loan
Bank line of credit
and mortgages......... 3,754 368 9.80% 1,659 275 16.58% 1,752 318 18.15%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest bearing
liabilities........... 163,742 8,116 4.96% 137,984 6,588 4.77% 122,389 5,775 4.72%
Other liabilities...... 1,149 -- -- 791 -- -- 920 -- --
Stockholders' equity... 16,713 -- -- 15,263 -- -- 14,336 -- --
-------- -------- --------
Total liabilities and
stockholders' equity.. $207,234 -- -- $178,526 -- -- $160,974 -- --
======== ======== ========
NET INTEREST INCOME, NET
INTEREST SPREAD........ -- $ 8,895 3.91% -- $ 7,383 3.64% -- $ 6,823 3.77%
NET INTEREST YIELD(3)... -- -- 4.64% -- -- 4.45% -- -- 4.60%
</TABLE>
- --------
(1) Includes non-interest bearing balances, cash and cash items.
(2) Loans, net of allowance for losses.
(3) Net interest yield is net interest earnings divided by total interest-
earning assets, with net interest earnings equal to the difference between
total interest earned and total interest paid.
35
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the increase
related to higher outstanding balances and that due to the unprecedented
levels and volatility of interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume (i.e., changes in volume multiplied by
previous rate) and (2) changes in rate (i.e., changes in rate multiplied by
previous volume). For purposes of this table, changes attributable to both
rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
--------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO A CHANGE IN DUE TO A CHANGE IN
--------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- -------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold.... $ (245) $ 92 $ (153) $ (38) $ (61) $ (99)
Taxable investment
securities........... (20) (43) (63) 96 378 474
Non-taxable
investments(1)....... 5 4 9 28 (5) 23
Loans and leases,
net(2)............... 2,868 (63) 2,805 814 161 975
Change due to non-
accrued interest for
1996,
received in 1997..... 442 -- 442 -- -- --
-------- ------- -------- ------- ------- ---------
Total Interest
Income............. $ 3,050 $ (10) $ 3,040 $ 900 $ 473 $ 1,373
======== ======= ======== ======= ======= =========
Interest paid on:
Interest-bearing
deposits............. $ 341 $ 172 $ 513 $ 243 $ 124 $ 367
Time deposits......... 833 89 922 471 18 489
Federal funds
purchased............ 70 13 83 (17) 12 (5)
Federal Home Loan Bank
and Notes Payable.... 25 (14) 11 (9) (27) (36)
-------- ------- -------- ------- ------- ---------
Total interest
expense............ $ 1,269 $ 260 $ 1,529 $ 688 $ 127 $ 815
======== ======= ======== ======= ======= =========
Change in net interest
income............... $ 1,781 $ (270) $ 1,511 $ 212 $ 346 $ 558
======== ======= ======== ======= ======= =========
</TABLE>
- --------
(1) Interest income and yields are not presented on a tax-equivalent basis due
to the immaterial effect on net interest income
(2) Nonaccruing loans are included in the average amounts outstanding
ASSET/LIABILITY MANAGEMENT
Fidelity Bankshares' policy is to normally maintain a positive GAP (ratio of
rate-sensitive assets to rate-sensitive liabilities). This is generally
accomplished through the use of adjustable-rate loans and relatively short-
term maturities of interest-earning assets and interest-bearing liabilities.
The Company has further established GAP parameters of 15% +/- Total Assets
within a twelve-month period. The Company uses rate impact analysis to review
the effects of maturity and repricing within various rate environments, and
adjusts loan pricing procedures, deposit pricing, and investment strategies to
bring GAP back in line when necessary.
In the past, Fidelity Bankshares has been subject to market risk due to a
high concentration of loans in agriculture at Fidelity Bank. With the purchase
of Heritage Bank in 1989, Fidelity Bankshares made an effort to diversify that
risk. Heritage Bank is located in a metropolitan area removed from Fidelity
Bank's lending area with its main concentration of loans being in small
businesses and commercial and residential real estate. Fidelity Bankshares has
also attempted to control market risk through continued diversification of its
portfolio and prudent lending practices.
36
<PAGE>
INVESTMENT PORTFOLIO
Fidelity Bankshares invests approximately 25% of its available funds in
short-term investments, including federal funds sold, obligations of the U.S.
Government and its agencies, obligations of state and political subdivisions
and mortgage-backed securities. These are all fixed-rate securities, and have
laddered maturities, with the weighted average maturity of the overall
investment portfolio not to exceed five years. The current weighted average
maturity of the portfolio is 1.66 years. Fidelity Bankshares' investment
portfolio is maintained primarily for liquidity and pledging purposes, and
secondarily for yield.
The following table presents Fidelity Bankshares' investments in certain
securities accounted for as Held to Maturity ("HTM") or Available for Sale
("AFS") on the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government, HTM................................ $ 6,836 $10,277 $16,576
U.S. Government, AFS................................ 8,769 13,227 9,875
U.S. Agencies, HTM.................................. 13,520 3,993 7,006
U.S. Agencies, AFS.................................. 14,157 18,335 11,824
Mortgage Backed Bonds, AFS.......................... 1,943 496 --
Municipal Securities, HTM........................... 2,041 1,866 1,322
Corporate Debt Securities, HTM...................... 10 10 10
Corporate Equity Securities, AFS.................... 293 185 71
------- ------- -------
Total Securities.................................. $47,568 $48,389 $46,684
======= ======= =======
</TABLE>
The following table sets forth the amounts by book value and weighted
average yields, as of December 31, 1997, of each category of investment listed
in the preceding table by time periods maturing.
<TABLE>
<CAPTION>
AFTER ONE YEAR BUT AFTER TWO YEARS BUT AFTER FIVE YEARS BUT
WITHIN ONE YEAR WITHIN TWO YEARS WITHIN FIVE YEARS WITHIN TEN YEARS
----------------- ------------------- --------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ------- ---------- -------- ----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government......... $ 2,253 5.05% $ 4,582 5.89% -- -- -- --
U.S. Agencies........... 2,747 5.65 300 6.00 $ 10,473 5.67% -- --
Municipal Securities.... 96 4.04 87 4.09 1,434 4.42 $ 425 4.82%
AVAILABLE FOR SALE:
U.S. Government......... 5,474 6.00 3,257 6.36 -- -- -- --
U.S. Agencies........... 8,068 6.19 5,567 6.12 499 6.18 -- --
Mortgaged Backed Bonds.. -- -- -- -- 1,943 6.61 -- --
Corporate Equity
Securities............. -- -- -- -- -- -- -- --
--------- ---------- ----------- ----------
Total Investments....... $18,638 $ 13,793 $ 14,349 $ 425
========= ========== =========== ==========
<CAPTION>
AFTER TEN YEARS
-------------------
AMOUNT YIELD
--------- ---------
<S> <C> <C>
HELD TO MATURITY:
U.S. Government......... -- --
U.S. Agencies........... -- --
Municipal Securities.... -- --
AVAILABLE FOR SALE:
U.S. Government......... -- --
U.S. Agencies........... -- --
Mortgaged Backed Bonds.. -- --
Corporate Equity
Securities............. $ 303 6.0%
---------
Total Investments....... $ 303
=========
</TABLE>
LOAN PORTFOLIO
The majority of the loans and commitments have been granted in the
subsidiary banks' market areas within the cities of Garden City and Olathe,
Kansas and the surrounding areas. The concentrations of credit by type are set
forth below. The commitments to extend credit approximate the distribution of
loans outstanding. A significant portion of the loan portfolio is comprised of
agriculture related loans. The maintenance of adequate collateral margins on
an ongoing basis is required of such borrowers.
37
<PAGE>
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Agriculture....................... $ 50,881 $ 41,199 $ 32,629 $ 44,521 $ 45,840
Agriculture real estate........... 9,992 7,321 5,999 6,307 9,805
Real estate....................... 58,755 49,017 39,818 27,298 22,877
Installment loans................. 8,534 7,446 6,389 4,916 4,724
Commercial loans and other........ 24,781 23,600 17,451 20,081 17,681
-------- -------- -------- -------- --------
Total........................... $152,943 $128,583 $102,286 $103,123 $100,927
======== ======== ======== ======== ========
</TABLE>
Gross loans at December 31, 1997, increased $24 million, or 18.94%, over
December 31, 1996. This growth is due to the merger of local competitors
driving new customers to Fidelity Bankshares. Total loans include $1.3 million
of non-accruing loans at December 31, 1997, and $3.2 million at December 31,
1996. Fixed rate loans at December 31, 1997 comprised 18.5% of loans. The
remaining 81% are floating or adjustable rate loans. Most commercial and real
estate loans are structured with three-year terms, reviewed annually.
The majority of agriculture loans are for livestock production in Finney
County, Kansas and the surrounding areas. In addition, $15.7 million of the
agriculture loans are for farm operating lines covering the same area.
Livestock production loans are secured by livestock and cash with a 20-30%
margin. Collateral is monitored through review of quarterly borrowing base
certificates and at least semi-annual inspections. Livestock production and
farm operating loans are all variable rates. In the past four years,
maturities on 40-50% of these loans have been extended to 3 years, with annual
reviews.
The majority of agriculture real estate loans are for agricultural real
estate located in Finney County, Kansas and the surrounding areas. In the past
four years, maturities on 40-50% of these have been extended to 3 years, with
annual reviews.
Real estate loans consist of commercial real estate loans for commercial
business construction, which comprise 69% of this category. Of the remaining
31%, $5 million represent residential real estate, and $2 million is in equity
lines of credit.
Installment loans include $1.5 million in credit card and related revolving
plans. Commercial loans include agri-business loans and the unsold portion of
Small Business Administration loans.
The maturities of loans at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
WITHIN 1-
ONE YEAR 5 YEARS OVER 5 YEARS TOTAL
-------- ------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Agriculture............................. $34,947 $15,128 $ 767 $ 50,843
Agriculture real estate................. 558 1,811 7,624 9,992
Real estate............................. 15,972 11,510 28,705 56,187
Installment loans....................... 3,831 4,420 289 8,539
Commercial loans and other.............. 11,744 8,929 6,709 27,382
------- ------- ------- --------
Total loans........................... $67,052 $41,798 $44,093 $152,943
======= ======= ======= ========
</TABLE>
The following table represents the interest rate sensitivity at December 31,
1997, for loans due after one year:
<TABLE>
<CAPTION>
FIXED INTEREST ADJUSTABLE
RATES INTEREST RATES
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Agriculture, real estate and commercial....... $11,059 $68,576
Installment loans and other................... 4,751 1,505
------- -------
Total loans................................. $15,810 $70,081
======= =======
</TABLE>
38
<PAGE>
RISK ELEMENTS OF LOAN PORTFOLIO
Management reviews the Fidelity Bank's and Heritage Bank's loan portfolio
continuously for problem loans. During the ordinary course of business,
management becomes aware of borrowers who may not be able to meet contractual
requirements of loan agreements. Such loans are placed under close
supervision, with consideration given to placing the loan on a nonaccrual
status. Management then determines the need for additions to the allowance for
loan loss, or, if appropriate, partial or full charge-off. Those loans on
which management does not expect to collect interest in the normal course of
business, or which are 90 days or more past due as to principal or interest,
are generally placed on nonaccrual status. After a loan is placed on
nonaccrual status, interest income is recognized only on a cash basis so long
as management is satisfied there is no impairment of the book value of the
loan. The loan is returned to accrual status only when the borrower has
brought all past due principal and interest payments current, and in the
opinion of management, the borrower has demonstrated the ability to make
future payments of principal and interest as scheduled.
It is Fidelity Bank's and Heritage Bank's stated policy that when a loan
becomes over 90 days delinquent, it is automatically placed on nonaccrual
status. In addition, any loan showing a high apparent risk and potential for
deterioration in financial strength or collateral value may be placed on a
nonaccrual status.
At December 31, 1997, Fidelity Bankshares had $1,332,000 in loans on non-
accruing status. At December 31, 1996, Fidelity Bankshares had $3,269,000 in
loans on non-accruing status. During 1997, interest income totaling $442,000
was collected on one loan, which was returned to accruing status. The amount
of interest which would have been recorded as of June 30, 1998 was $69,000. Of
that amount, $61,000 was collected and recorded as income.
Nonaccrual loans for the reported periods are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
(BOOK VALUE, DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-Accruing Loans:
Real estate.......................... $ 78 $ 1,896 $ 3,088 $ 246 $ 779
Commercial........................... 1,202 1,373 1,460 1,859 113
Agricultural......................... 38 -- -- 4,758 --
Consumer............................. 14 -- 7 -- --
------- ------- ------- ------- -----
Total.............................. $ 1,332 $ 3,269 $ 4,555 $ 6,863 $ 892
======= ======= ======= ======= =====
</TABLE>
There were no loans 90 days delinquent and still accruing for any of the
reported periods.
LOAN CONCENTRATIONS
Fidelity Bank prepares an analysis on a quarterly basis of client
concentrations. Loan policy states that the aggregate of commitments retained
by Fidelity Bank to affiliated entities will not exceed the lesser of 25% of
the unimpaired capital stock paid in and the unimpaired surplus fund of
Fidelity Bank, or $3,600,000. At December 31, 1997, the aggregate commitment
of two affiliated groups exceeded this threshold. The outstanding balances
were $3,992,000 and $3,722,000, respectively. Heritage Bank has no affiliated
commitments in excess of policy limits.
39
<PAGE>
SUMMARY OF LOAN LOSS
The table below presents an analysis of loan loss for each reported period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning period............ $2,526 $2,488 $2,227 $1,391 $1,235
Charge-offs:
Real estate loans.................... 0 36 40 52
Commercial loans..................... 231 45 436 141 312
Agriculture loans.................... 0 0 0 0 0
Consumer loans and other............. 114 80 45 35 24
Recoveries:
Real estate loans.................... 2 21 27 16 0
Commercial loans..................... 30 3 238 28 21
Agriculture loans.................... 0 0 0 0 0
Consumer loans and other............. 10 15 12 8 8
Provision for loan losses(1)........... 691 160 505 1,012 463
Balance at end of period............... $2,914 $2,526 $2,488 $2,227 $1,391
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period......... 0.20% 0.10% 0.25% 0.17% 0.31%
</TABLE>
- --------
(1) In 1994, Fidelity Bankshares placed all commitments to two entities and
their affiliates on non-accruing status. These entities had nine notes
with outstanding balances totalling $6,863,000 at December 31, 1994.
In determining the amount to be allocated each period to the allowance for
loan losses, Fidelity Bankshares uses a combination of specific allocation and
percentage allocation assigned to risk-weighted categories. For each
commercial, real estate and agriculture loan assigned to the banks' internal
watch lists (those which would be considered substandard or below), an
analysis is performed assessing estimated exposure (based on liquidation
proceeds from underlying collateral), and a potential loss is assigned. For
the remainder of the loan portfolio, a percentage is assigned to categories
based on applicable credit grades or types of loans. The percentages range
from 1/2 to 1% on commercial loans to 2-5% on consumer loans based on
historical experience.
40
<PAGE>
The table below presents a loan loss reserve liquidation analysis as of
December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------
PERCENTAGE LOAN COLLATERAL LIQUIDATION LIQUIDATION ESTIMATED RESERVE
ALLOCATION BALANCE VALUE VALUE COST EXPOSURE AMOUNT
---------- -------- ---------- ----------- ----------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Watch List Credits...... -- $ 11,612 $17,810 $13,296 $1,848 $1,331 $1,703
Balance of Portfolio:
Commercial and
agricultural loans
Risk Rating 1......... 0.00% 14,815 -- -- -- -- --
Risk Rating 2......... 0.50% 32,285 -- -- -- -- 161
Risk Rating 3......... 1.00% 80,456 -- -- -- -- 805
Home equity loans....... 1.00% 2,875 -- -- -- -- 29
Consumer loans.......... 1.00% 9,364 -- -- -- -- 94
Over draft banking...... 2.00% 228 -- -- -- -- 5
Credit cards............ 5.00% 1,308 -- -- -- -- 65
--------
Total loan portfolio.... -- $152,943 -- -- -- -- 2,862
========
Allowance for loan
losses................. -- -- -- -- -- -- 2,914
------
Excess (deficit) in
allowance.............. -- -- -- -- -- -- $ 52
======
</TABLE>
DEPOSITS
Fidelity Bank and Heritage Bank offer a variety of deposit products
including demand deposits, NOW and Money Market accounts, passbook savings,
IRAs and Certificates of Deposit. The maturities of certificate accounts
offered will vary in response to competition, but typically range from 182
days to 24 months. A total of $725,000 in time deposits have maturities
between two and three years. Transaction accounts, money market and passbook
savings represent 53% of deposits at June 30, 1998, and have remained
relatively stable since December 31, 1996. Time deposits grew from $81,524,000
at December 31, 1996, to $96,196,000 at December 31, 1997. At June 30, 1998,
time deposits were $90,273,000. The decrease was in public deposits, as
Fidelity Bank and Heritage Bank reduced their dependency on higher-cost
volatile public funds and increased their lines of credit with FHLB.
Approximately 3%, or $2,773,000, of time deposits at June 30, 1998, were
brokered deposits. Brokered deposits are no longer being accepted.
The following table indicates the average balances and average rate paid on
certain categories of deposits for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing:
DDA........................ $ 25,630 -- $ 24,488 -- $ 23,329 --
Interest bearing:
MMDA....................... 42,438 4.32% 32,935 4.20% 27,159 3.83%
NOW Accounts............... 24,773 3.29% 22,721 3.32% 20,742 3.27%
Savings.................... 8,830 2.70% 9,579 2.73% 10,204 2.85%
IRAs....................... 7,529 5.60% 7,148 5.56% 7,077 5.16%
CDS under $100,000......... 52,358 5.82% 39,890 5.62% 37,593 5.55%
CDS over $100,000.......... 24,058 5.76% 24,053 5.40% 17,862 5.57%
-------- -------- --------
Total average deposits... $185,616 $160,814 $143,966
======== ======== ========
</TABLE>
41
<PAGE>
Averages are computed on a monthly basis.
The following table sets forth the amount outstanding as of December 31,
1997, of certain deposits in excess of $100,000 and the maturities thereof:
<TABLE>
<CAPTION>
MATURING IN
--------------------------------
3 MONTHS 3 TO 12 OVER 12
OR LESS MONTHS MONTHS TOTAL
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CDS over $100,000........................... $19,292 $16,101 $2,314 $37,707
</TABLE>
SHORT-TERM BORROWINGS AND FHLB ADVANCES
Short-term borrowings consist mainly of federal funds purchased and advances
on lines of credit from the FHLB. There were no federal funds borrowed at June
30, 1998. Federal funds borrowed at December 31, 1997, amounted to $1,125,000.
The average short-term borrowings at December 31, 1997 and December 31, 1996,
were less than 30% of average stockholder's equity for each period.
In 1997, Heritage Bank borrowed $4.1 million from the FHLB, of which $1.5
million matured on August 26, 1998. The remaining $2.6 million matures between
November 2012 and January 2013, with put options on October 16 and December
29, 2002. In May 1998, Fidelity Bank borrowed $2.5 million from the FHLB.
Although the term of this note is 10 years, the FHLB may adjust the rate after
90 days, and monthly thereafter, and Fidelity Bank may pay the balance at that
time without penalty. A similar convertible rate note with a balance of $3.0
million was established on June 26, 1998.
LIQUIDITY AND CAPITAL
Fidelity Bankshares manages liquidity risk through the composition of its
assets and liabilities and through asset/liability management policies which
allow it to respond efficiently to the borrowing needs and withdrawal
requirements of its customers. Cash and cash equivalents include cash, due
from banks, and federal funds sold. The primary sources of liquidity are cash
and cash equivalents and investment securities with short-term maturities.
Fidelity Bankshares also has participation agreements in place on many lines
of credit to assist in managing liquidity.
As of June 30, 1998, Fidelity Bankshares had cash and cash equivalents of
$13,975,000, and investment securities maturing in less than one year of
$18,650,000. These assets represent 14.5% of total assets at June 30, 1998.
This was a decrease from December 31, 1997 of $3,569,000 in cash and cash
equivalents; and an increase in short-term investment securities of $11,000.
These assets were 15.9% of total assets at December 31, 1997.
Stockholders' equity was 8.28% of total assets at June 30, 1998. Risk-based
capital and leverage ratios for Fidelity Bank and Heritage Bank exceed
regulatory requirements for minimum capital.
EFFECT OF RECENT ACCOUNTING DEVELOPMENTS
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", requires reporting about operating segments, products and
services, geographic areas and major customers. Its objective is to provide
information about the different types of business activities and economic
environments in which businesses operate. Fidelity Bankshares management does
not anticipate that the implementation of SFAS 131 will impact financial
statement presentation.
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits", issued in 1998, standardizes the disclosure requirements for
pensions and other postretirement benefits and should not impact Fidelity
Bankshares' reporting. Nor should SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (also issued during 1998) have a
significant impact on Fidelity Bankshares' consolidated financial statements.
42
<PAGE>
YEAR 2000 COMPLIANCE
Fidelity Bankshares utilizes and is dependent upon data processing systems
and software to conduct its business. The data processing systems and software
include those developed and maintained by Fidelity Bankshares' data processing
provider, and purchased software which is run on in-house computer networks.
At June 30, 1998, Fidelity Bankshares had performed a review and assessment of
all hardware and software to determine its ability to function properly in the
year 2000. It had also reviewed all other systems required to be tested (e.g.
mechanical devices, security systems, etc.). Fidelity Bankshares is currently
in the testing stage, and has a written plan to bring all systems into
compliance by the end of 1998. There have been no systems identified as of now
which will require material expenditures to bring into compliance. Fidelity
Bankshares is communicating with its customers to determine the impact of Year
2000 on them, and is offering educational seminars to assist customers in
bringing their operations into compliance.
EFFECTS OF INFLATION
Fidelity Bankshares' financial statements and accompanying footnotes have
been prepared in accordance with general accepted accounting principles, which
generally require the measurement of financial position and operating results
in terms of historical dollars without consideration for changes in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation is the increased cost of Fidelity Bankshares' operations
because the assets and liabilities of Fidelity Bankshares are primarily
monetary and interest rates have a greater impact on Fidelity Bankshares'
performance than do the effects of inflation.
43
<PAGE>
COMMERCE STOCK AND FIDELITY BANKSHARES STOCK
COMPARATIVE PER SHARE PRICES AND DIVIDENDS
Shares of Commerce Stock are traded on the Nasdaq. As of June 30, 1998,
there were 243 holders of record of Fidelity Bankshares Stock. There is no
established public trading market for the shares of Fidelity Bankshares Stock
and there have been a limited number of transactions involving Fidelity
Bankshares Stock.
The following table sets forth the high and low sales prices for Fidelity
Bankshares Stock (based upon Fidelity Bankshares management's review of its
stock transfer records) and Commerce Stock, and cash dividends paid thereon
during the periods indicated:
<TABLE>
<CAPTION>
FIDELITY BANKSHARES
STOCK COMMERCE STOCK(1)
---------------------- ----------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
1996
First Quarter..................... * * $0.46 $23.20 $21.01 $0.115
Second Quarter.................... * * $0.46 $22.30 $20.63 $0.115
Third Quarter..................... $42.65 $41.40 $0.46 $24.49 $20.11 $0.115
Fourth Quarter.................... $43.63 $42.43 $0.46 $31.43 $23.36 $0.115
1997
First Quarter..................... $43.63 $43.63 $0.46 $32.06 $28.17 $0.130
Second Quarter.................... $44.50 $44.50 $0.46 $30.63 $26.67 $0.130
Third Quarter..................... $45.55 $43.63 $0.46 $38.02 $28.57 $0.130
Fourth Quarter.................... * * $0.46 $46.83 $35.79 $0.130
1998
First Quarter..................... $47.88 $46.74 $0.46 $49.17 $41.33 0.145
Second Quarter.................... * * $0.46 $50.63 $45.00 0.145
</TABLE>
- --------
* There were no known sales during such period.
(1) Commerce information has been restated for a three for two stock split
declared in February 1998.
The last sale price for Commerce Stock as reported by Nasdaq on , 1998
(the most recent date for which it was practicable to obtain market price data
prior to the printing of this Prospectus), was $ .
LEGAL OPINION
The legality of the Commerce Stock offered hereby will be passed upon by
Blackwell Sanders Peper Martin LLP.
EXPERTS
INDEPENDENT PUBLIC ACCOUNTANTS FOR COMMERCE BANCSHARES, INC.
The consolidated financial statements of Commerce Bancshares, Inc. and
subsidiaries as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 incorporated by reference in the
Annual Report on Form 10-K, which are incorporated by reference in this
Registration Statement, have been incorporated herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants, and
upon the authority of said firm as experts in auditing and accounting.
44
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS FOR FIDELITY BANKSHARES, INC.
The consolidated financial statements of Fidelity Bankshares, Inc. and
subsidiaries as of December 31, 1997 and 1996 and for the years ended December
31, 1997, 1996 and 1995 have been included herein in reliance upon the report
of Grant Thornton LLP, independent certified public accountants, such report
given upon the authority of said firm as experts in auditing and accounting.
SHAREHOLDER PROPOSALS
If the Merger is consummated, stockholders of Fidelity Bankshares will
become shareholders of Commerce at the Effective Time. Commerce shareholders
may submit to Commerce proposals for formal consideration at the 1999 annual
meeting of Commerce's shareholders and inclusion in Commerce's proxy
statements for such meetings. The deadline for all such proposals to be
considered for inclusion in Commerce's Proxy Statement and proxy for the 1999
annual meeting is November 20, 1998. The holder of any proxy delivered in
connection with Commerce's 1999 Shareholders' Meeting may exercise
discretionary authority in voting on any shareholder proposals not submitted
to Commerce 60 days prior to Commerce's 1999 Shareholders' Meeting which will
be held on April 21, 1999.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF
FIDELITY BANKSHARES, INC. AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................ F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 and June 30,
1998 (unaudited)......................................................... F-2
Consolidated Statements of Earnings for the years ended December 31, 1997,
1996 and 1995 and
the six months ended June 30, 1998 and 1997 (unaudited).................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998
and 1997 (unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 and the six months ended June 30, 1998 and 1997
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-i
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Fidelity Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Fidelity
Bankshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, 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 Fidelity
Bankshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Grant Thornton LLP
Wichita, Kansas
January 16, 1998
F-1
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.............. $ 12,479,723 $ 16,283,526 $ 11,769,365
Federal funds sold................... 1,495,000 1,260,000 9,695,000
------------ ------------ ------------
Total cash and cash equivalents.. 13,974,723 17,543,526 21,464,365
Investment securities
Available for sale................. 22,268,566 25,171,799 32,253,308
Held to maturity (estimated fair
value of $28,513,437 at June 30,
1998; $22,433,266 at December 31,
1997 and $16,152,854 at December
31, 1996)......................... 28,437,548 22,396,721 16,135,431
------------ ------------ ------------
Total investment securities...... 50,706,114 47,568,520 48,388,739
Loans and leases
Loans.............................. 151,635,445 152,943,267 128,583,148
Net investment in direct financing
leases............................ 2,233,872 2,443,076 2,411,860
Allowance for loan losses.......... (2,979,040) (2,913,702) (2,524,884)
------------ ------------ ------------
Net loans and leases............. 150,890,277 152,472,641 128,470,124
Bank premises and equipment, net..... 5,327,281 5,463,299 4,143,340
Intangible asset, net of accumulated
amortization of $430,855 at June 30,
1998; $406,555 at December 31, 1997
and $357,955 at December 31, 1996... 793,965 818,265 861,904
Real estate acquired through
foreclosure......................... 156,912 157,687 222,586
Interest receivable and other
assets.............................. 3,280,051 3,274,587 2,781,428
------------ ------------ ------------
$225,129,323 $227,298,525 $206,332,486
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand............................. $ 27,416,971 $ 30,742,775 $ 27,828,452
Savings and interest checking...... 76,368,325 74,368,404 77,237,815
Time............................... 61,647,063 58,861,731 56,325,602
Time, $100,000 and over............ 28,625,805 37,333,698 25,199,677
------------ ------------ ------------
Total deposits................... 194,058,164 201,306,608 186,591,546
Federal funds purchased.............. -- 1,125,000 --
Dividends payable.................... 175,716 175,716 173,758
Interest payable and other
liabilities......................... 941,277 924,937 1,035,592
Advances from Federal Home Loan
Bank................................ 9,582,822 4,123,195 --
Notes payable........................ 1,729,653 1,787,654 2,052,535
------------ ------------ ------------
Total liabilities................ 206,487,632 209,443,110 189,853,431
Stockholders' equity
Preferred stock, $25 par value
Authorized--2,000,000 shares
Issued--none...................... -- -- --
Common stock, $5 par value
Authorized--2,000,000 shares
Issued--400,400 shares............ 2,002,000 2,002,000 2,002,000
Capital surplus.................... 8,168,965 8,168,965 8,127,635
Retained earnings.................. 9,124,336 8,323,829 7,112,395
Unrealized gain on securities
available for sale, net of related
taxes............................. 24,970 39,201 67,449
Treasury stock, at cost, 18,408
shares at June 30, 1998 and
December 31, 1997 and 22,665
shares at December 31, 1996....... (678,580) (678,580) (830,424)
------------ ------------ ------------
Total stockholders' equity....... 18,641,691 17,855,415 16,479,055
------------ ------------ ------------
$225,129,323 $227,298,525 $206,332,486
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income
Loans and leases...... $7,230,376 $6,846,348 $13,700,121 $10,482,478 $9,583,614
Investment
securities........... 1,558,235 1,486,689 2,970,575 3,024,165 2,527,594
Federal funds sold and
other................ 109,758 113,648 340,532 464,142 486,340
---------- ---------- ----------- ----------- ----------
Total interest
income............. 8,898,369 8,446,685 17,011,228 13,970,785 12,597,548
Interest expense
Deposits.............. 4,214,538 3,789,753 7,747,327 6,312,087 5,455,828
Federal funds
purchased and other
borrowed funds....... 230,847 116,120 368,147 275,574 318,329
---------- ---------- ----------- ----------- ----------
Total interest
expense............ 4,445,385 3,905,873 8,115,474 6,587,661 5,774,157
---------- ---------- ----------- ----------- ----------
Net interest income..... 4,452,984 4,540,812 8,895,754 7,383,124 6,823,391
Provision for losses on
loans and leases....... 100,000 509,267 691,094 160,000 505,257
---------- ---------- ----------- ----------- ----------
Net interest income
after provision for
losses on loans and
leases................. 4,352,984 4,031,545 8,204,660 7,223,124 6,318,134
Other income
Service charges and
fees on deposits..... 473,946 376,668 833,687 862,379 899,291
Income from fiduciary
activities........... 277,477 150,143 295,983 238,520 245,860
Net gains from sale of
loans................ 174,090 105,462 229,172 239,176 348,510
Other................. 215,162 276,731 491,610 316,636 349,414
---------- ---------- ----------- ----------- ----------
Total other income.. 1,140,675 909,004 1,850,452 1,656,711 1,843,075
Other expenses
Salaries and employee
benefits............. 1,997,980 1,774,855 3,775,489 3,236,339 3,309,792
Occupancy and
equipment expense.... 601,163 458,417 1,090,317 849,184 773,214
Data processing fees.. 219,938 193,505 396,227 385,593 378,929
Other................. 816,084 879,987 1,782,116 1,541,777 1,633,343
---------- ---------- ----------- ----------- ----------
Total other
expenses........... 3,635,165 3,306,764 7,044,149 6,012,893 6,095,278
---------- ---------- ----------- ----------- ----------
Earnings before income
taxes.................. 1,858,494 1,633,785 3,010,963 2,866,942 2,065,931
Income tax expense...... 706,554 649,274 1,100,580 947,064 705,464
---------- ---------- ----------- ----------- ----------
NET EARNINGS........ $1,151,940 $ 984,511 $ 1,910,383 $ 1,919,878 $1,360,467
========== ========== =========== =========== ==========
Earnings per share
Basic................. $ 3.02 $ 2.61 $ 5.03 $ 5.10 $ 3.62
Diluted............... 2.99 2.59 5.00 5.07 3.61
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES TOTAL
COMMON CAPITAL RETAINED AVAILABLE TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE, NET STOCK EQUITY
---------- ---------- ---------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... $2,002,000 $8,115,126 $5,217,127 $(102,219) $(905,333) $14,326,701
Sale of 1,000 shares of
treasury stock......... -- 6,380 -- -- 34,180 40,560
Net earnings for the
year................... -- -- 1,360,467 -- -- 1,360,467
Cash dividends ($1.84
per share)............. -- -- (691,512) -- -- (691,512)
Appreciation of
securities available
for sale, net.......... -- -- -- 226,033 -- 226,033
---------- ---------- ---------- --------- --------- -----------
Balance, December 31,
1995................... 2,002,000 8,121,506 5,886,082 123,814 (871,153) 15,262,249
Sale of 663 shares of
treasury stock......... -- 4,887 -- -- 23,196 28,083
Stock options exercised
(500 shares)........... -- 1,242 -- -- 17,533 18,775
Net earnings for the
year................... -- -- 1,919,878 -- -- 1,919,878
Cash dividends ($1.84
per share)............. -- -- (693,565) -- -- (693,565)
Depreciation of
securities available
for sale, net.......... -- -- -- (56,365) -- (56,365)
---------- ---------- ---------- --------- --------- -----------
Balance, December 31,
1996................... 2,002,000 8,127,635 7,112,395 67,449 (830,424) 16,479,055
Sale of 4,257 shares of
treasury stock......... -- 41,330 -- -- 151,844 193,174
Net earnings for the
year................... -- -- 1,910,383 -- -- 1,910,383
Cash dividends ($1.84
per share)............. -- -- (698,949) -- -- (698,949)
Depreciation of
securities available
for sale, net.......... -- -- -- (28,248) -- (28,248)
---------- ---------- ---------- --------- --------- -----------
Balance, December 31,
1997................... 2,002,000 8,168,965 8,323,829 39,201 (678,580) 17,855,415
Net earnings for the six
months (unaudited)..... -- -- 1,151,940 -- -- 1,151,940
Cash dividends ($.92 per
share)................. -- -- (351,433) -- -- (351,433)
Depreciation of
securities available
for sale, net.......... -- -- -- (14,231) -- (14,231)
---------- ---------- ---------- --------- --------- -----------
Balance, June 30, 1998
(unaudited)............ $2,002,000 $8,168,965 $9,124,336 $ 24,970 $(678,580) $18,641,691
========== ========== ========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ -------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net earnings.......... $ 1,151,940 $ 984,511 $ 1,910,383 $ 1,919,878 $ 1,360,467
Adjustments to
reconcile net
earnings to net cash
provided by operating
activities
Depreciation.......... 318,914 200,810 562,870 365,647 346,525
Provision for losses
on loans and leases.. 100,000 509,267 691,094 160,000 505,257
Deferred income
taxes................ (45,300) (145,124) (58,062) 31,226 (171,741)
Gain on sale of
loans................ (174,090) (105,462) (229,172) (239,176) (348,510)
Gain on sale of real
estate acquired
through foreclosure
and other assets..... (16,080) -- (80,333) -- --
Proceeds from loan
sales................ 10,883,990 7,036,944 14,411,599 13,750,744 11,733,882
Originations of loans
held for sale........ (10,709,900) (6,931,482) (13,684,752) (13,821,788) (11,160,377)
Amortization and
accretion of
investment security
premiums and
discounts............ 28,028 22,665 48,120 183,547 411,436
Amortization of
intangible asset..... 24,300 19,339 43,639 48,600 48,600
(Increase) decrease in
interest receivable.. 61,171 (330,573) (414,552) (144,776) (245,250)
(Increase) decrease in
other assets......... (12,145) (36,299) (9,246) (72,737) 82,104
(Increase) decrease in
interest payable..... (4,941) 39,111 (7,949) 92,328 64,023
(Increase) decrease in
other liabilities.... 21,281 (12,873) (88,734) 54,592 82,469
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating
activities.......... 1,627,168 1,250,834 3,094,905 2,328,085 2,708,885
Cash flows from
investing activities
Proceeds from
maturities of
investment securities
Available for sale.... 9,395,030 5,833,127 16,984,620 3,950,000 4,250,000
Held to maturity...... 5,300,000 5,350,000 10,125,000 12,890,000 18,000,000
Proceeds from sale of
investment securities
Available for sale.... -- -- -- 971,875 495,469
Purchase of investment
securities
Available for sale.... (6,487,563) (9,357,695) (9,945,689) (15,563,077) (7,346,396)
Held to maturity...... (11,396,510) (1,341,113) (16,445,351) (4,229,315) (19,260,042)
Net (increase)
decrease in loans.... 1,213,160 (12,480,605) (25,160,070) (26,073,555) 946,208
Net (increase)
decrease in direct
financing leases..... 209,204 (48,281) (31,216) (797,538) (1,073,075)
Capital expenditures.. (231,289) (1,014,997) (1,905,187) (700,409) (431,029)
Proceeds from sale of
real estate acquired
through foreclosure
and other assets..... 125,248 63,077 167,590 331,960 234,366
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities.......... (1,872,720) (12,996,487) (26,210,303) (29,220,059) (4,184,499)
Cash flows from
financing activities
Net increase
(decrease) in
deposits............. (7,248,444) (3,254,897) 14,715,062 38,907,565 4,141,518
Net increase
(decrease) in federal
funds purchased...... (1,125,000) 4,250,000 1,125,000 (3,650,000) 2,800,000
Repayment of notes
payable and
advances............. (98,374) (101,186) (266,686) (213,504) (362,254)
Dividends paid........ (351,433) (347,517) (696,991) (693,030) (691,052)
Proceeds from advances
from FHLB............ 5,500,000 -- 4,125,000 -- --
Proceeds from sales of
treasury stock........ -- -- 193,174 46,858 40,560
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... (3,323,251) 546,400 19,194,559 34,397,889 5,928,772
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... (3,568,803) (11,199,253) (3,920,839) 7,505,915 4,453,158
Cash and cash
equivalents at
beginning of period... 17,543,526 21,464,365 21,464,365 13,958,450 9,505,292
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $13,974,723 $10,265,112 $17,543,526 $21,464,365 $13,958,450
=========== =========== =========== =========== ===========
Supplemental
disclosures of cash
flow information
Cash paid during the
period
Income taxes.......... $ 731,676 $ 551,028 $ 1,180,743 $ 958,572 $ 790,589
Interest.............. 4,450,326 3,866,762 8,107,525 6,495,333 5,710,134
Noncash investing and
financing activities
Issuance of loans
receivable in
connection with the
sale of real estate
acquired through
foreclosure.......... -- -- -- 35,000 205,000
Transfer from loans to
real estate acquired
through foreclosure.. 60,000 -- -- -- 353,892
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997 (UNAUDITED) AND
DECEMBER 31, 1997, 1996 AND 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Fidelity Bankshares, Inc. (together with its subsidiaries, the "Company")
conducts a general banking business in the communities of Garden City and
Olathe, Kansas which consists of attracting deposits from the general public
and applying those funds to the origination of loans and the purchase of
investment securities. The Company's profitability is significantly dependent
on net interest income, which is the difference between interest income
generated from interest-earning assets (i.e., loans and investments) and the
interest expense paid on interest-bearing liabilities (i.e., customer deposits
and borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Company can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside
of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles (GAAP) and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The financial statements as of June 30, 1998, and for the six-month periods
ended June 30, 1998 and 1997 are unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of financial position and results of operations have been
made.
The following is a summary of the Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of consolidation
The consolidated financial statements include the accounts of Fidelity
Bankshares, Inc., its wholly-owned subsidiaries, Fidelity State Bank and
Fidelity Capital Holding, Inc. and its majority-owned subsidiary Heritage
Bank. All significant intercompany balances and transactions have been
eliminated.
2. Cash equivalents
For purposes of reporting cash flows, the Company considers cash on hand,
amounts due from banks and federal funds sold to be cash and cash equivalents.
3. Investment securities
The Company classifies debt and equity securities as either available-for-
sale securities or held-to-maturity securities. Held-to-maturity securities
are those securities for which the Company has the positive intent and ability
to hold to maturity. Held-to-maturity securities are carried at amortized
cost. Available-for-sale securities are measured at their fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity.
Premiums and discounts on investment securities are amortized to income over
the term of the security using the level yield method. Gains and losses on the
sale of securities designated as available-for-sale are recorded using the
specific identification method.
F-7
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. Loans and allowance for loan losses
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, and the allowance
for loan losses. Loans for sale are carried at the lower of cost or estimated
fair value in the aggregate. Interest on loans is calculated by using the
simple interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolios, overall portfolio quality, review of specific
problem and impaired loans, estimated value of any underlying collateral and
current economic conditions that may affect the borrowers' ability to pay.
A loan is identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. The accrual of interest is discontinued on such loans and all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
5. Direct financing leases
Net investment in direct financing leases represent the Company's share of
aggregate rentals and residual values net of related unearned income. Income
is recognized using the level yield method over the term of the lease.
6. Bank premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Additions, major replacements and improvements are added to the
asset accounts at cost. Maintenance, repairs and minor replacements are
charged directly to operating expense. Depreciation is included in occupancy
and equipment expense and is computed primarily by accelerated methods over
the following estimated useful lives:
<TABLE>
<S> <C>
Buildings......................................................... 7-40 years
Furniture and equipment........................................... 3-25 years
</TABLE>
7. Real estate acquired through foreclosure
After foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair value less
cost to sell. Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at the
date of foreclosure establishing a new cost basis.
8. Intangible asset
Intangible asset consists of the cost of a bank subsidiary acquired in
excess of the fair value of the net assets at the date of acquisition. This
excess cost is being amortized using the straight-line method over 25 years.
Any impairment loss is measured by the excess of carrying values over fair
values.
F-8
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. Income taxes
Fidelity Bankshares, Inc. and its subsidiaries file a consolidated federal
income tax return. Fidelity Bankshares, Inc. and its nonbank subsidiaries file
a consolidated Kansas income tax return. The Company's bank subsidiaries file
separate Kansas privilege tax returns.
Deferred tax assets and liabilities are determined based on the differences
between the financial accounting and tax basis of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the currently enacted tax rate expected to apply to taxable income in
the periods in which the deferred tax asset or liability is expected to be
settled or realized.
10. Earnings per share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the periods.
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period plus
the common share equivalents related to outstanding stock options. Weighted
average common shares outstanding and diluted shares deemed outstanding were
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------- -----------------------
1998 1997 1997 1996 1995
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding..................... 381,992 377,735 379,864 376,819 375,655
Common share equivalents related
to outstanding stock options.... 2,776 2,067 2,249 1,536 832
-------- -------- ------- ------- -------
Adjusted weighted average common
shares deemed to be
outstanding..................... 384,768 379,802 382,113 378,355 376,487
======== ======== ======= ======= =======
</TABLE>
11. Comprehensive Income
The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" as of January 1, 1998. Comprehensive income
is defined as the change in equity from transactions and other events and
circumstances from non-owner sources and includes net earnings and
appreciation or depreciation on securities available for sale, net of related
income tax. Comprehensive income was $1,137,709, $1,882,135, $1,863,513 and
$1,586,500 for the six months ended June 30, 1998 and the years ended December
31, 1997, 1996 and 1995, respectively.
F-9
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 (UNAUDITED)
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
------------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.. $ 5,995,885 $ 30,898 $ -- $ 6,026,783
Federal agency securities.... 13,946,057 18,778 10,381 13,954,454
Collateralized mortgage
obligations................. 1,413,049 -- 1,520 1,411,529
Equity securities............ 875,800 -- -- 875,800
----------- -------- ------- -----------
$22,230,791 $ 49,676 $11,901 $22,268,566
=========== ======== ======= ===========
HELD TO MATURITY
----------------
U.S. Government obligations.. $ 5,558,671 $ 19,568 $ 84 $ 5,578,155
Federal agency securities.... 20,572,119 60,501 24,328 20,608,292
Obligations of states and
political subdivisions...... 2,306,758 21,136 904 2,326,990
----------- -------- ------- -----------
$28,437,548 $101,205 $25,316 $28,513,437
=========== ======== ======= ===========
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
------------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.. $ 8,730,437 $ 42,384 $ 3,701 $ 8,769,120
Federal agency securities.... 14,134,434 23,822 1,309 14,156,947
Collateralized mortgage
obligations................. 1,942,532 -- -- 1,942,532
Equity securities............ 303,200 -- -- 303,200
----------- -------- ------- -----------
$25,110,603 $ 66,206 $ 5,010 $25,171,799
=========== ======== ======= ===========
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
---------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.. $ 6,835,356 $ 19,397 $ 3,890 $ 6,850,863
Federal agency securities.... 13,519,846 28,220 10,641 13,537,425
Obligations of states and
political subdivisions...... 2,041,519 15,868 12,409 2,044,978
----------- -------- ------- -----------
$22,396,721 $ 63,485 $26,940 $22,433,266
=========== ======== ======= ===========
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
------------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.. $13,199,503 $ 40,981 $13,534 $13,226,950
Federal agency securities.... 18,247,491 93,722 6,454 18,334,759
Mortgage-backed security..... 495,749 -- -- 495,749
Equity securities............ 195,850 -- -- 195,850
----------- -------- ------- -----------
$32,138,593 $134,703 $19,988 $32,253,308
=========== ======== ======= ===========
</TABLE>
F-10
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
HELD TO MATURITY
----------------
U.S. Government obligations.. $10,276,629 $29,432 $17,931 $10,288,130
Federal agency securities.... 3,993,140 8,438 8,463 3,993,115
Obligations of states and
political subdivisions...... 1,865,662 9,494 3,547 1,871,609
----------- ------- ------- -----------
$16,135,431 $47,364 $29,941 $16,152,854
=========== ======= ======= ===========
</TABLE>
The amortized cost and estimated fair value of investment securities, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
AMORTIZED ESTIMATED
AVAILABLE FOR SALE COST FAIR VALUE
------------------ ----------- -----------
<S> <C> <C> <C>
Due in one year or less.......................... $13,542,501 $13,556,901
Due after one year through five years............ 9,322,370 9,369,166
----------- -----------
22,864,871 22,926,067
Collateralized mortgage obligations.............. 1,942,532 1,942,532
Equity securities................................ 303,200 303,200
----------- -----------
$25,110,603 $25,171,799
=========== ===========
<CAPTION>
HELD TO MATURITY
----------------
<S> <C> <C> <C>
Due in one year or less.......................... $ 5,096,905 $ 5,091,132
Due after one year through five years............ 16,595,123 16,638,127
Due after five years through ten years........... 704,693 704,007
----------- -----------
$22,396,721 $22,433,266
=========== ===========
</TABLE>
Proceeds from the sale of investment securities during 1996 and 1995 were
$971,875 and $495,469, respectively, with losses of $1,472 and $12,626,
respectively, recognized on the sales.
Securities with an amortized cost of $43,854,702 and $46,607,864 at December
31, 1997 and 1996, respectively, were pledged to secure public deposits and
for other purposes required or permitted by law.
F-11
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--LOANS
The majority of the loans and commitments have been granted in the
subsidiary banks' market areas which is within the cities of Garden City and
Olathe, Kansas and the surrounding areas. The concentrations of credit by type
of loan are set forth below. The commitments to extend credit approximate the
distribution of loans outstanding. A significant portion of the loan portfolio
is comprised of agriculture related loans. The maintenance of adequate
collateral margins on an ongoing basis is required of such borrowers. The
Company, as with any financial institution, is subject to the risk that
economic conditions could deteriorate in its primary lending area thereby
impairing collateral values.
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Agriculture.......................... $ 54,475,899 $ 50,880,447 $ 41,198,650
Agriculture real estate.............. 8,981,099 9,992,398 7,320,868
Real estate.......................... 53,302,596 58,755,429 49,016,637
Commercial........................... 26,216,524 24,781,473 23,600,679
Installment.......................... 8,659,327 8,533,520 7,446,314
------------ ------------ ------------
$151,635,445 $152,943,267 $128,583,148
============ ============ ============
</TABLE>
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in impaired loans and the
valuation allowance for losses related to loan impairment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Principal amount of impaired loans....... $1,595,139 $1,332,183 $3,269,391
Less valuation allowance................. 755,044 710,369 1,325,361
---------- ---------- ----------
$ 840,095 $ 621,814 $1,944,030
========== ========== ==========
</TABLE>
The average recorded investment in impaired loans for the six months ended
June 30, 1998 and the years ended December 31, 1997 and 1996 totaled
$1,479,437, $1,842,485 and $3,331,638, respectively. The Company has no
impaired loans for which there is no related allowance for losses. Interest
income of $53,116, $50,954, $558,444, $51,216 and $405,977 was recognized and
interest of $53,116, $50,954, $116,348, $51,216 and $405,977 was collected on
impaired loans during the six months ended June 30, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995, respectively. Included in the
$558,444 recognized in the year ended December 31, 1997 is interest income of
$442,096 which was recognized on one loan returned to accrual status and no
longer considered impaired. The Company is not committed to make additional
loans to borrowers whose loans have been modified.
F-12
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the normal course of business, the Company's subsidiary banks have made
loans and leases to directors, executive officers and related entities. An
analysis of aggregate loan activity with this group is as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
JUNE 30, 1998 1997 1996
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period....... $7,976,569 $10,488,674 $10,244,030
New loans, including existing
loans outstanding to new
directors....................... 4,306,638 4,114,305 5,969,811
Repayments, including existing
loans outstanding to former
directors....................... (5,968,485) (6,626,410) (5,725,167)
---------- ----------- -----------
Balance, end of period............. $6,314,722 $ 7,976,569 $10,488,674
========== =========== ===========
</TABLE>
NOTE D--ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
JUNE 30, 1998 1997 1996
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of period..... $2,913,702 $ 2,524,884 $ 2,487,290
Provision charged to operations.. 100,000 691,094 160,000
Recoveries on loans previously
charged off..................... 20,161 43,206 39,075
Loans charged off................ (54,823) (345,482) (161,481)
---------- ----------- -----------
Balance at end of period........... $2,979,040 $ 2,913,702 $ 2,524,884
========== =========== ===========
</TABLE>
NOTE E--DIRECT FINANCING LEASES
The net investment in direct financing leases consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total minimum lease payments receivable............ $ 2,286,964 $ 2,402,958
Allowance for lease losses......................... (40,172) (40,172)
Estimated unguaranteed residual value.............. 629,229 561,312
Unearned income.................................... (432,945) (512,238)
----------- -----------
Net investment..................................... $ 2,443,076 $ 2,411,860
=========== ===========
</TABLE>
Aggregate maturities of direct financing leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year ended December 31
1998............................................................ $ 612,975
1999............................................................ 656,628
2000............................................................ 442,217
2001............................................................ 307,065
2002............................................................ 158,240
Thereafter...................................................... 109,839
----------
$2,286,964
==========
</TABLE>
F-13
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Land................................................ $ 1,167,748 $ 1,119,001
Buildings........................................... 4,462,390 3,679,370
Furniture and equipment............................. 3,828,414 2,950,896
----------- -----------
9,458,552 7,749,267
Less accumulated depreciation....................... 3,995,253 3,605,927
----------- -----------
$ 5,463,299 $ 4,143,340
=========== ===========
</TABLE>
NOTE G--DEPOSITS
The scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
1998............................................................ $85,450,869
1999............................................................ 9,179,657
2000............................................................ 1,564,903
-----------
$96,195,429
===========
</TABLE>
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------- -----------------------
RATES AMOUNT RATES AMOUNT
------------ ---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Variable rate advance...... 5.56% $1,500,000 5.88% $1,500,000
Fixed rate advances........ 6.49 to 6.80 2,582,822 6.49 to 6.80 2,623,195
Fixed rate convertible
advances due in 2008
unless converted.......... 4.98 to 4.99 5,500,000 --
---------- ----------
$9,582,822 $4,123,195
========== ==========
</TABLE>
Aggregate maturities for the years following December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $1,586,547
1999.............................................................. 101,914
2000.............................................................. 110,377
2001.............................................................. 119,535
2002.............................................................. 129,468
Thereafter........................................................ 2,075,354
----------
$4,123,195
==========
</TABLE>
Advances from the Federal Home Loan Bank are secured by certain residential
loans and investment securities.
F-14
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Note payable to a bank with maximum advances of
$2,450,000, maturing June 1999 with interest at the
lender's prime rate (8.5% and 8.25% at December 31,
1997 and 1996, respectively), due quarterly--
collateralized by the common stock of the
subsidiary banks................................... $1,750,000 $2,000,000
Note payable due February 2000 with payments of
$1,612 due monthly with interest at 9.75%--
collateralized by bank premises.................... 37,654 52,535
---------- ----------
$1,787,654 $2,052,535
========== ==========
</TABLE>
Aggregate annual maturities of notes payable at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Year ending December 31
1998............................................................. $1,765,600
1999............................................................. 16,750
2000............................................................. 5,304
----------
$1,787,654
==========
</TABLE>
NOTE J--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The subsidiary banks are parties to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing needs of
their customers. These financial instruments include commitments to extend
credit, commitments under credit card arrangements and letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet.
The bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
commitments under credit card arrangements and letters of credit is
represented by the contractual amount of those instruments. The banks use the
same credit policies in making commitments and conditional obligations as they
do for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Commitments to extend credit........... $69,494,334 $63,322,070 $62,566,405
Commitments under credit card
arrangements.......................... 4,196,765 5,132,341 4,412,470
Letters of credit...................... 454,229 409,615 539,810
----------- ----------- -----------
$74,145,328 $68,864,026 $67,518,685
=========== =========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments and letters of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the
commitments and letters of credit are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
F-15
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
future cash requirements. The subsidiary banks also have commitments from
other banks to participate in these commitments to extend credit. The
subsidiary banks evaluate each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
subsidiary banks upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, livestock, growing crops, property, plant and equipment and income
producing commercial and agriculture properties.
NOTE K--EMPLOYEE BENEFIT AND BONUS PLANS
The Company has employee benefit plans which cover substantially all full-
time employees. Benefits to participants begin to vest at the end of their
third year of service, accruing 20% each year through the end of the seventh
year. Employee contributions are matched by the Company for the Fidelity
Savings Plan up to a maximum of 3 1/2% of compensation. The Company
contributes a minimum of 5% of its net profits to the Fidelity Employees'
Profit Sharing Plan. Total contributions made to employee benefit plans were
$195,809, $174,401 and $229,944 for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company formerly maintained a stock option plan which expired during
1996. Options granted and the option price were at the discretion of the Board
of Directors and expire ten years from the date of the grant. All options
outstanding at June 30, 1998 are exercisable at prices ranging from $35.63 to
$37.55 per share with a weighted average life of 2.77 years.
A summary of the Company's stock option plan as of June 30, 1998 and
December 31, 1997 and 1996 and changes during the periods ended as of those
dates are presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding at January 1, 1995 and December 31,
1995............................................ 12,500 $36.76
Exercised during 1996............................ 500 37.55
------
Outstanding at December 31, 1996 and 1997 and
June 30, 1998................................... 12,000 36.72
======
</TABLE>
The Company and subsidiary banks have incentive bonus plans which provide
for payments to employees based on profitability ratios as defined in the
plans. Expenses under the plans totaled $59,996, $158,557 and $72,196 for the
years ended December 31, 1997, 1996 and 1995, respectively. In addition, the
Company has an agreement with an officer of the Company to pay a lump sum
payment to that officer if the Company is sold and certain events occur.
NOTE L--INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1998 1997 1996 1995
----------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal........................... $663,325 $1,105,802 $912,216 $734,870
State............................. 88,529 52,840 3,622 142,335
-------- ---------- -------- --------
751,854 1,158,642 915,838 877,205
Deferred tax expense (benefit)...... (45,300) (58,062) 31,226 (171,741)
-------- ---------- -------- --------
Income tax expense.................. $706,554 $1,100,580 $947,064 $705,464
======== ========== ======== ========
</TABLE>
F-16
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliation of income tax expense computed at the federal statutory rate
of 34% and income tax expense is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------
1998 1997 1996 1995
----------- ---------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax expense at statutory
rate............................ $631,887 $1,023,727 $974,760 $ 702,416
Increase (decrease) in valuation
allowances...................... 8,352 12,314 13,978 (101,791)
Kansas privilege tax, net of
federal tax benefit............. 58,429 34,875 (3,652) 86,934
Amortization of goodwill......... 8,262 16,524 16,524 16,524
Interest on obligations of states
and political subdivisions...... (16,836) (25,502) (22,451) (14,779)
Other............................ 16,460 38,642 (32,095) 16,160
-------- ---------- -------- ---------
$706,554 $1,100,580 $947,064 $ 705,464
======== ========== ======== =========
</TABLE>
State taxes in 1997 and 1996 are less than the expected amount due primarily
to U.S. Government and agency interest which was non-taxable for state income
tax purposes. Beginning January 1, 1998 state tax laws were changed and
government and agency interest became taxable.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses..................... $ 814,528 $ 834,178 $675,825
State net operating loss carryforwards........ 164,509 157,761 145,447
Other......................................... 41,090 16,869 57,745
---------- ---------- --------
Total gross deferred tax assets............. 1,020,127 1,008,808 879,017
Less valuation allowances..................... 164,509 157,761 145,447
---------- ---------- --------
855,618 851,047 733,570
Deferred tax liabilities
Depreciation of property and equipment........ 342,831 350,576 327,653
Depreciation of leased assets................. 93,697 126,681 95,012
Securities available for sale................. 14,225 23,382 43,830
---------- ---------- --------
Total gross deferred tax liabilities........ 450,753 500,639 466,495
---------- ---------- --------
Net deferred tax asset.................... $ 404,865 $ 350,408 $267,075
========== ========== ========
</TABLE>
Fidelity Bankshares, Inc. has a state income tax carryforward of $3,300,000
which expires in various years through 2012. A valuation allowance has been
established for the state deferred tax asset associated with this
carryforward.
NOTE M--REGULATORY MATTERS
The subsidiary banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
F-17
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
action, the banks must meet specific capital guidelines that involve
quantitative measures of the banks' assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the banks to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1998, that
the banks meet all capital adequacy requirements to which they are subject.
As of June 30, 1998, the most recent notification from the federal banking
agencies categorized the banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the banks'
category. The banks' actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
(unaudited)
Fidelity State Bank
Total risk-based
capital............ $16,114 11.7% $ 10,979 18.0% $ 13,724 110.0%
Tier 1 risk-based
capital............ 14,388 10.5 5,490 14.0 8,235 16.0
Tier 1 leverage
capital............ 14,388 8.4 6,863 14.0 8,578 15.0
Heritage Bank
Total risk-based
capital............ 5,178 12.0 3,447 18.0 4,308 110.0
Tier 1 risk-based
capital............ 4,717 10.9 1,723 14.0 2,585 16.0
Tier 1 leverage
capital............ 4,717 9.2 2,056 14.0 2,569 15.0
As of December 31, 1997
Fidelity State Bank
Total risk-based
capital............ 15,460 10.8 11,504 18.0 14,380 110.0
Tier 1 risk-based
capital............ 13,886 9.7 5,752 14.0 8,628 16.0
Tier 1 leverage
capital............ 13,886 8.1 6,881 14.0 8,601 15.0
Heritage Bank
Total risk-based
capital............ 4,135 10.9 3,039 18.0 3,799 110.0
Tier 1 risk-based
capital............ 3,726 9.8 1,520 14.0 2,280 16.0
Tier 1 leverage
capital............ 3,726 8.1 1,851 14.0 2,314 15.0
As of December 31, 1996
Fidelity State Bank
Total risk-based
capital............ 14,531 11.1 10,487 18.0 13,108 110.0
Tier 1 risk-based
capital............ 12,893 9.8 5,243 14.0 7,865 16.0
Tier 1 leverage
capital............ 12,893 8.5 6,072 14.0 7,590 15.0
</TABLE>
F-18
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Heritage Bank
Total risk-based
capital............... $3,155 10.8% $ 2,334 18.0% $ 2,917 110.0%
Tier 1 risk-based
capital............... 2,790 9.6 1,167 14.0 1,750 16.0
Tier 1 leverage
capital............... 2,790 7.3 1,536 14.0 1,920 15.0
</TABLE>
Payment of dividends by the subsidiary banks to Fidelity Bankshares, Inc. is
subject to various regulatory restrictions including regulatory capital
requirements as described above. In addition, state banks are subject to state
laws permitting dividends to be declared from retained earnings, provided
certain specified capital requirements are met. The subsidiary banks had the
ability to pay dividends of approximately $6,000,000 to the Company at June
30, 1998.
NOTE N--MERGER AGREEMENT
On June 29, 1998, the Board of Directors of the Company approved an
Agreement and Plan of Reorganization to merge with Commerce Bancshares, Inc.
The outstanding common stock of the Company will be exchanged for common stock
of Commerce Bancshares, Inc. The merger is subject to shareholder and
regulatory authority approval.
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at December 31, 1997 and 1996.
Cash and cash equivalents: The balance sheet carrying amounts for cash and
short-term instruments approximate the estimated fair values of such assets.
Investment securities: Fair values for investment securities are based on
quoted market prices, if available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and which
entail no significant change in credit risk, fair values are based on the
carrying values. The estimated fair values of fixed rate loans are estimated
based on discounted cash flow analyses using interest rates currently offered
for loans with similar terms to borrowers of similar credit quality.
Nonperforming loans have not been discounted. Because of an insignificant
amount of long-term fixed rate loans and portfolio rates which are comparable
with rates currently offered, the fair value of such loans was determined to
approximate carrying value at December 31, 1997 and 1996. The carrying amount
of accrued interest receivable approximates its fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements. The aggregate amount of these fees is not material.
Deposit liabilities: The fair values estimated for demand deposits (e.g.,
interest and noninterest-bearing checking accounts, savings and certain types
of money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable rate, fixed-term money market accounts and certificates of
deposit approximate their fair values at the reporting date.
F-19
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair values of fixed rate certificates of deposit and individual retirement
accounts are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected
monthly time deposit maturities. Because of insignificant amounts of long-term
fixed rate certificates of deposit and individual retirement accounts and
portfolio rates which are comparable with rates currently offered, the fair
value was determined to approximate carrying value at December 31, 1997 and
1996. The carrying amount of accrued interest payable approximates its fair
value.
Short-term borrowings: The carrying amounts of Federal funds purchased and
other borrowed funds approximate their fair values.
Advances from Federal Home Loan Bank: The fair value of advances from
Federal Home Loan Bank (FHLB) are estimated using discounted cash flow
analysis based on current FHLB borrowing rates for similar types of borrowing
arrangements. Because current FHLB borrowing rates are comparable to Company
rates, the fair value was determined to approximate carrying value at December
31, 1997.
Long-term borrowings: The carrying amounts of notes payable reprice on an
annual basis and approximate their fair values.
The following table provides summary information on the fair value of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the Company. Further, the fair value estimates are
based on various assumptions, methodologies and subjective considerations,
which vary widely among different financial institutions and which are subject
to change. The carrying amounts are the amounts at which the financial
instruments are reported in the consolidated financial statements.
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT OF FAIR VALUE AMOUNT OF FAIR VALUE
ASSETS AND OF ASSETS AND ASSETS AND OF ASSETS AND
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 17,543,526 $ 17,543,526 $ 21,464,365 $ 21,464,365
Investment securities
available for sale..... 25,171,799 25,171,799 32,253,308 32,253,308
Investment securities
held to maturity....... 22,396,721 22,433,266 16,135,431 16,152,854
Loans................... 152,943,267 152,943,267 128,583,148 128,583,148
Deposits
Demand................ (30,742,775) (30,742,775) (27,828,452) (27,828,452)
Savings and interest
checking............. (74,368,404) (74,368,404) (77,237,815) (77,237,815)
Time deposits........... (96,195,429) (96,195,429) (81,525,279) (81,525,279)
Federal funds
purchased.............. (1,125,000) (1,125,000) -- --
Advances from Federal
Home Loan Bank......... (4,123,195) (4,123,195) -- --
Notes payable........... (1,787,654) (1,787,654) (2,052,535) (2,052,535)
</TABLE>
F-20
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE P--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following condensed financial statements summarize the financial
position, results of operations and cash flows of Fidelity Bankshares, Inc. as
of and for the periods indicated:
FIDELITY BANKSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEET
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash................................................... $ 304,006 $ 373,038
Investment in subsidiaries............................. 17,408,222 15,532,892
Loan to subsidiary..................................... -- 380,057
Bank premises and equipment, net....................... 817,790 1,451,847
Intangible asset, net of accumulated amortization...... 818,265 861,904
Interest receivable and other assets................... 516,919 253,146
----------- -----------
$19,865,202 $18,852,884
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
AND STOCK-
HOLDERS' EQ-
UITY
</TABLE>
<TABLE>
<S> <C> <C>
Dividends payable.................................... $ 175,716 $ 173,758
Interest payable and other liabilities............... 84,071 200,071
Notes payable........................................ 1,750,000 2,000,000
----------- -----------
2,009,787 2,373,829
Stockholders' equity
Common stock....................................... 2,002,000 2,002,000
Capital surplus.................................... 8,168,965 8,127,635
Retained earnings.................................. 8,323,829 7,112,395
Unrealized gain on securities available for sale,
net of tax........................................ 39,201 67,449
Treasury stock..................................... (678,580) (830,424)
----------- -----------
Total stockholders' equity....................... 17,855,415 16,479,055
----------- -----------
$19,865,202 $18,852,884
=========== ===========
</TABLE>
F-21
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FIDELITY BANKSHARES, INC.
PARENT COMPANY ONLY)
STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Dividends received from subsidiaries........ $ 900,000 $1,100,000 $1,075,000
Equity in undistributed earnings of
subsidiaries............................... 1,261,918 1,072,508 531,327
Interest income............................. 32,532 31,959 40,128
Other....................................... 105,019 93,961 94,162
---------- ---------- ----------
2,299,469 2,298,428 1,740,617
Expenses
Interest expense............................ 161,106 177,871 213,971
Administrative and other.................... 322,590 294,529 277,032
---------- ---------- ----------
483,696 472,400 491,003
---------- ---------- ----------
1,815,773 1,826,028 1,249,614
Income tax benefit............................ 94,610 93,850 110,853
---------- ---------- ----------
NET EARNINGS............................... $1,910,383 $1,919,878 $1,360,467
========== ========== ==========
</TABLE>
F-22
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FIDELITY BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................. $1,910,383 $1,919,878 $1,360,467
Adjustments to reconcile net earnings to
net cash provided by operating activities
Undistributed earnings of consolidated
subsidiaries............................ (1,261,918) (1,072,508) (531,327)
Amortization of intangible asset......... 43,639 48,600 48,600
Depreciation expense..................... 33,860 27,751 28,248
Increase in interest receivable and other
assets.................................. (263,773) (64,494) (46,655)
Increase (decrease) in interest payable
and other liabilities................... (116,000) 50,073 84,059
---------- ---------- ----------
Net cash provided by operating
activities............................ 346,191 909,300 943,392
Cash flows from investing activities
Net decrease in loans..................... 380,057 -- 149,013
Capital expenditures...................... (41,463) (41,845) --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. 338,594 (41,845) 149,013
Cash flows from financing activities
Repayment of notes payable................ (250,000) (200,000) (350,000)
Payment of dividends on common stock...... (696,991) (693,030) (691,052)
Proceeds from sales of treasury stock..... 193,174 46,858 40,560
---------- ---------- ----------
Net cash used in financing activities.. (753,817) (846,172) (1,000,492)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................... $ (69,032) $ 21,283 $ 91,913
Cash and cash equivalents at beginning of
year...................................... 373,038 351,755 259,842
---------- ---------- ----------
Cash and cash equivalents at end of year... $ 304,006 $ 373,038 $ 351,755
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Noncash investing and financing activities
Transfer of premises and equipment to
subsidiary bank.......................... $ 638,062 $ -- $ --
========== ========== ==========
</TABLE>
F-23
<PAGE>
ANNEX A
<PAGE>
AGREEMENT AND PLAN OF
REORGANIZATION AMONG
COMMERCE BANCSHARES, INC.
FIDELITY BANKSHARES, INC.
AND
CBI-KANSAS, INC.
DATED JULY 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I
THE MERGER
1.1. The Merger........................................................ A-1
1.2. Effective Time of Merger.......................................... A-1
1.3. Articles of Incorporation......................................... A-1
1.4. Effect of Merger.................................................. A-1
1.5. Further Assurances................................................ A-2
ARTICLE II
CONVERSION OF SHARES
2.1. Effect of Merger on Sub Stock..................................... A-2
2.2. Conversion of the Company Shares in the Merger.................... A-2
2.3. Exchange of Certificates.......................................... A-2
2.4. Closing of the Company Transfer Books............................. A-3
2.5. Dividends......................................................... A-3
2.6. Shareholders' Approval............................................ A-3
2.7. Dissenting Shares................................................. A-3
2.8. Adjustments....................................................... A-3
ARTICLE IIA
HERITAGE BANK MERGER
2A.1 Heritage Bank Merger.............................................. A-3
2A.2 Structure of Bank Merger.......................................... A-4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMMERCE AND SUB
3.1. Organization and Authority........................................ A-4
3.2. Valid and Binding Agreement; No Violation......................... A-4
3.3. Capital Stock of Commerce......................................... A-4
3.4. Financial Statements.............................................. A-4
3.5. SEC Reports....................................................... A-5
3.6. Status of Commerce Common Stock to be Issued...................... A-5
3.7. Governmental Regulation........................................... A-5
3.8. Litigation........................................................ A-5
3.9. Taxes............................................................. A-5
3.10. Defaults.......................................................... A-5
3.11. Information Supplied.............................................. A-6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
4.1. Organization and Good Standing.................................... A-6
4.2. Authority......................................................... A-6
4.3. Shareholder Approval.............................................. A-6
4.4. No Violations..................................................... A-7
4.5. Consents.......................................................... A-7
4.6. Capitalization.................................................... A-7
4.7. Government Regulation............................................. A-7
</TABLE>
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4.8. Financial Statements.............................................. A-8
4.9. Legal Proceedings................................................. A-8
4.10. Title to Assets................................................... A-8
4.11. Undisclosed Liabilities........................................... A-8
4.12. Taxes............................................................. A-8
4.13. Contracts......................................................... A-9
4.14. Regulatory Reports; Examinations.................................. A-10
4.15. Conduct........................................................... A-10
4.16. Compliance with ERISA............................................. A-10
4.17. Information Supplied.............................................. A-11
4.18. Defaults.......................................................... A-11
4.19. Insurance......................................................... A-11
4.20. Absence of Adverse Agreements..................................... A-11
4.21. Internal Controls and Records..................................... A-11
4.22. Loans............................................................. A-12
4.23. Environmental Laws................................................ A-12
4.24. Broker's Fees..................................................... A-13
4.25. Labor Matters..................................................... A-13
4.26. Full Disclosure................................................... A-14
4.27. Year 2000 Compliance.............................................. A-14
ARTICLE V
COVENANTS OF COMPANY
5.1. Affirmative Covenants of the Company.............................. A-15
5.2. Negative Covenants of the Company................................. A-15
5.3. Inspection........................................................ A-16
5.4. Financial Statements and Call Reports............................. A-16
5.5. Right to Attend Meetings.......................................... A-16
5.6. Data Processing................................................... A-16
5.7. No Solicitation................................................... A-16
5.8. Retirement Plans.................................................. A-16
5.9. Y2K............................................................... A-17
ARTICLE VI
COVENANTS OF COMMERCE AND SUB
6.1. Regulatory Approvals.............................................. A-17
6.2. Information....................................................... A-17
6.3. Tax-Free Reorganization Treatment................................. A-17
6.4. Employee Benefits................................................. A-17
ARTICLE VII
CONDITIONS PRECEDENT TO COMMERCE'S OBLIGATIONS
7.1. Representations, Warranties and Covenants......................... A-17
7.2. Material Actions, Debts or Defaults............................... A-17
7.3. Adverse Changes................................................... A-18
7.4. Regulatory Authority Approval..................................... A-18
7.5. Litigation........................................................ A-18
7.6. Financial Measures................................................ A-18
7.7. Approval by Shareholders.......................................... A-18
7.8. Tax Representations............................................... A-18
</TABLE>
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7.9. Sales of Shares................................................... A-18
7.10. Dissenting Shareholders........................................... A-19
7.11. Federal Tax Opinion............................................... A-19
7.12. Opinion of Counsel................................................ A-19
7.13. Market Price of Commerce Common Stock............................. A-19
7.14. Cancellation of Unexercised Option................................ A-19
7.15. Cancellation of Incentive and Bonus Plans......................... A-19
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATION OF COMPANY
8.1. Representations, Warranties and Covenants......................... A-19
8.2. Regulatory Authority Approval..................................... A-19
8.3. Litigation........................................................ A-20
8.4. Approval by Shareholders.......................................... A-20
8.5. Federal Tax Opinion............................................... A-20
8.6. Adverse Changes................................................... A-20
ARTICLE IX
TERMINATION OF AGREEMENT
9.1. Basis for Termination............................................. A-20
9.2. Effect of Termination............................................. A-20
9.3. Amendment......................................................... A-21
9.4. Extension; Waiver................................................. A-21
ARTICLE X
SECURITIES LAWS MATTERS
10.1. Registration Statement and Proxy Statement........................ A-21
10.2. State Securities Laws............................................. A-21
10.3. Affiliates........................................................ A-21
10.4. Publication of Combined Financial Results......................... A-22
10.5. Indemnification................................................... A-22
ARTICLE XI
MISCELLANEOUS
11.1. Brokers and Finders............................................... A-22
11.2. Parties in Interest............................................... A-22
11.3. Entire Agreement, Amendments, Waiver.............................. A-22
11.4. Notices........................................................... A-22
11.5. Law Governing..................................................... A-23
11.6. Further Acts...................................................... A-23
11.7. Confidential Treatment............................................ A-23
11.8. Press Release..................................................... A-23
11.9. Litigation Expenses............................................... A-24
</TABLE>
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INDEX OF DEFINITIONS
<TABLE>
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Agreement....................................................... Intro paragraph
Banks........................................................... 4.1(b)
Bank Merger..................................................... 2A.1
Bank Plan of Merger............................................. 2A.2
Bank Stock...................................................... 4.6
Capital......................................................... 4.1(c)
Closing Date.................................................... 1.2
Code............................................................ 4.16
Commerce........................................................ Intro paragraph
Commerce Common Stock........................................... 2.2(a)
Commerce's Counsel.............................................. 7.11
Commerce Stock Price............................................ 7.13
Company......................................................... Intro paragraph
Company Common Stock............................................ 2.2(a)
Company Dissenting Shares....................................... 2.7
Effective Time.................................................. 1.2
Environmental Liability......................................... 4.23(b)
ERISA........................................................... 4.16
Exchange Agent.................................................. 2.3(a)
Exchange Ratio.................................................. 2.2(a)
Fidelity........................................................ 4.1(b)
Fidelity Stock.................................................. 4.6
Financial Statements............................................ 4.8
GAAP............................................................ 5.2(l)
Governmental Entity............................................. 4.14
Heritage........................................................ 2A.1
Heritage Stock.................................................. 4.6
Hazardous Materials............................................. 4.23(b)
IRS............................................................. 4.12
KGCC............................................................ 1.2
Material Adverse Effect......................................... 4.12
Merger.......................................................... Recitals
Millennia Dates................................................. 4.27
Non-Bank Subsidiaries........................................... 4.1(c)
Preferred Stock................................................. 3.3
Plans........................................................... 4.16
Proxy Statement................................................. 10.1
Registration Statement.......................................... 10.1
Securities Act.................................................. 3.6
SEC............................................................. 3.5
Sub............................................................. Intro paragraph
Sub Common Stock................................................ 2.1
Tax............................................................. 4.12
Taxes........................................................... 4.12
Tax Returns..................................................... 4.12
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement"), dated as of the
1st day of July, 1998, is made by and between COMMERCE BANCSHARES, INC., a
Missouri corporation ("Commerce"), CBI-KANSAS, INC., a Kansas corporation
("Sub"), and FIDELITY BANKSHARES, INC. , a Kansas corporation ("Company").
W I T N E S S E T H :
WHEREAS, the Boards of Directors of Commerce, Sub and Company have approved
and deem it advisable and in the best interests of their respective companies
and shareholders that Commerce and Company become affiliated through the
merger of Company with and into Sub in the manner hereinafter set forth (the
"Merger"); and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as hereinafter defined), Company shall be
merged with and into Sub and the separate existence and corporate organization
of Company shall thereupon cease and Sub and Company shall thereupon be a
single corporation. Sub shall be the surviving corporation in the Merger and
the separate corporate existence of Sub shall continue unaffected and
unimpaired by the Merger.
1.2. Effective Time of Merger. On the Closing Date (as hereinafter defined),
the proper officers of Company and Sub shall execute and acknowledge
appropriate certificates of merger that shall be filed with the Kansas
Secretary of State on the first business day following the Closing Date, all
in accordance with the Kansas General Corporation Code (the "KGCC"). The
Merger shall become effective on the first day of the first calendar month
following the Closing Date (the "Effective Time"). The closing shall be on a
day (the "Closing Date") occurring not less than two (2) and not more than
four (4) business days before the Effective Time and not later than thirty
(30) days after the date on which the last of any condition precedent
contained herein is waived or is fulfilled, as specified in a notice delivered
by Commerce to Company not less than three (3) business days prior to such
Closing Date, or on such other date as Company, Commerce and Sub shall
mutually agree. The closing shall be at 10:00 a.m. at Commerce Bank, N.A.,
1000 Walnut, Kansas City, Missouri or at such other time and place as Company,
Commerce and Sub shall mutually agree.
1.3. Articles of Incorporation. The Articles of Incorporation and By-Laws of
Sub as in effect immediately prior to the Effective Time shall be and remain
the Articles of Incorporation and By-Laws of the surviving corporation from
and after the Effective Time until amended as provided by law and the officers
and directors of Sub shall continue as the officers and directors of the
surviving corporation from and after the Effective Time.
1.4. Effect of Merger. Subject to Kansas law, at the Effective Time (a) Sub
shall possess all assets and property of every description, and every interest
therein, wherever located, and the rights, privileges, immunities, powers,
franchises, and authority, of a public as well as of a private nature, of
Company and all obligations belonging to or due each of Company and Sub shall
be vested in Sub without further act or deed; (b) title to any real estate or
any interest therein vested in Company shall not revert or in any way be
impaired by reason of the
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Merger; (c) all rights of creditors and all liens on any property of the
Company shall be preserved unimpaired; (d) Sub shall be liable for all the
obligations of Company, and any claim existing, or action or proceeding
pending, by or against either of Company or Sub, may be prosecuted to judgment
with the right of appeal, as if the Merger had not taken place.
1.5. Further Assurances. If at any time after the Effective Time, Sub shall
consider it advisable that any further conveyances, agreements, documents,
instruments or assurances of law or any other actions or things are necessary
or desirable to vest, perfect, confirm, or record in Sub the title to any
property, rights, privileges, powers, or franchises of Company, the Board of
Directors and officers of Sub shall, and will be authorized to, execute and
deliver in the name and on behalf of Company or otherwise, any and all proper
conveyances, agreements, documents, instruments, and assurances of law and do
all things necessary or proper to vest, perfect, or confirm title to such
property, rights, privileges, powers and franchises in Sub, and otherwise to
carry out the provisions of this Agreement.
ARTICLE II
CONVERSION OF SHARES
2.1. Effect of Merger on Sub Stock. Each share of common stock, $1.00 par
value per share, of Sub ("Sub Common Stock") issued and outstanding
immediately prior to the Effective Time shall be unaffected by the Merger.
2.2. Conversion of the Company Shares in the Merger. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder
thereof:
(a) Each outstanding share of common stock, $5.00 par value per share, of
the Company ("Company Common Stock"), (but excepting Company Dissenting
Shares, as defined below, and excepting shares of Company Common Stock held
by Commerce or Sub or any subsidiary of the Company or Commerce, other than
as a trustee, fiduciary, nominee or in a similar capacity), shall be
converted into 2.0767 shares (the "Exchange Ratio") of common stock, $5.00
par value per share, of Commerce ("Commerce Common Stock").
(b) Each share of Company Common Stock that is either authorized but
unissued or held in the treasury of the Company, if any, or held by
Commerce or Sub or any subsidiary of the Company or Commerce (other than as
a trustee, fiduciary, nominee or in a similar capacity) shall be canceled
and retired and shall cease to exist from and after the Effective Time, and
no cash, securities or other consideration shall be delivered in exchange
therefor.
2.3. Exchange of Certificates.
(a) Commerce, on behalf of Sub, shall make available to Commerce Bank,
N.A., which is hereby designated as exchange agent (the "Exchange Agent"),
at and after the Effective Time, such number of shares of Commerce Common
Stock as shall be issuable to the holders of Company Common Stock in
accordance with Section 2.2 hereof. As soon as practicable after Closing
Date, Commerce on behalf of the Exchange Agent shall mail to each holder of
record of a certificate that immediately prior to the Closing Date
represented outstanding shares of Company Common Stock (i) a form letter of
transmittal and (ii) instructions for effecting the surrender of
certificates of Company Common Stock for exchange into certificates of
Commerce Common Stock.
(b) Notwithstanding any other provision herein, no fractional shares of
Commerce Common Stock and no certificates or script therefor or other
evidence of ownership thereof will be issued. All fractional shares of
Commerce Common Stock to which a holder of Company Common Stock would
otherwise be entitled under Section 2.2 hereof shall be aggregated. If a
fractional share results from such aggregation, such shareholder shall be
entitled, after the Effective Time and upon the surrender of such
shareholder's certificate or certificates representing shares of Company
Common Stock, to receive from the Exchange
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Agent an amount in cash in lieu of such fractional share equal to the
product of such fraction and the Commerce Stock Price. Commerce, on behalf
of Sub, shall make available to the Exchange Agent, as required from time
to time, any cash necessary for this purpose.
2.4. Closing of the Company Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of Company
Common Stock shall thereafter be made.
2.5. Dividends. No dividends or other distributions that are declared after
the Effective Time with respect to Commerce Common Stock payable to holders of
record thereof after the Effective Time shall be paid to the shareholders of
Company entitled to receive certificates representing Commerce Common Stock
until such shareholders surrender their certificates representing Company
Common Stock. Upon such surrender, there shall be paid to the shareholder in
whose name the certificates representing such Commerce Common Stock shall be
issued any dividends which shall have become payable with respect to such
Commerce Common Stock between the Effective Time and the time of such
surrender, without interest. After such surrender there shall also be paid to
the shareholder in whose name the certificates representing such Commerce
Common Stock shall be issued any dividend on such Commerce Common Stock that
shall have (a) a record date subsequent to the Effective Time and prior to
such surrender and (b) a payment date after such surrender, and such payment
shall be made on such payment date. In no event shall the shareholders
entitled to receive such dividends be entitled to receive interest on such
dividends.
2.6. Shareholders' Approval. Company agrees to submit this Agreement and the
transactions contemplated hereby to its shareholders for approval to the
extent required and as provided by law and the Articles of Incorporation and
By-Laws of Company and in accordance with Section 10.1 hereof. A shareholders'
meeting of Company shall be held and Company shall use its reasonable best
efforts to take all steps as shall be required for said meeting to be held as
soon as reasonably practicable after the effective date of the Registration
Statement (as defined in Section 10.1 hereof). Company and its Board of
Directors shall recommend, subject to the exercise of their fiduciary
responsibilities, that the shareholders of Company approve this Agreement and
the transactions contemplated hereby and shall use their reasonable best
efforts to secure such approval.
2.7. Dissenting Shares. Notwithstanding anything to the contrary contained
in this Agreement, to the extent appraisal rights are available to the
Company's shareholders pursuant to the KGCC, any shares of Company Common
Stock held by a person who objects to the Merger, whose shares of Company
Common Stock were not voted in favor of the Merger and who complies with all
of the provisions of the KGCC concerning the rights of such person to dissent
from the Merger and to require appraisal of such person's shares of Company
Common Stock and who has not withdrawn such objection or waived such rights
prior to the Closing Date ("Company Dissenting Shares") shall not be converted
pursuant to Section 2.2 but shall become the right to receive such
consideration as may be determined to be due to the holder of such Company
Dissenting Shares pursuant to the KGCC, including, if applicable, any costs
determined to be payable by the Sub to the holders of the Company Dissenting
Shares pursuant to an order of the district court in accordance with the KGCC.
2.8. Adjustments. If at any time during the period between the date hereof
and the Effective Time, any change in the outstanding shares of capital stock
of Commerce is effected by reason of any reclassification, recapitalization,
stock split or combination, exchange or readjustment of shares, or any stock
dividend thereon with a record date during such period, the Exchange Ratio and
the Bank Exchange Ratio shall be adjusted on a pro rata basis.
ARTICLE IIA
HERITAGE BANK MERGER
2A.1 Heritage Bank Merger. Simultaneously with the Merger, Commerce Bank,
N.A. shall merge (the "Bank Merger") with Heritage Bank of Olathe
("Heritage"). Commerce Bank, N.A. shall survive the merger.
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The effect of the Bank Merger shall be that all of the shares of stock of
Heritage ("Bank Stock") not owned by Company at the Effective Time shall be
converted into cash in an amount equal to $106.05 per share. Shares of
Heritage held by Company shall be canceled in the Bank Merger.
2A.2 Structure of Bank Merger. Company agrees to cause Heritage to adopt a
plan of merger reflecting the structure provided for in this Article IIA (the
"Bank Plan of Merger") and to submit the same to Heritage's stockholders
concurrently with the submission of the Merger to Company's stockholders. All
out of pocket expense incurred by the Company and the Bank in consummating the
Bank Merger, including without limitation, funds required to pay the minority
shareholders of the Bank, shall be paid by Sub.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMMERCE AND SUB
Commerce and Sub, jointly and severally, hereby represent and warrant as
follows:
3.1. Organization and Authority.
(a) Commerce is a corporation duly organized, validly existing and in
good standing under the laws of the State of Missouri and is a duly
registered bank holding company under the provisions of the Bank Holding
Company Act of 1956, as amended. Commerce has the corporate power to enter
into and perform this Agreement and the execution, delivery and performance
of this Agreement by Commerce and the consummation by Commerce of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Commerce with no approval thereof by the shareholders of
Commerce being required to approve this Agreement.
(b) Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Kansas. Sub has the corporate power
to enter into and perform this Agreement and the execution, delivery and
performance of this Agreement by Sub and the consummation by Sub of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and by Commerce as the sole shareholder of Sub.
3.2. Valid and Binding Agreement; No Violation. This Agreement constitutes a
valid and binding agreement of Commerce and Sub enforceable in accordance with
its terms and neither the execution and delivery of this Agreement nor the
consummation by Commerce or Sub of the transactions contemplated hereby
violates or conflicts with the Articles of Incorporation or By-Laws of
Commerce or Sub or any agreement, law, regulation, order, judgment or other
restriction of any kind to which Commerce or Sub is a party or by which either
of them is bound.
3.3. Capital Stock of Commerce. As of May 31, 1998, the authorized capital
stock of Commerce consisted of (a) 80,000,000 shares of common stock, $5.00
par value, of which 58,260,846 shares were issued and outstanding, and (b)
2,000,000 shares of preferred stock, $1.00 par value ("Preferred Stock"), of
which no shares were issued and outstanding. Holders of Commerce Common Stock
do not have any preemptive rights with respect to the issuance of additional
authorized shares of Commerce Common Stock.
3.4. Financial Statements. The consolidated balance sheets of Commerce as of
December 31, 1997 and December 31, 1996, the consolidated statements of
earnings for the years ended December 31, 1997 and December 31, 1996, and all
related schedules and notes to the foregoing, all of which have been delivered
to Company, have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. All of the foregoing financial statements have been
prepared in accordance with generally accepted accounting principles and
practices which were applied on a consistent basis, are correct and complete
and fairly and accurately present the financial position, results of operation
and changes of financial position of Commerce as of their respective dates and
for the periods indicated. Commerce has no material liabilities or obligations
of a type which would be included in a balance sheet prepared in accordance
with generally accepted accounting principles whether related
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to tax or non-tax matters, accrued or contingent, due or not yet due,
liquidated or unliquidated, or otherwise, except as and to the extent
disclosed or reflected in the balance sheet of Commerce as of December 31,
1997, or incurred since December 31, 1997, in the ordinary course of business.
From December 31, 1997 until the date hereof, there has been no material
adverse change in the financial condition, properties, assets, liabilities,
rights or business of Commerce, or in the relationship of Commerce with
respect to its employees, creditors, suppliers, distributors, customers or
others with whom it has business relationships.
3.5. SEC Reports. Commerce's Report on Form 10-K for year ended December 31,
1997, filed with the Securities and Exchange Commission ("SEC") and all
subsequent reports and proxy statements filed by Commerce thereafter pursuant
to Section 13(a) or 14(a) of the Securities Exchange Act of 1934 do not and
will not contain a misstatement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading as of the time the document was filed. Since the filing of such
Report on Form 10-K, no other report, proxy statement, or other document has
been required to be filed by Commerce pursuant to Section 13(a) or 14(a) of
the Securities Exchange Act of 1934 which has not been filed with the SEC and
delivered to Company. Commerce has delivered to Company the following
documents: Form 10-K for Fiscal Year Ended December 31, 1997; the Annual
Report to Shareholders for such year; and a copy of the Proxy Statement for
the 1998 Annual Meeting of Shareholders of Commerce; and copies of Commerce's
report on Form 10-Q for the quarter ended March 31, 1998.
3.6. Status of Commerce Common Stock to be Issued. The shares of Commerce
Common Stock into which the Company Common Stock is to be exchanged or
converted pursuant to this Agreement will be, when delivered as specified in
this Agreement, validly authorized and issued, fully paid and non-assessable,
and registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or any successor federal statute and the
rules and regulations promulgated thereunder, all as the same shall be in
effect at the time (the "Securities Act").
3.7. Governmental Regulation. Commerce and its subsidiaries hold all
material licenses, certificates, permits, franchises and rights from all
appropriate federal, state or other public authorities necessary for the
lawful conduct of their respective businesses and ownership of their
respective properties. Commerce and its subsidiaries have complied in all
material respects with all federal, state and local statutes, regulations,
ordinances or rules applicable to the ownership of their respective properties
or for the conduct of their respective businesses.
3.8. Litigation. There are no actions, suits, claims, demands or other
proceedings or investigations (either judicial or administrative) pending or,
to the knowledge of Commerce, threatened against or affecting the properties,
assets, rights or business of Commerce or its subsidiaries or the right to
carry on or conduct their respective businesses, nor are there any grounds
therefor, which would in the aggregate materially and adversely affect the
business, operations, properties or financial condition of Commerce and its
subsidiaries or which will or could prevent or materially impair the
transactions contemplated by this Agreement.
3.9. Taxes. Commerce and its subsidiaries have filed with the appropriate
governmental agencies all federal, state and local tax and information returns
and tax reports due in respect of any of their business or properties in a
timely fashion and have paid all amounts due shown on such returns, except
where the failure to make such filing or make such payment, individually or in
the aggregate, would not materially and adversely affect the business,
operations, properties or financial condition of Commerce and its
subsidiaries.
3.10 Defaults. Neither Commerce nor any of its subsidiaries is in material
breach or material default under any agreement or commitment to which Commerce
or any of its subsidiaries is a party, or under any loan agreement, note,
security agreement, guarantee or other document pursuant to or in connection
with Commerce's or any of its subsidiaries' extension of credit; and there has
not occurred any event which, after the giving of notice, the lapse of time or
otherwise, would constitute any such default under, or result in any such
breach of, any such agreement, commitment or extension of credit.
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3.11 Information Supplied. None of the information supplied or to be
supplied by Commerce and Sub for inclusion or incorporation by reference in
(a) the Registration Statement (as defined in Section 10.1) will, at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or (b) the Proxy
Statement (as defined in Section 10.1) will, at the date of mailing to
stockholders and at the times of the meetings of stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any 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, other than information supplied by
Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company hereby represents and warrants to each of Commerce and Sub as
follows:
4.1. Organization and Good Standing.
(a) Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Kansas with the corporate power and
authority to own its properties and conduct its business as it is now being
conducted and is duly registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended. The conduct of Company's business
and the ownership of its properties do not require Company to qualify as a
foreign corporation in any jurisdiction except where the failure to be so
qualified individually or in the aggregate would not materially and
adversely affect the business, operations, properties or financial
condition of Company and its subsidiary.
(b) Company has two bank subsidiaries, Fidelity State Bank ("Fidelity")
and Heritage ("Banks"); each is a Kansas bank duly organized, validly
existing and in good standing under the laws of the State of Kansas with
the corporate power and authority to carry on its respective businesses as
now being conducted. Each Bank is duly qualified to do business in each
jurisdiction in which it owns or leases real property or in which the
conduct of its respective business requires such qualification except where
the failure to be so qualified individually or in the aggregate would not
materially and adversely affect the business, operations, properties or
financial condition of Company or such and Bank.
(c) Company has five direct or indirect non-bank subsidiaries, each of
which is listed on Schedule 4.1(c) (collectively "Non-Bank Subsidiaries").
Each is a corporation duly organized, validly existing and in good standing
under the laws of the State of Kansas with the corporate power and
authority to own its respective properties and conduct its respective
businesses as are now being conducted.
4.2. Authority. Company has all requisite corporate power and authority to
enter into this Agreement, and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement, and the consummation of
the transactions contemplated hereby, have been duly authorized by all
necessary corporate action on the part of Company. This Agreement has been
duly executed and delivered by Company, and assuming due execution and
delivery by Commerce and Sub, constitutes a valid and binding obligation of
Company, enforceable in accordance with its terms subject to applicable
conservatorship, receivership, bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity (including without limitation
specific performance), whether applied in a court of law or a court of equity.
4.3. Shareholder Approval. The Board of Directors of Company will direct and
will cause Heritage to direct that this Agreement and the Bank Plan of Merger
and the transactions contemplated hereby and thereby be submitted to the
Company's and Heritage's shareholders for approval at a meeting of such
shareholders and, except for adoption of this Agreement and the Bank Plan of
Merger by the requisite vote of the Company's and Bank's shareholders,
respectively, no other shareholder action is necessary to approve this
Agreement and the
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Bank Plan of Merger and to consummate the transactions contemplated hereby and
thereby. The Board of Directors of Company and Heritage will recommend that
their respective shareholders approve this Agreement and the Bank Plan of
Merger and the transactions contemplated hereby and thereby subject to their
fiduciary duties and will exempt the transaction from any applicable state
takeover statutes. The approval of the majority of the outstanding shares of
each of the Company Common Stock and the Bank Stock entitled to vote is
required for approval of this Agreement and the Bank Plan of Merger,
respectively, and to consummate the transactions contemplated hereby and
thereby.
4.4. No Violations. Subject to approval by the appropriate regulatory
agencies, the execution, delivery and performance of this Agreement by Company
do not, and the consummation of the transactions contemplated hereby will not,
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of Company or any subsidiary or to which
Company or any subsidiary (or any of their respective properties) is subject,
(ii) a breach or violation of, or a default under, the articles of
incorporation, charter or bylaws of Company or any subsidiary of Company or
(iii) a breach or violation of, or a default under (or an event which with due
notice or lapse of time or both would constitute a default under), or result
in the termination of, accelerate the performance required by, or result in
the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of Company under any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which the
Company is a party, or to which any of its respective properties or assets may
be bound or affected.
4.5. Consents. Except for the approvals of the appropriate regulatory
agencies and such filings and registrations as are required under federal and
state securities and Blue Sky laws, no filing or registration with, or
authorization, consent or approval of, any public body or authority is
necessary for the consummation by Company of the Merger or Heritage of the
Bank Merger or the other transactions contemplated by this Agreement.
4.6. Capitalization. Company has authorized capital stock consisting of
2,000,000 shares of common stock, par value $5.00 per share, of which 381,992
shares are issued and outstanding. All of the issued and outstanding shares of
Company Common Stock are validly issued, fully paid and non-assessable. Except
as set forth on Schedule 4.6, there are no outstanding warrants, options,
subscriptions, contracts, rights or other agreements or commitments obligating
Company to issue or sell any additional shares of Company Common Stock nor are
there outstanding any securities, debts, obligations or rights which are
convertible into or exchangeable for shares of Company Common Stock. The
authorized capital stock of Fidelity consists of 40,000 shares of common
stock, $25.00 par value per share ("Fidelity Stock"), of which 40,000 shares
have been duly and validly authorized and issued, all of which are owned
directly by Company free and clear of all liens, encumbrances, equities or
claims. The authorized capital stock of Heritage consists of 90,000 shares of
common stock, $15.00 par value per share ("Heritage Stock"), of which 90,000
shares have been duly and validly authorized and issued and of which 89,240
shares of Heritage Stock are owned directly by Company free and clear of all
liens, encumbrances, equities or claims. The Company owns all of the issued
and outstanding shares of Non-Bank Subsidiaries free and clear of all liens,
encumbrances, equities or claims. There are no outstanding warrants, options,
subscriptions, contracts, rights or other arrangements or commitments
obligating Company, Banks or any Non-Bank Subsidiary to issue or sell any
additional shares of their respective capital stock nor are there outstanding
any securities, debts, obligations or rights which are convertible into or
exchangeable for shares of capital stock or any other equity security of
Company, Banks or the Non-Bank Subsidiaries.
4.7. Government Regulation. Company and Banks hold all material licenses,
certificates, permits, franchises and rights from all appropriate federal,
state or other public authorities necessary for the lawful conduct of their
respective businesses and ownership of their respective properties. Except as
disclosed herein or in Schedules attached hereto, Company and Banks have
substantially complied with all material federal, state and local statutes,
regulations, ordinances or rules applicable to the ownership of their
respective properties or the conduct of their respective businesses.
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4.8. Financial Statements. The consolidated balance sheet of Company as of
December 31, 1997, the consolidated statements of earnings for the year ended
December 31, 1997, the balance sheets of Banks as of December 31, 1997 and the
statements of earnings of Banks for the year ended December 31, 1997 and all
related schedules and notes to the foregoing, all of which have been delivered
or made available to Commerce, have been audited by Grant Thornton, LLP,
independent certified public accountants and Company has also furnished to
Commerce consolidated balance sheets of Company as of March 31, 1998 and the
consolidated statements of earnings for the three-month period ending March
31, 1998 (collectively referred to as "Financial Statements"). All of the
foregoing financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied, and present fairly in all
material respects the financial position, results of operations and changes of
financial position of Company or the applicable Bank as of their respective
dates and for the periods indicated. Company has no material liabilities or
obligations of a type which would be included in a balance sheet prepared in
accordance with generally accepted accounting principles whether related to
tax or non-tax matters, accrued or contingent, due or not yet due, liquidated
or unliquidated, or otherwise, except as and to the extent disclosed or
reflected in the balance sheet of Company as of December 31, 1997, or incurred
since December 31, 1997, in the ordinary course of business. From December 31,
1997 until the date hereof, there has been no material adverse change in the
financial condition, properties, assets, liabilities, rights or business of
Company or Banks, or in the relationship of Company or Banks with respect to
its employees, creditors, suppliers, distributors, customers or others with
whom it has business relationships.
4.9. Legal Proceedings. There are as of the date hereof no actions, suits,
claims, demands or other proceedings or investigations, either judicial or
administrative, pending or, to the knowledge of Company, threatened against or
affecting the properties, assets, rights or business of Company, Banks or the
Non-Bank Subsidiaries or the right to carry on or conduct their respective
businesses, nor are there to the knowledge of Company any grounds therefor,
which, if adversely determined, would in the aggregate materially adversely
affect the business, operations, properties or financial condition of Company,
Banks or the Non-Bank Subsidiaries. There are as of the date hereof no
actions, suits, claims, demands or other proceedings or investigations, either
judicial or administrative, pending or, to the knowledge of Company,
threatened which will or could prevent or interfere with the consummation of
the transactions contemplated by this Agreement.
4.10. Title to Assets. Except for securities pledged to secure public funds
deposits or subject to customer repurchase agreements entered into in the
ordinary course of business, and leased property discussed below, Company and
Banks have good and marketable title to and possession of all of their
respective real and personal properties and assets, in each case free and
clear of any liens, restrictions, encumbrances, rights, title and interests of
others, except for other real estate owned and except as reflected on their
respective financial statements and except for the lien of current taxes,
covenants and restrictions of record, and other minor imperfections of title
not affecting marketability, which liens, covenants, restrictions and
imperfections do not materially affect the value of such property and do not
interfere with the use made of such property by Company, Banks and the Non-
Bank Subsidiaries. The real and personal properties and assets held under
lease by Company, Banks and the Non-Bank Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as do not
interfere with the use made of such properties and assets by Company, Banks
and the Non-Bank Subsidiaries.
4.11. Undisclosed Liabilities. Except as disclosed in Schedules attached
hereto, as of the date hereof, Company, Banks and the Non-Bank Subsidiaries
have no debt, liability or obligation (whether accrued, contingent, absolute
or otherwise) known to either which would be included in a corporate balance
sheet or the notes thereto prepared in accordance with generally accepted
accounting principles that is not reflected or reserved against in the
Financial Statements or was not incurred in the ordinary course of their
business.
4.12. Taxes. The Company, Banks and the Non-Bank Subsidiaries have timely
filed all Tax Returns (as defined below) required to be filed by them, and the
Company and Bank have timely paid and discharged all Taxes (as defined below)
due in connection with or with respect to the filing of such Tax Returns and
have timely paid all other Taxes as are due, except such as are being
contested in good faith by appropriate proceedings and with respect to which
the Company is maintaining reserves adequate for their payment. To the best
knowledge
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of the Company, the liability for Taxes set forth on each such Tax Return
adequately reflects the Taxes required to be reflected on such Tax Return. For
purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, charges, fees,
levies, and other governmental assessments and impositions of any kind,
payable to any federal, state, local or foreign governmental entity or taxing
authority or agency, including, without limitation, (a) income, franchise,
profits, gross receipts, estimated, ad valorem, value added, sales, use,
service, real or personal property, capital stock, license, payroll,
withholding, disability, employment, social security, workers compensation,
unemployment compensation, utility, severance, production, excise, stamp,
occupation, premiums, windfall profits, transfer and gains taxes, (b) custom
duties, imposts, charges, levies or other similar assessments of any kind, and
(c) interest, penalties and additions to tax imposed with respect thereto, and
"Tax Returns" shall mean returns, reports, and information statements with
respect to Taxes required to be filed with the United States Internal Revenue
Service (the "IRS") or any other governmental entity or taxing authority or
agency, domestic or foreign, including, without limitation, consolidated,
combined and unitary tax returns. Neither the IRS nor any other governmental
entity or taxing authority or agency is now asserting, either through audits,
administrative proceedings, court proceedings or otherwise, or, to the best of
Company's knowledge, threatening to assert against Company or Bank any
deficiency or claim for additional Taxes. Neither the Company nor Bank nor the
Non-Bank Subsidiaries has granted any waiver of any statute of limitations
with respect to, or any extension of a period for the assessment of, any Tax.
Except as disclosed on Schedule 4.12, there are no tax liens on any assets
(excluding OREO properties) of the Company or Bank. Neither the Company nor
Bank nor the Non-Bank Subsidiaries has received a ruling or entered into an
agreement with the IRS or any other governmental entity or taxing authority or
agency that would have a Material Adverse Effect (as defined below) on the
Company, Bank, or the Non-Bank Subsidiaries taken as a whole, after the
Effective Time. For purposes of this Agreement, "Material Adverse Effect" with
respect to the Company, Bank or the Non-Bank Subsidiaries means an effect
that: (1) is materially adverse to the business, financial condition, results
of operations or prospects of the Company, Bank or the Non-Bank Subsidiaries
taken as a whole; (2) significantly and adversely affects the ability of the
Company or Bank to consummate the transactions contemplated by this Agreement
by the Closing Date or to perform their material obligations under this
Agreement; or (3) enables any persons to prevent the consummation by the
Closing Date of the transactions contemplated by this Agreement. The accruals
and reserves for taxes reflected in the Company's balance sheets included in
the Financial Statements are adequate to cover all Taxes accruable by the
Company on a consolidated basis through the date thereof (including Taxes
being contested) in accordance with generally accepted accounting principles.
Except as may be set forth in Schedule 4.12 attached hereto, no agreements
relating to allocating or sharing of Taxes exist between the Company, Banks or
the Non-Bank Subsidiaries.
4.13. Contracts. Except as set forth on Schedule 4.13 or any other Schedule
attached hereto, neither Company nor Banks nor the Non-Bank Subsidiaries is
party to or bound by any:
(a) employment contract;
(b) bonus, deferred compensation, savings, profit sharing, severance pay,
pension or retirement plan or arrangement;
(c) material lease or license with respect to any property, real or
personal, whether as a landlord or tenant, licensor or licensee, involving
a liability or obligation as obligor in excess of $5,000 on an annual
basis;
(d) agreement, contract or indenture relating to the borrowing of money
by Company or any subsidiary, excluding deposit obligations, obligations
under certificates of deposit, letters of credit, items in the process of
collection, commitments to loan or discount, endorsements made for
collection and guarantees made in the ordinary course of business;
(e) agreement with any present or former officer, director or
shareholder; or
(f) other contract, agreement or other commitment which is material to
the business, operations, property, prospects or assets or to the
condition, financial or otherwise, of the Company, the Banks or the Non-
Bank Subsidiaries which involves a payment by the Company, the Banks or the
Non-Bank Subsidiaries of more than $5,000 in one year.
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4.14 Regulatory Reports; Examinations. Company, Banks and the Non-Bank
Subsidiaries have timely filed all material reports, registrations and
statements, together with any amendments required to be made with respect
thereto, with any governmental or regulatory authority, agency, court,
commission or other entity ("Governmental Entity") and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Governmental Entity in the regular course of the
business of Company, no Governmental Entity has initiated any proceeding or,
to the best knowledge of Company, investigation into the business or
operations of Company, Banks or the Non-Bank Subsidiaries. To the best
knowledge of Company there is no unresolved material violation, criticism, or
exception by any Governmental Entity with respect to any report or written
statement relating to any examinations of Company, Banks and the Non-Bank
Subsidiaries. Company has made available to Commerce all reports of
examination conducted by any Governmental Entity with respect to Company
and/or Banks and/or the Non-Bank Subsidiaries during the preceding ten (10)
years.
4.15. Conduct. From December 31, 1997 until the date hereof and except as
set forth in Schedule 4.15 attached hereto or any other Schedule attached
hereto:
(a) There has been no material adverse change in the financial condition
of, or in the properties, assets, liabilities, rights or business, taken as
a whole, of Company, Banks or the Non-Bank Subsidiaries or in the
relationship of Company, Banks or the Non-Bank Subsidiaries with respect to
their employees, creditors, suppliers, distributors, customers or others
with whom they have business relationships.
(b) The business affairs of Company, Banks and the Non-Bank Subsidiaries
have been conducted and carried on only in their ordinary and regular
course of business, and Company, Banks and the Non-Bank Subsidiaries have
not, except as otherwise disclosed to Commerce, incurred or become subject
to any liabilities or obligations other than those incurred in their
ordinary course of business, those incurred pursuant to existing contracts
disclosed pursuant to Section 4.13 and those incurred pursuant to
commitments permitted hereby.
(c) There have been no dividends or other distributions declared, set
aside or paid in respect of Company Common Stock, nor has any action with
respect to Company Common Stock proscribed under Section 5.2(e) of this
Agreement occurred or been taken.
(d) Company, Banks and the Non-Bank Subsidiaries have not entered into
any employment contract with any director, officer or salaried employee,
paid any or made any accrual or arrangement for payment of bonuses or
special compensation of any kind or any severance or termination pay to any
of their officers, employees or directors, increased the rate of
compensation, if any, or instituted or made any material increase in any
officer's, employee's or director's welfare, retirement or similar plan or
arrangement, other than annual and merit increases made in accordance with
past practices and procedures.
4.16. Compliance with ERISA. Except for the plans listed on Schedule 4.16
(collectively, the "Plans") neither Company, Banks nor the Non-Bank
Subsidiaries has established, maintained or contributed at anytime during the
five-year period ending on the date hereof to any employee benefit plan (as
defined in Sections 3(3) or 3(37) of the Employment Retirement Income Security
Act of 1974 ("ERISA")) or any other plan with respect to which any
governmental filings are required. A true and accurate copy of each of the
Plans, any related trust agreements and each of the amendments thereto has
been provided to Commerce together with (i) all determination letters received
in respect of any qualified plans, and (ii) all required reports and
supporting schedules filed with any government agency in respect of the Plans
for the three most recent years ending on the date hereof. To Company's
knowledge as sponsor of the Plans, the Plans and each fiduciary (as defined in
Section 3(21) of ERISA) of the Plans are in compliance in all material
respects with all applicable requirements (including nondiscrimination
requirements in effect as of the date hereof) of the Internal Revenue Code of
1986 ("Code"), including, but not limited to, Sections 79, 105, 106, 125, 401,
501, and 4975 of the Code. For purposes of this Section 4.16, noncompliance
with the Code or ERISA is material if such noncompliance could have a Material
Adverse Effect on the condition of one or more of the Plans or of Company or
Banks, either as of the Effective Time or upon discovery of the noncompliance.
To Company's knowledge as sponsor of the Plans, all required contributions to
the Plans through the date hereof have been made. To Company's knowledge
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as sponsor of the Plans, Company and Banks (each with respect to the Plans),
as well as the Plans, have no material current or threatened liability of any
kind to any person, including but not limited to any government agency, as of
the date hereof, other than for the payment of benefits in the ordinary
course.
4.17. Information Supplied. None of the information supplied or to be
supplied by Company for inclusion or incorporation by reference in (i) the
Registration Statement will, at the time the Registration Statement is filed
with the SEC and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Proxy Statement will, at the date of mailing to
stockholders and at the times of the meetings of stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any 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, other than information supplied by
Commerce or Sub.
4.18. Defaults. As of the date hereof, neither Company, Banks nor the Non-
Bank Subsidiaries is in material breach or material default known to either
under any agreement or commitment to which Company, Bank or the Non-Bank
Subsidiaries is a party, or under any loan agreement, note, security
agreement, guarantee or other document pursuant to or in connection with
Company's or either Bank's or any of the Non-Bank Subsidiaries' extension of
credit; and to their knowledge there has not occurred any event which, after
the giving of notice, the lapse of time or otherwise, would constitute any
such default under, or result in any such breach of, any such agreement,
commitment or extension of credit.
4.19. Insurance. Complete and correct copies of all material policies of
fire, product or other liability, workers' compensation and other similar
forms of insurance owned or held by Company, Banks and the Non-Banking
Subsidiaries have been delivered to Commerce. Subject to expirations and
renewals of insurance policies in the ordinary course of business, all such
policies are in full force and effect, all premiums with respect thereto
covering all periods up to and including the date as of which this
representation is being made have been paid (other than retrospective premiums
which may be payable with respect to workers' compensation insurance
policies), and no notice of cancellation or termination has been received with
respect to any such policy. Such policies are valid and enforceable policies,
and will not be terminated by Company, Banks or the Non-Bank Subsidiaries
prior to the Effective Time. To the best knowledge of Company, the insurance
policies to which Company, Banks or the Non-Bank Subsidiaries are parties are
sufficient for compliance with all material requirements of law and all
material agreements to which Company, Banks or the Non-Bank Subsidiaries are
parties and will be maintained by Company, Banks and the Non-Bank Subsidiaries
until the Effective Time. Neither Company, Banks nor the Non-Bank Subsidiaries
has been refused any insurance with respect to any material assets or
operations, nor has coverage been limited in any respect material to their
operations by any insurance carrier to which they have applied for any such
insurance or with which they have carried insurance during the last five (5)
years.
4.20. Absence of Adverse Agreements. Neither Company, Banks nor the Non-Bank
Subsidiaries is a party to any agreement or instrument or any judgment, order
or decree or any rule or regulation of any court or other governmental agency
or authority which materially and adversely affects or is reasonably likely to
result in a Material Adverse Effect on the financial condition, results of
operations, assets, business or prospects of the Company, Bank or the Non-Bank
Subsidiaries, taken as a whole.
4.21. Internal Controls and Records. Company, Banks and the Non-Bank
Subsidiaries maintain books of account which accurately and validly reflect,
in all material respects, all loans, mortgages, collateral and other business
transactions and maintain accounting controls sufficient to ensure that all
such transactions are (a) in all material respects, executed in accordance
with its management's general or specific authorization, and (b) recorded in
conformity with generally accepted accounting principles. Company has
furnished to Commerce all of Company's, each Bank's and each Non-Bank
Subsidiaries' written internal policies and procedures which are identified on
Schedule 4.21.
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4.22. Loans. Except as disclosed on Schedule 4.22 attached hereto, (a) the
Banks are not a party to any written or oral loan agreement, note or borrowing
arrangement which has been classified as "substandard," "doubtful," "loss,"
"other loans especially mentioned" or any comparable classifications by the
Company or Bank or banking regulators; (b) neither the Company or Banks is a
party to any written or oral loan agreement, note, or borrowing arrangement,
including any loan guaranty, with any director or executive officer of the
Company, Bank, or the Non-Bank Subsidiaries or any person, corporation or
enterprise controlling, controlled by or under common control with any of the
foregoing; (c) to the Company's knowledge neither the Company, Banks nor the
Non-Bank Subsidiaries is a party to any written or oral loan agreement, note
or borrowing arrangement in violation of any law, regulation or rule of any
governmental authority and which violation is reasonably likely to result in a
Material Adverse Effect on the Company or Banks or the Non-Bank Subsidiaries
taken as a whole.
4.23. Environmental Laws.
(a) Compliance with Environmental and Safety Laws. To the best knowledge
of Company (i) the operations and Properties (as hereinafter defined) of
Company, Banks and the Non-Bank Subsidiaries comply with all applicable
past and present federal, state and local environmental statutes and
regulations; (ii) none of the operations of Company, Banks or the Non-Bank
Subsidiaries is subject to any judicial or administrative proceedings
alleging the violation of any federal, state or local environmental health
or safety statute or regulation nor is it the subject of any claim alleging
damages to health or property pursuant to which Company, Banks or the Non-
Bank Subsidiaries may be liable; (iii) none of the operations or Properties
of Company, Banks or the Non-Bank Subsidiaries is the subject of any
federal, state or local investigation evaluating whether any remedial
action is needed to respond to a release or threatened release of any
hazardous or toxic waste, substance or constituent, or any other substance
from whatever source (past or present; onsite or offsite) into the
environment, nor has Company, Banks or the Non-Bank Subsidiaries been
directed to conduct such investigation, formally or informally, by any
governmental agency, nor has it agreed with any governmental agency or
private person to conduct any such investigation; (iv) neither Company,
Bank or the Non-Bank Subsidiaries has filed any notice under any federal,
state or local law indicating past or present treatment, storage or
disposal of a hazardous waste or reporting a spill or release of a
hazardous or toxic waste, substance, or constituent, or any other substance
into the environment; (v) the operations and Properties of Company, Banks
or the Non-Bank Subsidiaries have obtained and currently maintain and
comply with, all environmental permits and compliance plans required to own
and operate Properties; (vi) Company, Banks or the Non-Bank Subsidiaries
perform all environmental and safety training required to own and operate
the Properties and maintain proper records of such; (vii) Company, Banks or
the Non-Bank Subsidiaries properly handle and dispose of all regulated and
Hazardous Materials (as herein defined) either onsite or offsite; (viii)
neither Company, Banks nor the Non-Bank Subsidiaries has ever been notified
by either a federal, state or local governmental authority, or a private
party that Company, Banks or the Non-Bank Subsidiaries is a potentially
responsible party ("PRP") for remedial costs spent addressing the release,
or threat of a release, of a hazardous substance into the environment
pursuant to the Comprehensive Environmental Response, Compensation or
Liability Act, 42 U.S.C. (S)(S)9601, et seq. or any corresponding state
law; (ix) neither Company nor Banks has received a CERCLA (S)104(e)
information request from the U.S. Environmental Protection Agency ("USEPA")
or a corresponding information request from any state or local
environmental regulator; and (x) the Company's, Banks' or the Non-Bank
Subsidiaries' operations, and Properties, procedures and designs conform to
the statutory or regulatory requirements of any environmental or safety
law.
(b) Hazardous Materials. As used herein, "Hazardous Materials" shall mean
any flammables, explosives, radioactive materials, hazardous wastes, solid
wastes, friable asbestos, or any material containing asbestos, toxic
substances or related materials, including, without limitation, substances
now defined as hazardous substances, hazardous materials pollutants,
contaminants, or toxic substances in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Hazardous
Materials Transport Act, the Resource Conservation and Recovery Act, any
so-called "Superfund" or "Superlien" law, the Clean Water Act, as amended,
the Safe Drinking Water Act, as
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amended, the Toxic Substance Control Act, or any other applicable federal,
state or local law, code, rule, regulation or ordinance presently in
effect. "Hazardous Materials" shall also include polychlorinated biphenols
(PCBs), petroleum and petroleum products (including crude and fraction
thereof), mercury, and lead-based paint.
(c) Environmental Audit. Commerce may obtain at its option and expense on
or prior to 90 days following the date hereof an environmental audit
("Environmental Audit") of all the properties and assets of Company, Banks
and the Non-Bank Subsidiaries classified as other real estate owned or real
property owned or leased by Company, Bank, or the Non-Bank Subsidiaries but
excluding all loans not in default and all collateral for such loans (the
"Properties"). A copy of any report or audit generated shall be provided to
Company at the time such report or audit is received by Commerce. The
consultant who will perform the Environmental Audit shall be selected by
Commere and shall be reasonably satisfactory to Company. The Environmental
Audit shall conform to the standards for Phase I environmental assessments
issued by the American Society for Testing and Materials ("ASTM"). Should
an environmental condition be discovered in the Phase I process that
Commerce decides, in its discretion, to investigate, then Commerce shall
perform, or have performed an ASTM Phase II environmental assessment to
determine whether Hazardous Materials exist (i) on or under any of the
Properties; (ii) on or under any other property or in any natural resources
which originated on, under or from the Properties either prior to or during
Company's or either Bank's ownership thereof. The Environmental Audit must
be performed to the reasonable satisfaction of Commerce.
In the event the Environmental Audit discloses the existence of any
liability ("Environmental Liability") (either absolute or potential) for
damages, penalties, fines, charges, interest, judgments, remedial action,
public or private, arising directly or indirectly in whole or in part out
of (w) noncompliance with any environmental law, (x) the presence of
Hazardous Materials on, under or from the Properties, or (y) any activity
carried on or undertaken on or off the Properties either prior to or after
the date hereof whether by Company, Banks the Non-Bank Subsidiaries or any
predecessor in title to any of the Properties or any employees, agents,
affiliates, contractors or subcontractors of Company, Bank, the Non-Bank
Subsidiaries or of any such predecessors in title, or any third person in
connection with the use, handling, treatment, removal, storage,
decontamination, clean-up, transport or disposal of any Hazardous Materials
at any time located or present on, under or from the Properties, which
liability exists against Company or either Bank or affects in any way the
Properties or Company's or Bank's or the Non-Bank Subsidiaries' rights or
business or the right to carry on or conduct their respective businesses,
Commerce shall notify Company of such Environmental Liability. If Company
does not choose to remediate the condition leading to such Environmental
Liability and to otherwise fully protect Commerce from such Environmental
Liability on terms and conditions and at a cost acceptable to Commerce
within thirty (30) days after receipt by Company of a copy of any report or
audit as provided, Commerce shall have the right to terminate this
Agreement under Article IX hereof, thereby relieving Company, Commerce and
Sub of all their obligations hereunder, including the obligation to cause
or engage in the Merger.
4.24. Broker's Fees. Neither the Company, Banks nor the Non-Bank
Subsidiaries nor any of their respective officers or directors has employed
any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement except for a fee payable to Alex Sheshunoff &
Company.
4.25. Labor Matters. (a) To the best knowledge of Company, Company, Banks
and the Non-Bank Subsidiaries are in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and are not engaged in any unfair labor
practice; (b) there is no unfair labor practice complaint against Company,
Banks or the Non-Bank Subsidiaries pending before the National Labor Relations
Board; (c) there is no labor strike, dispute, slowdown, representation
campaign or work stoppage actually pending or threatened against or affecting
Company, Banks or the Non-Bank Subsidiaries; (d) no grievance or arbitration
proceeding arising out of or under collective bargaining agreements is pending
and
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no claim therefor has been asserted against Company, Banks or the Non-Bank
Subsidiaries; and (e) neither Company, Banks nor the Non-Bank Subsidiaries is
experiencing any material work stoppage.
4.26. Full Disclosure. No statement contained in any document, certificate,
or other writing furnished or to be furnished by or at the direction of
Company to Commerce in, or pursuant to the provisions of, this Agreement
contains or shall contain any untrue statement of a material fact or omits or
shall omit to state any material fact necessary, in light of the circumstances
under which it was made, in order to make the statements herein or therein not
misleading.
4.27. Year 2000 Compliance. To the best knowledge of Company, all computer
hardware, computer software applications and bank services or products on and
after December 31, 1999 (the "Millennia Dates") will calculate, process,
record and store any and all information dependent on or relating to dates in
the same manner, with the same functionality, data integrity and performance
as before any Millennial Date. To the best knowledge of Company, there will be
no loss of functionality and all computer hardware, computer software and bank
services and products shall continue to perform (including, without
limitation, the performance of calculations, sequencing and processing of
data) substantially in accordance with applicable specifications before, on
and after the Millennial Dates without error or omission.
ARTICLE V
COVENANTS OF COMPANY
5.1. Affirmative Covenants of the Company. Unless the prior written consent
of Commerce shall have been obtained, and which consent will be given or
denied within 10 business days of receipt of written request for such consent,
and except as otherwise expressly contemplated herein, Company shall, and
shall cause Banks and the Non-Bank Subsidiaries to, (a) operate their
respective businesses only in the usual, regular, and ordinary course, (b)
continue a program for achieving "Year 2000" compliance in accordance with
regulatory compliance requirements, (c) preserve intact its business
organization and assets and maintain its rights and franchises; and (d) take
no action which would (1) materially adversely affect the ability of any party
to obtain any consents required for the transactions contemplated hereby (2)
prevent the Merger from qualifying for pooling-of-interests accounting
treatment or as a reorganization within the meaning of Section 368(a) of the
Code, or (3) materially adversely affect the ability of any party to perform
its covenants and agreements under this Agreement.
5.2. Negative Covenants of the Company. Except as specifically permitted by
this Agreement, from the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement, Company covenants and
agrees that it will not do or agree to commit to do, or permit Banks or the
Non-Bank Subsidiaries to do or agree to commit to do, any of the following
without the prior written consent of Commerce, which consent shall not be
unreasonably withheld and which consent will be given or denied within 10
business days of receipt of written request for such consent:
(a) make any single loan (or series of loans to the same or related
entities or persons) or any commitment to loan (or series of commitments to
the same or related entities or persons) which would be graded "OAEM" under
Bank's rating system or in an amount greater than $250,000 other than
renewals of existing loans or commitments to loan;
(b) purchase or invest in any securities other than U.S. government
obligations or other securities backed by the full faith and credit of the
United States having a maturity of not more than three years from the date
of purchase;
(c) Except in a manner consistent with past practices amend or adopt any
employee benefit plan, or grant any increase in the rates of pay of their
employees or any increase in the compensation payable or to become payable,
if any, to any director, officer, employee or agent thereof, or contribute
to any pension plan or otherwise increase in any amount the benefits or
compensation of any such directors, officers or employees of Company, Banks
or the Non-Bank Subsidiaries under any pension plan or other contract or
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commitment. The foregoing shall not, however, prevent the acceleration to a
time preceding the Closing Date of incentive payments normally made at year
end.
(d) make any capital expenditure or enter into any material contract or
commitment (except loan commitments as permitted in Subparagraph (a) of
this Section 5.1.) involving an obligation or commitment in excess of
$5,000 or engage in any transaction not in their usual and ordinary course
of business and consistent with past practices.
(e) declare or pay any dividend or make any other distribution in respect
of any capital stock of Company except for cash dividends consistent with
past practices;
(f) split, combine or reclassify any shares of its capital stock or,
directly or indirectly, redeem, purchase or otherwise acquire any share of
the capital stock of Company or Banks;
(g) amend the Articles of Incorporation or By-Laws of Company, Banks or
the Non-Bank Subsidiaries or make any change in the number of authorized,
issued or outstanding shares of capital stock of Company, Banks or the Non-
Bank Subsidiaries, other than in connection with outstanding stock options;
(h) acquire or purchase any assets of or make any investment in any
financial institution other than the purchase of loans or participations
therein in the ordinary course of business, but subject to Section 5.1(a);
(i) enter into any new line of business;
(j) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire any assets, which would be material, individually or
in the aggregate, to Company, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructuring
in the ordinary course of business consistent with prudent banking
practices;
(k) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect, or in any of
the conditions to the Merger set forth in Article VII not being satisfied,
or in a violation of any provision of this Agreement except, in every case,
as may be required by applicable law;
(l) change its methods of accounting in effect at the date hereof, except
as required by changes in generally accepted accounting principals ("GAAP")
or regulatory accounting principles as concurred to by Company's
independent auditors;
(m) other than activities in the ordinary course of business consistent
with prior practice, sell, lease, encumber, assign or otherwise dispose of,
any of its material assets, properties or other rights or agreements;
(n) file any application to relocate or terminate the operations of any
banking office;
(o) make any equity investment or commitment to make such an investment
in real estate or in any real estate development project, other than in
connection with foreclosures, settlements in lieu of foreclosure or
troubled loan or debt restructuring in the ordinary course of business
consistent with prudent banking practices;
(p) create, renew, amend or terminate or give notice of a proposed
renewal, amendment or termination of, any material contract, agreement or
lease for goods, services or office space to which the Company or either
Bank is a party or by which the Company or either Bank or their respective
properties is bound;
(q) make any loan or other extension of credit, or commit to make any
such loan or extension of credit, to any director or officer of Company,
Banks or the Non-Bank Subsidiaries, other than renewals of existing loans
or commitments to loan, without giving Commerce five days' notice in
advance of Company's, either Bank's or the Non-Bank Subsidiaries' approval
of such loan or extension of credit or commitment relating thereto; or
(r) make any adjustments to either Bank's loan loss reserve account
except for increases to such account and appropriate charge-offs and
recoveries following its normal historical practices; or
(s) agree to do any of the foregoing.
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5.3. Inspection. Between the date hereof and the Closing Date and upon
reasonable notice, Commerce and its authorized representatives shall be
permitted full access during regular business hours to all properties, books,
records, contracts and documents of Company, Banks and the Non-Bank
Subsidiaries. Company shall furnish to Commerce and its authorized
representative all information with respect to the affairs of Company, Banks
and the Non-Bank Subsidiaries as Commerce may reasonably request. In addition,
Commerce shall be permitted to conduct a verification of trust assets.
5.4. Financial Statements and Call Reports. From and after the date hereof,
Company shall deliver to Commerce monthly reports of condition and income
statements of Company and Bank and shall deliver to Commerce copies of the
call reports for Banks as filed with any regulatory agency promptly after such
filing.
5.5. Right to Attend Meetings. Company, Banks and the Non-Bank Subsidiaries
shall allow a representative of Commerce to attend as an observer all meetings
of the Board of Directors of Company and all meetings of the committees of
each such board, including, without limitation, the audit and executive
committees thereof and any other meetings of Company, Banks and the Non-Bank
Subsidiaries officials at which policy is being made. Company, Banks and the
Non-Bank Subsidiaries shall give reasonable notice to Commerce of any such
meeting and, if known, the agenda for or business to be discussed at such
meeting. Company, Banks and the Non-Bank Subsidiaries shall provide to
Commerce all information provided to the directors on all such boards and
committees in connection with all such meetings or otherwise provided to the
directors and shall provide any other financial reports or other analyses
prepared for senior management of Company, Banks or the Non-Bank Subsidiaries.
5.6. Data Processing. Company shall cooperate with Commerce in taking those
planning actions necessary to be in a position to convert its data processing
procedures and formats to procedures and formats used by Commerce as of the
Effective Time. Commerce shall provide such assistance and consultation as
Company may reasonably require in such planning process.
5.7. No Solicitation. Neither Company, Banks nor the Non-Bank Subsidiaries
nor any affiliates or associates of Company or Banks acting for or on behalf
or Company or Banks shall, directly or indirectly, make, encourage,
facilitate, solicit, assist or initiate any inquiry or proposal, or
participate in any negotiations with, or, subject to the provisos to this
sentence, provide any information to, any corporation, partnership, agent,
attorney, financial adviser, person, or other entity or group (other than (a)
Commerce, Sub, an affiliate or associate of Commerce or Sub or an officer,
employee or other authorized representative of Commerce, Sub or such affiliate
or associate or (b) the Company's counsel, accountants and financial adviser
solely for use in connection with the transactions contemplated hereby)
relating to any (i) liquidation, dissolution, recapitalization, merger or
consolidation of Company, Banks or the Non-Bank Subsidiaries, (ii) outside the
ordinary course of business, sale of a significant amount of assets of
Company, Banks or the Non-Bank Subsidiaries, (iii) purchase or sale of shares
of capital stock of Company, Banks or the Non-Bank Subsidiaries or (iv) any
similar transactions involving Company, Banks or the Non-Bank Subsidiaries,
other than the transactions contemplated by this Agreement; provided, however,
that Company may provide information at the request of a third party if the
Board of Directors of the Company determines, in good faith, that the exercise
of its fiduciary duties to Company's shareholders under applicable law, as
advised in writing by outside counsel reasonably acceptable to Commerce and
Sub, requires it to take such action, and, provided further, that Company may
not, in any event, provide to such third party any information which it has
not provided to Commerce and Sub, other than updated information and
information not requested by Commerce. Company shall immediately cease and
cause to be terminated any and all such contacts and negotiations with respect
to any such transaction upon the execution of this Agreement. Company shall
immediately inform Commerce and Sub of any inquiry, proposal or request for
information (including the terms thereof and the person making such inquiry)
which it may receive in respect of such a transaction.
5.8. Retirement Plans. Company shall, prior to the Effective Time, adopt any
and all resolutions that are necessary or appropriate to (i) cease
contributions to the Company's defined contribution retirement plans ("Company
Retirement Plans") as of the day before the Effective Time; (ii) terminate the
Company Retirement Plans and fully vest all participant account balances in
such plans as of the day before the Effective Time; and
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(iii) provide for distribution of the assets of such plans following receipt
of a favorable determination letter from the Internal Revenue Service with
respect to the termination and the distribution of the assets of such plans.
Commerce agrees to cooperate with Company in fulfilling this covenant.
5.9. Y2K. With respect to all computer hardware, computer software
applications, bank services or products, Company hereby covenants and agrees
(i) to use its best efforts to comply with all Federal Financial Institution
Examination Council Year 2000 regulations and guidelines and (ii) that
Company, Fidelity, and Heritage each will take action necessary to receive a
rating of "Satisfactory" or better on any Year 2000 compliance examination
conducted by its respective examining agencies.
ARTICLE VI
COVENANTS OF COMMERCE AND SUB
6.1. Regulatory Approvals. Subject to the terms and conditions of this
Agreement, Commerce and Sub agree to use their reasonable best efforts to
secure as expeditiously as practicable all the necessary approvals, regulatory
or otherwise, needed to consummate the transactions contemplated herein.
Commerce and Sub shall provide to Company's counsel a copy of all applications
for such approvals and shall keep such counsel or the Company advised of the
status of the regulatory review process.
6.2. Information. Commerce and Sub shall provide such information and answer
such inquiries as Company may reasonably request or make concerning the
subject matter of the representations and warranties of Commerce and Sub
herein.
6.3. Tax-Free Reorganization Treatment. Neither Commerce nor Sub shall
intentionally take or cause to be taken any action, whether before or after
the Effective Time, which would disqualify the Merger as a tax-free
"reorganization" within the meaning of Section 368(a) of the Code.
6.4. Employee Benefits. Employees of Company and Banks shall be eligible to
participate in all Commerce employee welfare benefit plans in accordance with
their terms, and for such purpose all service of such employees with Company
and Bank shall be counted as service with Commerce. Continuous coverage under
Company or Bank health plan through the Effective Time shall count as coverage
under the Commerce health plan.
ARTICLE VII
CONDITIONS PRECEDENT TO COMMERCE'S OBLIGATIONS
The obligations of Commerce and Sub to consummate the transactions hereunder
shall be subject to the satisfaction on or before the Closing Date of all of
the following conditions, except such conditions as Commerce or Sub may waive
in writing:
7.1. Representations, Warranties and Covenants. All representations and
warranties of Company contained in this Agreement shall be true in all
material respects on and as of the Closing Date, except for changes permitted
by or contemplated by this Agreement and except to the extent that any such
representation or warranty is made solely as of a specified date. Company
shall have performed all agreements and covenants in all material respects
required by this Agreement to be performed on or prior to the Closing Date.
7.2. Material Actions, Debts or Defaults. On the Closing Date, there shall
not be: (i) except as set forth on Schedule 4.9 or as otherwise disclosed to
Commerce prior to the date hereof, any actions, suits, claims, demands or
other proceedings or investigations, either judicial or administrative,
pending or, to the knowledge of Company, Banks or the Non-Bank Subsidiaries,
threatened against or affecting the properties, assets, rights or
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business of Company, Banks or the Non-Bank Subsidiaries or the right to carry
on or conduct their respective businesses; (ii) any debt, liability or
obligation of Company, Banks or the Non-Bank Subsidiaries known to each
(whether accrued, contingent, absolute or otherwise) required to be reflected
in a corporate balance sheet or the notes thereto that is not reflected or
reserved against in their respective financial statements or was not incurred
in ordinary course of their respective businesses; or (iii) any material
breach or material default of Company, Banks or the Non-Bank Subsidiaries
known to each under any agreement or commitment to which any is a party, or
under any loan agreement, note, security agreement, guarantee or other
document pursuant to or in connection with Company's, Bank's or the Non-Bank
Subsidiaries' extension of credit; any of the foregoing of which would have a
Material Adverse Effect upon the financial condition of, or upon the
properties, assets, liabilities, rights or business, taken as a whole, of
Company, Banks or the Non-Bank Subsidiaries.
7.3. Adverse Changes. From the date hereof to the Closing Date, there will
have been no material adverse change in the financial condition of, or in the
properties, assets, liabilities, rights or business, taken as a whole, of
Company, Banks or the Non-Bank Subsidiaries, and taking into account for this
purpose the proceeds of any applicable insurance.
7.4. Regulatory Authority Approval. Orders, consents and approvals in form
and substance reasonably satisfactory to Commerce shall have been entered by
or obtained from the appropriate regulatory authorities authorizing
consummation of the transactions contemplated hereby pursuant to the
provisions of the Bank Holding Company Act and any other applicable federal or
state banking regulatory statute or rule and no such order, consent or
approval shall be conditioned or restricted in any manner which in the
reasonable judgment of Commerce and Company would materially adversely affect
the operations of or be unduly burdensome to Commerce. In addition, all
required regulatory approvals to permit the Bank Merger shall have been
received and any applicable waiting periods shall have expired.
7.5. Litigation. At the Closing Date, there shall not be pending or
threatened litigation in any court or any proceeding by any governmental
commission, board or agency which Commerce reasonably believes could
reasonably result in restraining, enjoining or prohibiting the consummation of
this Agreement.
7.6. Financial Measures. On the Closing Date, Company's stockholders' equity
shall not be less than $18,000,000, and the Company's loan loss reserve shall
not be less than $2,900,000 and Heritage's stockholders' equity shall not be
less than $3,800,000 and its loan loss reserve shall not be less than
$400,000, all as determined on the basis of the financial statements of
Company and Banks as prepared in accordance with generally accepted accounting
principles consistently applied and applicable bank regulatory instructions.
7.7. Approval by Shareholders. The shareholders of Company shall have duly
approved and adopted this Agreement, and the shareholders of Heritage shall
have approved the Bank Plan of Merger, and the other transactions contemplated
hereby to the extent required by applicable requirements of law and the
Articles of Incorporation and By-Laws of Company and Heritage.
7.8. Tax Representations. Each shareholder of Company owning more than 10%
of the outstanding Company Common Stock shall have made those representations
reasonably requested by counsel and necessary to enable them to render the
opinion described in Section 7.11 hereof.
7.9. Sales of Shares. Each person who is an "affiliate" (as defined in Rules
145 and 405 adopted under the Securities Act) of the Company at the time this
Agreement is submitted to approval of the stockholders of the Company shall
deliver to Commerce a letter substantially in the form of Exhibit 7.9 whereby
such affiliate represents to and agrees with Commerce that he shall not sell,
pledge, transfer or otherwise dispose of any shares of stock of Commerce held
by such person or any shares of Commerce Common Stock to be received by such
person in the Merger except in compliance with the applicable provisions of
the Securities Act and until such
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time as financial results covering at least 30 days of combined operations of
Commerce and the Company shall have been published.
7.10. Dissenting Shareholders. Company Dissenting Shares shall not
constitute more than 10% of the outstanding shares of Company Common Stock on
the Closing Date. Notwithstanding anything in this Agreement to the contrary,
Commerce shall not be entitled to waive the condition contained in this
Section 7.10 unless it commits to provide the surviving corporation with funds
necessary to pay the aggregate appraisal amount for such Company Dissenting
Shares.
7.11. Federal Tax Opinion. Commerce shall have received an opinion of
Blackwell Sanders Peper Martin LLP., counsel to Commerce ("Commerce's
Counsel"), in form and substance reasonably satisfactory to Commerce, dated
the Closing Date, the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code.
7.12. Opinion of Counsel. Commerce shall have received an opinion of
Stinson, Mag & Fizzell P.C. dated the Closing Date in form and substance
reasonably satisfactory to Commerce covering the matters set out in Exhibit
7.12 hereto.
7.13. Market Price of Commerce Common Stock. The Commerce Stock Price shall
not be greater than $55.09. For purposes of this Agreement, the "Commerce
Stock Price" shall be the average of ten (10) closing sale prices of Commerce
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation National Market System ("NMS") on each of the ten (10)
consecutive trading days preceding the third trading day prior to the Closing
Date.
7.14. Cancellation of Unexercised Option. Company will have taken all
necessary corporate action to cause the cancellation, effective as of the
Closing Date, of all outstanding options under Company's 1985 Nonstatutory
Stock Option Plan which remain unexercised at the Closing Date.
7.15. Cancellation of Incentive and Bonus Plans. Company shall have
canceled, or otherwise made provisions for in a manner satisfactory to
Commerce, the Ron Megli 1998 Incentive Plan, the Heritage Bank 1998 Incentive
Plan, the 1998 Heritage Bank Executive Committee Incentive Plan, the Fidelity
State Bank 1998 Bonus Plan and the Fidelity State 1998 Bonus Plan, Executive
Committee.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATION OF COMPANY
The obligations of Company to consummate the transactions contemplated
hereunder shall be subject to satisfaction on or before the Closing Date of
all of the following conditions, except such conditions as Company may waive
in writing:
8.1. Representations, Warranties and Covenants. All representations and
warranties of Commerce contained in this Agreement shall be true in all
material respects on and as of the Closing Date, except to the extent that any
such representation or warranty is made solely as of a specified date, and
Commerce shall have performed all agreements and covenants in all material
respects required by this Agreement to be performed on or prior to the Closing
Date.
8.2. Regulatory Authority Approval. Orders, consents and approvals in form
and substance reasonably satisfactory to Company shall have been entered by or
obtained from the appropriate regulatory authorities authorizing consummation
of the transactions contemplated by this Agreement pursuant to the provisions
of the Bank Holding Company Act and any other applicable federal or state
banking regulatory statute or rule.
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8.3. Litigation. There shall not be pending or threatened litigation in any
court or any proceeding by any governmental commission, board or agency which
Company believes could reasonably result in restraining, enjoining or
prohibiting the consummation of the transactions contemplated by this
Agreement.
8.4. Approval by Shareholders. The shareholders of Company shall have duly
approved and adopted this Agreement, and the shareholders of Heritage shall
have approved the Bank Plan of Merger, and the other transactions contemplated
hereby to the extent required by applicable requirements of law and the
Articles of Incorporation and By-Laws of Company and Heritage.
8.5. Federal Tax Opinion. Company shall have received, at Commerce's
expense, an opinion of Commerce's Counsel, addressed to Company and its
shareholders and in form and substance reasonably satisfactory to Company and,
Company counsel, dated the Closing Date, to the effect that the Merger will be
a tax-free reorganization under Section 368(a) of the Code and no gain or loss
will be recognized by the shareholders of Company to the extent they receive
Commerce Common Stock solely in exchange for shares of Company Common Stock.
8.6. Adverse Changes. From December 31, 1997, to the Closing Date, there
will have been no material adverse change in the financial condition,
properties, assets, liabilities, rights, business or prospects of Commerce.
8.7. Opinion of Counsel. Company shall have received an Opinion of Blackwell
Sanders Peper Martin LLP, counsel to Commerce, dated the Closing Date, in form
and substance reasonably satisfactory to Company covering the matters set out
in Exhibit 8.7 hereto.
8.8. Market Price of Commerce Common Stock. The Commerce Stock Price shall
not be less than $40.72.
ARTICLE IX
TERMINATION OF AGREEMENT
9.1. Basis for Termination. This Agreement and the transactions contemplated
hereby may be terminated at any time prior to the Closing Date: (a) by mutual
consent in writing of the parties hereto; (b) by Commerce upon written notice
to Company if any regulatory approval of the transactions contemplated under
the terms of this Agreement shall be denied or if any such regulatory approval
shall be conditioned or restricted in any manner which in the reasonable
judgment of Commerce and Company would materially adversely affect the
operations of or would be unduly burdensome to Commerce; (c) by Commerce or
Company if the other party has materially breached this Agreement and has not
cured such breach within the earlier of (i) 30 days after the non-breaching
party shall have given notice to the breaching party of the existence of such
breach or (ii) the Closing Date; (d) by Commerce or Company upon written
notice to the other of any other condition imposed for the benefit of such
party that shall not have been satisfied or waived prior to the Closing Date;
or (e) by either Commerce or Company if this Agreement shall not have been
consummated by October 30, 1998, except that this date shall be December 31,
1998 if Company (or Banks) gives notice of termination no later than October
30, 1998 of the Data Center, Inc. processing contract; provided further that
neither Commerce nor Company, as the terminating party, is not then in
material breach of this Agreement. As used in this Section 9.1, actions
contemplated as being taken by Commerce or Company must be taken by their
respective Board of Directors or the Executive Committee of such Board.
9.2. Effect of Termination. In the event of termination of this Agreement
for any reason set forth in Section 9.1, other than a breach thereof, no party
hereto shall have any liability to the other of any nature whatsoever,
including any liability for loss, damages or expenses suffered or claimed to
be suffered by reason thereof.
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9.3. Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the stockholders of Company or Sub, but, after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
9.4. Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Board of Directors,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive
any inaccuracies in the representations and warranties of the other parties
hereto contained herein or in any document delivered pursuant hereto and (c)
waive compliance by the other parties hereto with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE X
SECURITIES LAWS MATTERS
10.1. Registration Statement and Proxy Statement. Commerce shall as soon as
practicable prepare and file a registration statement on Form S-4 to be filed
with the SEC pursuant to the Securities Act for the purpose of registering the
shares of Commerce Common Stock to be issued in the Merger (the "Registration
Statement"). Company, Commerce and Sub shall each provide promptly to the
other such information concerning their respective businesses, financial
conditions, and affairs as may be required or appropriate for inclusion in the
Registration Statement or the proxy statement for the special stockholders'
meeting of Company to be called for the purpose of considering and voting on
the Merger (the "Proxy Statement"). Company, Commerce and Sub shall each cause
their counsel and auditors to cooperate with the other's counsel and auditors
in the preparation and filing of the Registration Statement and the Proxy
Statement. Commerce shall not include in the Registration Statement any
information concerning Company to which Company shall reasonably and timely
object in writing. Commerce, Sub and Company shall use their reasonable best
efforts to have the Registration Statement declared effective under the
Securities Act as soon as may be practicable and thereafter Company shall
distribute the Proxy Statement to its stockholders in accordance with
applicable laws not fewer than 20 business days prior to the date on which
this Agreement is to be submitted to its stockholders for voting thereon. If
necessary, in light of developments occurring subsequent to the distribution
of the Proxy Statement to Company or stockholders, Company shall mail or
otherwise furnish to its shareholders such amendments or supplements to the
Proxy Statement materials as may, in the reasonable opinion of Commerce, Sub,
or Company, be necessary so that the Proxy Statement materials, as so amended
or supplemented, will contain no untrue statement of any material fact and
will not omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or as may be necessary to comply with
applicable law. Commerce and Sub shall not be required to maintain the
effectiveness of the Registration Statement after delivery of the Commerce
Common Stock issued pursuant hereto for the purpose of resale of Commerce
Common Stock by any person. For a period of at least two years from the date
of the conversion of shares described in Section 2.2 hereof, Commerce shall
make available "adequate current public information" within the meaning of and
as required by paragraph (c) of Rule 144 adopted pursuant to the Securities
Act.
10.2. State Securities Laws. The parties hereto shall cooperate in making
any filings required under the securities laws of any state in order either to
qualify or register the Commerce Common Stock so it may be offered and sold
lawfully in such state in connection with the Merger and the Exchange Offer or
to obtain an exemption from such qualification or registration.
10.3. Affiliates. Certificates representing shares of Commerce Common Stock
issued to "affiliates" (as defined in Rules 145 and 405 adopted under the
Securities Act) of Company pursuant to this Agreement will be subject to stop
transfer orders (as reasonably required in connection with Rule 145) and will
bear a restrictive legend set out in Exhibit 7.9; provided, however, that
following publication of financial results covering at least
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thirty (30) days of combined operations of Commerce and Company and upon
receipt of an opinion of counsel reasonably satisfactory to Commerce that a
proposed sale, pledge, transfer or other disposition of a specified number of
shares of Commerce Common Stock by an affiliate will comply with or will be
exempt from the Securities Act, Commerce shall, as promptly as practicable
after receipt of the stock certificates representing such affiliate's Commerce
Common Stock (and in any event within seven (7) business days after such
receipt), direct the Transfer Agent for the Commerce Common Stock to remove
the stop transfer order related thereto and reissue a stock certificate
evidencing such shares to the affiliate without such restrictive legend.
10.4. Publication of Combined Financial Results. Commerce will file with the
Securities and Exchange Commission a Periodic Report on Form 8-K containing
financial statements which include no less than 30 days of combined operations
of Commerce and Company, ended on a normal closing date, as soon as
practicable after the Effective Time unless the first 30 day period of
combined operations is reflected in and ends on the normal closing date of an
annual report on Form 10-K or quarterly report on Form 10-Q.
10.5. Indemnification. Commerce agrees to indemnify and hold harmless
Company and its directors, officers, employees, representatives and agents
from and against any and all claims, liabilities, damages and expenses
(including reasonable attorneys' fees), whether arising under federal or state
securities or Blue Sky laws or otherwise, which may be asserted against any of
them and which arise as a result of any alleged act or failure to act, or any
alleged statement or omission, of Commerce done or made in connection with the
Merger, Registration Statement, Proxy Statement, or any other statement or
form filed or required to be filed with the SEC or any state securities
department or delivered or required to be delivered to the holders of Company
Common Stock.
ARTICLE XI
MISCELLANEOUS
11.1. Brokers and Finders. Commerce and Company represent each to the other
that this Agreement is the result of direct negotiations between them and that
such party has not incurred any liability for any brokers, finders or similar
fees in connection with this Agreement except for a fee payable to Alex
Sheshunoff & Company.
11.2. Parties in Interest. This Agreement and the rights hereunder are not
assignable unless such assignment is consented to in writing by all parties
hereto. Except as otherwise expressly provided herein, all of the terms and
provisions of this Agreement shall be binding upon, shall inure to the benefit
of and shall be enforceable by the respective heirs, beneficiaries, personal
and legal representatives, successors and permitted assigns of the parties
hereto.
11.3. Entire Agreement, Amendments, Waiver. This Agreement contains the
entire understanding of Commerce, Sub and Company with respect to the Merger
and supersedes all prior agreements and understandings, whether written or
oral, between them with respect to the Merger contemplated herein. This
Agreement may be amended only by a written instrument duly executed by the
parties or their respective successors or permitted assigns. Any condition to
a party's obligation hereunder may be waived by such party in writing.
11.4. Notices. All notices, requests, demands or other communications
hereunder shall be in writing and shall be deemed to have been duly given when
personally delivered or transmitted by telefacsimile with a copy thereof
transmitted by a nationally recognized overnight delivery service or deposited
in the United States mail, certified or registered, return receipt requested,
postage prepaid, addressed to the parties at the following addresses or at
such other address as shall be given in like manner by any party to the other:
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If to Company: Mr. Taunce H. Mathiason
215 N. Main
Fidelity Bankshares, Inc.
Garden City, Kansas 67846
Telephone: 316-276-5722
FAX: 316-276-5735
with a copy to: Howard Mick, Esq.
Stinson, Mag & Fizzell P.C.
1201 Walnut Street
Kansas City, Missouri 64106
Telephone: 816-842-8600
FAX: 816-691-3495
If to Commerce: Mr. A. Bayard Clark
Commerce Bancshares, Inc.
8000 Forsyth Boulevard
Clayton, Missouri 63105
Telephone: (314) 746-7440
FAX: (314) 746-8739
with a copy to: J. Daniel Stinnett, Esq.
Commerce Bancshares, Inc.
1000 Walnut--18th Floor
Kansas City, Missouri 64106
Telephone: (816) 234-2350
FAX: (816) 234-2333
and Dennis P. Wilbert, Esq.
Blackwell Sanders Peper Martin LLP
Two Pershing Square
2300 Main, Suite 1100
Kansas City, Missouri 64108
Telephone: (816) 983-8124
FAX: (816) 983-8080
11.5. Law Governing. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Kansas.
11.6. Further Acts. Commerce, Company and Sub agree to execute and deliver
on or before the Closing Date such other documents, certificates, agreements
or other writings and take such other actions as may be necessary or desirable
in order to consummate or implement expeditiously the transactions
contemplated by this Agreement.
11.7. Confidential Treatment. In the event the transactions contemplated by
this Agreement shall not be consummated for any reason whatsoever, Commerce
agrees that all information relative to Company and Bank concerning their
operations and, in particular, information relative to loan and deposit
customers shall be treated as confidential information which will not be
disclosed or utilized by Commerce or its agents, representatives or employees,
and Commerce further agrees that it will cause all copies of documents or
other papers received from Company or Bank to be returned thereto.
11.8. Press Release. Immediately after execution and delivery of this
Agreement, the parties hereto shall issue a mutually acceptable press release
publicly disclosing the existence of this Agreement.
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11.9. Litigation Expenses. In the event that a dispute arises or legal
proceeding is brought with respect to any provision of this Agreement or any
party's rights or obligations hereunder, the party that prevails in such legal
proceeding or receives any amount in settlement of such dispute or proceeding
shall be entitled to recover its reasonable costs, expenses and attorneys'
fees from the other party or parties to such dispute or proceeding.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
Fidelity Bankshares, Inc.
/s/ Taunce H. Mathiason
By:__________________________________
Taunce H. Mathiason
President
Commerce Bancshares, Inc.
/s/ A. Bayard Clark
By:__________________________________
Name: A. Bayard Clark
Title: Executive Vice President
and
Chief Financial Officer
CBI-Kansas, Inc.
/s/ A. Bayard Clark
By:__________________________________
Name: A. Bayard Clark
Title: Vice President
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<PAGE>
ANNEX B
K.S.A. (S) 17-6712. PAYMENT FOR "STOCK" OF "STOCKHOLDER" OBJECTING TO MERGER
OR CONSOLIDATION; "STOCKHOLDER," "STOCK" AND "SHARE" DEFINED; NOTICE TO
OBJECTING STOCKHOLDERS; DEMAND FOR PAYMENT; APPRAISAL AND DETERMINATION OF
VALUE BY DISTRICT COURT, WHEN; TAXATION OF COSTS; RIGHTS OF OBJECTING
STOCKHOLDERS; STATUS OF STOCK; SECTION INAPPLICABLE TO CERTAIN SHARES OF
STOCK. (a) When used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest of
a member of a nonstock corporation.
(b) The corporation surviving or resulting from any merger or consolidation,
within 10 days after the effective date of the merger or consolidation, shall
notify each stockholder of any corporation of this state so merging or
consolidating who objected thereto in writing and whose shares either were not
entitled to vote or were not voted in favor of the merger or consolidation,
and who filed such written objection with the corporation before the taking of
the vote on the merger or consolidation, that the merger or consolidation has
become effective. If any such stockholder, within 20 days after the date of
mailing of the notice, shall demand in writing, from the corporation surviving
or resulting from the merger or consolidation, payment of the value of the
stockholder's stock, the surviving or resulting corporation shall pay to the
stockholder, within 30 days after the expiration of the period of 20 days, the
value of the stockholder's stock on the effective date of the merger or
consolidation, exclusive of any element of value arising from the expectation
or accomplishment of the merger or consolidation.
(c) If during a period of 30 days following the period of 20 days provided
for in subsection (b), the corporation and any such stockholder fail to agree
upon the value of such stock, any such stockholder, or the corporation
surviving or resulting from the merger or consolidation, may demand a
determination of the value of the stock of all such stockholders by an
appraiser or appraisers to be appointed by the district court, by filing a
petition with the court within four months after the expiration of the thirty-
day period.
(d) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the corporation, which shall file with the clerk of
such court, within 10 days after such service, a duly verified list containing
the names and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have not
been reached by the corporation. If the petition shall be filed by the
corporation, the petition shall be accompanied by such duly verified list. The
clerk of the court shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the corporation
and to the stockholders shown upon the list at the addresses therein stated
and notice shall also be given by publishing a notice at least once, at least
one week before the day of the hearing, in a newspaper of general circulation
in the county in which the court is located. The court may direct such
additional publication of notice as it deems advisable. The forms of the
notices by mail and by publication shall be approved by the court.
(e) After the hearing on such petition the court shall determine the
stockholders who have complied with the provisions of this section and become
entitled to the valuation of and payment for their shares, and shall appoint
an appraiser or appraisers to determine such value. Any such appraiser may
examine any of the books and records of the corporation or corporations the
stock of which such appraiser is charged with the duty of valuing, and such
appraiser shall make a determination of the value of the shares upon such
investigation as seems proper to the appraiser. The appraiser or appraisers
shall also afford a reasonable opportunity to the parties interested to submit
to the appraiser or appraisers pertinent evidence on the value of the shares.
The appraiser or appraisers, also, shall have the powers and authority
conferred upon masters by K.S.A. 60-253 and amendments thereto.
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(f) The appraiser or appraisers shall determine the value of the stock of
the stockholders adjudged by the court to be entitled to payment therefor and
shall file a report respecting such value in the office of the clerk of the
court, and notice of the filing of such report shall be given by the clerk of
the court to the parties in interest. Such report shall be subject to
exceptions to be heard before the court both upon the law and facts. The court
by its decree shall determine the value of the stock of the stockholders
entitled to payment therefor and shall direct the payment of such value,
together with interest, if any, as hereinafter provided, to the stockholders
entitled thereto by the surviving or resulting corporation. Upon payment of
the judgment by the surviving or resulting corporation, the clerk of the
district court shall surrender to the corporation the certificates of shares
of stock held by the clerk pursuant to subsection (g). The decree may be
enforced as other judgments of the district court may be enforced, whether
such surviving or resulting corporation be a corporation of this state or of
any other state.
(g) At the time of appointing the appraiser or appraisers, the court shall
require the stockholders who hold certificated shares and who demanded payment
for their shares to submit their certificates of stock to the clerk of the
court, to be held by the clerk pending the appraisal proceedings. If any
stockholder fails to comply with such direction, the court shall dismiss the
proceedings as to such stockholder.
(h) The cost of any such appraisal, including a reasonable fee to and the
reasonable expenses of the appraiser, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to such appraisal or any of them as appears to be equitable,
except that the cost of giving the notice by publication and by registered or
certified mail hereinabove provided for shall be paid by the corporation. The
court, on application of any party in interest, shall determine the amount of
interest, if any, to be paid upon the value of the stock of the stockholders
entitled thereto.
(i) Any stockholder who has demanded payment of the stockholder's stock as
herein provided shall not thereafter be entitled to vote such stock for any
purpose or be entitled to the payment of dividends or other distribution on
the stock, except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation, unless the appointment of an appraiser or appraisers shall not
be applied for within the time herein provided, or the proceeding be dismissed
as to such stockholder, or unless such stockholder with the written approval
of the corporation shall deliver to the corporation a written withdrawal of
the stockholder's objections to and an acceptance of the merger or
consolidation, in any of which cases the right of such stockholder to payment
for the stockholder's stock shall cease.
(j) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
(k) This section shall not apply to the shares of any class or series of a
class of stock, which, at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of stockholders at
which the agreement of merger or consolidation is to be acted on, were either
(1) registered on a National Securities Exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or (2) held of record by not less
than 2,000 stockholders, unless the articles of incorporation of the
corporation issuing such stock shall otherwise provide; nor shall this section
apply to any of the shares of stock of the constituent corporation surviving a
merger, if the merger did not require for its approval the vote of the
stockholders of the surviving corporation, as provided in subsection (f) of
K.S.A. 17-6701 and amendments thereto. This subsection shall not be applicable
to the holders of a class or series of a class of stock of a constituent
corporation if under the terms of a merger or consolidation pursuant to K.S.A.
17-6701 or 17-6702, and amendments thereto, such holders are required to
accept for such stock anything except (i) stock or stock and cash in lieu of
fractional shares of the corporation surviving or resulting from such merger
or consolidation, or (ii) stock or stock and cash in lieu of fractional shares
of any other corporation, which at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders at which the agreement of merger or consolidation is to be acted
on, were either registered on a national securities exchange or held of record
by not less than 2,000 stockholders, or (iii) a combination of stock or stock
and cash in lieu of fractional shares as set forth in (i) and (ii) of this
subsection.
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ANNEX C
JULY 1, 1998
Board of Directors
Fidelity Bankshares, Inc.
215 N. Main Street
Garden City, KS
Members of the Board:
Alex Sheshunoff & Co. Investment Banking ("Sheshunoff") understands Fidelity
Bankshares, Inc. ("Fidelity Bankshares") and Commerce Bancshares, Inc.
("Commerce") entered into an Agreement and Plan of Reorganization (the
"Agreement"), which provides, among other things, for the acquisition of all
of the capital stock of Fidelity Bankshares by means of a merger of Fidelity
Bankshares with and into CBI-Kansas, Inc., a subsidiary of Commerce (the
"Merger"). Pursuant to the Agreement at the Effective Time, each share of
Fidelity Bankshares Common Stock, issued and outstanding prior to the
Effective Time, excluding Dissenting Shares, shall, by virtue of the Merger
and without any action by the holder thereof, be exchanged for 2.0767 shares
of Commerce Common Stock (the "Exchange Ratio"). The Agreement is subject to
termination by Commerce if the market price (as defined in the Agreement) of
Commerce Stock at the date of closing is greater than $55.09 or by Fidelity
Bankshares if the market price of Commerce Stock at the date of closing is
less than $40.72
You have requested Sheshunoff's opinion, as to whether the Exchange Ratio to
be received by the holders of shares of Fidelity Bankshares Common Stock
pursuant to the Agreement is fair from a financial point of view to such
holders of Fidelity Bankshares' Common Stock.
In connection with our opinion, Sheshunoff has: (i) reviewed a draft copy of
the Agreement; (ii) reviewed certain publicly available financial statements
and other information of Fidelity Bankshares and Commerce, respectively, as
well as that of Gold Banc Corporation; (iii) discussed with Fidelity
Bankshares' management the results of regulatory examinations of Fidelity
Bankshares; (iv) reviewed certain estimates of cost savings prepared by
Fidelity Bankshares' management arising from the transaction; (v) reviewed
certain internal financial statements and other financial and operating data
concerning Fidelity Bankshares; (vi) analyzed certain budget and financial
projections of Fidelity Bankshares prepared by the management of Fidelity
Bankshares; (vii) analyzed the pro forma impact of the Merger on the combined
company's earnings, book value and tangible book value per share,
respectively, (viii) reviewed the reported prices and trading activity for
Commerce; (ix) discussed the past and current operations and financial
condition, and the prospects of Fidelity Bankshares with executive management;
(x) compared Fidelity Bankshares and Commerce from a financial point of view
with certain other companies which Sheshunoff deemed to be relevant; (xi)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger transactions, and (xii) performed such other analyses and
examinations as Sheshunoff has deemed appropriate.
Sheshunoff has assumed and relied upon without independent verification the
accuracy and completeness of the information supplied or otherwise made
available to us by Fidelity Bankshares and Commerce for the purposes of this
opinion. Sheshunoff has not made an independent evaluation of the assets or
liabilities of Fidelity Bankshares nor Commerce, nor has Sheshunoff been
furnished with any such appraisals. With respect to Fidelity Bankshares'
budgets and financial forecasts, Sheshunoff has assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of management of Fidelity Bankshares, as to the future financial
performance of Fidelity Bankshares, and Sheshunoff has assumed such forecasts
and projections will be realized in the amounts and at the times contemplated
thereby. Sheshunoff has assumed that obtaining any necessary regulatory
approvals and third party consents for the Merger or otherwise will not have
an adverse effect on Fidelity Bankshares, Commerce or the combined company
pursuant to the Agreement. Sheshunoff is not an expert in the evaluation of
loan portfolios for the purpose of assessing the adequacy of the allowance for
losses with respect thereto and has assumed that such allowances for each of
the companies are in the aggregate,
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adequate to cover such losses. In addition, Sheshunoff has not reviewed any
individual credit files or made an independent evaluation, appraisal or
physical inspection of the assets or individual properties of Fidelity
Bankshares or Commerce, nor has Sheshunoff been furnished with any such
evaluations or appraisals.
Sheshunoff's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to it, as of
the date hereof. Events occurring after the date hereof could materially
affect the assumptions used in preparing this opinion. Sheshunoff has also
assumed that there are no material changes in Fidelity Bankshares' or
Commerce's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements
reviewed by it, and that off-balance sheet activities of Fidelity Bankshares
and Commerce will not materially and adversely impact the future financial
position or results of operation of Fidelity Bankshares and Commerce.
Sheshunoff has also assumed the Merger will be completed as set forth in the
Agreement and that no material changes will be made or restrictions imposed by
regulatory or other parties on the terms of the Agreement.
Fidelity Bankshares retained Alex Sheshunoff & Co Investment Banking to
assist it in soliciting offers for the possible acquisition of Fidelity
Bankshares from potential acquires. Proposals were received from four
potential acquires, two of which were for cash and two for common stock of the
acquires. Both cash proposals were for lower acquisition prices than either of
the common stock proposals. Fidelity Bankshares' Board of Directors determined
to proceed with a transaction based upon an exchange of common stock.
Proposals for a common stock transaction were received from Commerce and from
Gold Banc Corporation.
The Commerce proposal was for a fixed exchange ratio, determined at the time
of the execution of a definitive agreement, that provided for a fixed number
of Commerce shares in exchange for Fidelity Bankshares shares. The exchange
ratio in the Commerce offer was determined by dividing the purchase price of
$38,000,000 plus the value of outstanding Fidelity Bankshares stock options,
by the average price of Commerce stock for the twenty days prior to the date
of the definitive agreement.
On the date of the definitive agreement, the twenty day average price was
$47.91. The number of Fidelity Bankshares shares outstanding, exclusive of
stock options, totaled 381,992, resulting in an exchange ratio of 2.0767
Commerce shares for each share of Fidelity Bankshares. On July 1, 1998, the
date of the definitive agreement, Commerce stock closed at $49.00. Based on
the Commerce market price, on July 1, 1998, the price per one share of
Fidelity Bankshares stock was $101.76. The price per share at closing may be
higher or lower than the initial acquisition price.
The Gold Banc Corporation proposal was for a fixed price of $45,000,000
inclusive of the value of Fidelity Bankshares options, payable in Gold Banc
Corporation stock at the date of the closing of the transaction. Under the
Gold Banc Corporation proposal, after adjusting for the Fidelity Bankshares
options, the value per one share of Fidelity Bankshares stock at closing would
be fixed at $114.22.
Sheshunoff reviewed both the Commerce and Gold Banc Corporation proposals
with Fidelity Bankshares' Board of Directors and informed Fidelity Bankshares'
Board of Directors that both proposals fell within a range of values that was
fair, from a financial point of view, to Fidelity Bankshares shareholders but
that the Gold Banc Corporation proposal represented a higher current price and
offered protection of that price in the period between the execution of a
definitive agreement and the closing of a transaction. Following consideration
of both proposals, Fidelity Bankshares' Board of Directors voted to pursue the
Commerce proposal and negotiated the Agreement. Sheshunoff understands that
Fidelity Bankshares' Board of Directors considered many factors in deciding to
accept the Commerce proposal, which factors they have advised Sheshunoff
include, among others, the difference in asset size, the higher earnings,
dividends and book value per share that, based upon current market valuations
of Commerce's stock, would be received on the Commerce Stock, the liquidity of
Commerce stock, Commerce's financial and operating ratios and Commerce's
reputation in the communities it serves. Sheshunoff expresses no opinion of
the relative weight Fidelity Bankshares' Board of Directors may have accorded
to these factors in reaching its decision to enter into negotiations with
Commerce rather than Gold Banc Corporation.
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Sheshunoff's opinion is limited to the fairness, from a financial point of
view, to the holders of Fidelity Bankshares' Common Stock of the Exchange
Ratio and does not address Fidelity Bankshares' underlying business decision
to undertake the Merger. Moreover, this letter, and the opinion expressed
herein, does not constitute a recommendation to any stockholder as to any
approval of the Merger or the Agreement. It is understood that this letter is
for the information of the Board of Directors of Fidelity Bankshares and may
not be used for any other purpose without Sheshunoff's prior written consent,
except that this opinion may be included in its entirety in any filing made by
Fidelity Bankshares or Commerce with the Securities and Exchange Commission
with respect to the Merger.
Based upon and subject to the foregoing, Sheshunoff is of the opinion that,
as of the date hereof, the Exchange Ratio to be received by Fidelity
Bankshares' Common stockholders is fair from a financial point of view to the
holders of such shares.
Very truly yours,
/s/ Alex Sheshunoff & Co.
Investment Banking
By___________________________________
Alex Sheshunoff & Co. Investment
Banking
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 351.355 of the Missouri Revised Statutes (1986) allows
indemnification of corporate directors and officers by a corporation under
certain circumstances as therein specified against liabilities, expenses,
counsel fees and costs reasonably incurred in connection with or arising out
of any action, suit, proceeding or claim in which such person is made a party
by reason of such person being or having been such director or officer.
Section 351.355 also permits such persons to seek indemnification under any
applicable bylaw, agreement, vote of shareholders or disinterested directors
or otherwise. Section 351.355 also permits corporations to maintain insurance
for officers and directors against liabilities incurred while acting in such
capacities whether or not the corporation would be empowered to indemnify such
persons under this section.
There is also in effect a bylaw provision entitling officers and directors
to be indemnified by Commerce from and against any and all of the expenses,
liabilities or other matters covered by said provision. Commerce has executed
a security agreement pursuant to which securities with a market value of
approximately $10,000,000 have been pledged to an agent to collateralize the
obligations of Commerce under this bylaw provision.
ITEM 21. EXHIBITS
The following exhibits are filed herewith or incorporated herein by
reference. Documents designated by an asterisk (*) are incorporated by
reference pursuant to Rule 411 of the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2 Agreement and Plan of Reorganization dated the 1st day of July, 1998,
among the Registrant, CBI-Kansas, Inc. and Fidelity Bankshares, Inc.
(included as Annex A to the Prospectus).
4(a)* Restated Articles of Incorporation, as currently amended, were filed
in the quarterly report on Form 10-Q for the quarter ended June 30,
1996, and the same are hereby incorporated by reference.
4(b)* Restated By-Laws, as currently amended, were filed in the quarterly
report on Form 10-Q for the quarter ended June 30, 1996, and the same
are hereby incorporated by reference.
4(c)* Shareholder Rights Plan contained in an Amended and Restated Rights
Agreement was filed on Form 8-A12G/A dated June 7, 1996, and the same
is hereby incorporated by reference.
4(d)* Form of Rights Certificate and Election to Exercise was filed on Form
8-A12G/A dated June 7, 1996, and the same is hereby incorporated by
reference.
4(e)* Form of Certificate of Designation of Preferred Stock was filed on
Form 8-A12G/A dated June 7, 1996, and the same is hereby incorporated
by reference.
5 Opinion of Blackwell Sanders Peper Martin LLP.
8 Opinion of Blackwell Sanders Peper Martin LLP.
10(a)* Commerce Bancshares, Inc. Executive Incentive Compensation Plan--
Amendment and Restatement of December 3, 1993, was filed in quarterly
report on Form 10-Q dated August 5, 1994, and the same is hereby
incorporated by reference.
10(b)* Copy of Commerce Bancshares, Inc. Incentive Stock Option Plan as
adopted on April 16, 1996, was filed in annual report on Form 10-K
dated March 30, 1997, and the same is hereby incorporated by
reference.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10(c)* Copy of Commerce Bancshares, Inc. 1987 Non-Qualified Stock Option
Plan, and now captioned the Commerce Bancshares, Inc. 1996 Non-
Qualified Stock Option Plan, as amended and restated in its entirety
on April 19, 1996, was filed in quarterly report on Form 10-Q dated
August 9, 1995, and the same is hereby incorporated by reference.
10(d)* Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee
Directors dated July 1, 1989 was filed on Form 10-Q for the quarterly
period ended June 30, 1989, and the same is hereby incorporated by
reference.
10(e)* Copy of Security Agreement with respect to Directors and Officers
Liability was filed in quarterly report on Form 10-Q dated July 30,
1986, and the same is hereby incorporated by reference.
10(f)* Copy of Supplemental Retirement Income Plan established by Commerce
Bancshares, Inc. for James M. Kemper, Jr. was filed in annual report
on Form 10-K dated March 6, 1992, and the same is hereby incorporated
by reference.
10(g)* Copy of Agreement between Commerce Bancshares, Inc. and James M.
Kemper, Jr. relating to the provision of consulting and other services
by James M. Kemper, Jr. for Commerce Bancshares, Inc. was filed in
annual report on Form 10-K dated March 6, 1992, and the same is hereby
incorporated by reference.
10(h)* Copy of 1996 Incentive Stock Option Plan was filed in quarterly report
on Form 10-Q dated August 9, 1995, and the same is hereby incorporated
by reference.
10(i)* Copy of Commerce Executive Retirement Plan was filed in annual report
on Form 10-K dated March 8, 1996, and the same is hereby incorporated
by reference.
21* The list of subsidiaries of Commerce was filed in annual report on
Form 10-K dated March 13, 1998, and the same is hereby incorporated by
reference.
23(a) Consent of KPMG Peat Marwick LLP.
23(b) Consent of Grant Thornton, LLP
23(c) Consents of Blackwell Sanders Peper Martin LLP (included in Exhibits 5
and 8).
23(d) Consent of Alex Sheshunoff & Company
24 Powers of Attorney.
</TABLE>
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for the 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 of 1934 (and,
where applicable, each filing of employee benefit plans annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(2) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
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(3) That, every prospectus (i) that is filed pursuant to paragraph (2)
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 part of an amendment of 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.
(4) 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, 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.
(5) 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.
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 Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with 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 of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF
MISSOURI, ON AUGUST 17, 1998.
Commerce Bancshares, Inc.
/s/ J. Daniel Stinnett
By: _________________________________
J. DANIEL STINNETT
VICE PRESIDENT, SECRETARY AND
GENERAL COUNSEL
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON AUGUST 17, 1998.
SIGNATURE TITLE
* Chairman of the Board, President and
- ------------------------------------- Chief Executive Officer (Principal
DAVID W. KEMPER Executive Officer) and Director
* Executive Vice President (Principal
- ------------------------------------- Financial Officer)
A. BAYARD CLARK
/s/ Jeffrey D. Aberdeen Controller (Principal Accounting
- ------------------------------------- Officer)
JEFFREY D. ABERDEEN
Jeffrey D. Aberdeen
Giorgio Balzer
Fred L. Brown
A. Bayard Clark
James B. Hebenstreit
David W. Kemper
Jonathan M. Kemper
Mary Ann Krey A majority of the Board of
Terry O. Meek Directors*
Benjamin F. Rassieur, Jr.
John H. Robinson, Jr.
Dolph C. Simons, Jr.
L. W. Stolzer
Robert H. West
/s/ J. Daniel Stinnett as attorney-in-fact for the above
By:__________________________________ officers and directors marked by an
J. DANIEL STINNETT asterisk.
(ATTORNEY-IN-FACT)
II-4
<PAGE>
Exhibit 5
---------
Commerce Bancshares, Inc.
1000 Walnut, 18th Floor
Kansas City, MO 64106
Ladies and Gentlemen:
We have acted as counsel to Commerce Bancshares, Inc., a Missouri
corporation (the "Company"), in connection with the transactions contemplated by
the Agreement and Plan of Reorganization, dated as of July 1, 1998 (as amended,
the "Acquisition Agreement'), by and among Commerce Bancshares, Inc.
("Commerce"), CBI-Kansas, Inc. ("CBI") and Fidelity Bankshares, Inc. ("Fidelity
Bankshares").
This opinion is being furnished in accordance with the requirements of item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Securities Act").
Pursuant to the Acquisition Agreement, Fidelity Bankshares will be merged
with and into CBI, with CBI being the surviving corporation (the "Merger"). In
the Merger, the outstanding shares of common stock, $5.00 par value, of Fidelity
Bankshares, other than any shares owned by Commerce, CBI, Fidelity Bankshares or
any of their subsidiaries (which shares will be canceled), will be exchanged for
fully paid and nonassessable shares of common stock, $5.00 par value, of
Commerce (the "Commerce Common Stock").
In connection with the transactions contemplated by the Acquisition
Agreement, the Company will file with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-4 (the "Registration
Statement") relating to the registration under the Securities Act of the shares
of the Commerce Common Stock to be issued in the Merger.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Registration Statement, (ii) the Articles of Incorporation and By-laws
of the Company, as in effect on the date hereof, (iii) the Acquisition Agreement
and (iv) certain resolutions of the Board of Directors of the Company relating
to the Merger. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such documents as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the completeness and authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified or photostatic copies and the
completeness and authenticity of the originals of such latter documents. In
making our examination of documents executed by parties other than Commerce, we
have assumed that such parties had the power, corporate or other, to enter into
and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution and
delivery by such parties of such documents on such parties. As to any facts
material to the opinion expressed herein which were not independently
established or verified, we have relied upon oral or written
<PAGE>
statements and representations of officers and other representations of Commerce
and others.
Members of our firm are admitted to the Bar in the State of Missouri, and
we do not express any opinion as to the laws of any other jurisdiction.
Based upon and subject the foregoing, we are of the opinion that the shares
of the Commerce Common Stock, when issued upon the consummation of the Merger in
accordance with the terms of the Acquisition Agreement and as set forth in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the reference to our firm under the
heading "LEGAL OPINION" in the related Proxy Statement/Prospectus which forms a
part of the Registration Statement. In giving such consent we do not thereby
admit or imply that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ Blackwell Sanders Peper Martin LLP
<PAGE>
Exhibit 8
----------
Commerce Bancshares, Inc.
1000 Walnut, 18th Floor
Kansas City, MO 64106
Fidelity Bankshares, Inc.
215 N. Main
Garden City, Kansas 67846
Fidelity Bankshares, Inc. Shareholders
Re: Commerce Bancshares, Inc. Acquisition of Fidelity Bankshares, Inc.
Ladies and Gentlemen:
You have asked for our opinion about the Federal income tax consequences of
the proposed acquisition of Fidelity Bankshares, Inc. ("Fidelity") by Commerce
Bancshares, Inc. ("Commerce"). In our opinion, the proposed acquisition of
Fidelity will constitute a tax-free reorganization within the meaning of section
368(a)(1)(A) (as amplified by Section 368(a)(2)(D)) of the Internal Revenue Code
(the "Code").
Proposed Transactions
---------------------
Fidelity is a closely held bank holding company incorporated under the laws
of Kansas. Fidelity has 381,992 shares of $5.00 par value voting common stock
issued and outstanding. Fidelity has no other shares outstanding.
Commerce is a publicly traded bank holding company incorporated under the
laws of Missouri. Commerce's $5.00 par value voting common stock is its only
outstanding stock. Commerce owns all of the outstanding stock of CBI-Kansas,
Inc. ("CBI"), which is a bank holding company incorporated under the laws of
Kansas.
Under the Agreement and Plan of Reorganization among Commerce, Fidelity and
CBI (the "Agreement"), Fidelity will merge with and into CBI pursuant to the
laws of Kansas (the "Merger"). At the time of the Merger, each share of
Fidelity common stock, except shares held by Commerce or any of its subsidiaries
or by any dissenting Fidelity shareholder, will be converted into shares of
Commerce common stock.
Assumptions
-----------
In rendering our opinion, we have examined and relied on the accuracy and
completeness of the information, covenants and representations contained in the
Registration Statement of Commerce on Form S-4 (including Annex as thereto) (the
"Registration Statement"), the Agreement and, originals or copies, certified or
otherwise identified to our satisfaction, of such other documents as we have
deemed necessary or appropriate, as the basis for our opinion. We have made
certain assumptions which are described below. Our opinion is conditioned on,
<PAGE>
among other things, the accuracy of such information, covenants, representations
and assumptions as of the time the Merger is consummated.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all persons, the authenticity of all documents submitted to us
as originals, and the conformity with authentic originals of all copies of
documents submitted to us. We have also assumed that the Merger will be
consummated in accordance with the terms described in the Registration
Statement.
In rendering our opinion, we have considered the applicable provisions of
the Code, Treasury Regulations promulgated under the Code, pertinent judicial
authorities, interpretive rules by the Internal Revenue Service, and such other
authorities as we have considered relevant. It should be noted that statutes,
regulations, judicial decisions and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. A
material change in the authorities upon which our opinion is based, could affect
our conclusions. In addition, we have made the following assumptions:
1. Except as provided in paragraph 17 hereof, Commerce voting stock is
the sole consideration in the Merger. The fair market value of the Commerce
common stock and other consideration received by each Fidelity shareholder in
the Merger will be approximately equal to the fair market value of the Fidelity
common stock surrendered in the Merger.
2. Following the Merger, CBI will hold (i) at least 90 percent of the
fair market value of Fidelity's net assets, and (ii) at least 70 percent of the
fair market value of Fidelity's gross assets held immediately prior to the
Merger. For this purpose, amounts paid to dissenters, amounts paid to
shareholders in lieu of fractional shares and amounts used by Fidelity to pay
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by Fidelity will be included as assets of
Fidelity immediately prior to the Merger.
3. There is no plan or intention by shareholders of Fidelity who own 1
percent or more of the Fidelity common stock, and to the best knowledge of the
management of Commerce and Fidelity, there is no plan or intention on the part
of the remaining shareholders of Fidelity, to sell, exchange, or otherwise
dispose of a number of shares of Commerce common stock received in the Merger
that would reduce the transferring shareholders' ownership of Commerce's common
stock received in the Merger to a number of shares having a value, as of the
date of the Merger, of less than 50 percent of the stock exchanged in the
Merger. For this purpose, shares of Fidelity common stock surrendered by
dissenters or exchanged for cash in lieu of fractional shares of Commerce common
stock will be deemed dispositions reducing the percentage of Commerce common
stock retained.
4. Prior to the Merger, Commerce will hold all of CBI's outstanding stock
and, after the Merger, Commerce will continue to hold all of CBI's outstanding
stock.
5. CBI has no plan or intention to issue additional shares of its stock
that would result in Commerce's holding less than 80 percent of CBI's voting
stock or less than 80 percent of any other classes of CBI stock.
<PAGE>
6. Except for fractional shares, neither Commerce nor any of its
subsidiaries has any plan or intention to reacquire any of the Commerce voting
stock issued in the Merger.
7. Except as described in this paragraph, neither Commerce nor any of its
affiliates has any plan or intention to liquidate CBI to merge CBI with or into
another corporation; to sell or otherwise dispose of the stock of CBI except for
transfers of stock to corporations controlled by Commerce; or to cause CBI to
sell or otherwise dispose of any of its assets or any of the assets acquired in
the Merger outside the ordinary course of business. As part of the acquisition,
it is planned that Heritage Bank of Olathe, over 90% of which is owned by
Fidelity, will merge into Commerce Bank, N.A., and all shareholders of Heritage
Bank of Olathe (other than Fidelity and CBI) will receive cash for their shares.
Various affiliates of Commerce or CBI may participate in mergers with Commerce
or CBI in which the latter two corporations will survive.
8. The liabilities of Fidelity assumed by CBI and the liabilities to
which the transferred assets of Fidelity are subject at the time of the Merger
were incurred in the ordinary course of business.
9. Following the Merger, CBI will continue Fidelity's historic business
or will use a significant portion of its historic business assets in a business.
10. All parties will pay their respective expenses incurred in connection
with the Merger.
11. There is no intercorporate indebtedness existing between Fidelity and
any other party to the Merger that was issued, acquired or will be settled at a
discount.
12. At the time of the Merger, Fidelity will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in Fidelity that, if exercised or
converted, would affect Commerce's acquisition or retention of 80 percent of
Fidelity's voting stock or 80 percent of any other classes of Fidelity stock.
13. None of the parties to the Merger is an investment company within the
meaning of section 368(a)(2)(F)(iii) of the Code.
14. During the five years prior to the Merger, neither Commerce nor any of
its affiliates owned, directly or indirectly, any shares of the stock of
Fidelity.
15. On the date of the Merger, the fair market values of the assets of
Fidelity transferred in the Merger will exceed the sum of the liabilities of
Fidelity that are assumed in the Merger or to which transferred assets are
subject.
16. Fidelity is not under the jurisdiction of a court in any insolvency
proceeding.
<PAGE>
17. CBI will pay Fidelity's dissenting shareholders the value of their
stock out of CBI's own funds. No funds will be supplied for that purpose,
directly or indirectly, by Commerce, nor will Commerce directly or indirectly
reimburse CBI for any payments to dissenters.
18. The payment of cash to transferring shareholders in lieu of fractional
shares of Commerce voting stock is not separately bargained for consideration,
and is solely for the purpose of saving Commerce the expense and inconvenience
of issuing fractional shares. The total amount of cash paid in lieu of
fractional shares will not exceed one percent of the total consideration in the
Merger. No shareholder will receive cash for fractional shares in excess of the
value of one full share of Commerce voting stock in the Merger.
19. None of the shares being issued in the Merger is consideration for the
performance of services, and none of the compensation received by any
shareholder employee of Fidelity will be allocable to any shares of stock
exchanged. All compensation paid to shareholder employees will be commensurate
with amounts paid to third parties bargaining at arm's length for similar
services.
Opinion
-------
Based on the assumptions set forth above, our examination of the
Registration Statement and the Agreement, and such other investigations of fact
and legal authorities as we have deemed necessary or appropriate, and subject to
the conditions and limitations expressed elsewhere herein, it is our opinion
that:
1. The Merger of Fidelity into CBI will constitute a reorganization both
within the meaning of Section 368(a)(1)(A) (as amplified by Section
368(a)(2)(D)) of the Code.
2. Under section 354(a) of the Code, shareholders of Fidelity will not
recognize gain or loss upon the conversion of their Fidelity stock to Commerce
voting stock.
3. Under section 358 of the Code, the basis of Commerce's voting stock in
the hands of former shareholders of Fidelity will equal the basis of the stock
exchanged.
4. Under section 1223(l) of the Code, the holding period of Commerce
voting stock received by shareholders (other than dealers) of Fidelity will
include the holding period of the stock exchanged.
5. The Merger will not affect the basis or holding period of the assets
of Fidelity.
6. Cash paid to holders of shares of Fidelity stock who dissent and cash
paid to holders of shares of Fidelity in lieu of fractional shares will be
treated as proceeds from sales of shares on which gain or loss will be
recognized.
Except as otherwise set forth above, we express no opinion to any party to
the transactions as to the consequences of the consummation of the transactions
described in this letter. We consent to the filing of this opinion as an
exhibit to the Registration Statement and
<PAGE>
to references to the opinion and to Blackwell Sanders Peper Martin LLP in the
Prospectus. In giving this consent, we do not admit or imply that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933. This opinion is solely for your benefit and may not be relied upon
by any other person without our prior written consent.
Very truly yours,
/s/ Blackwell Sanders Peper Martin LLP
<PAGE>
Exhibit 23(a)
-------------
ACCOUNTANTS' CONSENT
--------------------
Board of Directors
Commerce Bancshares, Inc.
We consent to the use of our report on the consolidated financial statements of
Commerce Bancshares, Inc. as of December 31, 1997 and 1996 and for each of the
years in the three-year period ending December 31, 1997, incorporated herein by
reference and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
Kansas City, Missouri
August 17, 1998
<PAGE>
Exhibit 23(b)
-------------
ACCOUNTANTS' CONSENT
We have issued our report dated January 16, 1998, accompanying the consolidated
financial statements of Fidelity Bankshares, Inc. contained in Commerce
Bancshares, Inc.'s Registration Statement on Form S-4 and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
Wichita, Kansas
August 17, 1998
<PAGE>
Exhibit 23(d)
CONSENT OF ALEX SHESHUNOFF & CO. INVESTMENT BANKING
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of Commerce Bancshares, Inc. ("Registration Statement") of
our opinion, dated July 1, 1998 with respect to the merger of CBI-Kansas, Inc.,
a wholly-owned subsidiary of Commerce Bancshares, Inc. and Fidelity Bankshares,
Inc. and to our firm, respectively, included in the Registration Statement and
to the inclusion of such opinion as an annex to the Registration Statement. By
giving such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission
thereunder.
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
By: /s/ Gerard Feil
----------------
AUSTIN, TX
August 17, 1998
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint J.
Daniel Stinnett and Jeffrey D. Aberdeen, or either of them, attorney for the
undersigned and in the name of and on behalf of the undersigned to sign a
Registration Statement on Form S-4 to be filed by Commerce Bancshares, Inc.,
together with any and all amendments which might be required from time to time
with respect thereto, to be filed with the Securities and Exchange Commission
under the Securities Act of 1933, with respect to the acquisition of Fidelity
Bankshares, Inc. with full power and authority in either of said attorneys to do
and perform in the name of and on behalf of the undersigned every act whatsoever
necessary or desirable to be done in connection therewith as fully and to all
intents and purposes as the undersigned might or could do in person.
Executed this 31st day of July, 1998.
/s/ David W. Kemper
- -------------------------------
David W. Kemper
/s/ Fred L. Brown
- -------------------------------
Fred L. Brown
/s/ James B. Hebenstreit
- -------------------------------
James B. Hebenstreit
/s/ Mary Ann Krey
- -------------------------------
Mary Ann Krey
/s/ Benjamin F. Rassieur, III
- -------------------------------
Benjamin F. Rassieur, III
/s/ Dolph C. Simons, Jr.
- -------------------------------
Dolph C. Simons, Jr.
- -------------------------------
Andrew C. Taylor
/s/ A. Bayard Clark
- -------------------------------
A. Bayard Clark
/s/ Giorgio Balzer
- -------------------------------
Giogio Balzer
- -------------------------------
W. Thomas Grant II
/s/ Jonathan M. Kemper
- -------------------------------
Jonathan M. Kemper
/s/ Terry O. Meek
- -------------------------------
Terry O. Meek
/s/ John H. Robinson, Jr.
- -------------------------------
John H. Robinson, Jr.
/s/ L.W. Stolzer
- -------------------------------
L. W. Stolzer
/s/ Robert H. West
- -------------------------------
Robert H. West
/s/ Jeffrey D. Aberdeen
- -------------------------------
Jeffrey D. Aberdeen
